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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- -----------------
Commission File Number: 0-23335
MPW INDUSTRIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1567260
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
9711 Lancaster Road, S.E., Hebron, Ohio 43025
(Address of principal executive offices) (Zip code)
(740) 927-8790
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the latest practicable date.
As of January 31, 2000, 10,879,334 shares of the issuer's common stock,
without par value, were outstanding.
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MPW INDUSTRIAL SERVICES GROUP, INC.
INDEX
<TABLE>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1999 (unaudited) and June 30, 1999............3
Consolidated Statements of Income for the three and six months ended December 31,
1999 and 1998 (unaudited)....................................................................4
Consolidated Statements of Cash Flows for the six months ended December 31,
1999 and 1998 (unaudited)....................................................................5
Notes to Consolidated Financial Statements (unaudited).......................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................14
Item 2. Changes in Securities and Use of Proceeds...................................................14
Item 3. Defaults Upon Senior Securities.............................................................14
Item 4. Submission of Matters to a Vote of Security Holders.........................................14
Item 5. Other Information...........................................................................15
Item 6. Exhibits and Reports on Form 8-K............................................................15
SIGNATURES....................................................................................................17
EXHIBIT INDEX ................................................................................................18
</TABLE>
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PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MPW INDUSTRIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
---------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 295 $ 318
Accounts receivable, net 40,964 35,744
Inventories 10,905 9,044
Deferred income taxes 917 1,492
Prepaid expenses 2,103 1,868
Other current assets 2,650 973
-------- --------
57,834 49,439
Property and equipment, net 48,118 41,429
Noncurrent assets:
Intangibles, net 57,355 50,946
Other assets 615 436
-------- --------
Total assets $163,922 $142,250
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,838 $ 9,968
Accrued compensation and related taxes 2,427 4,638
Current maturities of noncurrent liabilities 653 714
Other accrued liabilities 7,232 5,846
-------- --------
24,150 21,166
Noncurrent liabilities:
Long-term debt 78,743 65,475
Deferred income taxes 4,622 4,456
Other 156 312
-------- --------
83,521 70,243
Minority interest 1,200 1,275
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and
outstanding -- --
Common stock, no par value; 30,000,000 shares authorized; 10,879,334 and 10,784,945 shares
issued and outstanding at December 31, 1999 and June 30, 1999, respectively 109 108
Additional paid-in capital 41,409 40,531
Retained earnings 13,533 8,927
-------- --------
55,051 49,566
-------- --------
Total liabilities and shareholders' equity $163,922 $142,250
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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MPW INDUSTRIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $48,427 $38,414 $94,823 $68,251
Costs and expenses:
Cost of services 31,925 25,689 63,220 45,647
Selling, general and administrative expenses 8,160 6,510 16,341 11,852
Depreciation and amortization 2,414 1,593 4,644 2,932
------------ ------------ ------------ ------------
Total costs and expenses 42,499 33,792 84,205 60,431
------------ ------------ ------------ ------------
Income from operations 5,928 4,622 10,618 7,820
Interest expense, net 1,622 780 2,932 1,269
------------ ------------ ------------ ------------
Income from operations before income taxes 4,306 3,842 7,686 6,551
Provision for income taxes 1,722 1,575 3,074 2,685
------------ ------------ ------------ ------------
Net income $ 2,584 $ 2,267 $ 4,612 $ 3,866
============ ============ ============ ============
Net income per share $ 0.24 $ 0.21 $ 0.42 $ 0.36
============ ============ ============ ============
Net income per share, assuming dilution $ 0.22 $ 0.20 $ 0.39 $ 0.34
============ ============ ============ ============
Weighted average common shares outstanding 10,879 10,757 10,862 10,683
Weighted average common shares outstanding, assuming dilution 11,903 11,452 11,876 11,389
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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MPW INDUSTRIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------------
1999 1998
------------ ----------
(UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 4,612 $ 3,866
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 3,306 2,262
Amortization 1,338 670
Loss on disposals of assets 275 74
Change in deferred income taxes 741 248
Changes in operating assets and liabilities:
Accounts receivable (4,699) (7,744)
Inventories (2,322) (320)
Prepaid expenses and other assets (2,035) (1,918)
Accounts payable 3,823 1,158
Other accrued liabilities (1,614) (1,214)
----------- -----------
Net cash provided by (used in) operating activities 3,425 (2,918)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,058) (6,401)
Purchase of businesses, net of acquired cash (5,634) (24,658)
Proceeds from the disposal of property and equipment 32 46
----------- -----------
Net cash used in investing activities (15,660) (31,013)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 29 14
Proceeds from revolving credit facility 36,688 79,485
Payments on revolving credit facility (24,287) (29,801)
Proceeds from notes payable - 6,804
Payments on notes payable (182) (22,833)
Payments on capital lease obligations (36) (80)
----------- -----------
Net cash provided by financing activities 12,212 33,589
----------- -----------
Decrease in cash and cash equivalents (23) (342)
Cash and cash equivalents at beginning of year 318 507
----------- -----------
Cash and cash equivalents at end of period $ 295 $ 165
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS MPW Industrial
Services Group, Inc. and its subsidiaries (the "Company") provide
technically-based services, including industrial cleaning and facility
maintenance, industrial filtration management, contamination control services
for critical cleanroom environments, industrial container cleaning and
industrial process water purification. Such services are primarily provided at
customer facilities. The Company serves customers in numerous industries
including automotive, electric power, pulp and paper, chemical, steel,
transportation, semiconductor, microelectronics and pharmaceutical. The Company
provides services primarily throughout the United States, Mexico and Canada.
The accompanying unaudited consolidated financial statements presented
herein have been prepared by the Company and reflect all adjustments of a normal
recurring nature that are, in the opinion of management, necessary for a fair
presentation of financial results for the three and six months ended December
31, 1999 and 1998, in accordance with generally accepted accounting principles
for interim financial reporting and pursuant to Article 10 of Regulation S-X.
Certain footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. These interim consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended June 30, 1999 ("Annual Report"). The
results of operations for the three and six months ended December 31, 1999 and
1998 are not necessarily indicative of the results for the full year (see Note 7
for further information regarding fluctuations in quarterly results).
USE OF ESTIMATES The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
accompanying consolidated financial statements. Actual results could differ from
those estimates.
NOTE 2. ACQUISITIONS
THERMAL COATING On August 10, 1999, effective April 1, 1999, the
Company purchased substantially all of the assets of Thermal Coating, Inc.
("Thermal Coating") for an aggregate consideration of $3,434,000. The
consideration included the issuance of preferred stock of Pentagon Technologies
Group, Inc., a wholly-owned subsidiary of the Company ("Pentagon"), representing
1% of the equity in Pentagon. Also included in the consideration is the issuance
of an unsecured convertible subordinated promissory note with a principal amount
of $1,000,000 and accruing interest at 10%, which is convertible into shares of
common stock of the Company. The acquisition has been accounted for using the
purchase method of accounting. The accompanying financial statements include the
results of operations of Thermal Coating from the effective acquisition date
through December 31, 1999.
The terms of certain of the Company's other acquisition agreements also
provide for additional consideration to be paid based on the achievement of
certain objectives. Such additional consideration is paid in cash, common stock
of the Company, or a combination thereof, and is capitalized as goodwill. During
the six months ended December 31, 1999, the Company paid additional
consideration of $3,719,000, of which $1,079,000 related to the issuance of
86,389 shares of the Company's common stock.
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NOTE 3. INTANGIBLES
Intangibles are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------ --------
<S> <C> <C>
Goodwill $48,576 $42,318
Customer lists 7,238 6,971
Patents 1,195 1,264
Non-compete agreements 346 393
------- -------
$57,355 $50,946
======= =======
</TABLE>
Accumulated amortization of intangibles as of December 31, 1999 and
June 30, 1999 was $3,717,000 and $2,418,000, respectively.
NOTE 4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ---------------------
1999 1998 1999 1998
------------------------ ----------------------
<S> <C> <C> <C> <C>
Numerator for basic earnings per share - net
income $2,584 $2,267 $4,612 $3,866
Effect of assumed exercise of equity
interest in Pentagon - 7 17 7
------------------------ ----------------------
Numerator for diluted earnings per share -
net income after assumed conversions $2,584 $2,260 $4,595 $3,859
======================== ======================
Denominator for basic earnings per share -
weighted average common shares 10,879 10,757 10,862 10,683
Effect of dilutive securities:
Dilutive employee stock options 658 668 648 679
Preferred stock of Pentagon 366 27 366 27
------------------------ ----------------------
Dilutive potential common shares 1,024 695 1,014 706
Denominator for diluted earnings per share -
adjusted weighted average common shares and
assumed conversions 11,903 11,452 11,876 11,389
======================== ======================
Net income per share $ 0.24 $ 0.21 $ 0.42 $ 0.36
======================== ======================
Net income per share, assuming dilution $ 0.22 $ 0.20 $ 0.39 $ 0.34
======================== ======================
</TABLE>
Options to purchase 773,350 and 340,000 shares of common stock at a
weighted average price of $10.07 and $10.88 per share, respectively, were
outstanding during the three months ended December 31, 1999 and 1998,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares and, therefore, the effect would be antidilutive.
Options to purchase 765,350 and 340,000 shares of common stock at a weighted
average price of $10.09 and $10.88 per share, respectively, were outstanding
during the six months ended December 31, 1999 and 1998, respectively, but were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
The 10% convertible debenture that was issued in connection with the
acquisition of Thermal Coating is convertible into 86,505 shares of common stock
of the Company if the common stock price is at least $11.56. These shares were
not included in the computation of diluted earnings per share because the
conversion price of the convertible debenture was
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greater than the market price of the common shares at the end of the three and
six months ended December 31, 1999 and, therefore, the effect would be
antidilutive.
NOTE 5. OPERATING SEGMENTS
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The column entitled "Other" primarily
includes corporate related items and are not allocated to the Company's
reportable segments.
<TABLE>
<CAPTION>
FACILITIES
SUPPORT FILTRATION OTHER TOTAL
---------- ---------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31, 1999
Revenues $ 33,640 $14,787 $ -- $48,427
Depreciation and amortization 2,079 214 121 2,414
Income (loss) from operations 6,204 1,434 (1,710) 5,928
Assets 118,126 37,152 8,644 163,922
THREE MONTHS ENDED DECEMBER 31, 1998
Revenues $ 27,006 $ 11,408 $ -- $38,414
Depreciation and amortization 1,379 151 63 1,593
Income (loss) from operations 4,880 1,302 (1,560) 4,622
Assets 93,574 27,609 3,207 124,390
SIX MONTHS ENDED DECEMBER 31, 1999
Revenues $ 67,700 $27,123 $ -- $94,823
Depreciation and amortization 4,034 407 203 4,644
Income (loss) from operations 11,735 2,530 (3,647) 10,618
Assets 118,126 37,152 8,644 163,922
SIX MONTHS ENDED DECEMBER 31, 1998
Revenues $ 48,974 $ 19,277 $ -- $68,251
Depreciation and amortization 2,536 266 130 2,932
Income (loss) from operations 8,785 1,936 (2,901) 7,820
Assets 93,574 27,609 3,207 124,390
</TABLE>
NOTE 6. SUBSEQUENT EVENTS
In January 2000, the Company acquired all of the outstanding stock of
Industrial Service, Inc. for an aggregate consideration of $4,500,000.
The Company has recently entered into an agreement in principle with an
investment partnership that provides for the partnership to invest in Pentagon,
resulting in MPW owning a minority interest in the equity of Pentagon. See Item
2 included elsewhere in this Form 10-Q for further information regarding this
transaction.
NOTE 7. FLUCTUATIONS IN QUARTERLY RESULTS
The Company's revenues and results of operations tend to vary
seasonally as a result of a number of factors over which the Company has no
control, including its customers' budgetary constraints, the timing and duration
of its customers' planned maintenance activities and shutdowns, changes in its
competitors' pricing policies and general economic conditions. Also, certain
operating and fixed costs remain relatively constant throughout the fiscal year,
which when offset by differing levels of revenues, may result in fluctuations in
quarterly operating results. Because of these factors, the Company typically
generates the least amount of revenues in the third quarter, higher revenues in
the second quarter and the greatest amount of revenues in the first and fourth
quarters. Although the Company believes that the historical trend in quarterly
revenue for the first and fourth quarters are generally higher than the second
and third quarters, there can be no assurance that this trend will occur in
future periods. Accordingly, quarterly or other interim results should not be
considered indicative of results to be expected for any quarter or for the full
year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Except for historical information, certain statements in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") are forward looking. These forward looking statements are
based on current expectations that are subject to a number of uncertainties and
risks and actual results may differ materially. The uncertainties and risks
include, but are not limited to, competitive and other market factors, customer
purchasing behavior, general economic conditions and other facets of our
business operations as well as other risk factors identified in "Investment
Considerations" in our Annual Report. We undertake no obligation and do not
intend to update, revise or otherwise publicly release the result of any
revisions to these forward looking statements that may be made to reflect future
events or circumstances.
The following information should be read in conjunction with our
Unaudited Consolidated Financial Statements and related notes included elsewhere
in this Form 10-Q. The following information should also be read in conjunction
with our Audited Consolidated Financial Statements and related notes and MD&A
for the year ended June 30, 1999 as contained in our Annual Report.
OVERVIEW
CURRENT EVENTS Although it does not affect the three and six months
ended December 31, 1999, we have been exploring alternatives to finance the
expected growth of Pentagon, due to the predicted recovery of the semiconductor
industry. Recently, we entered into an agreement in principle with an investment
partnership, which provides for the partnership to invest in Pentagon. This
investment, which should result in Pentagon's ability to directly access
substantial debt capital to finance its growth, will result in MPW owning a
minority interest in the equity of Pentagon.
The transaction, which is expected to close in the fourth fiscal
quarter, is subject to numerous conditions, including due diligence, approval of
the boards of directors of MPW and Pentagon and other customary conditions.
Pentagon's revenues for the three and six months ended December 31, 1999 were
$7.4 million and $14.9 million, respectively. MPW expects to post a one time,
non-cash charge relative to this transaction of approximately $3.0 million, net
of related income tax benefit. This charge includes the estimated amount of loss
arising from the transaction and estimated fees and expenses of the transaction.
UNUSUAL EVENTS IN FISCAL 1999 In late June 1998 through July 1998,
General Motors experienced a strike, which affected our operations primarily at
our industrial filtration management and our industrial container cleaning
service lines.
In March 1999, we experienced a fire at our Austin, Texas facility.
This facility provided critical parts cleaning within the cleanroom services
service line. The fire caused the facility, and most equipment within the
facility, to be unusable. A portion of the business from this facility was
temporarily transferred to our Hopewell Junction, New York facility and the
remainder was temporarily lost to other service providers. We obtained a new
site in Austin to replace the damaged facility and completed construction in
August 1999. The new facility was ramped up to pre-fire business levels in the
second quarter of fiscal 2000.
ACQUISITIONS Since June 1998, we have acquired 11 businesses that
represent an aggregate increase in our revenues of approximately $56.0 million.
We agreed to pay an aggregate consideration for these businesses of
approximately $46.4 million, which included cash, common stock, preferred stock
of Pentagon and contingent consideration for future performance. We accounted
for each of these acquisitions using the purchase method of accounting and each
are included in our results of operations only from the effective date of
acquisition. Certain of the acquisitions related to our entry in late 1998 into
a new service line that provides contamination control services for critical
cleanroom environments. These companies have been combined into a single
subsidiary of MPW, Pentagon.
As a result of these acquisitions, we do not believe that our results
of operations are necessarily comparable on a period to period basis. Our
discussion of results of operations below should be read in conjunction with our
Annual Report and the Consolidated Unaudited Financial Statements and related
notes included herein where each of these acquisitions has been described in
more detail.
GENERAL
We primarily derive our revenues from services under time and
materials, fixed price and unit price contracts. We recognize revenues from time
and materials type contracts based on performance and efforts expended. We
record revenues from non-contract activities as we perform services or sell
goods.
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Cost of services includes all direct labor, materials, subcontractor
and other costs related to the performance of our services. Cost of services
also includes all costs associated with our operating equipment, excluding
depreciation and amortization.
Selling, general and administrative expenses include management
salaries, clerical and administrative overhead, professional services, costs
associated with marketing and sales efforts and costs associated with our
information systems.
Depreciation and amortization consists of depreciation of operating
equipment and amortization of capital leases and intangibles. Depreciation is
calculated using the straight-line method over the estimated useful lives of
property and equipment. We amortize capital leases on a straight-line basis over
the lease term and goodwill and other intangibles on a straight-line basis over
periods not exceeding 25 years.
RESULTS OF OPERATIONS
The following table sets forth selected statement of income data as a
percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of services 65.9 66.9 66.7 66.9
Selling, general and administrative expenses 16.9 16.9 17.2 17.4
Depreciation and amortization 5.0 4.1 4.9 4.3
------------ ----------- ----------- ----------
Total costs and expenses 87.8 88.0 88.8 88.5
------------ ----------- ----------- ----------
Income from operations 12.2 12.0 11.2 11.5
Interest expense, net 3.3 2.0 3.1 1.9
------------ ----------- ----------- ----------
Income from operations before income taxes 8.9 10.0 8.1 9.6
Provision for income taxes 3.6 4.1 3.2 3.9
------------ ----------- ----------- ----------
Net income 5.3% 5.9% 4.9% 5.7%
============ =========== =========== ===========
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1998
Revenues. Revenues increased by $10.0 million, or 26.1%, to $48.4
million in the three months ended December 31, 1999 from $38.4 million in the
three months ended December 31, 1998. This increase is the result of internal
growth of 14.1%, but is also due to acquisitions that have not been reported in
our results of operations for a full fiscal year, which contributed an aggregate
of $4.6 million of incremental growth in revenues.
Revenues in the Industrial Facilities Support Services segment
increased by $6.6 million, or 24.6%, to $33.6 million in the three months ended
December 31, 1999 from $27.0 million in the three months ended December 31,
1998. This increase primarily came from certain acquisitions, which contributed
an aggregate of $4.6 million of incremental growth in revenues.
Revenues in the Industrial Filtration Products and Services segment
increased by $3.4 million, or 29.6%, to $14.8 million in the three months ended
December 31, 1999 from $11.4 million in the three months ended December 31,
1998, all related to internal growth.
Cost of Services. Cost of services increased by $6.2 million, or 24.3%,
to $31.9 million in the three months ended December 31, 1999 from $25.7 million
in the three months ended December 31, 1998. Cost of services as a percentage of
revenues decreased to 65.9% in the three months ended December 31, 1999 from
66.9% in the three months ended December 31, 1998. The decrease in cost of
services as a percentage of revenues is the result of improved operating margins
in our industrial cleaning and facility maintenance and container cleaning
service lines that resulted from improved operating efficiencies in the three
months ended December 31, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.7 million, or 25.3%, to $8.2 million in
the three months ended December 31, 1999 from $6.5 million in the three months
ended December 31, 1998. The increase in selling, general and administrative
expenses is primarily due to the overhead costs
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assumed in the 11 acquisitions completed since June 30, 1998 and other
investments in our infrastructure to support overall growth. Selling, general
and administrative expenses as a percentage of revenues was 16.9% in both the
three months ended December 31, 1999 and the three months ended December 31,
1998.
Depreciation and Amortization. Depreciation and amortization increased
by $821,000, or 51.5%, to $2.4 million in the three months ended December 31,
1999 from $1.6 million in the three months ended December 31, 1998. Depreciation
and amortization increased as a percentage of revenues to 5.0% in the three
months ended December 31, 1999 from 4.1% in the three months ended December 31,
1998. This increase is primarily a result of additional goodwill and other
intangible assets arising out of acquisitions, but is also due to additional
capital expenditures related to our growth.
Income from Operations. Income from operations in the Industrial
Facilities Support Services segment increased by $1.3 million, or 27.1%, to $6.2
million in the three months ended December 31, 1999 from $4.9 million in the
three months ended December 31, 1998. Income from operations increased as a
percentage of revenues to 18.4% in the three months ended December 31, 1999 from
18.1% in the three months ended December 31, 1998. The increase in income from
operations and operating margin is due to strong internal growth and improved
operating margins in our industrial cleaning and facility maintenance and
container cleaning service lines that resulted from improved operating
efficiencies in the three months ended December 31, 1999.
Income from operations in the Industrial Filtration Products and
Services segment increased by $132,000, or 10.1%, to $1.4 million in the three
months ended December 31, 1999 from $1.3 million in the three months ended
December 31, 1998. Income from operations decreased as a percentage of revenues
to 9.7% in the three months ended December 31, 1999 from 11.4% in the three
months ended December 31, 1998. This decrease in operating margin is due to a
change in the product and customer mixes during the three months ended December
31, 1999.
Consolidated income from operations increased $1.3 million, or 28.3%,
to $5.9 million in the three months ended December 31, 1999 from $4.6 million in
the three months ended December 31, 1998. Consolidated income from operations
increased as a percentage of revenues to 12.2% in the three months ended
December 31, 1999 from 12.0% in the three months ended December 31, 1998. The
increase in consolidated income from operations and consolidated operating
margin are due to the factors discussed above.
Interest Expense, net. Interest expense increased $842,000, or 107.9%,
to $1.6 million in the three months ended December 31, 1999 from $780,000 in the
three months ended December 31, 1998. This increase is the result of new
borrowings primarily related to acquisitions.
Provision for Income Taxes. The provision for income taxes for the
three months ended December 31, 1999 and 1998 reflects an effective rate of 40%
and 41%, respectively.
Net Income and Net Income per Share. Net income increased $317,000, or
14.0%, to $2.6 million in the three months ended December 31, 1999 from $2.3
million in the three months ended December 31, 1998. Assuming dilution, net
income per share increased to $0.22 in the three months ended December 31, 1999
from $0.20 in the three months ended December 31, 1998. These increases are due
to the factors discussed above.
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SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1998
Revenues. Revenues increased by $26.6 million, or 38.9%, to $94.8
million in the six months ended December 31, 1999 from $68.3 million in the six
months ended December 31, 1998. This increase came from acquisitions that were
completed since June 30, 1998, which contributed an aggregate of $14.6 million
of incremental growth in revenues, but also included our internal rate of growth
in revenues in the six months ended December 31, 1999, which was 17.5%.
Revenues in the Industrial Facilities Support Services segment
increased by $18.7 million, or 38.2%, to $67.7 million in the six months ended
December 31, 1999 from $49.0 million in the six months ended December 31, 1998.
This increase primarily came from certain acquisitions, which contributed an
aggregate of $13.0 million of incremental growth in revenues, but also included
an internal rate of growth in revenues for this segment in the six months ended
December 31, 1999 of 11.6%.
Revenues in the Industrial Filtration Products and Services segment
increased by $7.8 million, or 40.7%, to $27.1 million in the six months ended
December 31, 1999 from $19.3 million in the six months ended December 31, 1998.
This increase is primarily the result of internal growth of 32.4%, but is also
due to certain acquisitions, which contributed an aggregate of $1.6 million of
incremental growth in revenues.
Cost of Services. Cost of services increased by $17.6 million, or
38.5%, to $63.2 million in the six months ended December 31, 1999 from $45.6
million in the six months ended December 31, 1998. Cost of services as a
percentage of revenues decreased to 66.7% in the six months ended December 31,
1999 from 66.9% in the six months ended December 31, 1998. The flatness in
operating margins as compared to prior year is the result of improved operating
margins in our container cleaning service line, offset by slightly lower margins
in our industrial cleaning and facility maintenance service line. While
operating margins improved in the industrial cleaning and facility maintenance
service line for the current quarter, these improvements were offset by lower
margins reported in the prior quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.5 million, or 37.9%, to $16.3 million in
the six months ended December 31, 1999 from $11.9 million in the six months
ended December 31, 1998. The increase in selling, general and administrative
expenses is primarily due to the overhead costs assumed in the 11 acquisitions
completed since June 30, 1998 and other investments in our infrastructure to
support overall growth. Selling, general and administrative expenses decreased
as a percentage of revenues to 17.2% in the six months ended December 31, 1999
from 17.4% in the six months ended December 31, 1998.
Depreciation and Amortization. Depreciation and amortization increased
by $1.7 million, or 58.4%, to $4.6 million in the six months ended December 31,
1999 from $2.9 million in the six months ended December 31, 1998. Depreciation
and amortization increased as a percentage of revenues to 4.9% in the six months
ended December 31, 1999 from 4.3% in the six months ended December 31, 1998.
This increase is primarily a result of additional goodwill and other intangible
assets arising out of acquisitions, but is also due to additional capital
expenditures related to our growth.
Income from Operations. Income from operations in the Industrial
Facilities Support Services segment increased by $3.0 million, or 33.6%, to
$11.7 million in the six months ended December 31, 1999 from $8.8 million in the
six months ended December 31, 1998. This increase is primarily the result of
strong internal growth, improved operating efficiencies in our industrial
container cleaning service line and certain acquisitions. Income from operations
decreased as a percentage of revenues to 17.3% in the six months ended December
31, 1999 from 17.9% in the six months ended December 31, 1998. The decrease in
operating margin is due to (a) investments that were made in the three months
ended September 30, 1999 in new facilities for new customers within our
industrial cleaning and facility maintenance service line for which the revenues
have not yet been realized and (b) the other factors discussed above.
Income from operations in the Industrial Filtration Products and
Services segment increased by $594,000, or 30.7%, to $2.5 million in the six
months ended December 31, 1999 from $1.9 million in the six months ended
December 31, 1998. Income from operations decreased as a percentage of revenues
to 9.3% in the six months ended December 31, 1999 from 10.0% in the six months
ended December 31, 1998. This decrease in operating margin is due to a change in
product and customer mixes during the three months ended December 31, 1999, but
is partially offset by improved operating and administrative efficiencies in the
six months ended December 31, 1999 and the negative impact on margins related to
the General Motors strike in the three months ended September 30, 1998.
Consolidated income from operations increased $2.8 million, or 35.8%,
to $10.6 million in the six months ended December 31, 1999 from $7.8 million in
the six months ended December 31, 1998. Consolidated income from operations
decreased as a percentage of revenues to 11.2% in the six months ended December
31, 1999 from 11.5% in the six months
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<PAGE> 13
ended December 31, 1998. The increase in consolidated income from operations and
the decrease in consolidated operating margin are due to the factors discussed
above.
Interest Expense, net. Interest expense increased $1.7 million, or
131.0%, to $2.9 million in the six months ended December 31, 1999 from $1.3
million in the six months ended December 31, 1998. This increase is the result
of new borrowings primarily related to acquisitions.
Provision for Income Taxes. The provision for income taxes for the six
months ended December 31, 1999 and 1998 reflects an effective rate of 40% and
41%, respectively.
Net Income and Net Income per Share. Net income increased $746,000, or
19.3%, to $4.6 million in the six months ended December 31, 1999 from $3.9
million in the six months ended December 31, 1998. Assuming dilution, net income
per share increased to $0.39 in the six months ended December 31, 1999 from
$0.34 in the six months ended December 31, 1998. These increases are due to the
factors discussed above.
QUARTERLY RESULTS AND SEASONALITY
Our results of operations tend to vary seasonally, with the least
amount of revenues generated in the third quarter, higher revenues in the second
quarter and the greatest amount of revenues in the first and fourth quarters.
Our quarterly results of operations may fluctuate significantly as a result of a
number of factors over which we have no control, including our customers'
budgetary constraints, the timing and duration of our customers' planned
maintenance activities and shutdowns, changes in our competitors pricing
policies and general economic conditions. Also, certain operating and fixed
costs remain relatively constant throughout the fiscal year, which when offset
by differing levels of revenues, may result in fluctuations in quarterly
results.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash and cash equivalents of $295,000
and working capital of $33.7 million. During the six months ended December 31,
1999, we had net cash provided by operating activities of $3.4 million and made
capital investments of $10.1 million.
In the six months ended December 31, 1999, we completed one acquisition
that required an aggregate of $2.2 million in cash, net of cash received, and
the issuance of an unsecured convertible subordinated promissory note with a
principal amount of $1.0 million, which is convertible into shares of common
stock of the Company. In addition, we paid additional consideration of $2.7
million in cash and issued 86,389 shares of our common stock in connection with
several of our other acquisition agreements that provide for additional
consideration to be paid based on the achievement of certain objectives. The
borrowings under our revolving credit facility reached $77.0 million as of
December 31, 1999.
During October 1999, we entered into our current credit facility with
our principal banks and two additional banks. The current credit facility
provides us with up to $100.0 million of revolving credit availability for a
three-year period, subject to extension by the banks each year on the
anniversary of the agreement. Under the terms of our current credit facility,
the entire $100.0 million is available for general corporate purposes, including
working capital, capital expenditures and acquisitions. Borrowing under our
current credit facility is at rates, based on the prime or Eurodollar rate, that
we believe to be very favorable. Availability of borrowing is subject to the
maintenance of a minimum level of net worth, certain levels of interest coverage
and maintenance of a specific ratio of funded debt to earnings before interest,
taxes, depreciation and amortization that we believe will not affect the
availability of borrowings under our current credit facility. The terms of the
current credit facility include a mechanism that allows us, with the approval of
the banks, to increase the capacity under the credit agreement up to $150.0
million.
From time to time, we supplement our internal growth and expand our
service offerings through selective acquisitions in each of our business units.
In early January 2000, we acquired Industrial Service, Inc. ("ISI"), an
industrial cleaning company located near Indianapolis, Indiana for a cash
payment of $4.5 million. Borrowings at February 10, 2000, including borrowings
used in the acquisition of ISI, were $78.3 million.
In conjunction with the agreement in principle with the partnership
noted above, we expect to receive a payment of approximately $22.0 million,
which will be used to repay debt. Following this repayment, we expect our cost
of borrowing under the credit facility to be reduced by approximately fifty
basis points.
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<PAGE> 14
INFLATION
The effects of inflation on our operations were not significant during
the periods presented in the Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to certain market risks from transactions that are
entered into during the normal course of business. We have not entered into
derivative financial instruments for trading purposes. Our primary market risk
exposure relates to interest rate risk. We had a balance of $77.0 million on our
revolving credit facility at December 31, 1999, which is subject to a variable
rate of interest based on the prime or Eurodollar rate. Assuming borrowings at
December 31, 1999, a one hundred basis point change in interest rates would
impact net interest expense by approximately $770,000 per year.
PART II.--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Various legal actions arising in the ordinary course of business are
pending against the Company. None of the litigation pending against the
Company, individually or collectively, is expected to have a material
adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting of the shareholders on
November 4, 1999.
(b) Each of the following nominees for election the Board of
Directors of the Company were elected by the shareholders who
were present or represented by proxy: Monte R. Black, Ira O.
Kane, Alfred Friedman, Pete A. Klisares, Gerald Nilsson-Weiskott,
Timothy A. Walsh, Scott N. Whitlock and J. Craig R. Wright.
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<PAGE> 15
(c) Of the 9,606,320 shares present in person or represented by proxy
at the meeting, the number of shares voted for and the number of
shares as to which the authority to vote in the election was
withheld, were as follows with respect to each director nominee:
<TABLE>
<CAPTION>
VOTES FOR AUTHORITY
ELECTION OF TO VOTE
NAME DIRECTOR WITHHELD
<S> <C> <C> <C>
Monte R. Black 9,593,554 12,766
Ira O. Kane 9,593,254 13,066
Alfred Friedman 9,593,454 12,866
Pete A. Klisares 9,593,354 12,966
Gerald Nilsson-Weiskott 9,593,454 12,866
Timothy A. Walsh 9,593,554 12,766
Scott N. Whitlock 9,593,554 12,766
J. Craig R. Wright 9,593,554 12,766
</TABLE>
The shareholders were also asked to consider and vote upon a
proposal to amend and restate the Company's Amended and Restated
Articles of Incorporation (the "Articles") to amend Article IV
thereof to allocate shares of the Company's preferred stock, par
value $0.01 per share, among the three classes of preferred stock
permitted by the Articles. Of the 9,606,320 shares present in
person or represented by proxy at the meeting, 7,266,739 shares
were voted for the proposal, 1,691,993 shares were voted against
the proposal, 44,250 shares abstained from voting with respect to
the proposal and 603,338 shares represented broker non-voting.
The shareholders were also asked to consider and vote upon a
proposal to amend and restate the Articles to amend Articles V
and XI thereof to allow the Board of Directors to adopt further
amendments to the Company's Articles if such adoption is
authorized by Ohio law. Of the 9,606,320 shares present in person
or represented by proxy at the meeting, 7,947,889 shares were
voted for the proposal, 1,048,543 shares were voted against the
proposal, 6,550 shares abstained from voting with respect to the
proposal and 603,338 shares represented broker non-voting.
The shareholders were also asked to consider and vote upon a
proposal to amend and restate the Company's Amended and Restated
Code of Regulations (the "Regulations") to amend regulations 6,
15 and 18 thereof to modernize and modify the Regulations to more
closely parallel applicable provisions of Ohio law. Of the
9,606,320 shares present in person or represented by proxy at the
meeting, 8,994,046 shares were voted for the proposal, 3,086
shares were voted against the proposal, 5,850 shares abstained
from voting with respect to the proposal and 603,338 shares
represented broker non-voting.
(d) Not Applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3(a) Amended and Restated Articles of Incorporation of the
Company effective November 4, 1999 (filed as Exhibit 3(a) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, and incorporated herein by
reference).
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<PAGE> 16
3(b) Amended and Restated Code of Regulations of the Company
effective November 4, 1999 (filed as Exhibit 3(b) to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, and incorporated herein by
reference).
4 Credit Agreement, dated as of October 20, 1999, among the
Company and its subsidiaries, Bank One, NA, National City
Bank, LaSalle Bank, National Association, SunTrust Bank,
Central Florida, N.A., and Banc One Capital Markets, Inc.
(filed as Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, and
incorporated herein by reference).
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the period.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
MPW INDUSTRIAL SERVICES GROUP, INC.,
an Ohio corporation
Dated: February 14, 2000 By: /s/ Daniel P. Buettin
------------------------ ---------------------------
Daniel P. Buettin
Vice President and Chief Financial
Officer
(on behalf of the Registrant and as
Principal Financial Officer)
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<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3(a) Amended and Restated Articles of Incorporation of the Company
effective November 4, 1999 (filed as Exhibit 3(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference).
3(b) Amended and Restated Code of Regulations of the Company effective
November 4, 1999 (filed as Exhibit 3(b) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, and incorporated herein by reference).
4 Credit Agreement, dated as of October 20, 1999, among the Company
and its subsidiaries, Bank One, NA, National City Bank, LaSalle
Bank, National Association, SunTrust Bank, Central Florida, N.A.,
and Banc One Capital Markets, Inc. (filed as Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference).
27 Financial Data Schedule.
Page 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from MPW
Industrial Services Group Inc. Form 10-Q for the three and six month period
ended December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 295
<SECURITIES> 0
<RECEIVABLES> 41,853
<ALLOWANCES> 889
<INVENTORY> 10,905
<CURRENT-ASSETS> 57,834
<PP&E> 84,616
<DEPRECIATION> 36,498
<TOTAL-ASSETS> 163,922
<CURRENT-LIABILITIES> 24,150
<BONDS> 78,743
0
0
<COMMON> 109
<OTHER-SE> 54,942
<TOTAL-LIABILITY-AND-EQUITY> 163,922
<SALES> 94,823
<TOTAL-REVENUES> 94,823
<CGS> 63,220
<TOTAL-COSTS> 84,205
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,932
<INCOME-PRETAX> 7,686
<INCOME-TAX> 3,074
<INCOME-CONTINUING> 4,612
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,612
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.39
</TABLE>
