Matrix Service Co.: Down, but not out
The shadow of hurricanes Katrina and Rita hangs heavy over the Gulf Coast region nearly two years after the one-two punch devastated the area. It also has continued to impact industrial construction companies such as Matrix Service Co. (Nasdaq: MTRX), which saw its fiscal 2007 profits take a hit from lingering problems on a major Louisiana tank project.
The Tulsa, Okla., company reported Tuesday its financial results for the fiscal fourth quarter and year ended May 31, and outside of a one-time charge, results from a deep 18-month restructuring were clearly visible.
For the quarter, revenue climbed 28% to $177.9 million, but net income dropped to $1.9 million, or $0.08 per share, compared with $3.3 million, or $0.16 per share in the year-ago period. The company took a charge of $10.9 million, or $0.24 per share, for continued cost overruns on a liquefied natural gas construction project in the Gulf Coast region. Without the charge, the company would have handily beaten the consensus earnings estimate of analysts surveyed by Thomson Financial, which called for $0.26 EPS.
Despite the earnings miss on the one-time charge, analysts didn't take company executives to task over the lingering problems associated with the big tank project during a Tuesday morning conference call. Nor have they rushed to recommend that their clients dispose of Matrix shares. Outside of the problems on the one project, the company has quickly implemented a restructuring that has strengthened its operations.
Matrix Service, in collaboration with Mitsubishi Heavy Industries, received a contract in 2005 from Bechtel Corp. for the engineering, fabrication and construction of three LNG tanks for Cheniere Energy at its Sabine Pass facility in Cameron Parish, La. Now more than two-thirds completed, the LNG terminal will be the largest in the world when operations begin in mid-2008. The $1.5 billion tank project will have the capacity of sending out 4 billion cubic feet of liquefied natural gas per day.
The Gulf Coast’s lingering shortage of skilled labor has hurt Matrix, and that has driven up costs on completing the project – its only construction carryover from the pre-Katrina period.
“Our ability to meet our cost projections … has continued to be eroded by a difficult post-Katrina labor environment, unforeseen productivity challenges and complexity of design, leading to material and equipment cost increases,” said Michael Bradley, the president and chief executive officer of Matrix, during a conference call with analysts on Tuesday. “The loss recognized this quarter reflects our best forecast of costs required to achieve our customer’s schedule on the remaining … work.”
Other than this project, Bradley said, “The fundamentals of our business and execution remain strong.” He also affirmed previous guidance for the year ending next May 31 that calls for revenue in the $700 million to $750 million range – or at least 9% better than the just-completed year’s $639.8 million.
The company has seen its share price drop about 40% since June, leaving investors scratching their heads on whether the stock should remain on their buy list. So far, the several analysts covering Matrix apparently have decided not to rush into drastically readjusting their expectations.
After hitting a 52-week high of $29.38 on June 19, a press release issued by Matrix the next day appeared to upset some recent smooth sailing for its shares to higher ground. In that release, Matrix issued its fiscal 2008 guidance and the healthy revenue leap from fiscal 2007’s just-reported $639.8 million -- which was nearly 30% better than fiscal 2006’s revenue.
But a statement from Bradley added a warning that “fourth-quarter results will be partially impacted by productivity related cost overruns … .”
That helped send Matrix shares into a one-day 17% sell-off. Cost overruns are nothing new: When Matrix released its financials for the quarter ended Feb. 28 in early April, it said the $10.8 million gross profit from construction services “was partially impacted by weather and productivity-related cost overruns on a project.”
Following that June update for the company’s current fiscal year, Sidoti & Co. analyst Richard Wesolowski increased his rating on Matrix to “buy” from “neutral,” and raised his price target to $35 from $28. On Tuesday Matrix closed at $19.99. Wesolowski, who began covering the company four years ago, cited in a research note “substantial upside to profitability as company completes lagging LNG job in F2008.”
To help prop up the stock, Matrix said Tuesday that it would buy back up to 1.3 million shares of the 26.6 million shares outstanding under a program initially approved in 2000.
The matrix of services that the company offers to the petroleum, petrochemical, power, bulk storage terminal and pipeline industries has grown since its founding in 1984 to include construction, repair and maintenance. Mostly, its goal is to make sure oil and water don’t mix, and it specializes in handing repairs and maintenance during outages and planned or unplanned shutdowns, when a quick completion is critical.
Its construction services segment designs and builds plants, refineries and storage tanks that hold ethanol, liquefied natural gas, water and wastewater. Employment has stabilized at around 3,400 at the company’s 13 locations in North America.
In the most recent Thomson Financial analyst tally, one rated Matrix a strong buy, three had a “buy” opinion, while two said “hold.” In late April, Matrix did receive a boost when Standard & Poor’s Corp. added the company to the S&P SmallCap 600 index.
The company has come a long way back in a short time of retrenching and restructuring. Even seeing the stock trade in the low $20s is a far cry better than its most recent low of $3.40, a bottom that it touched on April 11, 2005. When fiscal 2005 ended, Matrix reported a $39 million loss before former finance chief Michael Hall came out of retirement to take charge as acting CEO and replace Brad Vetal. Cost-cutting and downsizing over an 18-month period brought the company back into the black, with a profit of $7.7 million in the 2006 fiscal year.
In October 2006, Matrix hired Bradley, former chief of DCP Midstream Partners, to run the company, and Hall was appointed chairman.
For fiscal 2007, without $11.3 million in charges (including the LNG costs and $500,000 for accounting changes), the company’s EPS would have been $0.99 instead of the reported $0.74 per share; net income more than doubled from last year to $19.2 million after taking the charges.
For the quarter ended Feb. 28, Matrix reported a 244% improvement in net income to $6.2 million, or $0.24 per share, up from the prior year’s $1.8 million, or $0.08 a share. Revenue climbed 41% to $168.7 million.
Contract backlog continues to substantially increase, to $356.4 million as of May 31, compared with $248.4 million the year before. The company confirmed a number of new contracts during late spring and early summer, including a June 26 announcement that it won a $35 million deal to build above-ground storage tanks in Paulsboro, N.J., for Plains All American Pipeline, a Houston oil transporter.
During an April 5 conference call with analysts to review the February quarter's results, Bradley pointed to a healthy backlog of work at Matrix, saying during a question-and-answer session that "there continues to be very strong demand for our services in the downstream petroleum and, really, energy-related environment."
In discussing the current fiscal year this week, company officials sounded optimistic about the company's prospects at least through next May, and into fiscal 2009 as well. The world's continuing thirst for oil is likely to keep demand high for Matrix's services for many years.
