Business Context and Reporting Period
Company: Matrix Service Company (MTRX)
Filing Type: Form 10-K (Annual Report)
Period Ended: May 31, 2009
Business Overview: Matrix Service is a full-service industrial contractor providing construction and repair/maintenance services primarily to the energy, petrochemical, and power industries. Operations are divided into two segments: Construction Services and Repair and Maintenance Services. The company operates in the U.S. and Canada, serving major integrated oil companies, refiners, and pipeline operators.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Revenues | $689.7 million | $731.3 million |
| Gross Profit | $94.3 million | $75.1 million |
| Gross Margin | 13.7% | 10.3% |
| Operating Income | $47.3 million | $34.6 million |
| Net Income | $30.6 million | $21.4 million |
| Diluted EPS | $1.16 | $0.80 |
| Cash Flow from Operations | $38.6 million | $45.6 million |
| Total Debt | $1.9 million | $2.2 million |
| Working Capital | $82.5 million | $60.8 million |
| Backlog (Total) | $401.1 million | $467.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 5.7% to $689.7 million. This was driven by a $60.7 million drop in Construction Services (due to the completion of a major Gulf Coast LNG project and declines in Aboveground Storage Tank and Downstream Petroleum markets), partially offset by a $19.1 million increase in Repair and Maintenance Services.
- Margin Expansion: Despite lower revenues, gross profit increased 25.6% to $94.3 million. Gross margins improved from 10.3% to 13.7%, primarily due to the absence of $20.8 million in pretax cost overrun charges related to the Gulf Coast LNG project that impacted fiscal 2008 results.
- Profitability Growth: Net income rose 42.9% to $30.6 million, and Operating Income increased 37.0% to $47.3 million, reflecting improved project execution and margin recovery in the Construction segment.
- Backlog Reduction: Total backlog decreased $66.2 million to $401.1 million. Construction Services backlog fell $91.7 million, while Repair and Maintenance backlog increased $25.5 million.
- Acquisitions: The company acquired S.M. Electric Company, Inc. (SME) in February 2009 and assets/technology for cryogenic tank construction in December 2008, funded by cash on hand.
Outlook, Risks, and Management Commentary
- Outlook: Management remains cautious regarding the near-term outlook due to the ongoing economic downturn and uncertainty in the timing of capital expenditures by customers. They anticipate uneven quarterly results in fiscal 2010 but expect some market improvement late in calendar 2009 and early 2010.
- Liquidity: Total liquidity stood at $102.3 million as of May 31, 2009, comprising $34.6 million in cash and $67.7 million in availability under a $75.0 million senior revolving credit facility. The company is in compliance with all financial covenants.
- Key Risks:
- Cyclicality: Demand is highly dependent on capital and maintenance spending in the oil, gas, and power industries, which are sensitive to commodity prices and economic conditions.
- Customer Concentration: Three customers (Plains All American Pipeline LP, Chevron Corp, and BP PLC) accounted for nearly 30% of consolidated revenues in fiscal 2009.
- Fixed-Price Contracts: Increased use of fixed-price contracts exposes the company to cost overruns if estimates prove inaccurate.
- Goodwill Impairment: While no impairment was recorded in 2009, management notes that adverse economic conditions or changes in customer relationships could trigger future impairment charges.
- Unusual Items: Fiscal 2008 results were negatively impacted by $20.8 million in charges for cost overruns on a Gulf Coast LNG project. Fiscal 2009 included a $1.2 million charge for inventory write-downs due to declining steel prices.
Investor Verification Checklist
- Backlog Quality: Verify the composition of the $401.1 million backlog, noting that 94% is expected to be completed in fiscal 2010, and assess the risk of cancellations in the Construction segment.
- Customer Concentration: Monitor the stability of relationships with top three customers (Plains, Chevron, BP) which represent a significant portion of revenue.
- Margin Sustainability: Determine if the 13.7% gross margin is sustainable given the removal of the one-time LNG project losses from the prior year and potential pricing pressure in a recessionary environment.
- Acquisition Integration: Assess the financial contribution and integration progress of the S.M. Electric Company, Inc. acquisition.
- Credit Facility Covenants: Review the amended credit facility terms, specifically the Tangible Net Worth covenant and leverage ratios, to ensure continued compliance during economic volatility.