Matrix Service Company — FY2012 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2012, with comparative results for FY2011 and FY2010. The filing was signed September 6, 2012. Although the request metadata references 2011 Q4, this is an annual report for FY2012; fourth-quarter figures are noted below.
Business context
Matrix provides engineering, fabrication, construction and maintenance services, primarily to oil and gas, power, petrochemical, industrial, and mining and minerals markets in the United States and Canada. FY2012 reporting uses four revised segments: Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial; prior-period segment information was restated. Storage Solutions was the largest segment, contributing $378.2 million of FY2012 revenue.
Key financial results
| Metric | FY2012 | FY2011 | Change / context |
|---|---|---|---|
| Revenue | $739.0 million | $627.1 million | Up 17.8% |
| Gross profit / margin | $79.6 million / 10.8% | $74.9 million / 11.9% | Profit increased; margin declined 1.1 percentage points |
| Operating income | $31.6 million | $30.9 million | Up $0.7 million |
| Net income | $17.2 million | $19.0 million | Down 9.5% |
| Diluted EPS | $0.65 | $0.71 | Down $0.06 |
| Cash from operations | $2.9 million | $22.7 million | Down $19.8 million |
| Capital expenditures | $13.5 million | $10.4 million | Higher investment in growth strategy |
| Backlog at year-end | $497.5 million | $405.1 million | Up 22.8% |
Margins and segments: Oil Gas & Chemical revenue rose 43.5% to $205.8 million, with gross margin of 9.8% versus 9.5%. Storage Solutions revenue rose 26.6% to $378.2 million, but gross margin fell to 11.2% from 13.0%, reflecting geographic expansion, unexpected warranty work and isolated margin fades. Electrical Infrastructure revenue declined 10.6% to $135.1 million; gross margin was 12.3%. Industrial revenue declined 41.0% to $20.0 million and gross margin fell to 2.4%, partly due to startup costs in bulk material handling and mining and minerals; the segment recorded a $1.6 million operating loss.
Liquidity and debt: Cash was $39.7 million at June 30, 2012, down from $59.4 million. Working capital was $124.6 million, compared with $115.4 million. The company reported no borrowings outstanding under its $125 million revolving credit facility and $106.8 million of availability after letters of credit and covenant-based capacity limits. Total stated liquidity was $146.5 million. Management expected to fund the next 12 months with operating cash flow, existing cash and facility borrowings. Long-term debt was zero.
Cash flow drivers: Operating cash flow was constrained primarily by a $33.7 million cash outflow from contract assets and liabilities, as the FY2012 project mix required more funding of work than the prior-year portfolio. Investing activities used $12.7 million; financing activities used $9.4 million, including $8.1 million for share repurchases. EBITDA, a non-GAAP measure, was $42.8 million versus $42.5 million.
Material changes and unusual items
- Revenue growth was led by Storage Solutions and Oil Gas & Chemical, partly offset by declines in Electrical Infrastructure and Industrial.
- SG&A increased 9.1% to $48.0 million, reflecting higher activity, investment in growth and support functions, and a non-routine stock-compensation charge; SG&A as a share of revenue improved to 6.5% from 7.0%.
- The effective tax rate increased to 43.6% from 38.0%. A $3.1 million cumulative tax charge reflected deductibility limitations, including $2.1 million relating to prior fiscal years and $1.0 million to FY2012. A $0.5 million release of a foreign-tax-credit valuation allowance partly offset the effect.
- Fourth-quarter FY2012 revenue was $184.9 million, operating income $6.4 million and net income $1.8 million, versus $163.6 million, $9.5 million and $5.7 million, respectively, in fourth-quarter FY2011. FY2012 fourth-quarter results included the $3.1 million income-tax charge.
- Backlog additions were $831.4 million during FY2012, against $739.0 million of revenue recognized. Backlog is not guaranteed revenue and may be adjusted, delayed or cancelled.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or margin guidance. Management described growth investments and expected adequate liquidity for the coming year, but results remain exposed to project award timing and customer capital spending. The company noted seasonality in turnarounds and construction activity.
- Customer concentration increased: BP accounted for 11.0% of consolidated revenue and Enbridge 10.7%. Management warned that losing a major customer could materially harm the business.
- Fixed-price work, percentage-of-completion estimates, unapproved change orders and customer disputes create risk of cost overruns, profit revisions and collection delays. Unapproved change-order revenue included in contract assets was $8.5 million, up from $5.1 million; no claims were included there at either year-end.
- Safety incidents, environmental exposure, insurance limitations, severe weather, labor availability and multiemployer pension obligations are significant operating risks. Management said legal proceedings were typical and not expected to have a material effect, while acknowledging outcomes are inherently uncertain.
- Goodwill was $28.7 million. Annual impairment testing found positive headroom across reporting units, but management cautioned that weaker margins, growth or other changed assumptions could reduce that cushion.
- The credit agreement requires a senior leverage ratio below 2.50:1.00 and fixed-charge coverage of at least 1.25:1.00. The company reported covenant compliance and the lowest pricing tier at year-end. Dividends have not been paid and are restricted by the agreement.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded internal control was effective as of June 30, 2012.
Important facts for investors to verify
- Whether operating cash flow improves as contract asset growth and project billing patterns normalize; FY2012 operating cash flow was only $2.9 million despite $17.2 million of net income.
- Whether backlog converts to profitable revenue, particularly given lower margins in Storage Solutions and the Industrial segment loss.
- Customer concentration, project awards and ongoing work levels for BP, Enbridge and other major customers.
- The collectability and timing of $8.5 million in unapproved change orders, retentions and other contract receivables.
- Compliance with revolving-credit covenants and liquidity needs if working capital requirements, disputes or capital spending increase.