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 August 31, 1995
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 October 14, 1998, there were 9,649,388 shares of the Company's common
stock, $.0l par value per share, issued and 9,507,388 shares outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Matrix Service Company
Consolidated Statements of Income
(in thousands, except share and per share data)
[CAPTION]
Three Months Ended
August 31
(unaudited)
------------------
1998 1997*
Revenues $50,603 $48,218
Cost of revenues 45,549 43,145
------- -------
Gross profit 5,054 5,073
Selling, general and
administrative expenses 3,258 2,729
Goodwill and noncompete amortization 163 184
------- -------
Operating income 1,633 2,160
Other income (expense):
Interest expense (377) (237)
Interest income 118 39
Other income 76 8
------- --------
Income from continuing operations
before income tax expense 1,450 1,970
Provision for federal, state and
foreign income tax expense 613 718
------- --------
Income from continuing operations 837 1,252
Loss from discontinued operations,
net of tax benefit of $253,000 - (483)
------- --------
Net income $837 $769
======= ========
Earnings from continuing operations
per share of common stock:
Basic $0.09 $0.13
Diluted 0.09 0.13
Earnings per share of common stock:
Basic $0.09 $0.08
Diluted 0.09 0.08
Weighted average number of common shares:
Basic 9,524,685 9,393,547
Diluted 9,661,972 9,957,173
* Certain amounts have been restated as described in Notes D & E.
See Notes to Consolidated Financial Statements
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
August 31, May 31,
----------------------
1998 1998
-------- ---------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $3,111 $2,606
Accounts receivable 36,419 37,165
Costs and estimated earnings
in excess of billings on
uncompleted contracts 12,789 15,340
Inventories 6,734 6,352
Income tax receivable 4,256 5,279
Deferred income taxes 3,010 3,252
Prepaid expenses 270 524
-------- --------
Total current assets 66,589 70,518
Property, plant and equipment at cost:
Land and buildings 16,445 16,481
Construction equipment 23,592 24,092
Transportation equipment 6,154 6,108
Furniture and fixtures 3,089 3,315
Construction in progress 1,195 973
-------- --------
50,475 50,969
Less accumulated depreciation 22,604 22,533
-------- --------
Net property, plant and
equipment 27,871 28,436
Goodwill, net of accumulated
amortization of $1,687 and
$1,595 in 1999 and 1998,
respectively 12,983 13,217
Other assets 457 570
-------- --------
Total assets $107,900 $112,741
======== ========
See Notes to Consolidated Financial Statements
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
August 31, May 31,
---------------------
1998 1998
--------- ---------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $9,763 $12,250
Billings on uncompleted
contracts in excess of costs
and estimated earning 7,976 7,612
Accrued insurance 1,939 2,369
Earnout payable 884 884
Other accrued expenses 2,473 4,214
Income taxes payable 263 -
Current portion of long-term debt 2,104 2,105
-------- --------
Total current liabilities 25,402 29,434
Long-term debt 12,586 13,106
Deferred income taxes 4,949 4,949
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,596 51,458
Retained earnings 15,058 14,221
Accumulated other comprehensive
income (803) (523)
-------- --------
65,947 65,252
Less treasury stock, at cost (984) -
-------- --------
Total stockholders' equity 64,963 65,252
-------- --------
Total liabilities and
stockholders' equity $107,900 $112,741
======== ========
See Notes to Consolidated Financial Statements
Matrix Service Company
Consolidated Cash Flow Statements
(in thousands)
Three Months Ended
August 31
(unaudited)
------------------
1998 1997
Cash flow from operating activities:
Net income $837 $769
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,259 1,546
(Gain) loss on sale of equipment (46) -
Changes in current assets and
liabilities increasing
(decreasing) cash:
Accounts receivable 746 4,129
Costs and estimated earnings
in excess of billings on
uncompleted contracts 2,551 (1,741)
Inventories (382) 494
Prepaid expenses 254 (16)
Accounts payable (3,371) (2,900)
Billings on uncompleted
contracts in excess of
costs and estimated earnings 364 151
Taxes and other accruals 242 (2,141)
Other (14) (3)
------- -------
Net cash provided by
operating activities 2,440 288
Cash flow from investing
activities:
Capital expenditures (613) (932)
Proceeds from sale of equipment 67 36
Acquisition of subsidiary,
net of cash acquired - (4,129)
------- -------
Net cash used in investing
activities (546) (5,025)
See Notes to Consolidated Financial Statements
Matrix Service Company
Consolidated Cash Flow Statements
(in thousands)
Three Months Ended
August
(unaudited)
------------------
1998 1997
------ -------
Cash flows from financing activities:
Issuance of acquisition notes - 197
Repayment of acquisition payables (17) (132)
Issuance of equipment notes - 39
Repayment of equipment notes (5) (3)
Issuance of long-term debt - 9,750
Repayments of long-term debt (500) (5,910)
Purchase of treasury stock (985) -
Issuance of stock 139 116
------- -------
Net cash provided (used) in
financing activities (1,368) 4,057
Effect of exchange rate
changes on cash (21) (13)
------- -------
Increase (decrease) in cash and
cash equivalents 505 (693)
Cash and cash equivalents at
beginning of period 2,606 1,877
------- -------
Cash and cash equivalents at end
of period $3,111 $1,184
====== ======
See Notes to Consolidated Financial Statements
MATRIX SERVICE COMPANY
NOTES TO 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 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, 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 have been
disposed of or absorbed by other operating units. The Company will abandon
this business entirely. The cost to terminate Midwest 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:
Three Months Ended
August 31,
1997
------------------
(In Thousands)
Revenues $1,301
Loss from discontinued operations 483
Loss from discontinued operations
per share of common stock:
Basic ($ .05)
Diluted ($ .05)
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. 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 three months ended August 31, 1999 and August 31, 1998, total
comprehensive income was $557,000 and $748,000. 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
Three Months Ended August 31, 1998 Compared to Three Months
Ended August 31, 1997
Revenues for the quarter ending August 31, 1998 were $50.6 million as
compared to revenues of $48.2 million for the quarter ended August 31,
1997, representing an increase of approximately $2.4 million or 5.0%.
The increase is due principally to revenues from the Company's industrial
service in the Northeast as compared with the same period in 1997.
Gross profit was $5.1 million for the quarterly period ending August 31,
1998. Gross profit as a percentage of revenues decreased to 9.9% for the
1998 period from 10.5% for the 1997 period. The decrease was attributable
to weakness in the elevated tank market.
Selling, general and administrative expenses increased to $3.3 million for
the quarterly period ending August 31, 1998 from expenses of $2.7 million
for the quarterly period ended August 31, 1997, an increase of $529 thousand
or approximately 19.4% and representing as a percentage of revenues, an
increase to 6.4% for the 1998 period from 5.7% for the 1997 period. The
increased costs represent additional supervisory and technical personnel
and certain costs related to operational software and Year 2000 compliance.
Operating income decreased to $1.6 million for the quarterly period ending
August 31, 1998 from income of $2.2 million for the quarterly period ended
August 31, 1998, or a decrease of $527 thousand. The decline was due to
lower profit margins reduced by higher selling, general and administrative
expense.
Interest expense increased to $377 thousand for the quarterly period ending
August 31, 1998 from $237 thousand of interest expense for the quarterly
period ended August 31, 1997. The increase resulted primarily from
increased borrowing of $4.8 million under the Company's credit facility.
The increased borrowing resulted from the GSC acquisition over the same
quarterly period ended August 31, 1997. During the period ending August
31, 1998 there was an average of $9.3 million outstanding under the
term loan.
Net income from continuing operations decreased to $837 thousand for the
quarterly period ending August 31, 1998 from net income of $1.3 million
for the quarterly period ended August 31, 1997. The decrease was due
principally to lower margins and increased selling, general and
administrative expense.
During the quarter ending February 28, 1998 the directors of the Company
approved a plan whereby the Company would discontinue the operations of
"Midwest" - See Note B to the financial statements.
Net income for the quarterly period ending August 31, 1998 was $837 thousand
as compared to net income of $769 thousand for the same period ending August
31, 1997. The increase resulted from the restructuring of the Company and
discontinued operations.
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 $30 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, 1999. At August
31, 1998, the interest rate was 6.8% and the outstanding advances under
the revolver totaled $5.5 million. The credit facility also provides for
a term loan up to $10 million. On March 1, 1998, a term loan of $10.0
million was made to the Company. The term loan is due on February 29,
2003, 1999 and is to be repaid in 60 equal payments beginning in March 1998
at an interest rate based upon the Prime Rate or LIBOR. At August 31, 1998,
the interest rate on the term loan was 7.5%, and the outstanding balance
was $9.0 million.
Operations of the Company provided $2.4 million of cash for the three months
ending August 31, 1998 as compared with cash provided from operations of
$288 thousand for the three months ended August 31, 1997, representing an
increase of approximately $2.2 million. The increase was due to an increase
in costs in excess of billings of $4.3 million and an increase in tax and
other accruals of $2.4 million offset by decrease in accounts receivable of
$3.4 million and a decrease in inventories of $876 thousand.
Capital expenditures during the three month period ending August 31, 1998
totaled approximately $613 thousand. Of this amount $261 thousand was used
to purchase trucks for field operations and $194 thousand was used to
purchase welding, construction and fabrication equipment. The Company has
also invested $104 thousand in computer equipment for operations and
automated drafting. The Company currently has budgeted approximately $4.6
million for the remaining fiscal 1999 for capital expenditures.
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 1999 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.
Other
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 substantially completed its inventory and
assessment efforts, which included a comprehensive review of its business
systems. The assessment focused on the identification of automated business
areas and electronic processes.
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 be
less than 1% and will 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.
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.
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.
The Company has substantially completed its inventory and assessment
activities. Of the systems identified, 25% have been remediated, and 15%
solutions implemented into the production environment. The Company expects
that the remaining systems will be upgraded, tested and implemented by the
second quarter of 1999, which is prior to any anticipated impact on its
operating systems.
Anticipated Cost. The anticipated costs of the Year 2000 project has 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 is
developing a risk management and contingency plan for its critical
operations. The Company anticipates completion of this task no later than
November 30, 1998.
In addition to the upgrade strategy, the Company has recently completed a
requirements study for the selection and implementation of a new
enterprise-wide management information system. The scope of this project
has been maintained separately and independent of the Year 2000 efforts.
The project is designed to be a full replacement for the financial and
operational systems, and is scheduled for implementation in mid-1999.
If the existing "upgrade" 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
"Business" and "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" 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. As noted elsewhere in this Quarterly Report,
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. 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: October 15, 1998
By: /s/ C. William Lee
--------------------
C. William Lee
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
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] May-31-1999
[PERIOD-START] Jun-01-1998
[PERIOD-END] Aug-31-1998
[COMMON] 9,525
[NET-INCOME] 837
[EPS-PRIMARY] 0.09
[COMMON] 9,662
[NET-INCOME] 837
[EPS-DILUTED] 0.09
[FISCAL-YEAR-END] May-31-1998
[PERIOD-START] Jun-01-1997
[PERIOD-END] Aug-31-1997
[COMMON] 9,394
[NET-INCOME] 769
[EPS-PRIMARY] 0.08
[COMMON] 9,957
[EPS-DILUTED] 0.08
5
1,000
3-MOS
MAY-31-1999
AUG-31-1998
3,111
0
36,419
0
6,734
66,589
50,475
22,604
107,900
25,402
0
96
0
0
64,963
107,900
50,603
50,603
45,549
45,549
3,421
0
377
1,450
613
0
0
0
0
837
0.09
0.09
