MTRX

Business Context and Reporting Period

Company: Matrix Service Company (MTRX)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended November 30, 2002
Business Overview: Matrix operates in three primary segments: Aboveground Storage Tank (AST) Services, Construction Services, and Plant Services. The company provides maintenance, repair, and construction services primarily to the petroleum and refining industries in the United States and Canada.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 8.3% for the quarter and 10.2% for the six-month period compared to the prior year. This was driven by a significant 83.3% increase in Construction Services revenue and a 5.8% increase in AST Services revenue.
• Profitability: Net income rose 9.0% for the quarter and 18.9% for the six-month period. Operating income increased slightly for the quarter (2.0%) and 7.2% for the six-month period.
• Segment Performance:
  • AST Services: Revenue increased, but gross margins declined (12.8% vs 13.7% in Q3) due to a lower mix of high-margin product sales.
  • Construction Services: Revenue surged due to a refocus on core clients. Gross margins improved significantly to 14.5% (Q3) and 14.0% (6-month) due to better job execution and cost absorption.
  • Plant Services: Revenue declined 8.3% (Q3) and 17.6% (6-month) due to fewer turnaround projects. Margins improved slightly in Q3 but declined in the six-month period due to lower volume.
• Working Capital: Accounts receivable decreased by $5.7 million over the six-month period, contributing to a strong operating cash flow of $5.4 million, compared to a cash usage of $3.1 million in the prior year.

Outlook, Risks, and Contingencies

• Guidance and Outlook: Management expects improved sales volumes and profitability in the third and fourth quarters for Plant Services, though below original forecasts due to refinery schedule consolidations. AST Services activity is currently quiet as clients approve 2003 budgets; the outlook depends on oil prices and the global economy.
• Capital Expenditures: CapEx for the six months was $8.0 million, primarily for the Port of Catoosa facility. The company has budgeted $15.8 million for fiscal 2003.
• Liquidity: The company maintains a $20 million revolving credit agreement with $14.9 million available. Management believes existing funds and borrowing capacity are sufficient for foreseeable needs.
• Risks and Contingencies:
  • Legal: Ongoing litigation in Tulsa County regarding worker's compensation collateral with a former insurer. Management believes this will not have a material effect.
  • Environmental: Potential liabilities from former operations (Brown Steel) and current fabrication sites. Cleanup costs for Brown Steel were $2.1 million, with an insignificant amount remaining accrued. The company holds pollution liability insurance.
  • Market: Risks include delays in customer maintenance budgets, severe weather, labor market conditions, and fluctuations in the energy industry.

Investor Verification Checklist

• Verify the status of the $1.9 million in claims and $0.7 million in unapproved change orders included in receivables.
• Monitor the approval of customer maintenance and capital budgets for calendar 2003, which will drive AST Services revenue.
• Track the progress and cost overruns of the $15.8 million capital expenditure budget, specifically the Port of Catoosa facility.
• Review the resolution of the Tulsa County litigation regarding worker's compensation collateral.
• Assess the impact of the global recession and oil prices on the timing of refinery turnaround schedules.