Business context and reporting period
Matrix Service Company’s unaudited Form 10-Q covers the quarter and nine months ended March 31, 2012 (fiscal 2012 third quarter), compared with the corresponding 2011 periods. The request metadata says “2011 Q3,” but the filing itself reports fiscal 2012 Q3. The company provides construction, maintenance, turnaround, and related services across electrical infrastructure, oil, gas and chemical, storage solutions, and industrial markets.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Nine months ended March 31, 2012 | Nine months ended March 31, 2011 |
|---|---|---|---|---|
| Revenue | $183.9 | $136.3 | $554.2 | $463.4 |
| Gross profit | $19.8 | $18.6 | $61.0 | $54.0 |
| Gross margin | 10.8% | 13.6% | 11.0% | 11.7% |
| Operating income | $7.4 | $7.6 | $25.2 | $21.4 |
| Net income | $4.9 | $4.9 | $15.4 | $13.3 |
| Diluted EPS | $0.19 | $0.18 | $0.58 | $0.50 |
- Quarterly revenue rose 34.9%, but gross margin contracted 2.8 percentage points and operating income declined about 3%. Net income was slightly lower year over year; diluted EPS increased from $0.18 to $0.19.
- Nine-month revenue increased 19.6%, operating income 17.9%, and net income 15.8%, while gross margin declined 0.7 percentage point.
- Operating cash flow was $0.5 million for the nine months, versus $20.1 million in the prior-year period. Working-capital demands included a $22.2 million cash use from contract costs/billings balances and a $10.3 million increase in receivables.
- Cash was $43.1 million at March 31, down from $59.4 million at June 30, 2011. Total reported liquidity was $157.0 million, including $113.9 million available under the revolving facility.
- Long-term debt was $1.8 million; the company reported compliance with credit covenants. The $125 million five-year secured revolver is subject to leverage and fixed-charge coverage tests; letters of credit outstanding were $6.9 million.
- Total assets were $315.8 million and stockholders’ equity $208.8 million at March 31. Capital expenditures were $9.6 million for the nine months; financing cash use included $8.1 million of open-market share repurchases.
Material changes and management commentary
- Quarterly growth came mainly from Oil, Gas & Chemical and Storage Solutions, with contributions from Electrical Infrastructure; Industrial revenue declined. For nine months, Oil, Gas & Chemical and Storage Solutions growth offset declines in Electrical Infrastructure and Industrial.
- Storage Solutions revenue grew, but margins were pressured by unexpected warranty work and overall pricing pressure. Oil, Gas & Chemical margins were affected by lower-margin capital construction work. Industrial results included startup costs from entry into material handling and mining and metals markets.
- Management cited weak activity in east coast Electrical Infrastructure operations, linked to refinery instability, warm winter weather, low natural-gas prices, and project-start and award delays. It said these conditions were likely to negatively affect that segment’s revenue and operating margin in fiscal fourth quarter.
- The company revised its reportable segments following a strategy and organizational review. It also disclosed backlog of $454.9 million at March 31, up from $405.1 million at June 30, 2011; backlog is not a guarantee of future revenue.
Outlook, risks, contingencies, and unusual items
- No specific numerical revenue or earnings guidance is provided. Management expected to fund the next 12 months with operating cash flow, existing cash, and potential revolver borrowings.
- Management warns that business is cyclical and quarterly results may fluctuate with customer project timing, seasonal turnarounds, energy demand, weather, and customer capital budgets.
- Unapproved change-order claims included $6.5 million in contract assets at March 31, versus $5.1 million at June 30; collection timing and ultimate recovery are uncertain.
- A remaining acquired claim receivable of $0.7 million and related trade receivables of $2.8 million require mediation or litigation for recovery. Management cautions that actual recoveries could differ materially from recorded values.
- Insurance reserves were $7.2 million. The company notes that deductibles, coverage limits, self-insurance, and subcontractor coverage may not fully protect it against claims. Other legal proceedings were not expected by management to have a material impact.
- Quarterly other income was a $0.1 million loss, compared with $0.5 million income a year earlier, primarily reflecting foreign-currency movements. The nine-month period also had foreign-currency losses versus gains in the prior year. The quarter’s lower effective tax rate reflected a tax deduction exceeding the prior estimate.
- Cash dividends have not been paid; the credit agreement limits dividends. The company repurchased 886,503 shares for $8.1 million during the nine months under its buyback program.
Most important facts for investors to verify
- Whether gross-margin pressure—especially warranty costs in Storage Solutions and lower-margin construction work—persists in coming periods.
- Whether the east coast Electrical Infrastructure weakness affects fourth-quarter results as management anticipated.
- Whether operating cash flow recovers as contract billing, collections, and working-capital balances normalize.
- Recoverability and timing of unapproved change-order claims and acquired claim/trade receivables.
- Backlog conversion, project execution, and covenant headroom under the revolving credit facility.