Matrix Service Company — Q2 FY2014 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2013; the quarter is the second quarter of fiscal 2014. Comparative results are for the periods ended December 31, 2012, unless noted. Financial statements are unaudited.
Business context and results
Matrix provides construction, maintenance, and related services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial segments. Results are project-timing sensitive and can be seasonal. On December 21, 2013, Matrix acquired Kvaerner North American Construction (KNAC), expanding its presence across several segments.
| Metric | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $311.0 million | $221.4 million | $537.2 million | $431.0 million |
| Gross profit / margin | $34.2 million / 11.0% | $22.3 million / 10.1% | $59.6 million / 11.1% | $44.6 million / 10.3% |
| Operating income | $14.8 million | $8.8 million | $25.6 million | $16.7 million |
| Net income attributable to Matrix | $10.3 million | $5.4 million | $16.9 million | $10.1 million |
| Diluted EPS | $0.38 | $0.21 | $0.63 | $0.39 |
Quarterly revenue rose 40.5% and six-month revenue rose 24.6%. Growth was led by Storage Solutions and Industrial; lower storm-restoration and other work reduced Electrical Infrastructure revenue, while Oil Gas & Chemical revenue also declined. Gross margins improved year over year in both periods. SG&A was $19.3 million for the quarter and $34.0 million for six months, including approximately $2.0 million of KNAC acquisition-related expenses for the six-month period.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $50.5 million, versus $12.1 million a year earlier. Investing used $63.0 million, including $51.4 million net cash paid for KNAC and $12.0 million in capital expenditures. Financing provided $22.2 million, primarily reflecting net credit-facility borrowings.
- Cash was $73.3 million at December 31, 2013, up from $63.8 million at June 30, 2013. Cash plus undrawn credit availability was reported at $162.0 million.
- Credit-facility borrowings were $23.2 million, with $13.1 million of letters of credit and $88.7 million of remaining availability under the $125 million revolving facility. The company reported compliance with all covenants; funded indebtedness was $29.5 million and covenant-defined trailing-four-quarter EBITDA was $64.4 million.
- Total assets were $535.9 million, compared with $410.0 million at June 30, 2013; total liabilities were $277.8 million and stockholders’ equity was $258.1 million. Current assets were $346.3 million and current liabilities $246.9 million.
Material changes, outlook, and risks
- Acquisition: KNAC was purchased for $88.1 million, funded with cash and credit-facility borrowings. Its post-acquisition results included $5.4 million of revenue and approximately break-even operating income. Preliminary allocation included $36.3 million of goodwill and $24.0 million of other intangible assets; goodwill allocation and joint-venture accounting were still under assessment. Pro forma results are provided in the filing but are not presented as a forecast.
- Project estimate charge: A change in estimate on an aboveground storage tank project reduced operating income by $4.4 million in the quarter and $4.0 million in the six-month period. The prior-year comparable charge was $3.3 million for the quarter and $3.0 million for six months.
- Taxes: Effective tax rates were 28.4% for the quarter and 32.2% for six months, down from 36.5% and 38.2%, respectively. Management cited revised R&D tax-credit estimates, including approximately $1.0 million of discrete benefit for the six-month period and an additional estimated fiscal 2014 benefit of approximately $0.7 million.
- Backlog: Reported backlog at December 31 was $882.6 million, including $242.0 million acquired with KNAC. Backlog is not a guarantee of future revenue and depends on project performance, timing, and customer commitments.
- Management outlook: No specific numerical earnings or revenue guidance is provided. Management said cash, remaining facility availability, and operating cash generation were expected to provide sufficient liquidity for business objectives. It cautioned that project timing, customer budgets, seasonality, weather, and working-capital swings can affect results.
- Key risks and contingencies: The company highlighted KNAC integration, realizing expected growth and synergies, unknown or unindemnified acquired liabilities, and exposure to cyclical steel-market demand. Unapproved change orders and claims included $12.0 million in contract assets; collection could take longer than a year and actual recovery could differ materially. Certain legacy S.M. Electric receivables remain subject to mediation or litigation. Management considered known legal proceedings not material and stated that no goodwill impairment was currently anticipated, while the acquired goodwill assessment remained incomplete.
Important facts for investors to verify
- How KNAC integration, the final purchase-price allocation, and the acquired joint venture’s accounting affect margins, goodwill, and cash generation.
- Whether Storage Solutions’ large project workload converts to cash as expected, given contract assets, billings, retentions, and the disclosed estimate charge.
- Recoverability and timing of the $12.0 million of unapproved change orders and claims and the outstanding S.M. Electric receivables.
- Credit-facility availability and covenant headroom as acquisition-related borrowings and project working-capital needs change.
- Whether backlog execution and segment trends—especially reduced Electrical Infrastructure storm work and cyclical Industrial exposure—support future revenue and profitability.