Matrix Service Company — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2012; fiscal 2013 second quarter. Financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Business context
Matrix provides construction, maintenance and industrial services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial segments. The company notes that project timing and seasonal factors can cause results to fluctuate between quarters.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Prior-year quarter | Six months ended Dec. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $221.4 | $201.0 | $431.0 | $370.3 |
| Gross profit | $22.3 | $23.1 | $44.6 | $41.2 |
| Gross margin | 10.1% | 11.5% | 10.3% | 11.1% |
| Operating income | $8.8 | $11.2 | $16.7 | $17.8 |
| Net income | $5.4 | $7.0 | $10.1 | $10.5 |
| Diluted EPS | $0.21 | $0.27 | $0.39 | $0.40 |
| Operating cash flow | Not separately reported for the quarter | $11.0 | $(5.8) |
Six-month EBITDA, a non-GAAP measure, was $22.6 million versus $23.2 million. Six-month SG&A rose 19.2% to $27.9 million, or 6.5% of revenue, including a $0.7 million bad-debt charge and investment in growth initiatives and support functions.
Segments and material changes
- Oil Gas & Chemical: Six-month revenue increased 40.0% to $133.7 million and operating income rose to $7.7 million from $3.8 million, reflecting more turnaround and construction work and improved overhead recovery.
- Electrical Infrastructure: Six-month revenue increased 27.1% to $83.4 million; operating income rose to $6.0 million from $3.2 million. Storm restoration work supported revenue and margins.
- Storage Solutions: Six-month revenue increased 3.8% to $201.9 million, but operating income fell to $5.0 million from $10.8 million. Margins were pressured by a western Canada tank project charge and unrecovered overhead.
- Industrial: Six-month revenue declined 18.4% to $12.0 million, and the segment recorded a $2.0 million operating loss, versus approximately break-even a year earlier. Startup costs in mining, minerals and bulk material handling contributed.
For the quarter, revenue grew 10.1%, but gross profit, operating income and net income declined year over year. The western Canada aboveground storage tank project estimate change reduced second-quarter operating income by $3.3 million, net income by $2.1 million and diluted EPS by $0.08; the six-month impacts were reported as $3.0 million, $2.0 million and $0.07, respectively.
Backlog was $605.1 million at December 31, 2012, up from $497.5 million at June 30, 2012. Six-month net awards were $538.7 million against $431.0 million of revenue recognized.
Cash, debt and liquidity
- Cash was $33.2 million, down from $39.7 million at June 30. Six-month operating cash flow was $11.0 million; investing used $20.2 million, including $12.0 million of capital expenditures and $8.3 million for the Pelichem acquisition.
- Accounts receivable increased $43.8 million during the six months. Management attributed the rise to higher activity and billing timing, and said aging had not deteriorated and unusual collection problems were not anticipated.
- Current assets were $267.3 million and current liabilities $144.5 million. Total assets were $376.1 million and stockholders’ equity $222.4 million.
- Long-term debt was $3.4 million. Under the $125 million revolving facility, reported availability was $102.1 million, including the effects of borrowings, letters of credit and a leverage-based capacity constraint. The company said it complied with all credit covenants.
Outlook, risks and unusual items
No quantified revenue or earnings guidance was provided. Management expected to fund the next 12 months with operating cash flow, existing cash and potential revolver borrowings. It cited working-capital timing, capital expenditures, acquisitions, strategic investments, contract disputes and credit-facility capacity as liquidity factors.
On December 31, 2012, Matrix acquired substantially all assets of Pelichem Industrial Cleaning Services for a preliminary purchase price of $8.25 million, funded with cash on hand. The working-capital true-up was expected to be completed in the third fiscal quarter; acquired operating results were described as immaterial.
Other items to monitor include $9.3 million of revenue recorded for unapproved change orders; $3.6 million of recorded S.M. Electric receivables, with recovery of remaining amounts potentially requiring mediation or litigation; and exposure to insurance deductibles, self-insured retentions and coverage limits. Management said known legal proceedings were not expected to have a material adverse effect. It also noted economic and industry conditions, regulation, litigation, contingency reserves and project execution among forward-looking risks.
Important facts for investors to verify
- Whether the western Canada tank project estimate stabilizes and whether further costs or losses arise.
- Conversion of the $605.1 million backlog into revenue and cash, including the timing and collectability of billings, retentions and unapproved change orders.
- Collection outcomes for the S.M. Electric receivables and the final Pelichem working-capital purchase-price adjustment.
- Whether receivables growth and contract working-capital movements continue to support operating cash generation.
- Continued covenant compliance and revolver availability as project, acquisition and capital-spending needs evolve.