Matrix Service Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2011. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Business context
Matrix provides construction, repair and maintenance services, primarily for aboveground storage tanks, downstream petroleum, and electrical and instrumentation markets. Its two reportable segments are Construction Services and Repair and Maintenance Services. Management notes that project timing and seasonal conditions can cause quarterly results to fluctuate.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 |
|---|---|---|
| Revenue | $201.0; +14.7% year over year | $370.3; +13.2% year over year |
| Gross profit / margin | $23.1 / 11.5%, versus $19.8 / 11.3% | $41.2 / 11.1%, versus $35.5 / 10.8% |
| Operating income | $11.2, versus $8.6 | $17.8, versus $13.7 |
| Net income | $7.0, versus $5.3 | $10.5, versus $8.4 |
| Diluted EPS | $0.27, versus $0.20 | $0.40, versus $0.32 |
| EBITDA (non-GAAP) | $14.4, versus $11.4 | $23.2, versus $19.4 |
For the quarter, Repair and Maintenance revenue increased 17.8% and gross margin rose to 11.6% from 10.0%, with management attributing the margin improvement mainly to storm restoration work. Construction Services revenue increased 12.6%, but its margin declined to 11.4% from 12.1%. For the six-month period, Repair and Maintenance revenue rose 22.4%; Construction Services revenue rose 7.6%, with lower segment margins partly offsetting higher sales.
Six-month operating cash flow was negative $5.8, compared with negative $2.6 a year earlier. Investing cash flow was negative $6.6, including $6.8 of capital expenditures; financing cash flow was negative $9.2, chiefly reflecting $8.1 of open-market share repurchases and $0.6 of credit-facility amendment fees. Cash declined to $37.4 from $59.4 at June 30, 2011. Management attributed operating cash use largely to higher working capital, including a $20.1 cash use from the net change in contract costs/billings and a $12.2 increase in receivables, partly offset by higher payables.
At December 31, current assets were $221.3 and current liabilities $106.3. The company reported total liquidity of $153.4, comprising cash of $37.4 and $116.0 available under its senior revolving credit facility. The new five-year secured facility, entered into in November, has a $125.0 commitment. Availability is constrained by the leverage covenant: $1.475 of capacity was unavailable for that reason. Letters of credit outstanding were $7.6. The filing does not clearly state a separate period-end borrowings balance; the balance sheet presents no borrowing line item.
Backlog was $433.6 at December 31, up from $405.1 at June 30. Construction Services backlog increased to $264.6 from $225.7, while Repair and Maintenance backlog declined to $169.0 from $179.4.
Material changes, outlook and risks
- Revenue and earnings improved year over year, led by higher activity in Repair and Maintenance, including storm restoration, and higher Construction Services activity in storage tanks and downstream petroleum.
- SG&A rose to $23.4 for six months from $21.7, reflecting higher business volumes, strategic initiatives and a non-routine stock-compensation charge, partly offset by lower legal costs. Six-month other expense of $0.4 was primarily foreign-currency losses.
- Management describes growth opportunities in electrical infrastructure, storm restoration, shale-related oil, gas and chemical work, North American storage, industrial cleaning, and mining and materials handling. It cited a $34 million tank award in Western Canada. This is qualitative outlook, not quantified earnings or revenue guidance.
- Management expects to fund the next 12 months from operating cash flow and existing cash, but cautions that forecast cash generation is not assured and facility borrowings may be required. Key liquidity sensitivities include working capital, contract billing and collection timing, retentions, capital spending, disputes and covenant capacity.
- The facility requires a senior leverage ratio below 2.50:1 and a fixed-charge coverage ratio of at least 1.25:1. Four-quarter covenant EBITDA was $49.4; the filing says funded indebtedness above $123.5 would breach the leverage limit.
- Unapproved change-order claims included $5.6 in contract assets. Acquired claims and related receivables include $0.7 and $2.8, respectively, that management says require resolution, potentially through mediation or litigation; realized amounts could differ materially. Insurance reserves were $7.3, and coverage may not fully protect against valid claims.
- Management reported no material change in risk factors or market risks and concluded disclosure controls were effective at the reasonable-assurance level. It noted no currently identified goodwill impairment indicators. Results remain exposed to project cycles, seasonal weather, industry conditions, litigation and contingency estimates.
Most important facts for investors to verify
- Whether operating cash flow converts to positive cash generation as receivables and contract working capital are collected, and whether backlog converts to revenue on expected terms.
- Facility borrowings, covenant headroom and the effect of the leverage-based capacity constraint on liquidity.
- Margins and sustainability of storm-restoration-driven Repair and Maintenance results, alongside the weaker Construction Services margins.
- Recoverability and timing of unapproved change-order claims and acquired receivables, and adequacy of insurance and other contingency reserves.
- Progress against management’s qualitative growth plans and the timing and profitability of awarded work, including the Western Canada tank package.