Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MTRX > SEC Filings for MTRX > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for MATRIX SERVICE CO

Form 10-Q for MATRIX SERVICE CO


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes in our critical accounting policies from those reported in our fiscal 2012 Annual Report on Form 10-K filed with the SEC. For more information on our critical accounting policies, see Part II, Item 7 of our fiscal 2012 Annual Report on Form 10-K. The following section provides certain information with respect to our critical accounting estimates as of the close of our most recent quarterly period.

Unapproved Change Orders and Claims

Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unapproved change orders of $9.4 million at September 30, 2012 and $8.5 million at June 30, 2012. There were no revenues related to claims included in costs and estimated earnings in excess of billings on uncompleted contracts at September 30, 2012 or June 30, 2012. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.

SME Receivables

The Company continues to pursue collection of certain receivables acquired in connection with the purchase of S.M. Electric Company, Inc. in February 2009. The recorded values at September 30, 2012 include $0.7 million in claim receivables, which represents the Company's best estimate of the amount to be collected under a claim, and an additional $2.9 million for amounts due under the related contract. Recovering the remaining receivables will require mediation or litigation and the ultimate amount realized may be significantly different than the recorded amounts, which could result in an adjustment to future earnings.

Insurance Reserves

We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, coverage limits and self-insured retentions. We establish reserves for claims using a combination of actuarially determined estimates and management judgment on a case-by-case basis and update our evaluations as further information becomes known. Judgments and assumptions, including the assumed losses for claims incurred but not reported, are inherent in our reserve accruals; as a result, changes in assumptions or claims experience could result in changes to these estimates in the future. If actual results of claim settlements are different than the amounts estimated, we may be exposed to gains and losses that could be significant.

Goodwill

The Company has four significant reporting units with goodwill representing 42%, 21%, 14% and 11% of the total goodwill balance. Our most recent annual goodwill impairment test, performed in the fourth quarter of fiscal 2012, indicated that the fair value of these reporting units exceeded their respective carrying values by 46%, 84%, 106% and 40%, respectively. Based on the excess of estimated fair value over carrying value and the absence of any indicators of impairment at September 30, 2012, the Company does not currently anticipate recording a goodwill impairment charge for any of its operating units.

Recently Issued Accounting Standards

There are no recently issued accounting standards that we believe will have a material affect on our financial statements.

-15-


Table of Contents

RESULTS OF OPERATIONS

Overview

During fiscal 2012, the Company completed an update of its long-term business strategy. This strategic update along with certain changes in our organizational structure led to a reassessment of our operating segments. As a result of these events, we have revised our reportable segments to better align with the current management of the business. Our segments are as follows:

The Electrical Infrastructure segment primarily encompasses high voltage services to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants, nuclear facilities, coal fired power stations, and renewable energy installations.

The Oil Gas & Chemical segment includes our traditional turnaround activities, plant maintenance services and construction in the downstream petroleum industry. Another key offering is industrial cleaning services, which include hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the renewable energy, industrial and natural gas, gas processing and compression, and upstream petroleum markets.

The Storage Solutions segment includes new construction of, as well as planned and emergency maintenance services for, crude and refined products aboveground storage tanks. Also included in the Storage Solutions segment is work related to specialty storage tanks including liquefied natural gas ("LNG"), liquid nitrogen/liquid oxygen ("LIN/LOX"), liquid petroleum ("LPG") tanks and other specialty vessels including spheres. Finally, the Storage Solutions segment includes balance of plant work in storage terminals and tank farms.

The Industrial segment includes work in the mining and minerals industry, bulk material handling, thermal vacuum chambers, as well as work for clients in other industrial and manufacturing markets.

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Consolidated

Consolidated revenues were $209.6 million for the three months ended September 30, 2012, an increase of $40.3 million, or 23.8%, from consolidated revenues of $169.3 million in the same period in the prior fiscal year. The increase in consolidated revenues was a result of increases in Oil Gas & Chemical, Electrical Infrastructure and Storage Solutions revenues, which increased $21.3 million, $11.3 million and $9.3 million, respectively, partially offset by a decrease of $1.6 million in Industrial revenues.

Consolidated gross profit increased from $18.1 million in the three months ended September 30, 2011 to $22.2 million in the three months ended September 30, 2012. The increase of $4.1 million, or 22.7%, was primarily due to higher revenues in the first quarter of the current fiscal year. Gross margins were 10.6% in the three months ended September 30, 2012 compared to 10.7% in the same period a year earlier.

Consolidated SG&A expenses were $14.3 million in the three months ended September 30, 2012 compared to $11.5 million in the same period a year earlier. The increase of $2.8 million, or 24.3%, was primarily related to our planned investments in the branding initiative and strategic growth areas. In addition, the first quarter results include a bad debt charge of $0.7 million. SG&A expense as a percentage of revenue remained unchanged at 6.8%.

Net interest expense was $0.2 million in the three months ended September 30, 2012 and $0.3 million in the three months ended September 30, 2011.

-16-


Table of Contents

Other income in the three months ended September 30, 2012 was $0.1 million compared to a loss of $0.7 million in the three months ended September 30, 2011. The prior period loss was related primarily to foreign currency transaction losses.

The effective tax rate was 40.0% for the three months ended September 30, 2012 and 38.0% for the three months ended September 30, 2011. The increase in the effective tax rate in the first quarter of fiscal 2013 was due to a change in the deductibility limitations applying to certain items that had previously been fully deducted.

Electrical Infrastructure

Revenues for the Electrical Infrastructure segment increased $11.3 million, or 51.4%, to $33.3 million in the three months ended September 30, 2012 compared to $22.0 million in the same period a year earlier. The higher revenue was primarily due to an increase in high voltage work in the Northeastern United States. Gross margins were 14.1% in the three months ended September 30, 2012 compared to 12.7% in the same period a year earlier. The improvement in gross margins in the first quarter of fiscal 2013 is due to the favorable effect of the improved recovery of overhead costs caused by a higher business volume.

Oil Gas & Chemical

Revenues for the Oil Gas & Chemical segment increased to $67.1 million in the three months ended September 30, 2012 compared to $45.8 million in the same period a year earlier. The increase of $21.3 million, or 46.5%, was primarily due to a higher level of turnaround and capital construction projects. Gross margins were 11.7% in the three months ended September 30, 2012 compared to 9.5% in the same period a year earlier. The improvement in gross margins in the first quarter of fiscal 2013 is primarily due to improved project execution and the favorable effect of the improved recovery of overhead costs caused by a higher business volume.

Storage Solutions

Revenues for the Storage Solutions segment increased to $104.2 million in the three months ended September 30, 2012 compared to $94.9 million in the same period a year earlier. The increase of $9.3 million, or 9.8%, was due to higher levels of work both domestically and in Canada in our aboveground storage tank business. Gross margins decreased from 10.9% in the three months ended September 30, 2011 to 9.6% in the same period in the current year. The lower margins in the current quarter were due to geographic expansion and short-term softening of the market as expected.

Industrial

Revenues for the Industrial segment totaled $5.0 million in the three months ended September 30, 2012 compared to $6.6 million in the same period a year earlier. The decrease of $1.6 million, or 24.2%, was largely due to the timing of projects related to legacy industrial work, offset in part by higher revenues in our mining and minerals and bulk material handling businesses. Gross margins decreased from 8.7% in the three months ended September 30, 2011 to (6.0%) in the same period in the current year. Gross margins in the current quarter were negatively impacted by startup costs related to our entry into the bulk material handling and mining and minerals markets.

Backlog

We define backlog as the total dollar amount of revenues that we expect to recognize as a result of performing work that has been awarded to us through a signed contract, notice to proceed or other type of assurance that we consider firm. The following arrangements are considered firm:

fixed-price awards;

minimum customer commitments on cost plus arrangements; and

certain time and material arrangements in which the estimated value is firm or can be estimated with a reasonable amount of certainty in both timing and amounts.

For long-term maintenance contracts we include only the amounts that we expect to recognize into revenue over the next 12 months. For all other arrangements, we calculate backlog as the estimated contract amount less revenues recognized as of the reporting date.

-17-


Table of Contents

The following table provides a summary of changes in our backlog for the three months ended September 30, 2012:

                                       Electrical         Oil Gas &        Storage
                                     Infrastructure        Chemical       Solutions        Industrial         Total
                                                                      (In thousands)
Backlog as of June 30, 2012         $        127,699      $  117,862      $  236,571      $     15,320      $  497,452
Net awards                                    40,889          66,092         132,603             7,218         246,802
Revenue recognized                           (33,270 )       (67,097 )      (104,266 )          (4,975 )      (209,608 )

Backlog as of September 30, 2012    $        135,318      $  116,857      $  264,908      $     17,563      $  534,646

Non-GAAP Financial Measure

EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. We have presented EBITDA because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses. We believe that the line item on our Consolidated Statements of Income entitled "Net Income" is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. EBITDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure is not necessarily a measure of our ability to fund our cash needs. As EBITDA excludes certain financial information compared with net income, the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded. Our non-GAAP performance measure, EBITDA, has certain material limitations as follows:

It does not include interest expense. Because we have borrowed money to finance our operations, pay commitment fees to maintain our credit facility, and incur fees to issue letters of credit under the credit facility, interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore, any measure that excludes interest expense has material limitations.

It does not include income taxes. Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations.

It does not include depreciation or amortization expense. Because we use capital and intangible assets to generate revenue, depreciation and amortization expense is a necessary element of our cost structure. Therefore, any measure that excludes depreciation or amortization expense has material limitations.

A reconciliation of EBITDA to net income follows:

                                                 Three Months Ended
                                          September 30,       September 30,
                                              2012                2011
                                                   (In thousands)
         Net income                      $         4,684     $         3,509
         Interest expense                            183                 277
         Provision for income taxes                3,122               2,151
         Depreciation and amortization             2,826               2,826

         EBITDA                          $        10,815     $         8,763

-18-


Table of Contents

FINANCIAL CONDITION AND LIQUIDITY

Overview

We define liquidity as the ongoing ability to pay our liabilities as they become due, fund business operations and meet all monetary contractual obligations. Our primary sources of liquidity for the three months ended September 30, 2012 were cash on hand at the beginning of the year, capacity under our senior revolving credit facility and cash generated from operations. Cash on hand at September 30, 2012 totaled $17.2 million and availability under the senior revolving credit facility totaled $108.4 million resulting in total funding availability of $125.6 million. We expect to fund our operations for the next twelve months through the use of cash generated from operations, existing cash balances and borrowings under our credit facility.

Factors that routinely impact our short-term liquidity and may impact our long-term liquidity include, but are not limited to:

Changes in costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs due to contract terms that determine the timing of billings to customers and the collection of those billings

Some cost plus and fixed price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collections from our customers.

Time and material contracts are normally billed in arrears. Therefore, we are routinely required to carry these costs until they can be billed and collected.

Some of our large construction projects may require significant retentions or security in the form of letters of credit.

Other changes in working capital

Capital expenditures

Other factors that may impact both short and long-term liquidity include:

Acquisitions of new businesses

Strategic investments in new operations

Purchases of shares under our stock buyback program

Contract disputes or collection issues

Capacity constraints under our senior revolving credit facility and remaining in compliance with all covenants contained in the credit agreement

We have an effective shelf registration statement on file with the SEC under which we may issue, from time to time, up to $400 million of senior debt securities, subordinated debt securities, common stock, preferred stock and warrants. This shelf gives us additional flexibility, when capital market conditions are favorable, to grow our business, finance acquisitions or to optimize our balance sheet in order to improve or maintain our financial flexibility. We may also elect to issue term debt or increase the amount of our revolving credit facility. We will continue to evaluate our working capital requirements and other factors to maintain sufficient liquidity.

Cash Flow in the Three Months Ended September 30, 2012

Cash Flows Used for Operating Activities

Cash flows used for operating activities for the three months ended September 30, 2012 totaled $21.0 million. Major components of cash flows used for operating activities for the first quarter of fiscal 2013 are as follows:

-19-


Table of Contents

                   Net Cash Provided by Operating Activities

                                 (In thousands)



     Net income                                                   $   4,684
     Non-cash expenses                                                4,445
     Deferred income tax                                                 98
     Cash effect of changes in operating assets and liabilities     (30,152 )
     Gain on disposition of property, plant and equipment               (33 )
     Other                                                              (40 )

     Net cash used by operating activities                        $ (20,998 )

The cash effect of significant changes in operating assets and liabilities include the following:

The net change in the combined balances of costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs and estimated earnings caused an increase in operating assets and liabilities and an increase to cash of $6.3 million in the three months ended September 30, 2012. This change was primarily attributable to our project portfolio permitting a higher degree of advanced billings in the first quarter of fiscal 2013.

Accounts receivable increased by $49.5 million. The accounts receivable increase is due to a higher level of business and the timing of billings particularly in the Storage Solutions and Electrical Infrastructure segments. We view this increase as a short-term fluctuation. The receivable aging categories have not deteriorated and we do not anticipate any unusual collection difficulties.

Accounts payable increased by $12.5 million. The increase was primarily due to an increase in business activity.

Cash Flows Used For Investing Activities

Investing activities used $5.1 million of cash in the three months ended September 30, 2012 due to capital expenditures. Capital expenditures included $2.4 million for the purchase of construction equipment, $1.4 million for transportation equipment, $1.2 million for office equipment and software and $0.1 million for land and buildings.

Cash Flows from Financing Activities

Financing activities provided $3.1 million of cash in the three months ended September 30, 2012 primarily due to net cash borrowings of $3.4 million, offset in part by treasury share purchases of $0.4 million. Cash borrowings were Canadian dollar advances under our credit agreement to mitigate foreign exchange rate risks.

Senior Revolving Credit Facility

The Company has a five-year senior secured revolving credit facility (the "Credit Agreement") of $125.0 million that expires November 7, 2016. Advances under the Credit Agreement may be used for working capital, issuance of letters of credit and other lawful corporate purposes.

The Credit Agreement includes the following covenants and borrowing limitations:

Our Senior Leverage Ratio, as defined in the agreement, may not exceed 2.50 to 1.00 as of the end of each fiscal quarter.

We will be required to maintain a Fixed Charge Coverage Ratio, as defined in the agreement, greater than or equal to 1.25 to 1.00 as of the end of each fiscal quarter.

-20-


Table of Contents
Asset dispositions (other than inventory and obsolete or unneeded equipment disposed of in the ordinary course of business) are limited to $15.0 million per 12-month period.

Amounts borrowed under the Credit Agreement bear interest at LIBOR or an Alternate Base Rate, plus in each case, an additional margin based on the Senior Leverage Ratio. The Credit Agreement includes additional margin ranges on Alternate Base Rate loans between 0.75% and 1.5% and between 1.75% and 2.5% on LIBOR-based loans.

The Credit Agreement also permits us to borrow in Canadian dollars with a sublimit of U.S. $15.0 million. Amounts borrowed in Canadian dollars will bear interest either at the CDOR Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 1.75% to 2.5%, or at the Canadian Prime Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 2.25% to 3.0%. The CDOR Rate is equal to the sum of the annual rate of interest which is the rate determined as being the arithmetic average of the quotations of all institutions listed in respect of the relevant CDOR interest period for Canadian Dollar denominated bankers' acceptances, plus 0.1%. The Canadian Prime Rate is equal to the greater of (i) the rate of interest per annum most recently announced or established by JPMorgan Chase Bank, N.A., Toronto Branch as its reference rate in effect on such day for determining interest rates for Canadian Dollar denominated commercial loans in Canada and (ii) the CDOR Rate plus 1.0%.

The Unused Credit Facility Fee is between 0.30% and 0.45% based on the Senior Leverage Ratio.

As noted previously, the Credit Agreement includes a Senior Leverage Ratio covenant which provides that Consolidated Funded Indebtedness may not exceed 2.5 times Consolidated EBITDA, as defined in the agreement, over the previous four quarters. For the four quarters ended September 30, 2012, Consolidated EBITDA was $48.1 million. Accordingly, at September 30, 2012, Consolidated Funded Indebtedness in excess of $120.2 million would have violated the Senior Leverage Ratio covenant. The Consolidated Funded Indebtedness at September 30, 2012 was $4.5 million.

Dividend Policy

We have never paid cash dividends on our common stock, and the terms of our Credit Agreement limit the amount of cash dividends we can pay. Under our Credit Agreement, we may declare and pay dividends on our capital stock during any fiscal year up to an amount which, when added to all other dividends paid during such fiscal year, does not exceed 50% of our cumulative net income for such fiscal year to such date. While we currently do not intend to pay cash dividends, any future dividend payments will depend on our financial condition, capital requirements and earnings as well as other relevant factors.

Stock Repurchase Program and Treasury Shares

Treasury Shares

The Company's existing stock buyback program, which was approved by the Board of Directors on February 4, 2009, was scheduled to expire on December 31, 2012. The program permits the Company to purchase up to 3,000,000 shares of common stock provided that such purchases do not exceed $25.0 million in any calendar year. Since its inception, the Company has purchased a total of 886,503 shares under our stock buyback program at an average price of $9.17. On November 6, 2012, our Board of Directors approved a two year extension of the stock buyback plan, which will allow the Company to purchase up to an additional 2,113,497 shares through the end of calendar year 2014 if sufficient liquidity exists and we believe that it is in the best interest of the stockholders.

In addition to the stock buyback program, the Company may withhold shares of common stock to satisfy the tax withholding obligations upon vesting of an employee's deferred shares. Matrix withheld 33,454 shares in the first quarter of fiscal 2013 to satisfy these obligations. These shares were returned to the Company's pool of treasury shares.

The Company has 2,051,764 treasury shares as of September 30, 2012 and intends to utilize these treasury shares solely in connection with equity awards under the Company's stock incentive plans.

-21-


Table of Contents

FORWARD-LOOKING STATEMENTS

This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-Q which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words "believes," "intends," "expects," "anticipates," "projects," "estimates," "predicts" and similar expressions are also intended to identify forward-looking statements.

These forward-looking statements include, among others, such things as:

amounts and nature of future revenues and margins from each of our segments;

the likely impact of new or existing regulations or market forces on the demand for our services;

expansion and other trends of the industries we serve;

our ability to generate sufficient cash from operations or to raise cash in order to meet our short and long-term capital requirements; and

our ability to comply with the covenants in our credit agreement.

. . .

  Add MTRX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MTRX - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.