UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended February 29, 1996
Commission File number 0-l87l6
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 73-1352l74
(State of incorporation) (I.R.S. Employer
Identification No.)
l070l E. Ute St., Tulsa, Oklahoma 74ll6-l5l7
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(9l8) 838-8822
Indicate by check mark whether the registrant (l) has filed all
reports required to be filed by Section l3 or l5(d) of the Securities
Exchange Act of 1934 during the preceding l2 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 [ ]
As of April 11, 1996, there were 9,491,153 shares of the Company's
common stock, $.01 par value per share, issued and 9,309,786 shares
outstanding.
<PAGE>
PART I.- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Matrix Service Company
Condensed Consolidated Statements of Income
(in thousands, except share and per share data)
[CAPTION]
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
[MULTIPLIER] 1,000
<TABLE>
<S> <C> <C> <C> <C>
Revenues $39,951 $34,707 $131,375 $137,766
Cost of revenues 35,965 33,073 118,743 126,388
Gross profit 3,986 1,634 12,632 11,378
Selling, general and
administrative expenses 2,715 2,598 8,013 8,280
Goodwill and noncompete
amortization 279 294 836 1,148
Operating income 992 (1,258) 3,783 1,950
Other income (expense):
Loss from equity in
operations of foreign
joint venture - (92) _ (349)
Loss from impairment of
investment in foreign
joint venture - (1,017) - (1,017)
Interest income 49 32 100 47
Interest expense (207) (345) (651) (635)
Other 11 (88) 40 301
Income (loss) before income
tax expense 845 (2,768) 3,272 297
Provision for federal
and state income
tax expense(benefit) 388 (958) 1,594 9
Net income $457 ($1,810) $1,678 $288
Net income per common and
common equivalent shares:
Primary $0.05 ($0.19) $0.18 $0.03
Fully diluted $0.05 ($0.19) $0.18 $0.03
Weighted average common and
common equivalent shares
outstanding:
Primary 9,441,659 9,408,484 9,432,087 9,484,401
Fully diluted 9,458,758 9,408,484 9,455,043 9,484,401
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
[MULTIPLIER] 1,000
<TABLE>
Matrix Service Company
Condensed Consolidated Balance Sheets
(in thousands)
<CAPTION>
February 29, May 31,
1996 1995
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 3,970 $ 1,976
Accounts receivable 26,484 26,948
Costs and estimated earnings
in excess of billings on
uncompleted contracts 12,110 9,582
Inventories 4,536 5,025
Prepaid expenses 501 426
Deferred tax asset 871 871
Income tax receivable 2,463 3,716
Total current assets 50,935 48,544
Investment in undistributed equity
of a foreign joint venture 374 454
Property, plant and equipment at cost:
Land and buildings 13,408 13,356
Construction equipment 22,365 20,459
Transportation equipment 4,898 4,955
Furniture and fixtures 2,710 2,522
Construction in progress 158 135
43,539 41,427
Less accumulated depreciation 16,056 12,821
Net property, plant and equipment 27,483 28,606
Goodwill, net of accumulated
amortization 26,865 27,437
Other assets 418 688
Total assets $106,075 $105,729
See Notes to Condensed Consolidated Financial Statements
</TABLE>
[MULTIPLIER] 1,000
<TABLE>
Matrix Service Company
Condensed Consolidated Balance Sheets
(in thousands)
<CAPTION>
February 29, May 31,
1996 1995
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 8,325 $ 10,772
Billings on uncompleted contracts in
excess of costs and estimated earnings 7,687 4,313
Accrued expenses 6,013 4,148
Current portion of long-term debt 1,643 2,511
Total current liabilities 23,668 21,744
Long-term debt:
Bank credit agreement 2,000 4,000
Acquisition payable 529 928
Term notes 2,722 3,539
Total long-term debt 5,251 8,467
Deferred income taxes 4,698 4,698
Stockholders' equity:
Common stock 95 95
Capital in excess of par value 51,188 51,188
Retained earnings 22,985 21,464
Total capital and
retained earnings 74,268 72,747
Less:
Treasury shares, at cost 1,654 1,826
Cumulative translation adjustment 156 101
Total stockholders' equity 72,458 70,820
Total liabilities and
stockholders' equity $106,075 $105,729
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
[MULTIPLIER] 1,000
<TABLE>
Matrix Service Company
Condensed Consolidated Cash Flow Statements
(in thousands)
<CAPTION>
Nine Months Ended
(unaudited)
February 29, February 28,
1996 1995
<S> <C> <C>
Cash flow from operating activities:
Net income $1,678 $ 288
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,375 4,606
Changes in current assets and
liabilities increasing
(decreasing) cash:
Accounts receivable 464 (527)
Costs and estimated earnings in
excess of billings on uncompleted
contracts (2,528) 1,496
Inventories 489 (1,771)
Prepaid expenses (75) 114
Accounts payable (2,447) 339
Billings on uncompleted contracts
in excess of costs and estimated
earnings 3,374 (2,522)
Taxes and other accruals 3,118 (2,369)
Foreign joint venture - 1,017
Other (4) 335
Net cash provided by
operating activities 8,444 1,006
Investing activities:
Capital expenditures (2,456) (4,531)
Marketable securities-sold - 262
Proceeds from sale of assets 55 95
Acquisition of subsidiary,
net of cash acquired - (789)
Foreign joint venture 80 85
Other, net (61) (47)
Net cash used in investing
activities (2,382) (4,925)
<PAGE>
Matrix Service Company
Condensed Consolidated Cash Flow Statements
(in thousands)
<CAPTION>
Nine Months Ended
(unaudited)
February 29, February 28,
1996 1995
<S> <C> <C>
Financing activities:
Repayment of acquisition payable ($1,277) ($2,223)
Repayment of equipment notes - (99)
Issuance under long-term credit
agreement 5,500 6,100
Repayments under long-term
credit agreement (7,500) (4,100)
Issuance of long-term debt - 4,900
Repayment of long-term debt (817) -
Issuance of stock - 129
Change in treasury stock 15 (294)
Other, net 11 -
Net cash provided by (used)
in financing activities (4,068) 4,413
Increase in cash and cash
equivalents 1,994 494
Cash and cash equivalents at beginning
of period 1,976 2,948
Cash and cash equivalents at end
of period $3,970 $3,442
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
MATRIX SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. All significant
inter-company balances and transactions have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Rule 10-0l of Regulation S-X for interim
financial statements required to be filed with the Securities and Exchange
Commission and do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, the information furnished reflects all adjustments, consisting only
of normal recurring adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods.
The accompanying financial statements should be read in conjunction with the
audited financial statements for the year ended May 3l, 1995, included in
the Company's Annual Report on Form 10-K for the year then ended. The
Company's business is seasonal; therefore, results for any interim period
may not necessarily be indicative of future operating results.
NOTE B - BUSINESS ACQUISITIONS
On June 10, 1993, the Company acquired substantially all of the assets and
assumed certain liabilities of Heath Engineering, Ltd. and an affiliated
company, Heath Engineering (Tank Maintenance) Ltd. (collectively "Heath"),
for $3.3 million. The purchase price consisted of $2.5 million in cash and
$782 thousand (1,000 shares) in redeemable preferred stock, of a wholly owned
subsidiary of the company. The dividend rate on the preferred is bank prime
(currently 6%), and the preferred stock is redeemable at a rate of
approximately $39 thousand per quarter, (or 50 shares per quarter) for a
5-year period. The transaction was accounted for as a purchase and created
approximately $2.2 million of goodwill and non-compete covenants.
On July 18, 1993, the Company executed a joint venture agreement with Saud Al
Shafai and Sons Constructors, a Saudi Arabian Company. The Company invested
$653 thousand for a 49% interest in Al Shafai-Midwest Constructors, Ltd. The
Al Shafai-Midwest joint venture was established to conduct maintenance services
and capital construction projects for the petroleum industry in the Middle
East. Adverse changes in economic conditions in Saudi Arabia, have caused a
shortage of work available of the nature performed by the joint venture. It is
management's opinion that these conditions could last for several years. The
venture partners, Saudi Al Shafai and Sons Contractors and the Company, are in
the process of liquidating the joint venture. The Company has reduced the carry-
ing value of its investment in this joint venture to the estimated recovery
amount upon completion of the liquidation. The Company recorded a loss of
$1.4 million for the year ended May 31, 1995 and $200 thousand loss for the
year ended May 31, 1994, in conjunction with the joint venture.
On April 4, 1994, the Company acquired all of the outstanding common and
special stock of Georgia Steel Fabricators, Inc. and its wholly owned sub-
sidiary Brown Steel Contractors, Inc. (collectively "Brown Steel") for up to
$8.0 million, subject to certain adjustments. The purchase price consisted of
$3.5 million in cash and 45,452 shares of the Company's common stock valued at
$500 thousand. In addition, the stockholders of Brown Steel are entitled to
receive in the future up to an additional $4.0 million in cash if Brown Steel
satisfies certain earnings requirements. The transaction was accounted for
as a purchase.
On August 26, 1994, the Company acquired certain assets of Mayflower Vapor Seal
Corporation for $660,000. The purchase price was paid in cash.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
Three Months Ended February 29, 1996 Compared With
The Three Months Ended February 28, 1995
Revenues for the quarter ending February 29, 1996 were $40.0 million as
compared to revenues of $34.7 million for the quarter ended February 28,
1995, representing an increase of approximately $5.3 million or 15%. The
increase is due to increased revenues from work related to aboveground
storage tanks and the Company's refinery maintenance operations as compared
with the same period in 1995. The increased revenue resulted from refinery
maintenance in the Northwest region of the U.S. and the increased tank
revenues is principally from elevated aboveground storage tanks.
Gross profit increased to $4.0 million for the quarterly period ended
February 29, 1996 from gross profit of $1.6 million for the quarterly period
ended February 28, 1995, an increase of approximately $2.4 million or 150%.
This increase was due in part to greater revenues over which to spread fixed
costs and from certain jobs which had improved gross margins for the 1996
period as compared with the 1995 period.
Selling, general and administrative expenses increased to $2.7 million for
the quarterly period ended February 29, 1996 from expenses of $2.6 million
for the quarterly period ending February 28, 1995, an increase of $117
thousand or approximately 5% and representing as a percentage of revenues, a
decrease to 6.8% for the 1996 period from 7.5% for the 1995 period. The
increase in expenses was due principally to non-routine expenditures during
the period, such as promotional expenses and relocation expenses for
employees.
Operating income increased to $992 thousand for the quarterly
period ended February 29, 1996 from a loss of ($1.3) million for the
quarterly period ended February 28, 1995, or an improvement of $2.3 million.
The increase was due to increased revenues and improved gross margins during
the 1996 period as compared to the 1995 period.
Due to changes in the economic conditions in Saudi Arabia, there is a shortage
of work available of the nature performed by the foreign joint venture Al
Shafai-Midwest Constructors, Ltd. It is management's opinion that these
conditions could last for several years. Thus, the venture partners, Saud Al
Shafai and Sons Contractors and the Company elected to liquidate the joint
venture. The Company reduced the carrying value of its investment in this
joint venture to the estimated recovery amount upon completion of the liquid-
ation. The liquidation should be completed by July 1996.
Interest expense decreased to $207 thousand for the quarterly period ending
February 29, 1996 from $345 thousand for the quarterly period ended February
28, 1995. The decrease resulted primarily from decreased borrowing under the
Company's bank credit facility and lower amounts outstanding from acquisition
debt.
Net income increased to $457 thousand for the quarterly period ended February
29, 1996 from a net loss of ($1.8) million for the quarterly period ended
February 28, 1995. The increase was due to increased revenues, improved gross
margins and lower interest expense for the 1996 period, as compared with the
1995 period. Also, the 1995 period was substantially impacted by the
discontinuance of operations in Saudi Arabia.
Nine Months Ended February 29, 1996 Compared With The Nine Months Ended
February 28, 1995
Revenues for the nine months ended February 29, 1996 were $131.4 million as
compared to revenues of $137.8 million for the nine months ended February 28,
1995, representing a decrease of approximately $6.4 million or 5%. The
decrease was primarily due to lower revenues during the second quarter from
the Company's refinery maintenance operations as compared with the same period
of the prior year. This decrease resulted primarily from a shortage of work
available in the Midwest Division during the current period.
Gross profit increased to $12.6 million for the nine months ended February
29, 1996 from gross profit of $11.4 million for the nine months ended February
28, 1995, an increase of approximately $1.2 million or 11%. Gross profit as a
percentage of revenues increased to 9.6% in the 1996 period from 8.3% for the
1995 period. Gross margins in some markets have improved; however, the Company
continues to experience pricing pressure as a result of lower demand for the
Company's products and services in its established markets. Customer inquiry
levels for repairs and maintenance and new construction projects have been
improving of late. Management believes margins, while improving some, will
remain under pressure for the remainder of fiscal 1996.
Selling, general and administrative expenses decreased to $8.0 million for the
nine months ended February 29, 1996 from expenses of $8.3 million for the nine
months ended February 28, 1995,a decrease of $267 thousand or approximately 3%
and representing an increase to 6.1% of revenues for nine months ending Feb-
ruary 29, 1996 as compared to 6.0% of revenues for the nine months ending Feb-
ruary 28, 1995. The decrease in expenses was due mainly to lower revenues for
the 1996 period as compared to the 1995 period.
Operating income increased to $3.8 million for the nine months ended February
29, 1996 from income of $2.0 million for the nine months ended February 28,
1995 an increase of $1.8 million or approximately 90%. The increase was due
to improved gross margins and lower selling, general and administrative expenses
during the 1996 period as compared to the 1995 period.
Due to changes in the economic conditions in Saudi Arabia, there is a shortage
of work available of the nature performed by the foreign joint venture Al Shafai
- -Midwest Constructors, Ltd. It is management's opinion that these conditions
could last for several years. Thus, the venture partners, Saud Al Shafai and
Sons Contractors and the Company elected to liquidate the joint venture. The
Company reduced the carrying value of its investment in this joint venture to
the estimated recovery amount upon completion of the liquidation. The
liquidation should be completed by July 1996.
Interest expense increased to $651 thousand for the quarterly period ending
February 29, 1996 from $635 thousand of interest expense for the quarterly
period ended February 28, 1995. The increase resulted primarily from increased
borrowing under the Company's credit facility during the first quarter of the
1996 period as compared with the 1995 period. Under this facility a $4.9
million term loan was made to the Company on October 5, 1994, and the balance
outstanding at February 28, 1995 is $3.8 million.
Net income increased to $1.7 million for the 1996 period from net income of
$288 thousand for the 1995 period. The increase was due to improved gross
profit margins for the 1996 period as compared with the 1995 period and a loss
from investment in foreign joint venture in the 1995 period.
Liquidity and Capital Resources
The Company has financed its operations recently with cash generated by
operations and advances under the Company's credit facility. The Company has
a credit facility with a commercial bank under which the Company may borrow a
total of $20.0 million. The Company may borrow up to $15.0 million under a re-
volving credit agreement based on the level of the Company's eligible
receivables. The agreement provides for interest at the Prime Rate minus one-
half of one percent (1/2 of 1%), or a LIBOR based option, and matures on
October 31, 1997. At February 29, 1996, the interest rate was 7.75% and the
outstanding advances under the revolver totaled $2.0 million. The credit
facility also provides for a term loan up to $5.0 million. On October 5, 1994,
a term loan of $4.9 million was made to the Company. The term loan is due on
August 31, 1999 and is to be repaid in 54 equal payments beginning in March
1995 at an interest rate based upon the Prime Rate. At February 29, 1996, the
interest rate on the term loan was 8.25%, and the outstanding balance was $3.8
million.
Operations of the Company provided $8.4 million of cash for the nine
months ended February 29, 1996 as compared with providing cash from operations
of $1.0 million for the nine months ended February 29, 1996, representing an
increase of approximately $7.4 million. The increase was primarily the result
of increased net income of $1.4 million, a decrease in inventory of $2.3 mil-
lion, a net decrease of $5.9 million in billings on uncompleted contracts in
excess of costs and estimated earnings and $5.5 million of taxes receivable and
other accruals, offset by net decreases of $4.0 million in costs and estimated
earnings in excess of billings on uncompleted contracts and $2.8 million de-
crease from accounts payable and a decrease from loss on joint venture of $1.0
million.
Capital expenditures during the nine month period ended February 29, 1996 total-
ed approximately $2.5 million. Of this amount approximately $2.0 million was
used to purchase welding and construction equipment for field operations. In
addition, the Company has invested approximately $227 thousand in transport-
ation equipment to be used to support field operations. The Company has
currently budgeted approximately $1.0 million for additional capital expend-
itures primarily to be used to purchase construction equipment during the re-
mainder of fiscal year 1996. The Company expects to be able to finance any such
expenditures with available working capital.
The Company believes that its existing funds, amounts available for borrowing
under its credit facility, and cash generated by operations will be sufficient
to meet the Company's working capital needs at least through fiscal 1996 and
possibly thereafter unless significant expansions of operations not now planned
are undertaken, in which case the Company would arrange additional financing as
a part of any such expansion.
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
A. Exhibit 11 - Computation of earnings per share
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K: None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX SERVICE COMPANY
Date: April 12, 1996 By: /s/C. William Lee
C. William Lee
Vice President-Finance
Chief Financial Officer
Signing on behalf of the
registrants the registrant's
chief financial officer.
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] May-31-1996
[PERIOD-START] Dec-01-1995
[PERIOD-END] Feb-29-1996
[COMMON] 9,442
[NET-INCOME] 457
[EPS-PRIMARY] 0.05
[COMMON] 9,459
[NET-INCOME] 457
[EPS-DILUTED] 0.05
[FISCAL-YEAR-END] May-31-1995
[PERIOD-START] Dec-01-1994
[PERIOD-END] Feb-28-1995
[COMMON] 9,408
[NET-INCOME] (1,810)
[EPS-PRIMARY] (0.19)
[COMMON] 9,408
[NET-INCOME] (1,810)
[EPS-DILUTED] (0.19)
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] May-31-1996
[PERIOD-START] Jun-01-1995
[PERIOD-END] Feb-29-1996
[COMMON] 9,432
[NET-INCOME] 1,678
[EPS-PRIMARY] 0.18
[COMMON] 9,455
[NET-INCOME] 1,678
[EPS-DILUTED] 0.18
[FISCAL-YEAR-END] May-31-1995
[PERIOD-START] Jun-01-1994
[PERIOD-END] Feb-28-1995
[COMMON] 9,484
[NET-INCOME] 288
[EPS-PRIMARY] 0.03
[COMMON] 9,484
[NET-INCOME] 288
[EPS-DILUTED] 0.03
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> May-31-1996
<PERIOD-END> Feb-29-1996
<CASH> 3,970
<SECURITIES> 0
<RECEIVABLES> 26,484
<ALLOWANCES> 0
<INVENTORY> 4,536
<CURRENT-ASSETS> 50,935
<PP&E> 43,539
<DEPRECIATION> 16,056
<TOTAL-ASSETS> 106,075
<CURRENT-LIABILITIES> 23,668
<BONDS> 0
<COMMON> 95
0
0
<OTHER-SE> 72,363
<TOTAL-LIABILITY-AND-EQUITY> 106,075
<SALES> 131,375
<TOTAL-REVENUES> 131,375
<CGS> 118,743
<TOTAL-COSTS> 118,743
<OTHER-EXPENSES> 8,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 651
<INCOME-PRETAX> 3,272
<INCOME-TAX> 1,594
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,678
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
