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 28, 1999
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 8, 1999, there were 9,638,638 shares of the Company's
common stock, $.01 par value per share, issued and 9,507,388 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
February 28, February 28, February 28, February 28,
(unaudited) (unaudited)
---------------------------------------------------
1999 1998 * 1999 1998 *
-------- -------- -------- --------
[MULTIPLIER] 1,000
<TABLE>
<S> <C> <C> <C> <C>
Revenues $47,074 $54,431 $153,076 $158,279
Cost of revenues 43,938 49,156 140,008 143,070
------- ------- -------- --------
Gross profit 3,136 5,275 13,068 15,209
Selling, general and
administrative expenses 3,387 3,433 9,858 9,055
Goodwill and noncompete 163 181 488 455
amortization
Mergers, acquisitions,
abandonments and
restructuring cost 0 6,018 0 6,018
------- ------- -------- --------
Operating income (loss) (414) (4,357) 2,722 (319)
Other income (expense):
Interest expense (169) (364) (814) (838)
Interest income 54 35 212 105
Other income 1 207 135 212
------- ------- -------- -------
Income (loss) from
continuing operations
before income tax expense (528) (4,479) 2,255 (840)
Provision (benefit) for
federal, state and
foreign income tax
expense (195) (127) 728 1,175
------- ------- -------- -------
Income (loss) from
continuing operations (333) (4,352) 1,527 (2,015)
Loss from discontinued
operations, net of tax
benefit of $6,262
and $6,262
respectively - (10,305) - (10,920)
------- -------- -------- ---------
Net income (loss) $ (333) $(14,657) $ 1,527 $(12,935)
======= ======== ======== ========
Earnings from continuing
operations per share
of common stock:
Basic $(0.03) $(0.46) $0.16 $(0.21)
Diluted $(0.03) $(0.46) $0.15 $(0.21)
Earnings per share of
common stock:
Basic $(0.03) $(1.55) $0.16 $(1.37)
Diluted $(0.03) $(1.55) $0.15 $(1.37)
Weighted average number
of common shares:
Basic 9,649,388 9,437,242 9,606,676 9,412,579
Diluted 9,649,388 9,437,242 10,181,752 9,412,579
* Certain amounts have been restated as described in Notes B & C.
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
[MULTIPLIER] 1,000
<TABLE>
Matrix Service Company
Condensed Consolidated Balance Sheets
(in thousands)
<CAPTION>
February 28, May 31,
----------------------
1999 1998
-------- ---------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 5,633 $ 2,606
Accounts receivable 32,936 37,165
Costs and estimated earnings
in excess of billings on
uncompleted contracts 10,198 15,340
Inventories 5,336 6,352
Income tax receivable 1,079 5,279
Deferred income taxes 3,009 3,252
Prepaid expenses 665 524
------- -------
Total current assets 58,856 70,518
Property, plant and equipment at cost:
Land and buildings 16,673 16,481
Construction equipment 24,025 24,092
Transportation equipment 6,363 6,108
Furniture and fixtures 3,555 3,315
Construction in progress 2,120 973
------- -------
52,736 50,969
Less accumulated depreciation 24,257 22,533
------- -------
Net property, plant and equipment 28,479 28,436
Goodwill, net of accumulated
amortization of $1,939 and
$1,595 in 1999 and 1998,
respectively 12,873 13,217
Other assets 314 570
------- -------
Total assets $100,522 $112,741
======== ========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
[MULTIPLIER] 1,000
<TABLE>
Matrix Service Company
Condensed Consolidated Balance Sheets
(in thousands)
<CAPTION>
February 28, May 31,
----------------------
1999 1998
-------- ---------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,876 $12,250
Billings on uncompleted contracts
in excess of costs and estimated
earnings 12,196 7,612
Accrued insurance 2,939 2,369
Other accrued expenses 3,614 5,098
Current portion of long-term debt 2,100 2,105
------- -------
Total current liabilities 23,725 29,434
Long-term debt 6,042 13,106
Deferred income taxes 4,949 4,949
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,582 51,458
Retained earnings 15,693 14,221
Accumulated other comprehensive
income (654) (523)
------- -------
66,717 65,252
Less: Treasury stock, at cost (911) -
------- -------
Total stockholders' equity 65,806 65,252
------- -------
Total liabilities and
stockholders' equity $100,522 $112,741
======== ========
<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
February 28, February 28,
(unaudited)
--------------------------
1999 1998 *
-------- ---------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $1,527 $(12,935)
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 3,620 4,414
(Gain) loss on sale of equipment (13) 16
Non-cash write-offs from restructuring - 4,983
Loss from discontinued operations
net of tax benefit - 10,920
Changes in current assets and
liabilities increasing
(decreasing) cash:
Accounts receivable 4,229 1,337
Costs and estimated earnings
in excess of billings on
uncompleted contracts 5,142 75
Inventories 1,016 (302)
Prepaid expenses (140) 89
Accounts payable (10,258) (4,931)
Billings on uncompleted
contracts in excess of
costs and estimated earnings 4,584 530
Taxes and other accruals 4,412 (4,222)
Other (41) 64
------ ------
Net cash provided by
continuing operating
activities 14,078 38
Net cash provided by
disconintued operating
activities - 1,359
------ ------
Net cash provided by
operating activities 14,078 1,397
Cash flow from investing activities:
Capital expenditures (3,300) (1,863)
Proceeds from sale of equipment 95 62
Acquisition of subsidiary,
net of cash acquired - (4,129)
Other, net - (26)
------ ------
Net cash used in
investing activities (3,205) (5,956)
<PAGE>
Matrix Service
Company
Condensed Consolidated Cash Flow Statements
(in thousands)
<CAPTION>
Nine Months Ended
February 28, February 28,
(unaudited)
--------------------------
1999 1998 *
---------- -----------
<S> <C> <C>
Cash flow from financing activities:
Repayment of acquisition payables (58) (201)
Repayment of equipment notes (10) (22)
Issuance of long-term debt 0 11,750
Repayment of long-term debt (7,000) (6,407)
Purchase of treasury stock (911) 424
Issuance of stock 124 -
------- -------
Net cash provided (used)
in financing activities (7,855) 5,544
Effect of exchange rate
changes on cash 9 -
------- --------
Increase (Decrease) in cash
and cash equivalents 3,027 985
Cash and cash equivalents at
beginning of period 2,606 1,877
------- -------
Cash and cash equivalents at
end of period $5,633 $2,862
====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
MATRIX SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<PAGE>
MATRIX SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A - BASIS OF PRESENTATION
The 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 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 that 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, 1998, 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 - DISCONTINUED OPERATIONS
During the third quarter of fiscal year 1998, the board of directors approved
a plan whereby the Company would discontinue the operations of Midwest
Industrial Contractors, Inc. ("Midwest") and discontinue to operate in the
markets that Midwest had historically participated. All assets of Midwest
have been disposed of or absorbed by other operating units. The Company
abandoned this business entirely. The cost to terminate Midwest's
operations resulted in a charge of $15.5 million, before income tax benefit
of $6.3 million, which includes the write-off of $14.6 million of goodwill.
The operating results of Midwest for the prior period is reported as
discontinued operations. Summarized operating results of the discontinued
operations are as follows:
[MULTIPLIER] 1,000
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------
February 28, 1998 February 28, 1998
-------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C>
Loss from discontinued
operations per share
of common stock
Basic ($1.09) ($1.16)
Diluted ($1.09) ($1.16)
</TABLE>
NOTE C - EARNINGS PER SHARE OF COMMON STOCK
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share.
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted earnings
per share. And, for the Company includes the dilutive effect of outstanding
stock options. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
NOTE D - REPORTING COMPREHENSIVE INCOME
As of June 1, 1998, the Company adopted Statement 130, Reporting Comprehensive
Income. Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of Statement
130 had no impact on the Company's net income or stockholders' equity.
Statement 130 requires foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income.
Prior period financial statements have been reclassified to conform to the
requirements of Statement 130.
For the quarter ended February 28, 1999, total comprehensive loss was $268
thousand as compared to $344 thousand in income for the same quarterly
period ended February 28, 1998. For the nine months ended February 28,
1999 total comprehensive income was $1.4 million as compared to $2.0
million for the nine months ended February 28, 1998. Other comprehensive
income and accumulated other comprehensive income consisted of foreign
currency translation adjustments.
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
The following chart segments revenues, gross profits and gross margins for
the Company's operating divisions for the three months and nine months ended
February 28, 1999 compared to the three months and nine months ended
February 28, 1998.
<TABLE>
[MULTIPLIER] 1,000
(in thousands) (in thousands)
Three Months Ended Nine Months Ended
------------------------------- ----------------------------------
<CAPTION> 02-28-99 02-28-98 Variance 02-28-99 02-28-98 Variance
<S> <C> <C> <C> <C> <C> <C>
Revenues
Combined AST services $30,432 28,336 2,096 $ 89,680 79,642 10,038
Colt Construction 12,064 17,649 (5,585) 37,396 46,929 (9,533)
San Luis Tank 2,367 3,648 (1,281) 8,805 10,443 (1,638)
Brown Steel 6,526 7,617 (1,091) 24,986 23,984 1,002
Eliminations/other operations (4,315) (2,819) (1,496) (7,791) (2,719) (5,072)
----------------------------------------------------------------------
Total Company $47,074 54,431 (7,357) $153,076 158,279 (5,203)
======================================================================
Gross Profit
Combined AST services $ 2,856 3,230 (374) $ 10,588 8,632 1,956
Colt Construction 810 1,831 (1,021) 3,603 4,441 (838)
San Luis Tank (16) 483 (499) (194) 1,131 (1,325)
Brown Steel (477) (264) (213) (571) 1,072 (1,643)
Eliminations/other operations (37) (5) (32) (358) (67) (291)
Total Company ----------------------------------------------------------------------
$ 3,136 5,275 (2,139) $ 13,068 15,209 (2,141)
======================================================================
Gross Margin
Combined AST services 9.4% 11.4% 2.0% 11.8% 10.8% 1.0%
Colt Construction 6.7% 10.4% -3.7% 9.6% 9.5% 0.1%
San Luis Tank -0.7% 13.2% -13.9% -2.2% 10.8% -13.0%
Brown Steel -7.3% -3.5% -3.8% -2.3% 4.5% -6.8%
Eliminations/other operations 0.9% 0.2% 0.7% 4.6% 2.5% 2.1%
----------------------------------------------------------------------
Total Company 6.7% 9.7% -3.0% 8.5% 9.6% -1.1%
======================================================================
Entity: Services:
Combined AST services Above-ground Storage Tank construction, repair and maintenance
Colt Construction Refinery maintenance, turnarounds, and capital construction
San Luis Tank Flat bottom water tanks
Brown Steel Elevated water tanks
</TABLE>
Three Months Ended February 28, 1999 Compared With
The Three Months Ended February 28, 1998
Revenues for the quarter ended February 28, 1999 were $47.1 million
compared to revenues of $54.4 million for the quarter ended February 28,
1998, which represented a decrease of $7.4 million or 13.5%. Each of the
Company's operating divisions experienced a decline in revenues with the
exception of the Company's tank construction, repair, and maintenance
sector where revenues increased $2.1 million or 7.4%. The increase was
the result of overall market strength and the Company's favorable
position within the market resulting from its various strategic alliances.
The decline in revenues at the Colt operating division was primarily due
to a $3.7 million decline in capital projects. For the quarter ended
February 28, 1998, the Colt division had two major capital projects in
the Northwest whereas the only capital projects in the quarter ended
February 28, 1999 were relatively small. Turnaround work at the Colt
division was also down due to postponement of scheduled work into the
fourth quarter of 1999. Revenues at the Company's water tank divisions
were also down due to weak market conditions and pricing pressure.
Gross profit decreased to $3.1 million for the quarter ended February 28,
1999 from gross profit of $5.3 million for the quarter ended February 28,
1998, a decrease of $2.2 million. Gross margins declined to 6.7% for the
three months ended February 28, 1999 from 9.7% for the three months ended
February 28, 1998.
Gross profits and gross margins declined in all operating divisions.
Approximately $1.1 million of the gross profit decrease was due to the
decline in capital project work at the Colt division. Gross profits
and gross margins were negative at both the Brown and San Luis Tank water
divisions. Management at the Brown division conducted an in depth review
of all outstanding contracts during the quarter ended February 28, 1999
and revised their estimates as to the ultimate profitability of each
contract. Margins were negative at the San Luis Tank water division
due to the very low volume of work and the inability to fully absorb
fixed costs. Gross profits and gross margins declined at the Company's tank
construction, repair and maintenance division despite an increase in
revenues. The decline was due to a number of lower margin jobs and a
slow down in projects late in the quarter ended February 28, 1999 which
reduced the number of man-hours that could be charged directly to jobs,
which in turn, increased unabsorbed fixed costs.
Operating income increased to a $414 thousand loss for the quarter ended
February 28, 1999 from a loss of $4.4 million for the quarter ended February
28, 1998 or a change of $3.9 million. For the quarter ended February 28,
1998, there were $6.0 million in one-time charges for mergers, acquisitions,
abandonment and restructuring costs. Eliminating these one-time charges,
operating income decreased $2.1 million for the three months ended February
28, 1999 compared to the three months ended February 28, 1998, which is
comparable to the decline in gross profits for the current period.
Interest expense decreased to $169 thousand for the quarter ended February
28, 1999 from $364 thousand of interest expense for the quarterly period
ended February 28, 1998 due to lower borrowings under the Company's revolving
credit facility.
Net loss decreased to $333 thousand for the three months ended February 28,
1999 from a $14.7 million loss for the three months ended February 28, 1998.
Eliminating the one-time charges of $5.0 million, net of tax benefit, for
mergers, acquisitions, abandonment and restructure costs and the $10.3
million loss from discontinued operations, net of tax benefit, that were
reflected in the results for the second quarter of last year, net income
decreased from $647 thousand for the quarter ended February 28, 1998 to a
$333 thousand net loss for the quarter period ended February 28, 1999.
Nine Months Ended February 28, 1999 Compared With
The Nine Months Ended February 28, 1998
Revenues for the nine months ended February 28, 1999 were $153.1 million
as compared to revenues of $158.3 million for the nine months ended February
28, 1998, a decrease of $5.2 million or 3.3%. Revenues increased $10.0
million at the Company's tank construction, repair and maintenance operating
division ($6.1 million after inter-company eliminations) due to strong demand
and the Company's strategic alliances. This increase was offset by a $9.5
million decrease at the Colt operating division. The decline at Colt was due
to a $14.2 million decline in capital projects offset in part by increases
in refinery maintenance and turnarounds. The decline in capital work was
the result of fewer and smaller capital projects in the Northwest in the
first nine months of 1999 versus the first nine months of 1998. Revenues at
the Company's water divisions were down $636 thousand in total for the nine
months ended February 28, 1999 versus the comparable period in 1998 due to
weak market demand at the San Luis Tank flat bottom water tank division
offset by volume driven bidding at the Brown elevated water tank division.
Gross profit decreased to $13.1 million for the nine months ended February
28, 1999 from gross profit of $15.2 million for the nine months ended
February 28, 1998, a decrease of $2.1 million or 14.1%. Gross margins
decreased to 8.5% for the current period from 9.6% for the comparable
nine-month period of the prior year. Lower gross margins in the elevated
and flat bottom water tank divisions, capital projects and refinery
maintenance sectors of Colt were offset somewhat by the increase in
gross margins in the refinery turnaround sector of Colt and slightly
higher margins in the tank construction, repair and maintenance division.
Gross margins declined in the water tank divisions due to major weakness
in the markets, intensified competition and less than optimum project
management.
Selling, general and administrative expenses increased to $9.9 million for
the nine months ended February 28, 1999 compared to $9.1 million for the
nine months ended February 28, 1998, an increase of $803 thousand or
8.9%. The increase was primarily due to additional technical personnel,
costs related to operational software implementation, Year 2000 compliance
and the re-classification of certain components of selling, general and
administrative expenses by a recently acquired division. These
classifications were brought into alignment with the rest of the Company
effective June 1, 1998. Selling, general and administrative expenses as a
percentage of revenues increased to 6.4% for the current nine-month period
as compared with 5.7% for the 1998 nine-month period. The increase in the
percentage of selling, general and administrative expenses relative to
revenues was due to lower revenues and the increases in selling, general
and administration expenses as described above.
Operating income increased to $2.7 million for the nine-month period ended
February 28, 1999 from an operating loss of $319 thousand for the nine-month
period ended February 28, 1998, an increase of $3.0 million. Excluding the
one time charges of $6.0 million dollars reflected in the prior year as
discussed above, operating income decreased by $3.0 million for the nine
months ending February 28, 1999 as compared to the nine month period ended
February 28, 1998.
Net Income increased to $1.5 million for the 1999 period as compared to a
net loss of $12.9 million for the nine-month period ending February 28, 1998.
Without the one time charges of $5.0 million reflected in the prior year, net
of tax benefits and $10.9 million net of tax benefits for losses from
discontinued operations, net income decreased by $1.5 million for the nine
month period ended February 28, 1999 as compared to the 1998 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, amended and restated October 22, 1998, with a
commercial bank under which the Company may borrow a total of $30.0
million. The Company may borrow up to $20 million under a revolving
credit agreement based on the level of the Company's eligible receivables.
The agreement provides for interest at the Prime Rate or a LIBOR based
option, and matures on October 31, 2000. At February 28, 1999 the
interest rate was 6.1% and there were no outstanding advances under the
revolver. The original credit facility also provided for a term
loan up to $10 million. On March 1, 1998, a term loan in the original
amount of $10.0 million was made to the Company and was due on February
28, 2003 and was to be repaid in 60 equal payments of $167 thousand
that began on March 1, 1998. The amended agreement term loan amount is
restated at $8.8 million with the repayment schedule and due date remaining
the same per the original agreement. The term loan is at a fixed rate of
7.5% established in an interest rate swap agreement entered into with the
bank on February 1, 1998. The outstanding balance of the term loan at
February 28, 1999 was $8.0 million.
Operations of the Company provided $14.1 million of cash for the
nine months ended February 28, 1999 as compared with cash provided by
operations of $1.4 million for the nine months ended February 28, 1998,
an increase of approximately $12.7 million. The period ending February
28, 1998 included $15.9 million in non-cash write-offs and losses from
discontinued operations.
Capital expenditures during the nine-month period ended February 28, 1999
totaled approximately $3.3 million. Of this amount, $552 thousand was used
to purchase trucks for field operations and $1.4 million was used to
purchase welding, construction and fabrication equipment. The Company also
invested $1.3 million in computer equipment for operations and automated
drafting, which included $1.0 million for a new enterprise-wide management
information system. The Company has budgeted approximately $2.8 million for
the remainder of fiscal 1999 for capital expenditures but in all likelihood
actual expenditures will fall below this level.
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 for the next twelve
months and possibly thereafter unless significant expansions of operations
not now planned are undertaken, in which case the Company anticipates it would
arrange additional financing as a part of any such expansion.
Outlook
Management will continue to evaluate strategic alternatives in the fourth
quarter for those businesses that are negatively impacting the Company's
operating performance. There were substantial improvements at the Brown
division in the latter part of the third quarter (February) but performance
is still not providing an acceptable return. Management believes that
operating results at the Brown division will approximate break-even for the
fourth quarter 1999.
The capital project business at the Colt division will continue to be weak
in the fourth quarter due to the lack of a significant backlog of
construction projects. Unless new projects are booked in the Company's
fiscal fourth quarter, the weakness will in all likelihood continue into
the first quarter of fiscal 2000.
The weakness experienced in the Company's tank repair and maintenance
business in the latter part of the third quarter will continue until our
customer's maintenance budgets are finalized and authorization is given
to spend monies. It is also unclear whether or not these maintenance
budgets will be approved at levels comparable, greater, or lower than
last year. Management believes that its strategic alliances put the
Company in a more favorable position than our competition if budgets
are reduced.
A subsidiary of Matrix has a receivable approximating $3 million that
remains unpaid due to customer cash flow problems. The customer is in
the process of restructuring its lending agreements, the proceeds of
which will be used to pay the outstanding receivable. Although management
believes that a satisfactory agreement will be reached, it is uncertain
whether or not the restructuring will be successful.
Other
On March 3, 1999, the Board announced a stock repurchase plan. The Company
is authorized to repurchase up to $4 million of Matrix Service Company common
stock. To date the Company has purchased 397,000 shares at a cost of $1.4
million.
On March 16, 1999, the Board of Directors elected Bradley S. Vetal as
President and Chief Executive Officer of Matrix Service Company.
Year 2000 Impact
The Year 2000 issue creates a significant problem with business automation
for businesses, government agencies, and all computer users. A significant
number of applications in use today use two digit years and can fail between
now and January 1, 2000.
State of Readiness. The Company is sensitive to the growing concern associated
with the inception of the new millennium and its impact on the business
marketplace. In an effort to retain its ability to provide on-going quality
products and services to its customers, the Company is actively pursuing Year
2000 compliance for all of its computer systems.
Assessment. The Company has completed its inventory and assessment efforts,
which included a comprehensive review of its business systems. Based on
assessment results, the Company has determined that it will be required to
modify, upgrade or replace only a limited number of its systems so that its
business areas will function properly with respect to dates in the year 2000
and thereafter.
The Company estimates the impact of Year 2000 issues on non-IT Systems to
have no material impact on the operations of the business. Non-IT Systems
include systems with embedded technology containing programmed instructions
running via processor chips.
The Company has minimal third party interface systems; however, communications
have been initiated with significant suppliers and large customers to
determine the extent to which the Company's systems are vulnerable to those
third parties' failure to remediate their own Year 2000 issues.
Project Timetable. The Company believes that with the planned modifications
to existing software and conversions to new software, the Year 2000 issue
will not pose significant operation problems for its computer systems. Of
the systems identified more than 75% have been remedied and implemented into
the production environment. The Company expects that the remaining systems
will be upgraded, tested and implemented by the fourth quarter of fiscal
1999, which is prior to any anticipated impact on its operating systems.
Anticipated Cost. The anticipated costs of the Year 2000 project have been
estimated at $200 thousand, of which approximately 40% will be capitalized.
The remaining 60% is being expensed as incurred and is not expected to have
a material effect on the results of operations. Any non-compliant hardware
is dated and would ordinarily be scheduled for replacement.
Contingency Plans. Despite the best planning and execution efforts, the
Company is working from the premise that some issues will not be uncovered,
and that some issues that are uncovered will not be successfully resolved.
In an effort to manage and mitigate this risk exposure, the Company has
developed a risk management and contingency plan for its critical
operations.
In addition to the Company's remediation strategy, a new enterprise-wide
management information system has been purchased as a replacement for the
core financial and operational systems. The project began during the
third quarter of fiscal 1999 and has an estimated duration of nine months.
The scope of this project has been maintained separately and independent
of the Year 2000 efforts. Ifthe existing remediation strategy fails, this
project could be escalated to mitigate any material business disruptions.
While the Company believes its efforts are adequate to address its Year
2000 issues, there can be no guarantee that all Year 2000 issues will be
anticipated and corrected and that the systems of other companies on
which the Company's systems and operations rely will be converted on a
timely basis; failure of all significant Year 2000 issues to be corrected
could have a material adverse effect on the Company.
Certain Factors Influencing Results and Accuracy
of Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933. Discussions containing such
forward-looking statements may be found in the material set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as within the Quarterly Report generally. In addition,
when used in this Quarterly Report, the words "believes", "anticipates",
"expects", likelihood and similar expressions are intended to identify
forward-looking statements.
In the normal course of its business, the Company, in an effort to help keep
it stockholders and the public informed about the Company's operations, may
from time to time issue certain statements, either in writing or orally,
that contain or may contain forward-looking information. Generally, these
statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of such plans or strategies, or projections
involving anticipated revenues, earnings or other aspects of operating
results. Such forward-looking statements are subject to a number of risks
and uncertainties. These uncertainties include but may not be limited
to competitive response to the Company's plans, environmental regulations,
potential liability due to the risks associated with using heavy equipment
and exposure to construction hazards, low energy prices, recession,
consolidation and mergers in the customer base, postponement, reduction,
or cancellation of maintenance and capital budgets by customers,
availability of skilled craftsmen and field foremen, and a reduction in
the number of contractors serving our customer base. As noted elsewhere
in this Quarterly Report and the Annual Report (10K) for the year ended
May 31, 1998, all phases of the Company's operations are subject to a
number of uncertainties, risks and other influences, many of which are
beyond the control of the Company, and any one of which, or a combination
of which, could materially affect the results of the Company's operations
and whether forward-looking statements made by the Company ultimately
prove to be accurate.
Fluctuations in Quarterly Results. The operating results of hydrocarbon
process services may be subject to significant quarterly fluctuations,
affected primarily by the timing of planned maintenance projects at
customers' facilities. Generally, the Company's turnaround projects are
undertaken in two primary periods-February through May and September
through November-when refineries typically shut down certain operating
units to make changes to adjust to seasonal shifts in product demand.
As a result, the Company's quarterly operating results can fluctuate
materially. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company."
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
A. Exhibit 11 - Computation of Earnings Per Share.
B. Exhibit 27 - Financial Data Schedule.
C. 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 8, 1999 By: /s/Michael J. Hall
----------------------
Michael J. Hall
Vice President-Finance
Chief Financial Officer
signing on behalf of the
registrant and as the
registrant's chief financial officer.
[ARTICLE] 5
[MULTIPLIER] 1,000
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[NET-INCOME] (333)
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[COMMON] 9,437
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[PERIOD-START] Jun-01-1997
[PERIOD-END] Feb-28-1998
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[NET-INCOME] (12,935)
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[COMMON] 9,413
[NET-INCOME] (12,935)
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