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UNITED STATES
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 Exchange Act of 1934
For the quarterly period ended August 31, 2000
---------------
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-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
l934 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
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As of October 9, 2000, there were 9,642,638 shares of the Company's common
stock, $.0l par value per share, issued and 8,618,766 shares outstanding.
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INDEX
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PART I FINANCIAL INFORMATION PAGE NO.
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ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Income for the Three Months Ended
August 31, 2000 and 1999 .............................................................................. 1
Consolidated Balance Sheets August 31, 2000 and May 31, 2000 ............................................ 2
Consolidated Statements of Cash Flow for the Three Months Ended
August 31, 2000 and 1999 .............................................................................. 4
Notes to Consolidated Financial Statements............................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................................. 8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk .............................................. N/A
PART II OTHER INFORMATION
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ITEM 1. Legal Proceedings........................................................................................ N/A
ITEM 2. Changes in Securities.................................................................................... N/A
ITEM 3. Defaults Upon Senior Securities.......................................................................... N/A
ITEM 4. Submission of Matters to a Vote of Security Holders...................................................... N/A
ITEM 5. Other Information........................................................................................ N/A
ITEM 6. Exhibits and Reports on Form 8-K......................................................................... 13
Signatures ......................................................................................................... 13
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PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Matrix Service Company
Consolidated Statements of Income
(in thousands, except share and per share data)
Three Months Ended
August 31,
(unaudited)
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2000 1999
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Revenues $ 37,862 $ 47,507
Cost of revenues 34,042 41,741
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Gross profit 3,820 5,766
Selling, general and administrative expenses 3,656 3,544
Goodwill and non-compete amortization 90 88
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Operating income 74 2,134
Other income (expense):
Interest expense (64) (111)
Interest income 54 21
Other (52) (39)
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Income before income tax expense 12 2,005
Provision for federal, state and
foreign income tax expense 4 -
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Net income $ 8 $ 2,005
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Earnings per share of common stock:
Basic $0.00 $0.22
Diluted $0.00 $0.22
Weighted average number of common shares:
Basic 8,668,941 8,945,587
Diluted 8,776,433 9,025,249
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See Notes to Consolidated Financial Statements
1
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Matrix Service Company
Consolidated Balance Sheets
(in thousands)
August 31, May 31,
---------------------------------
2000 2000
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ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $ 184 $ 1,806
Accounts receivable, less allowances 22,376 24,188
(August 31 - $75, May 31 - $150)
Costs and estimated earnings in excess
of billings on uncompleted contracts 13,487 11,029
Inventories 2,909 3,049
Income tax receivable 187 146
Prepaid expenses 2,494 2,559
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Total current assets 41,637 42,777
Investment in Joint Venture 366 279
Property, plant and equipment at cost:
Land and buildings 10,033 9,992
Construction equipment 18,462 17,892
Transportation equipment 7,294 7,220
Furniture and fixtures 4,533 4,399
Construction in progress 1,859 1,995
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42,181 41,498
Less accumulated depreciation 21,125 20,211
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Net property, plant and equipment 21,056 21,287
Goodwill, net of accumulated amortization
(August 31 - $2,186, May 31 - $2,092) 11,604 11,660
Other assets 2,295 2,303
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Total assets $ 76,958 $ 78,306
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See Notes to Consolidated Financial Statements
2
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Matrix Service Company
Consolidated Balance Sheets
(in thousands)
August 31, May 31,
----------------------------------
2000 2000
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(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 4,311 $ 8,759
Billings on uncompleted contracts in
excess of costs and estimated earnings 10,578 5,138
Accrued insurance 2,732 3,112
Accrued environmental reserves 318 432
Earnout payable 968 968
Income tax payable 275 412
Other accrued expenses 2,483 4,560
Current portion of long-term debt - 22
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Total current liabilities 21,665 23,403
Long-term debt 836 -
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,596 51,596
Retained earnings 7,786 7,785
Accumulated other comprehensive
income (635) (693)
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58,843 58,784
Less: Treasury stock, at cost (4,386) (3,881)
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Total stockholders' equity 54,457 54,903
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Total liabilities and stockholders'
equity $ 76,958 $ 78,306
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See Notes to Consolidated Financial Statements
3
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Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
Three Months Ended
August 31,
(unaudited)
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2000 1999
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Cash flow from operating activities:
Net income $ 8 $ 2,005
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,125 1,080
(Gain) loss on sale of equipment (28) 2
Changes in current assets and liabilities
increasing (decreasing) cash:
Accounts receivable 1,812 6,383
Costs and estimated earnings in excess
of billings on uncompleted contracts (2,458) (750)
Inventories 140 966
Prepaid expenses 65 (1,973)
Accounts payable (4,448) (6,435)
Billings on uncompleted contracts in
excess of costs and estimated earnings 5,440 632
Accrued expenses (2,571) (2,621)
Income taxes receivable/payable (178) (6)
Other 8 3
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Net cash used by operating activities (1,085) (714)
Cash flow from investing activities:
Capital expenditures (802) (1,576)
Investment in Joint Venture (87) -
Proceeds from other investing activities 34 3
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Net cash used in investing activities $ (855) $ (1,573)
See Notes to Consolidated Financial Statements
4
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Matrix Service Company
Consolidated Cash Flow Statements
(in thousands)
Three Months Ended
August 31,
(unaudited)
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2000 1999
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Cash flows from financing activities:
Repayment of acquisition payables $ (16) $ (16)
Repayment of equipment notes (5) (6)
Issuance of long-term debt 7,400 9,950
Repayments of long-term debt (6,565) (9,775)
Purchase of treasury stock (522) -
Issuance of stock 10 3
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Net cash provided in financing
activities 302 156
Effect of exchange rate changes
on cash 16 (17)
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Decrease in cash and cash equivalents (1,622) (2,148)
Cash and cash equivalents at
beginning of period 1,806 2,972
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Cash and cash equivalents at
end of period $ 184 $ 824
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See Notes to Consolidated Financial Statements
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Matrix Service
Company ("Matrix") and its subsidiaries, all of which are wholly owned. All
significant inter-company balances and transactions have been eliminated in
consolidation.
In March 2000, Matrix entered into a joint venture partnership agreement for the
construction of a pulp and paper project. The joint venture is accounted for
under the equity method.
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, 2000, included in
Matrix's Annual Report on Form 10-K for the year then ended. Matrix's business
is seasonal; therefore, results for any interim period may not necessarily be
indicative of future operating results.
6
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NOTE B - SEGMENT INFORMATION
Matrix operates primarily in the United States and has operations in Canada.
Matrix's industry segments are Aboveground Storage Tank (AST) Services,
Construction Services, Plant Services, and Other Services.
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Matrix Service Company
1st Quarter Results of Operations
($ Amounts in millions)
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AST Construction Plant Other Combined
Services Services Services Services Total
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Three Months ended August 31, 2000
Gross revenues 31.4 3.7 3.5 0.0 38.6
Less: Inter-segment revenues (0.7) 0.0 0.0 0.0 (0.7)
Consolidated revenues 30.7 3.7 3.5 0.0 37.9
Gross profit 3.9 0.1 0.0 (0.2) 3.8
Operating income (loss) 1.0 (0.3) (0.5) (0.1) 0.1
Income (loss) before income tax expense 1.0 (0.4) (0.5) (0.1) 0.0
Net income (loss) 0.7 (0.3) (0.3) (0.1) 0.0
Identifiable assets 61.0 3.1 8.9 4.0 77.0
Capital expenditures 0.7 0.0 0.1 0.0 0.8
Depreciation expense 0.9 0.0 0.1 0.0 1.0
Three Months ended August 31, 1999
Gross revenues 26.5 1.5 8.9 10.9 47.8
Less: Inter-segment revenues (0.1) 0.0 (0.0) (0.2) (0.3)
Consolidated revenues 26.4 1.5 8.9 10.7 47.5
Gross profit 4.5 (0.1) 0.9 0.5 5.8
Operating income (loss) 2.3 (0.5) 0.4 (0.1) 2.1
Income (loss) before income tax expense 2.2 (0.5) 0.4 (0.1) 2.0
Net income (loss) 2.2 (0.5) 0.4 (0.1) 2.0
Identifiable assets 51.5 5.2 4.9 19.9 81.5
Capital expenditures 1.1 0.2 0.3 0.0 1.6
Depreciation expense 0.7 0.1 0.1 0.1 1.0
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NOTE C - REPORTING ACCUMULATED OTHER COMPREHENSIVE INCOME/LOSS
For the quarter ended August 31, 2000, total comprehensive income was $58
thousand as compared to a total comprehensive loss of $44 thousand for the same
three month period ended August 31, 1999. Other comprehensive income or loss
and accumulated other comprehensive loss consisted of foreign currency
translation adjustments.
NOTE D - INCOME TAXES
For the quarter ended August 31, 1999, a provision for income taxes was offset
by the benefit of operating loss carryforwards for which a valuation allowance
was provided at May 31, 1999 as required under Statement of Financial Accounting
Standards No 109.
7
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
Certain matters discussed in this report include forward-looking statements.
Matrix is making these forward-looking statements in reliance on the "safe
harbor" protections provided under the Private Securities Litigation Reform Act
of 1995.
Such statements are subject to a number of uncertainties that could cause actual
results to differ materially from any results projected, forecasted, estimated,
or budgeted, including the following:
. The timing and planning of maintenance projects at customer facilities in the
refinery industry which could cause adjustments for seasonal shifts in
product demands.
. Changes in general economic conditions in the United States.
. Changes in laws and regulations to which Matrix is subject, including tax,
environmental, and employment laws and regulations.
. The cost and effects of legal and administrative claims and proceedings
against Matrix or its subsidiaries.
. Conditions of the capital markets Matrix utilizes to access capital to
finance operations.
. The ability to raise capital in a cost-effective way.
. The effect of changes in accounting policies.
. The ability to manage growth and to assimilate personnel and operations of
acquired businesses.
. The ability to control costs.
. Changes in foreign economies, currencies, laws, and regulations, especially
in Canada and Venezuela where Matrix has made direct investments.
. Political developments in foreign countries, especially in Canada and
Venezuela where Matrix has made direct investments.
. The ability of Matrix to develop expanded markets and product or service
offerings as well as its ability to maintain existing markets.
. Technological developments, high levels of competition, lack of customer
diversification, and general uncertainties of governmental regulation in the
energy industry.
. The ability to recruit, train, and retain project supervisors with
substantial experience.
. A downturn in the petroleum storage operations or hydrocarbon processing
operations of the petroleum and refining industries.
. Changes in the labor market conditions that could restrict the availability
of workers or increase the cost of such labor.
. The negative effects of a strike or work stoppage.
. Exposure to construction hazards related to the use of heavy equipment with
attendant significant risks of liability for personal injury and property
damage.
. The use of significant production estimates for determining percent complete
on construction contracts could produce different results upon final
determination of project scope.
. The inherent inaccuracy of estimates used to project the timing and cost of
exiting operations of non-core businesses.
. Fluctuations in quarterly results.
8
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Results of Operations
AST Services 2000 vs. 1999
Revenues for AST Services in the quarter ended August 31, 2000 were $31.4
million, increasing $4.9 million or 18.5% over the quarter ended August 31,
1999. Gross margin for the quarter ended August 31, 2000 of 12.4% was worse than
the 17.0% produced for the quarter ended August 31, 1999 primarily the result of
less than satisfactory execution on a number of large maintenance jobs. The mix
of work was also less favorable for the quarter ended August 31, 2000 than the
comparable quarter last year as more low margin new tank construction projects
were started. These margin declines offset by the increased sales volumes
resulted in gross profit for the quarter ended August 31, 2000 of $3.9 million,
$0.6 million less than the $4.5 million in the quarter ended August 31, 1999.
Total selling, general and administrative costs for the entire Company were
relatively flat at $3.7 million and $3.6 million for the three months ended
August 31, 2000 and 1999, respectively. As a significant portion of these costs
are allocated to the segments primarily based upon revenues, the AST Services
segment absorbed the largest share of these costs ($2.9 million for the quarter
ended August 31, 2000 versus $2.1 million for the quarter ended August 31,
1999), as revenues decreased in the Plant and Other Services segments.
Operating income and income before income tax expense for the quarter ended
August 31, 2000 of $1.0 million and $1.0 million respectively, were worse than
the $2.3 million and $2.2 million respectively produced in the quarter ended
August 31, 1999, primarily the result of the declining gross profit and the
increase in selling, general and administrative expenses discussed above. No
tax expense was recognized in the quarter ended August 31, 1999 as discussed in
Note D - Income Taxes.
Construction Services 2000 vs. 1999
Revenues for Construction Services in the quarter ended August 31, 2000 were
$3.7 million, compared to $1.5 million in the comparable quarter of the prior
year, an increase of $2.2 million or 146.7%. Gross margin for the quarter ended
August 31, 2000 of 2.7% was also significantly better than the (6.7%) produced
for the quarter ended August 31, 1999 as a direct result the increased volume of
work. These margin improvements along with the increased sales volumes resulted
in gross profit for the quarter ended August 31, 2000 of $0.1 million, $0.2
million more than the ($0.1) million in the quarter ended August 31, 1999.
Other expenses included a charge of $0.2 million as a direct result of cost
overruns on a joint venture. Although the project is now almost complete,
significant claims for change orders remain unresolved which if not successful
could have an adverse impact on this segment in a future period. In addition,
the parent of the joint venture partner is in bankruptcy, which may further
adversely affect Matrix's interest in the joint venture if such change orders
are not successfully resolved.
Operating loss and loss before income tax expense for the quarter ended August
31, 2000 of ($0.3) million and ($0.4) million respectively, were better than the
($0.5) million and ($0.5) million respectively, produced in the quarter ended
August 31, 1999, primarily the result of higher gross margins discussed above
offset somewhat by less than satisfactory performance at the joint venture.
Project volume is still below a level to fully cover the fixed cost structure in
9
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place for Construction Services. No tax expense is recognized in the quarter
ended August 31, 1999 as discussed in Note D - Income Taxes.
Plant Services 2000 vs. 1999
Revenues for Plant Services for the quarter ended August 31, 2000 were
significantly lower at $3.5 million, decreasing $5.4 million or 60.7% over the
$8.9 million in revenues for the quarter ended August 31, 1999. The revenue
decline was the result of fewer turnarounds and maintenance work this year
versus last year. Gross margin for the quarter ended August 31, 2000 of 0.0%
was worse than the 10.1% produced for the quarter ended August 31, 1999 as a
direct result of the low volume of work performed, as no major turnaround work
was completed this year compared to approximately $4.6 million of turnaround
work completed during the first quarter last year. These decreased sales
volumes and lower margins resulted in gross profit for the quarter ended August
31, 2000 of $0.0 million, $0.9 million less than the $0.9 million in the quarter
ended August 31, 1999.
Operating loss and loss before income tax expense for the quarter ended August
31, 2000 of ($0.5) million and ($0.5) million respectively, was worse than the
$0.4 million and $0.4 million respectively, produced in the quarter ended August
31, 1999, primarily the result of the lower sales volumes discussed above. No
tax expense is recognized in the quarter ended August 31, 1999 as discussed in
Note D - Income Taxes.
Other Services 2000 vs. 1999
Other Services consists of Brown Steel Contractors, Inc. ("Brown") (which was
sold in August 1999) and San Luis Tank Piping Construction Company, Inc. (which
was shut down in April 2000). Activity for the quarter ended August 31, 2000
was not significant. The only activity for the quarter ended August 31, 1999
consisted of completing open contracts, which had been appropriately recorded in
prior periods.
Financial Condition & Liquidity
Matrix's cash and cash equivalents totaled approximately $0.2 million at August
31, 2000 and $1.8 million at May 31, 2000.
Matrix has financed its operations recently with cash generated by operations
and advances under a credit agreement. Matrix has a credit agreement with a
commercial bank under which a total of $20.0 million may be borrowed on a
revolving basis based on the level of Matrix's eligible receivables, which would
have provided $12.3 million of availability on August 31, 2000. Revolving loans
bear interest at a Prime Rate or a LIBOR based option, and mature on October 31,
2002. At August 31, 2000, $0.8 million was outstanding under the revolver at an
interest rate of 8.4%. The agreement requires maintenance of certain financial
ratios, limits the amount of additional borrowings and prohibits the payment of
dividends. The credit facility is secured by all accounts receivable, inventory,
intangibles, and proceeds related thereto.
Operations of Matrix used $1.1 million of cash for the quarter ended August 31,
2000 as compared with $0.7 million of cash for the quarter ended August 31,
1999, representing a increase of approximately $0.4 million. The increase was
due primarily to lower net income.
10
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Capital expenditures during the quarter ended August 31, 2000 totaled
approximately $0.8 million. Of this amount, approximately $0.2 million was used
to purchase transportation equipment for field operations, and approximately
$0.3 million was used to purchase welding, construction, and fabrication
equipment. Matrix has invested approximately $0.3 million in buildings, office
equipment, computer hardware and software, furniture and fixtures during the
quarter. Matrix has budgeted approximately $6.5 million for capital expenditures
for fiscal 2001. Of this amount, approximately $2.2 million would be used to
purchase transportation equipment for field operations, and approximately $3.3
million would be used to purchase welding, construction, and fabrication
equipment. A 20,000 square foot, 45-acre facility is planned in Tulsa, Oklahoma
in order to consolidate Matrix's four facilities in the Tulsa market now
containing fabrication, operations and administration. This consolidation should
take 18 to 24 months at an estimated cost of approximately $11.0 million. The
cost would be offset by the sale of the existing four facilities for
approximately $6.0 million.
Matrix purchased $0.5 million in treasury shares in the quarter ended August 31,
2000, which fully exhausted the authorized amounts available under the Share
Buyback Plan approved in March 1999.
Matrix believes that its existing funds, amounts available from borrowings under
its existing credit agreement and cash generated by operations will be
sufficient to meet the working capital needs through fiscal 2001 and for the
foreseeable time thereafter.
The preceding discussion contains forward-looking statements including, without
limitation, statements relating to Matrix's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that such forward-looking statements contained in
the financial condition and liquidity section are based on certain assumptions,
which may vary from actual results. Specifically, the capital expenditure
projections are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the successful
remediation of environmental issues relating to the Brown sale and other
factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or increased costs associated
with, the successful remediation of the remaining Brown property.
Outlook
For the balance of the year, management will continue to evaluate those
businesses that are negatively impacting Matrix's operating performance. The
current backlog in the Construction Services and Plant Services Divisions
suggest that the second quarter will show stronger sales volumes. The
strengthening experienced in Matrix's AST Services Division in the latter part
of the first quarter should continue as our customers' maintenance budgets are
spent during the last four months of the calendar year. It is unclear, however,
whether or not these maintenance budgets will be approved at levels comparable,
greater, or lower in the upcoming calendar year of 2001. Management believes,
however, that its strategic alliances put Matrix in a more favorable position
than our competition if budgets are either reduced or increased.
11
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Environmental
Matrix is a participant in certain environmental activities in various stages
involving assessment studies, cleanup operations and/or remedial processes.
In connection with the Company's sale of Brown and affiliated entities in 1999,
an environmental assessment was conducted at Brown's Newnan, Georgia facilities.
The assessment turned up a number of deficiencies relating to storm water
permitting, air permitting and waste handling and disposal. An inspection of
the facilities also showed friable asbestos that needed to be removed. In
addition, Phase II soil testing indicated a number of VOC's, SVOC's and metals
above the State of Georgia notification limits. Ground water testing also
indicated a number of contaminants above the State of Georgia notification
limits.
Appropriate State of Georgia agencies have been notified of the findings and
corrective and remedial actions have been completed, are currently underway, or
plans for such actions have been submitted to the State of Georgia for approval.
The current estimated total cost for cleanup and remediation is $1.7 million,
$0.3 million of which remains accrued at August 31, 2000. Additional testing,
however, could result in greater costs for cleanup and remediation than is
currently accrued.
Matrix closed or sold the business operations of its San Luis Tank Piping
Construction Company, Inc. and West Coast Industrial Coatings, Inc.
subsidiaries, which are located in California. Although Matrix does not own the
land or building, it would be liable for any environmental exposure while
operating at the facility, a period from June 1, 1991 to the present. At the
present time, the environmental liability that could result from the testing is
unknown, however, Matrix has purchased a pollution liability insurance policy
with $5.0 million of coverage.
Matrix has other fabrication operations in Tulsa, Oklahoma; Bristol,
Pennsylvania; and Anaheim, California which could subject the Company to
environmental liability. It is unknown at this time if any such liability
exists but based on the types of fabrication and other manufacturing activities
performed at these facilities and the environmental monitoring that the Company
undertakes, Matrix does not believe it has any material environmental
liabilities at these locations.
Matrix builds aboveground storage tanks and performs maintenance and repairs on
existing aboveground storage tanks. A defect in the manufacturing of new tanks
or faulty repair and maintenance on an existing tank could result in an
environmental liability if the product stored in the tank leaked and
contaminated the environment. Matrix currently has liability insurance with
pollution coverage of $1 million, but the amount could be insufficient to cover
a major claim. Matrix is currently involved in one claim which occurred before
pollution coverage was obtained. The Company does not believe that its repair
work was defective and is not liable for any subsequent environmental damage.
12
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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
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: October 12, 2000 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 accounting officer.
13
