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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 February 28, 2002
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 0-18716
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 73-1352174
(State of incorporation) (I.R.S. Employer Identification No.)
10701 E. Ute St., Tulsa, Oklahoma 74116-1517
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (918) 838-8822
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
As of April 9, 2002 there were 9,642,638 shares of the Company's common
stock, $.01 par value per share, issued and 7,793,181 shares outstanding.
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INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------------------- --------
ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Income for the Three and Nine Months Ended
February 28, 2002 and February 28, 2001 .............................. 1
Consolidated Balance Sheets February 28, 2002 and May 31, 2001 ........... 2
Consolidated Statements of Cash Flow for the Nine Months Ended
February 28, 2002 and February 28, 2001 .............................. 4
Notes to Consolidated Financial Statements ............................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ............... N/A
PART II OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings ........................................................ N/A
ITEM 2. Changes in Securities and Use of Proceeds ................................ 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 ......................................... 15
Signatures ............................................................................ 15
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 Nine Months Ended
(unaudited) (unaudited)
------------------------------------- --------------------------------------
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
----------------- ------------------ ------------------ ------------------
Revenues $ 54,588 $ 49,135 $ 156,731 $ 132,049
Cost of revenues 49,996 43,373 139,301 117,699
----------------- ------------------ ------------------ ------------------
Gross profit 4,592 5,762 17,430 14,350
Selling, general and administrative expenses 3,941 3,617 11,241 10,462
Goodwill and non-compete amortization 86 91 254 267
Restructuring, impairment and abandonment (665) - (70) -
----------------- ------------------ ------------------ ------------------
Operating income 1,230 2,054 6,005 3,621
Other income (expense):
Interest expense - (119) (177) (248)
Interest income 5 32 36 113
Other 760 230 648 278
----------------- ------------------ ------------------ ------------------
Income before income tax expense 1,995 2,197 6,512 3,764
Provision for federal, state and
foreign income tax expense 756 747 2,483 1,317
----------------- ------------------ ------------------ ------------------
Net income $ 1,239 $ 1,450 $ 4,029 $ 2,447
================= ================== ================== ==================
Earnings per share of common stock:
Basic $ 0.16 $ 0.17 $ 0.52 $ 0.28
Diluted $ 0.15 $ 0.17 $ 0.50 $ 0.28
Weighted average number of common shares:
Basic 7,748,939 8,326,372 7,686,954 8,522,326
Diluted 8,120,275 8,591,324 8,031,724 8,686,031
See Notes to Consolidated Financial Statements
1
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
February 28, May 31,
2002 2001
--------------- -------------
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $ 2,192 $ 835
Accounts receivable, less allowances
(February 28 - $234, May 31 - $375) 39,254 29,184
Costs and estimated earnings in excess
of billing on uncompleted contracts 10,183 12,951
Inventories 2,487 2,772
Income Taxes Receivable 519 -
Deferred income taxes 253 442
Prepaid expenses 2,325 2,573
--------------- -------------
Total current assets 57,213 48,757
Property, plant and equipment at cost:
Land and buildings 10,197 10,108
Construction equipment 20,711 19,550
Transportation equipment 8,606 7,560
Furniture and fixtures 5,074 4,841
Construction in progress 10,666 2,306
--------------- -------------
55,254 44,365
Less accumulated depreciation 24,867 22,507
--------------- -------------
Net property, plant and equipment 30,387 21,858
Goodwill, net of accumulated amortization
(February 28 - $2,667, May 31 - $2,427) 10,935 11,258
Other assets 1,775 1,848
--------------- -------------
Total assets $ 100,310 $ 83,721
=============== =============
See Notes to Consolidated Financial Statements
2
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
February 28, May 31,
2002 2001
---------------- ---------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 7,151 $ 10,229
Billings on uncompleted contracts in
excess of costs and estimated earnings 15,047 7,148
Accrued insurance 1,807 2,362
Accrued environmental reserves 142 471
Income taxes payable - 400
Other liabilities 5,746 4,307
Current portion of long-term debt 400 -
---------------- ---------------
Total current liabilities 30,293 24,917
Long-term debt 10,037 3,515
Deferred income taxes 2,184 1,983
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,596 51,596
Retained earnings 16,500 12,245
Accumulated other comprehensive income (1,158) (813)
---------------- ---------------
67,034 63,124
Less: Treasury stock, at cost -
1,849,457 and 2,021,972 at
February 28 and May 31, respectively (9,238) (9,818)
---------------- ---------------
Total stockholders' equity 57,796 53,306
---------------- ---------------
Total liabilities and stockholders' equity $ 100,310 $ 83,721
================ ===============
See Notes to Consolidated Financial Statements
3
Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
Nine Months Ended
(unaudited)
--------------------------------------------
February 28, February 28,
2002 2001
------------------ ------------------
Cash flow from operating activities:
Net income $ 4,029 $ 2,447
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,702 3,379
Deferred income taxes 390 669
Gain on sale of equipment (53) (158)
Changes in current assets and liabilities
increasing (decreasing) cash:
Accounts receivable (10,070) (2,607)
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,768 (922)
Inventories 285 719
Prepaid expenses 248 (410)
Accounts payable (3,078) (2,129)
Billings on uncompleted contracts in
excess of costs and estimated earnings 7,899 3,010
Accrued expenses 354 (2,442)
Income taxes receivable/payable (919) 270
Other 73 (35)
---------------- ----------------
Net cash provided by operating activities 5,628 1,791
Cash flow from investing activities:
Capital expenditures (12,076) (3,386)
Proceeds from sale of exited operations - 480
Investment in joint venture - (87)
Proceeds from other investing activities 128 638
---------------- ----------------
Net cash used in investing activities $ (11,948) $ (2,355)
See Notes to Consolidated Financial Statements
4
Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
Nine Months Ended
(unaudited)
--------------------------------------------------
February 28, February 28,
2002 2001
----------------------- ----------------------
Cash flows from financing activities:
Repayment of acquisition payables $ - $ (17)
Repayment of equipment notes - (5)
Issuance of long-term debt 82,300 40,260
Repayments of long-term debt (75,465) (36,065)
Purchase of treasury stock - (4,212)
Issuance of stock 806 243
----------------------- ----------------------
Net cash provided by financing activities 7,641 204
Effect of exchange rate changes on cash 36 (32)
----------------------- ----------------------
Increase (decrease) in cash and cash equivalents 1,357 (392)
Cash and cash equivalents at beginning of period 835 1,806
----------------------- ----------------------
Cash and cash equivalents at end of period 2,192 $ 1,414
======================= ======================
See Notes to Consolidated Financial Statements
5
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.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 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, 2001, 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.
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.
6
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Matrix Service Company
3/rd/ Quarter Segment Information
($ Amounts in millions)
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AST Construction Plant Other Combined
Services Services Services Services Total
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Three Months Ended February 28, 2002
Gross revenues 37.4 6.1 11.3 0.0 54.8
Less: Inter-segment revenues (0.2) 0.0 0.0 0.0 (0.2)
Consolidated revenues 37.2 6.1 11.3 0.0 54.6
Gross profit 1.9 0.8 1.9 0.0 4.6
Operating income (loss) (1.0) 0.4 1.1 0.7 1.2
Income (loss) before income tax expense (0.4) 0.6 1.1 0.7 2.0
Net income (loss) (0.3) 0.3 0.7 0.5 1.2
Identifiable assets 77.4 7.1 13.8 2.0 100.3
Capital expenditures 3.2 0.0 0.2 0.0 3.4
Depreciation expense 1.0 0.0 0.2 0.0 1.2
Three Months Ended February 28, 2001
Gross revenues 36.2 4.7 8.5 0.0 49.4
Less: Inter-segment revenues (0.2) (0.1) 0.0 0.0 (0.3)
Consolidated revenues 36.0 4.6 8.5 0.0 49.1
Gross profit 5.0 0.0 0.7 0.0 5.7
Operating income (loss) 2.2 (0.3) 0.2 (0.1) 2.0
Income (loss) before income tax expense 2.4 (0.4) 0.2 0.0 2.2
Net income (loss) 1.4 (0.2) 0.2 0.0 1.4
Identifiable assets 60.3 5.6 11.5 2.8 80.2
Capital expenditures 0.9 0.0 0.1 0.0 1.0
Depreciation expense 0.8 0.1 0.1 0.0 1.0
Nine Months Ended February 28, 2002
Gross revenues 119.8 16.0 21.5 0.0 157.3
Less: Inter-segment revenues (0.6) 0.0 0.0 0.0 (0.6)
Consolidated revenues 119.2 16.0 21.5 0.0 156.7
Gross profit 13.1 1.7 2.6 0.0 17.4
Operating income 4.7 0.6 0.6 0.1 6.0
Income before income tax expense 5.2 0.7 0.5 0.1 6.5
Net income 3.2 0.4 0.3 0.1 4.0
Identifiable assets 77.4 7.1 13.8 2.0 100.3
Capital expenditures 11.6 0.2 0.3 0.0 12.1
Depreciation expense 3.0 0.1 0.4 0.0 3.5
Nine Months Ended February 28, 2001
Gross revenues 101.1 13.5 18.6 0.0 133.2
Less: Inter-segment revenues (1.0) (0.2) 0.0 0.0 (1.2)
Consolidated revenues 100.1 13.3 18.6 0.0 132.0
Gross profit 13.5 0.1 1.2 (0.5) 14.3
Operating income (loss) 5.3 (0.9) (0.2) (0.6) 3.6
Income (loss) before income tax expense 5.5 (1.1) (0.2) (0.4) 3.8
Net income (loss) 3.5 (0.7) (0.1) (0.3) 2.4
Identifiable assets 60.3 5.6 11.5 2.8 80.2
Capital expenditures 2.9 0.1 0.4 0.0 3.4
Depreciation expense 2.7 0.1 0.3 0.0 3.1
7
NOTE C - REPORTING ACCUMULATED OTHER COMPREHENSIVE LOSS
For the quarter ended February 28, 2002, total other comprehensive loss was $42
thousand as compared to $2 thousand for the same three-month period ended
February 28, 2001. For the nine months ended February 28, 2002, total other
comprehensive loss was $345 thousand as compared to $96 thousand for the same
nine-month period ended February 28, 2001. Other comprehensive loss and
accumulated other comprehensive loss consisted of foreign currency translation
adjustments and fair value adjustments of derivative instruments. There was no
accumulated gain or loss on derivative instruments at May 31, 2001.
NOTE D - NEW ACCOUNTING STANDARDS
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which was subsequently amended in June of 2000 by
Financial Accounting Standards No. 138. The statement requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedged must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the derivative are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedge item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. On June 1, 2001, the Company entered into an interest
rate swap agreement to manage interest rate exposure and modify interest
characteristics of its long-term debt. The agreement is designated with specific
debt obligations, and involves the exchange of amounts based on the difference
between variable and fixed interest rates calculated by reference to an
agreed-upon notional amount. The interest rate swap currently in place
effectively modifies the Company's exposure to interest rates by converting a
portion of the Company's variable rate debt to a fixed rate. The derivative has
been designated as a cash flow hedge and is effective. As a result, there is no
current impact to earnings due to hedge ineffectiveness or due to the exclusion
of a component of the derivative from the assessment of effectiveness. The fair
value of the cash flow hedge at February 28, 2002 is a liability of $288
thousand.
NOTE E -CONTINGENCIES
The Company has been in litigation over a contested contract since fiscal 1997.
In January 2000, the Company won its case and was awarded $1.1 million. In July
2001, the appellate court upheld the original verdict plus accrued interest and
attorney's fees. In October 2001, the Oklahoma Supreme Court upheld the ruling
of the appellate court. On December 6, 2001, the Company received $1.6 million
in settlement of the original judgment, accrued interest and attorney's fees,
resulting in a $1.3 million gain.
8
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 and service 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.
. Severe weather which could cause project delays and/or a decline in labor
productivity.
. Changes in foreign economies, currencies, laws, and regulations, especially
in Canada where Matrix has made direct investments.
. Political developments in foreign countries, especially in Canada 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.
. The need to develop a learning curve in bidding and managing projects in a
new industry.
. 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.
9
Results of Operations
Three Months Ended February 28, 2002 Compared to Three Months Ended February 28,
2001
AST Services 2002 vs. 2001
- --------------------------
Gross revenues for AST Services in the quarter ended February 28, 2002 were
$37.4 million, compared to $36.2 million in the comparable quarter of the prior
year, an increase of $1.2 million or 3.3%. The increase is primarily the result
of the continuing positive overall business environment for tank repair and
maintenance and new tank construction. Gross margin for the quarter ended
February 28, 2002 of 5.1% was significantly less than the 13.8% produced for the
quarter ended February 28, 2001 as a result of two large projects that had
negative gross margins. One project experienced cost overruns due to under
estimating field manhours, and the second project experienced cost overruns due
to lower than expected labor productivity. Management has strengthened policy
and procedures to incorporate a more stringent methodology into the estimating
process and has taken actions to improve labor productivity on the second job.
The losses taken in the third quarter reflect all losses anticipated for the
duration of these jobs, which will be completed in the fourth quarter of fiscal
2002. The increased sales volumes offset by the gross margin decreases resulted
in gross profit for the quarter ended February 28, 2002 of $1.9 million falling
short of the $5.0 million for the quarter ended February 28, 2001 by $3.1
million, or 62.0%.
Selling, general and administrative costs as a percent of revenues was 7.6% in
the quarter ended February 28, 2002, similar to the 7.7% in the quarter ended
February 28, 2001.
Operating loss and loss before income tax expense for the quarter ended February
28, 2002 of $1.0 million and $0.4 million respectively, were significantly worse
than the operating income and income before income tax expense of $2.2 million
and $2.4 million respectively produced in the quarter ended February 28, 2001,
primarily as the result of lower gross profits discussed above. Other income for
the quarter ended February 28, 2002 includes $0.3 million for accrued interest
related to litigation over a contested contract.
Construction Services 2002 vs. 2001
- -----------------------------------
Gross revenues for Construction Services in the quarter ended February 28, 2002
were $6.1 million, compared to $4.7 million in the comparable quarter of the
prior year, an increase of $1.4 million or 29.8%. The revenue increase is a
result of continuing development efforts towards Matrix's core customer base.
Gross margin for the quarter ended February 28, 2002 of 13.1% was significantly
better than the 0.0% produced for the quarter ended February 28, 2001, again as
a direct result of the increased business development efforts towards Matrix's
core customer base which began last year. These margin increases along with the
higher sales volumes resulted in gross profit for the quarter ended February 28,
2002 of $0.8 million being $0.8 million better than the $0.0 million for the
quarter ended February 28, 2001.
Operating income and income before income tax expense for the quarter ended
February 28, 2002 of $0.4 million and $0.6 million respectively, were better
than the operating loss and loss before income taxes of $0.3 million and $0.4
million respectively produced in the quarter ended February 28, 2001, primarily
as the result of higher gross profits discussed above.
Plant Services 2002 vs. 2001
- ----------------------------
Gross revenues for Plant Services in the quarter ended February 28, 2002 were
$11.3 million compared to $8.5 million in the comparable quarter of the prior
year, an increase of $2.8 million or 32.9%. The revenue increase is a result of
stronger turnaround activity. Gross margin for the quarter ended February 28,
2002 of 16.8% was significantly better than the 8.2% produced for the quarter
ended February 28, 2001 as a result of the higher level of turnaround activity
this year versus last year and better fixed cost absorption associated with the
higher volume of manhours. These margin increases along with the increased sales
volume resulted in gross profit for the quarter ended February 28, 2002 of $1.9
million being $1.2 million, or 171.4% better than the $0.7 million in the
quarter ended February 28, 2001.
10
Operating income and income before income tax expense for the quarter ended
February 28, 2002 of $1.1 million and $1.1 million respectively, were better
than the $0.2 million and $0.2 million respectively produced in the quarter
ended February 28, 2001, primarily as the result of higher gross revenues and
margins discussed above.
Other Services
- --------------
Other services consist of Midwest Industrial Contractors, Inc. ("Midwest")
(which was shut down in February 1998), Brown Steel Contractors, Inc. ("Brown")
(which was sold in August 1999) and San Luis Tank Piping Construction Company,
Inc. ("SLT") (which was shut down in April 2000). Activity for the three months
ended February 28, 2002 consists mainly of $0.2 million of increased worker's
compensation claims activity of these exited operations and $0.1 million in
warranty work at SLT. These costs were offset by a $1.0 million gain on the
settlement of litigation over a contested Midwest contract. The only activity
for the three months ended February 28, 2001 consisted of increased worker's
compensation claims activity of these exited operations.
Nine Months Ended February 28, 2002 Compared to Nine Months Ended February 28,
2001
AST Services 2002 vs. 2001
- --------------------------
Gross revenues for AST Services for the nine months ended February 28, 2002 were
$119.8 million, compared to $101.1 million in the comparable nine months of the
prior year, an increase of $18.7 million or 18.5%. The revenue increase is a
result of overall business environment continuing to be very positive. Gross
margin for the nine months ended February 28, 2002 of 10.9% was worse than the
13.4% produced for the nine months ended February 28, 2001 primarily due to the
two large projects that had negative gross margins in the third quarter of
fiscal 2002. These increased sales volumes offset by the decreased margins
resulted in gross profit for the nine months ended February 28, 2002 of $13.1
million falling short of the $13.5 million for the nine months ended February
28, 2001 by $0.4 million, or 3.0%.
Selling, general and administrative costs as a percent of revenues decreased to
6.9% in the nine months ended February 28, 2002 versus 7.9% in the nine months
ended February 28, 2001. The resulting decrease was primarily due to better
fixed cost absorption from a larger revenue base.
Operating income and income before income tax expense for the nine months ended
February 28, 2002 of $4.7 million and $5.2 million respectively, were slightly
worse than the $5.3 million and $5.5 million respectively produced for the nine
months ended February 28, 2001, primarily as the result of lower gross profits
discussed above. Other income for the nine months ended February 28, 2002
includes $0.3 million accrued interest related to litigation over a contested
contract.
Construction Services 2002 vs. 2001
- -----------------------------------
Gross revenues for Construction Services for the nine months ended February 28,
2002 were $16.0 million, compared to $13.5 million for the comparable nine
months of the prior year, an increase of $2.5 million or 18.5%. This increase
was due to increased business development efforts towards Matrix's core customer
base which began last year. Gross margin for the nine months ended February 28,
2002 of 10.6% was significantly better than the 0.7% produced for the nine
months ended February 28, 2001 as a direct result of higher margin construction
projects and cost controls put in place last year. These margin increases along
with the higher sales volumes resulted in gross profit for the nine months ended
February 28, 2002 of $1.7 million being $1.6 million more than the $0.1 million
in the nine months ended February 28, 2001.
Operating income and income before income tax expense for the nine months ended
February 28, 2002 of $0.6 million and $0.7 million respectively, were
significantly better than the operating loss and loss before income tax expense
of $0.9 million and $1.1 million respectively, produced in the nine months ended
February 28, 2001, primarily as the result of higher gross profits discussed
above.
11
Plant Services 2002 vs. 2001
- ----------------------------
Gross revenues for Plant Services in the nine months ended February 28, 2002
were $21.5 million compared to $18.6 million in the comparable nine months of
the prior year, an increase of $2.9 million or 15.6%. The revenue increase is a
result of stronger turnaround activity this year versus last year. Gross margin
for the nine months ended February 28, 2002 of 12.1% was significantly better
than the 6.5% produced for the nine months ended February 28, 2001. This
increase was due to a higher level of turnaround activity and a higher fixed
cost absorption from a higher level of manhours worked. These margin
improvements along with increased sales volume resulted in gross profit for the
nine months ended February 28, 2002 of $2.6 million exceeding the $1.2 million
for the nine months ended February 28, 2001 by $1.4 million, or 116.7%.
Operating income and income before income tax expense for the nine months ended
February 28, 2002 of $0.6 million and $0.5 million respectively, were
significantly better than the operating loss and loss before income tax expense
of $0.2 million and $0.2 million respectively produced in the nine months ended
February 28, 2001, primarily as the result of the gross revenues and margin
improvements discussed above.
Other Services
- --------------
Other services consist of Midwest, Brown and SLT. Activity for the nine months
ended February 28, 2002 consists mainly of $0.4 million in increased
environmental costs related to the remediation at Brown, $0.4 million of
increased worker's compensation claims activity of these exited operations and
$0.1 million in warranty work at SLT. These costs were offset by a $1.0 million
gain on the settlement of litigation over a contested Midwest contract. Activity
for the nine months ended February 28, 2001 consists mainly of $0.2 million in
increased worker's compensation claims activity of these exited operations, and
$0.3 million in warranty work at SLT.
Financial Condition & Liquidity
Matrix's cash and cash equivalent totaled approximately $2.2 million at February
28, 2002 and $0.8 million at May 31, 2001.
Matrix has financed its operations recently with cash from operations and from
advances under a credit agreement. On September 26, 2001, Matrix amended its
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 and cost in excess of billings. In addition, $5.9 million was
borrowed as a term loan. Matrix can elect revolving loans which bear interest at
a Prime Rate or a LIBOR-based option and mature on October 31, 2004. At February
28, 2002, $4.7 million was outstanding under the revolver at a prime interest
rate of 3.625% with $15.3 million remaining in availability. Additionally, $5.7
million was outstanding under the term loan at a LIBOR interest rate of 3.86%.
The agreement requires maintenance of certain financial ratios and limits the
amount of additional borrowings and the payment of dividends. The credit
facility is secured by all accounts receivable, inventory, intangibles, certain
real property, and proceeds related thereto.
On June 1, 2001, Matrix entered into an interest rate swap agreement with a
commercial bank, effectively providing a fixed interest rate of 7.23% for a
five-year period on $6.0 million of debt with a 15-year amortization. This debt
was initially drawn under the credit agreement revolving loan and was rolled
into the term loan on September 26, 2001 in the amount of $5.9 million. The term
loan is subject to certain mortgage restrictions on the Port of Catoosa and
California facilities currently under construction.
Operations of Matrix provided $5.6 million of cash for the nine months ended
February 28, 2002 as compared with providing $1.8 million of cash for the nine
months ended February 28, 2001, representing an increase of approximately $3.8
million. The increase was due primarily to an increase in net income coupled
with decreased seasonal working capital needs in the current year as compared to
the prior year.
Capital expenditures during the nine months ended February 28, 2002 totaled
approximately $12.1 million. Of this amount, approximately $6.0 million was used
in the construction of the Anaheim facility, $2.0
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million was used in the construction of the Port of Catoosa facility, $1.2
million was used to purchase transportation equipment for field operations, and
approximately $2.2 million was used to purchase welding, construction, and
fabrication equipment. Matrix invested approximately $0.7 million in office
equipment, computer hardware and software, furniture and fixtures during the
period. Matrix has forecasted approximately $15.5 million for capital
expenditures for fiscal 2002. Approximately $2.0 million of the forcasted amount
would be used for construction of the Port of Catoosa facility, $0.9 million to
purchase welding, construction, and fabrication equipment, and approximately
$0.5 million would be used to purchase transportation equipment for field
operations. Matrix signed a 40-year lease for a 50-acre facility 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 three owned
facilities in Tulsa for approximately $5.4 million.
Matrix believes that its existing funds, amounts available from borrowing under
its existing credit agreement and cash generated by operations will be
sufficient to meet the working capital needs through fiscal 2002 and for the
foreseeable time thereafter unless significant expansions of operations not now
planned are undertaken, in which case Matrix would need to arrange additional
financing as a part of any such expansion.
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" provision 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
Our business climate continues to be positive although we anticipate that the
balance of the year's performance will be slightly below last year's fourth
quarter results which included significant turnaround activity in the Plant
Services segment.
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 volatile organic compounds,
semi-volatile organic compounds 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
on the remaining property. The current estimated total cost for cleanup and
remediation is $2.1 million, $0.1 million of which remains accrued at February
28, 2002. 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
13
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 $1.0 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.
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PART II
OTHER INFORMATION
ITEM 6. Exhibits and 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 11, 2002 By: /s/ Michael J. Hall
------------------------------------
Michael J. Hall, Vice
President-Finance signing on
behalf of the registrant and as
the registrant's chief
accounting officer.
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