Business Context and Reporting Period
Company: Matrix Service Company (Matrix Service)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Second quarter of Fiscal Year 2010 ended December 31, 2009. This filing also covers the six-month period ended December 31, 2009, and a one-month transition period ended June 30, 2009, resulting from a fiscal year change from May 31 to June 30.
Business Overview: Matrix Service provides construction and repair/maintenance services primarily to the downstream petroleum, bulk storage/terminal, and industrial sectors. Operations are divided into two segments: Construction Services and Repair and Maintenance Services.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Dec 31, 2009 | Six Months Ended Dec 31, 2009 | Three Months Ended Nov 30, 2008 | Six Months Ended Nov 30, 2008 |
|---|---|---|---|---|
| Revenues | $150,425 | $288,075 | $176,937 | $363,587 |
| Gross Profit | $18,442 | $35,860 | $26,369 | $53,040 |
| Gross Margin % | 12.3% | 12.4% | 14.9% | 14.6% |
| Operating Income | $7,066 | $14,397 | $14,593 | $29,202 |
| Net Income | $4,533 | $9,042 | $10,128 | $19,632 |
| Diluted EPS | $0.17 | $0.34 | $0.38 | $0.74 |
| Cash and Equivalents (Dec 31, 2009) | $61,367 | |||
| Operating Cash Flow (6 Months) | $11,913 | |||
| Total Debt / Credit Facility | $75.0M Facility; $9.5M Letters of Credit outstanding; $65.5M Available |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 15.0% ($26.5M) for the quarter and 20.8% ($75.5M) for the six months compared to the prior year. This was driven by a 19.5% drop in Construction Services and a 9.1% drop in Repair and Maintenance Services.
- Margin Compression: Gross margins declined to 12.3% (quarter) and 12.4% (six months) from 14.9% and 14.6% respectively in the prior year. The decline was attributed to lower business volumes failing to recover fixed construction overhead costs.
- Segment Performance:
- Construction Services: Revenues fell due to delays in project awards and reduced customer capital spending, particularly in Downstream Petroleum (-51.3% QoQ) and Aboveground Storage Tanks (-20.0% QoQ). However, Electrical and Instrumentation revenues increased 83.9%.
- Repair and Maintenance: Revenues declined due to customer discretion on maintenance scope. Aboveground Storage Tank revenues dropped 51.1%, partially offset by an 86.3% increase in Downstream Petroleum revenues.
- SG&A Expenses: Selling, general, and administrative expenses decreased slightly due to cost reduction efforts, though they were partially offset by a $0.9 million charge for collection costs on acquired claim receivables.
Outlook, Risks, and Management Commentary
- Outlook: Management remains cautious regarding the second half of fiscal 2010 due to strong competition and a slower-than-expected pace of project awards. While consolidated backlog stabilized in the second quarter, margins are expected to face continued pressure from the economic environment.
- Backlog: Total backlog as of December 31, 2009, was $323.7 million ($182.4M Construction; $141.3M Repair & Maintenance). This represents a decrease from the June 30, 2009 level of $392.1 million, primarily due to project cancellations and lower new awards in certain categories.
- Liquidity: The company maintains a $75.0 million senior revolving credit facility expiring in November 2012. As of December 31, 2009, total liquidity (cash + availability) was $126.9 million. The company is in compliance with all financial covenants.
- Risks and Contingencies:
- Legal Proceedings: A trial is scheduled for February 2010 regarding a 2005 fatal accident at a Delaware refinery. The company believes insurance will cover amounts beyond existing reserves.
- Unapproved Change Orders: $1.7 million in revenues for unapproved change orders are included in costs and estimated earnings in excess of billings. Collection is expected within 12 months but is subject to resolution.
- Insurance Reserves: Reserves totaled $7.2 million as of December 31, 2009. Actual claim settlements could differ from estimates.
Investor Verification Checklist
- Verify the sustainability of the backlog stabilization trend given the reported project cancellations ($18.2M in the six months ended Dec 31, 2009).
- Monitor the resolution of the Delaware refinery legal proceeding scheduled for February 2010 and potential impacts on insurance reserves.
- Assess the collectability of the $1.7 million in unapproved change orders and the $0.9 million charge related to acquired claim receivables.
- Track the recovery of gross margins in the Repair and Maintenance segment, which dropped significantly from 17.7% to 9.4% year-over-year.
- Review the pace of new project awards in the Downstream Petroleum and Aboveground Storage Tank markets to gauge future revenue recovery.