Matrix Service Company — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2013, ended March 31, 2013. The filing compares results with the corresponding periods of fiscal 2012. The supplied metadata says “2012 Q3,” but the filing itself identifies the period as March 31, 2013.
Business context and results
Matrix provides construction, maintenance, and industrial services through four segments: Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial. Results are project-driven and seasonal, and interim results may not indicate future performance.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $226.0 million | $183.9 million | $657.0 million | $554.2 million |
| Gross profit / margin | $23.1 million / 10.2% | $19.8 million / 10.8% | $67.7 million / 10.3% | $61.0 million / 11.0% |
| Operating income | $8.4 million | $7.4 million | $25.1 million | $25.2 million |
| Net income | $6.5 million | $4.9 million | $16.6 million | $15.4 million |
| Diluted EPS | $0.25 | $0.19 | $0.63 | $0.58 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $36.2 million | $0.5 million |
For the nine months, EBITDA, a non-GAAP measure, was $34.5 million versus $33.5 million. Cash and cash equivalents were $50.7 million at March 31, 2013, compared with $39.7 million at June 30, 2012. Total assets were $379.2 million and total stockholders’ equity was $230.0 million. The company reported no outstanding cash borrowings; funded indebtedness for covenant purposes was $0.7 million. Its $125 million revolving facility had $110.1 million available, including the effect of outstanding letters of credit. The company stated it was in compliance with all credit covenants.
Changes versus prior comparable periods
- Q3 revenue increased 22.9% and net income increased 34.1%; nine-month revenue increased 18.5% and net income increased 8.0%.
- Operating income was nearly flat for the nine-month period despite higher revenue, as gross margin contracted and SG&A rose 19.3% to $42.6 million. Management attributed SG&A growth to business volume, strategic growth investments, branding, and support functions; a $0.7 million bad-debt charge was also recorded.
- Oil Gas & Chemical and Electrical Infrastructure grew strongly. For nine months, their revenues increased 37.2% and 21.1%, respectively, with improved segment margins. Storage Solutions revenue rose 5.2%, but its gross margin fell from 11.7% to 8.9%. Industrial revenue rose 56.7%, while its nine-month margin fell from 5.7% to 3.2%, reflecting startup costs and a project charge.
- Backlog reached $644.3 million at March 31, 2013, up from $497.5 million at June 30, 2012. Nine-month net awards were $803.9 million.
- Operating cash flow improved substantially from $0.5 million to $36.2 million. The current-period amount benefited from a $17.5 million cash contribution from the net change in contract assets and liabilities, primarily due to advanced billings; accounts receivable growth used $23.2 million.
Outlook, management commentary, risks, and unusual items
- Management expected to fund operations over the next 12 months using operating cash flow, cash on hand, and the revolving facility. No specific revenue, earnings, or margin guidance was provided.
- In the nine months, a western Canada storage-tank project generated a $3.1 million estimate-change charge, mainly due to lower labor productivity and higher direct employee costs. It reduced net income by $2.0 million and diluted EPS by $0.08. The project was 81% complete at March 31 and expected to finish in early fiscal 2014.
- A customer dispute settlement announced May 3, 2013 resulted in a $1.0 million third-quarter charge; the $1.5 million settlement was expected to be paid in fiscal Q4.
- The December 2012 acquisition of Pelichem Industrial Cleaning Services was funded with cash on hand. Cash paid was $8.3 million; the preliminary allocation included $2.2 million of goodwill. The acquired operation’s results were not material, and the purchase allocation remained subject to final working-capital adjustments.
- Tax rates benefited from retroactive tax legislation and a change in estimate related to an available tax credit. The Q3 effective rate was 21.2%, compared with 32.5% a year earlier; the nine-month rates were 32.5% and 36.3%, respectively.
- Risks highlighted include project execution and cost-estimate changes, customer disputes and collections, unapproved change orders, self-insured losses and insurance limits, cyclical and seasonal activity, industry conditions, and compliance with credit covenants. Recorded unapproved change-order revenue was $8.2 million. Certain acquired S.M. Electric receivables—$0.7 million of claim receivables and $2.9 million contract amounts—may require mediation or litigation; recoveries could differ materially from recorded values.
- The company reported no material changes to its previously disclosed risk factors or market risks. Management concluded disclosure controls were effective at the reasonable-assurance level.
Key facts investors should verify
- Whether the $644.3 million backlog converts to revenue and acceptable margins, particularly in Storage Solutions and Industrial.
- Final costs and completion of the western Canada project, and the final cash and earnings impact of the customer settlement.
- Collection of the S.M. Electric receivables, unapproved change orders, retentions, and other project balances.
- Whether operating cash flow remains strong as receivables and contract billing positions fluctuate.
- Whether Pelichem delivers the expected contribution and whether the acquisition purchase allocation changes after the working-capital true-up.
- Future margin recovery, given lower consolidated gross margins and higher SG&A despite revenue growth.