Matrix Service Company — Q1 FY2013 Form 10-Q
Business context and reporting period: The filing covers the three months ended September 30, 2012, compared with the three months ended September 30, 2011. Matrix provides construction, maintenance, and related services across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial markets. Management notes that project timing, customer budgets, weather, and seasonal turnarounds can make results fluctuate between quarters.
Financial results and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $209.6 million | $169.3 million | +23.8% |
| Gross profit / margin | $22.2 million / 10.6% | $18.1 million / 10.7% | Profit +22.7%; margin down 0.1 percentage point |
| Operating income | $7.9 million | $6.6 million | +19.9% |
| Net income | $4.7 million | $3.5 million | +33.5% |
| Diluted EPS | $0.18 | $0.13 | Up $0.05 |
| Operating cash flow | $(21.0) million | $(12.1) million | Cash use increased |
- SG&A was $14.3 million, up 24.3%, primarily reflecting planned investment in branding and strategic growth areas and a $0.7 million bad-debt charge. SG&A remained 6.8% of revenue. The effective tax rate was 40.0%, versus 38.0%.
- Cash and cash equivalents were $17.2 million at September 30, down from $39.7 million at June 30. Current assets were $266.2 million and current liabilities $136.6 million.
- The company reported $3.4 million of long-term debt on its balance sheet and $4.5 million of consolidated funded indebtedness for covenant purposes. Its $125 million revolving facility had $108.4 million available, including effects of borrowing constraints and letters of credit. The company stated it was in compliance with all credit covenants.
- Investing activities used $5.1 million, mainly for capital expenditures. Financing activities provided $3.1 million, including net credit-facility borrowings. Cash declined by $22.6 million during the quarter.
- Backlog rose to $534.6 million at September 30 from $497.5 million at June 30; quarterly net awards were $246.8 million.
Material changes and operating trends
- Revenue growth was led by Oil Gas & Chemical (+46.5%) and Electrical Infrastructure (+51.4%); Storage Solutions grew 9.8%, while Industrial revenue declined 24.2%.
- Electrical Infrastructure gross margin improved to 14.1% from 12.7%, and Oil Gas & Chemical to 11.7% from 9.5%, reflecting improved overhead recovery and, for Oil Gas & Chemical, improved project execution.
- Storage Solutions gross margin declined to 9.6% from 10.9%, which management attributed to geographic expansion and expected short-term market softening. Industrial recorded a gross loss margin of 6.0%, versus an 8.7% gross margin a year earlier, due to startup costs in bulk material handling and mining and minerals.
- Other income was $0.1 million, compared with a $0.7 million loss in the prior-year quarter, which primarily reflected foreign-currency transaction losses.
- Accounts receivable increased $49.5 million during the quarter, primarily from higher activity and billing timing. Management characterized this as a short-term fluctuation and reported no deterioration in receivable aging or anticipated unusual collection difficulties.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management expects to fund operations for the next 12 months with operating cash flow, cash on hand, and credit-facility borrowings. Results may vary with project timing, seasonality, customer capital budgets, and weather.
- Operating cash flow was pressured by working-capital movements, particularly receivables. Contract milestone billing, retainage, costs incurred before collection, and capital expenditures can affect liquidity; management also identifies acquisitions, strategic investments, share repurchases, disputes, and credit-facility capacity as potential liquidity factors.
- Unapproved change orders included in contract assets were $9.4 million, versus $8.5 million at June 30. The company cautions that realization may differ materially from recorded amounts. No claim revenue was included in contract assets at either date.
- Receivables acquired with S.M. Electric included $0.7 million of claim receivables and $2.9 million due under the related contract. Recovery of remaining amounts may require mediation or litigation; actual collections could differ materially from recorded values.
- Insurance deductibles, coverage limits, and self-insured retentions expose the company to potential losses. The company states that known legal proceedings are not expected to have a material adverse effect.
- On November 6, 2012, after quarter-end, the board extended the stock-buyback program through 2014, allowing purchases of up to an additional 2,113,497 shares if liquidity permits and management considers them in shareholders’ interests. No open-market program purchases were reported during the quarter.
- The annual goodwill impairment test in fiscal 2012 found reporting-unit fair values above carrying values; management reported no impairment indicators at September 30 and did not anticipate an impairment charge. Disclosure controls were deemed effective at a reasonable-assurance level, with no material quarterly change in internal controls reported.
Important facts for investors to verify
- Whether the sharp rise in receivables converts to cash as expected, and whether the bad-debt charge or allowance signals further collection risk.
- Collection outcomes for unapproved change orders and the S.M. Electric receivables, including any mediation or litigation developments.
- Whether Storage Solutions margins stabilize and whether Industrial startup costs subside as newer markets develop.
- Backlog conversion, project execution, and working-capital needs, given negative operating cash flow despite higher earnings and revenue.
- Credit-facility availability and covenant compliance as borrowings, letters of credit, and business activity change; also assess the liquidity implications of the extended buyback authorization.