Business Context and Reporting Period
Company: Matrix Service Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and nine months ended February 28, 2007
Business Overview: Matrix Service provides industrial construction and repair/maintenance services, primarily serving the Downstream Petroleum Industry. The company operates through two reportable segments: Construction Services and Repair and Maintenance Services.
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Feb 28, 2007 | 9 Months Ended Feb 28, 2006 | 3 Months Ended Feb 28, 2007 | 3 Months Ended Feb 28, 2006 |
|---|---|---|---|---|
| Revenues | $461,925 | $355,349 | $168,700 | $119,575 |
| Gross Profit | $54,133 | $34,807 | $18,924 | $11,665 |
| Gross Margin % | 11.7% | 9.8% | 11.2% | 9.8% |
| Operating Income | $29,447 | $12,392 | $10,671 | $4,381 |
| Net Income | $17,232 | $4,314 | $6,150 | $1,771 |
| Diluted EPS | $0.67 | $0.21 | $0.24 | $0.08 |
| Cash from Operations | $6,092 | $26,031 | N/A | N/A |
| Total Debt | $15,000 | $25,000 | $15,000 | $25,000 |
| Cash & Equivalents | $7,002 | $8,585 | $7,002 | $8,585 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 30.0% ($106.6 million) for the nine months ended Feb 28, 2007, driven primarily by a 59.7% increase in the Construction Services segment due to robust activity in the Downstream Petroleum Industry.
- Profitability: Net income surged 300% to $17.2 million for the nine-month period. Gross margins expanded to 11.7% from 9.8% due to higher revenue volumes and improved project execution.
- Debt Reduction: Total debt decreased by $10 million to $15 million, resulting from the conversion of $10 million of convertible notes into common stock during the period. Interest expense dropped significantly from $7.0 million to $2.0 million.
- Cash Flow: Net cash provided by operating activities decreased to $6.1 million from $26.0 million in the prior year, largely due to increases in receivables and costs in excess of billings associated with higher project volumes.
- Contract Disputes: Contract dispute receivables decreased from $11.7 million to $1.0 million after settling three of four major disputes, resulting in a $0.2 million pre-tax gain.
Guidance, Outlook, and Risks
- Revenue Guidance: Management raised full-year fiscal 2007 revenue guidance to $630 million - $640 million, up from the previous range of $560 million - $580 million.
- Margin Outlook: Expected annual gross profit margins are 11.0% - 12.0%, with SG&A expenses projected at 5.0% - 5.5% of revenue.
- Liquidity: The company maintains a $75 million senior revolving credit facility with $64.4 million available (after $10.6 million in letters of credit). Management expects adequate liquidity to meet working capital and capital expenditure needs.
- Capital Expenditures: Expected to range between $13.0 million and $16.0 million for fiscal 2007 to support growth.
- Risks: Key risks include a slowdown in capital investment in the energy sector, reliance on a few major contracts, and potential exposure to insurance claims or legal disputes (one contract dispute remains pending).
Investor Verification Checklist
- Convertible Note Conversions: Verify the impact of the $10 million note conversion on share count and future interest expense.
- Backlog Quality: Review the $314.4 million backlog, noting that 68.1% of Repair & Maintenance revenue comes from contracts not in backlog (time and materials).
- Remaining Contract Dispute: Monitor the status of the single remaining contract dispute valued at $1.0 million involving a joint venture in Oregon.
- Stock-Based Compensation: Note the adoption of SFAS 123(R) and the $0.9 million expense recognized in the nine-month period.
- Debt Covenants: Confirm continued compliance with the Senior Leverage Ratio (max 2.50:1) and Fixed Charge Coverage Ratio (min 1.25:1) under the new credit facility.