Business context and reporting period
Matrix Service Company’s Form 10-K reports the fiscal year ended June 30, 2013, with fiscal 2012 as the primary comparable period. The filing is not a fiscal 2012 year-end report. The company provides engineering, construction, fabrication, maintenance and infrastructure services across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial markets, primarily in the United States and Canada.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $892.6 million | $739.0 million |
| Gross profit / margin | $94.7 million / 10.6% | $79.6 million / 10.8% |
| Operating income | $36.7 million | $31.6 million |
| Net income | $24.0 million | $17.2 million |
| Diluted EPS | $0.91 | $0.65 |
| Operating cash flow | $57.1 million | $2.9 million |
| Capital expenditures | $23.2 million | $13.5 million |
| Backlog at year end | $626.7 million | $497.5 million |
At June 30, 2013, cash was $63.8 million, working capital was $131.9 million, and total assets were $410.0 million. The company reported no outstanding credit-facility borrowings at year-end; it had $111.6 million of facility availability after letters of credit. The filing separately reports $6.6 million of consolidated funded indebtedness for covenant purposes. Total liquidity, including cash and facility availability, was $175.4 million.
FY2013 fourth-quarter revenue was $235.6 million and net income was $7.4 million, compared with $184.9 million and $1.8 million, respectively, in FY2012’s fourth quarter.
Material changes versus prior year
- Revenue rose 20.8%, driven by growth in all four segments. Oil Gas & Chemical increased 33.0%, Electrical Infrastructure 26.7%, Industrial 172.0% from a smaller base, and Storage Solutions 4.0%.
- Gross profit grew 19.0%, but consolidated gross margin eased to 10.6% from 10.8%. SG&A increased 20.8% to $58.0 million, principally reflecting planned spending on branding, growth initiatives, support functions and higher activity.
- Net income benefited from a lower effective tax rate, 33.2% versus 43.6%. Management attributed the FY2013 rate partly to retroactive tax legislation and a tax-credit estimate change; FY2012 included significant nondeductible expenses.
- Operating cash flow improved to $57.1 million. Receivables increased $32.4 million with higher business volume and billing timing, while advanced billings and other working-capital movements contributed cash.
- Backlog increased 26.0% to $626.7 million. Storage Solutions was the largest component at $319.7 million.
Outlook, commentary, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management said it expected to fund the next 12 months with operating cash flow, cash on hand and, if needed, the revolving facility. It cited planned investment in strategic growth areas and support functions. Backlog is not guaranteed to convert to profitable revenue and may be adjusted or cancelled.
- Storage Solutions gross margin declined to 9.5% from 11.2%, affected by unrecovered overhead, a $1.0 million legal charge and a $3.7 million loss estimate on a western Canada tank project. The project charge reduced FY2013 net income by $2.4 million, or diluted EPS by $0.10; the project was completed in Q4.
- A customer dispute settlement concerning work performed in 2002–2003 cost $1.5 million, $1.0 million above the prior accrual. Industrial recorded a $0.4 million project charge and a $0.3 million intangible impairment was recorded in SG&A.
- Key risks include cyclical customer capital and maintenance spending, contract-award timing, fixed-price cost overruns, claims and unapproved change orders, customer concentration, workforce utilization and availability, safety incidents, weather, environmental regulation, litigation and insurance exposures, and potential multiemployer pension withdrawal liabilities.
- Enbridge represented 10.7% of consolidated FY2013 revenue, all in Storage Solutions. The company had 3,587 employees. It reported compliance with credit covenants and effective disclosure and financial-reporting controls; the independent auditor issued unqualified opinions on the financial statements and internal controls.
- Potentially material collection exposure includes $3.6 million of recorded receivables related to a dispute acquired with S.M. Electric; recovery may require mediation or litigation, and ultimate proceeds could differ materially. Recorded revenue for unapproved change orders and claims was $9.1 million.
Most important facts for investors to verify
- Whether the higher backlog converts to revenue and acceptable margins, especially in Storage Solutions and Industrial.
- Progress on collecting the S.M. Electric receivable and the $9.1 million of unapproved change orders and claims.
- Whether the western Canada project charges, legal settlement and other project-cost estimates are fully reflected in results.
- Cash conversion and receivables: operating cash flow improved sharply, but receivables grew materially with volume and billing timing.
- Customer concentration, contract execution and safety performance, and compliance with credit covenants as activity and investment expand.