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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 29, 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
----- -----
As of April 11, 2000 there were 9,642,638 shares of the Company's common
stock, $.0l par value per share, issued and 8,722,266 shares outstanding.
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INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------------------- --------
ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Operations for the Three and Nine Months Ended
February 29, 2000 and February 28, 1999 ............................................. 1
Consolidated Balance Sheets February 29, 2000 and May 31, 1999 ...................... 2
Consolidated Statements of Cash Flow for the Nine Months Ended
February 29, 2000 and February 28, 1999 ............................................. 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..................................................... 16
Signatures ..................................................................................... 16
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Matrix Service Company
Consolidated Statements of Operations
(in thousands, except share and per share data)
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
------------------------------- -----------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
------------ -------------- ------------- ------------
Revenues $ 48,033 $ 47,074 $ 146,277 $ 153,631
Cost of revenues 43,552 43,938 130,798 140,628
------------ -------------- ------------- ------------
Gross profit 4,481 3,136 15,479 13,003
Selling, general and administrative 3,064 3,389 9,425 9,931
expenses
Goodwill and non-compete amortization 132 164 351 490
------------ -------------- ------------- ------------
Operating income (loss) 1,285 (417) 5,703 2,582
Other income (expense):
Interest expense (28) (169) (271) (814)
Interest income 9 54 63 212
Other 98 4 521 275
------------ -------------- ------------- ------------
Income before income tax expense 1,364 (528) 6,016 2,255
Provision (benefit) for federal, state
and Foreign income tax expense 180 (195) 350 728
------------ -------------- ------------- ------------
Net income (loss) $ 1,184 $ (333) $ 5,666 $ 1,527
============ ============== ============= ============
Earnings per share of common stock:
Basic 0.13 (0.03) 0.64 0.16
Diluted 0.13 (0.03) 0.63 0.15
Weighted average number of common
shares:
Basic 8,884,456 9,649,388 8,920,222 9,606,676
Diluted 9,079,420 9,649,388 9,026,844 10,181,752
See Notes to Consolidated Financial Statements
1
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
February 29, May 31,
2000 1999
------------ ----------
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $ 1,296 $ 2,972
Accounts receivable, less allowances
(February 29 - $397 May 31 - $2,464) 20,848 34,390
Costs and estimated earnings in excess
of billings on uncompleted contracts 15,948 8,541
Inventories 3,054 3,042
Assets held for disposal -- 8,556
Income tax receivable 56 104
Prepaid expenses 2,853 1,051
---------- ----------
Total current assets 44,055 58,656
Property, plant and equipment at cost:
Land and buildings 9,555 9,645
Construction equipment 17,620 15,562
Transportation equipment 6,349 6,144
Furniture and fixtures 2,691 2,449
Construction in progress 4,150 2,385
---------- ----------
40,365 36,185
Less accumulated depreciation 19,746 17,971
---------- ----------
Net property, plant and equipment 20,619 18,214
Goodwill, net of accumulated amortization of
$2,017 and $1,753 at February 29 and
May 31, respectively 11,045 11,122
Other assets 2,505 228
---------- ----------
Total assets $ 78,224 $ 88,220
========== ==========
See Notes to Consolidated Financial Statements
2
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
February 29, May 31,
2000 1999
--------------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,526 $ 9,805
Billings on uncompleted contracts in
excess of costs and estimated earnings 5,703 7,356
Accrued insurance 4,106 4,541
Accrued environmental reserves 400 1,778
Earnout payable 85 727
Income taxes payable 194 307
Other accrued expenses 4,958 6,378
Current portion of long-term debt 44 2,092
--------------- ------------
Total current liabilities 22,016 32,984
Long-term debt 1,175 5,521
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,596 51,596
Retained earnings 7,051 1,567
Accumulated other comprehensive income (564) (555)
--------------- ------------
58,179 52,704
Less: Treasury stock, at cost (3,146) (2,989)
--------------- ------------
Total stockholders' equity 55,033 49,715
--------------- ------------
Total liabilities and stockholders' equity $ 78,224 $ 88,220
=============== ============
See Notes to Consolidated Financial Statements
3
Matrix Service Company
Consolidated Cash Flow Statements
(in thousands)
Nine Months Ended
(unaudited)
-----------------------------
February 29, February 28,
2000 1999
------------- ------------
Cash flow from operating activities:
Net income $ 5,666 $ 1,527
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,984 3,620
Gain on sale of equipment (20) (13)
Changes in current assets and liabilities
increasing (decreasing) cash:
Accounts receivable 12,620 4,229
Costs and estimated earnings in excess
Of billings on uncompleted contracts (8,459) 5,142
Inventories 911 1,016
Prepaid expenses (1,802) (140)
Accounts payable (3,279) (10,258)
Billings on uncompleted contracts in
excess of costs and estimated earnings (1,653) 4,584
Accrued expenses (3,509) (31)
Income taxes receivable/payable (65) 4,443
Other 6 (41)
------------- ----------
Net cash provided by operating activities 3,400 14,078
Cash flow from investing activities:
Capital expenditures (4,758) (3,300)
Proceeds from sale of exited operations 6,408 --
Proceeds from sale of equipment 46 95
------------- ----------
Net cash provided by (used in) investing activities $ 1,696 $ (3,205)
See Notes to Consolidated Financial Statements
4
Matrix Service Company
Consolidated Cash Flow Statements
(in thousands)
Nine Months Ended
(unaudited)
-------------------------------------
February 29, February 28,
2000 1999
----------- ------------
Cash flows from financing activities:
Repayment of acquisition payables $ (63) $ (58)
Repayment of equipment notes (7) (10)
Issuance of long-term debt 30,710 --
Repayments of long-term debt (37,035) (7,000)
Purchase of treasury stock (366) (911)
Issuance of stock 27 124
----------- -----------
Net cash used in financing activities (6,734) (7,855)
Effect of exchange rate changes on cash (38) 9
----------- -----------
Increase (Decrease) in cash and cash equivalents (1,676) 3,207
Cash and cash equivalents at beginning of period 2,972 2,606
----------- -----------
Cash and cash equivalents at end of period $ 1,296 $ 5,633
=========== ===========
See Notes to Consolidated Financial Statements
5
NOTES TO CONDENSED 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 10-0l 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, 1999, 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 and
Venezuela. Matrix's industry segments are Aboveground Storage Tank (AST)
Services, Construction Services, Plant Services, Municipal Water Services, and
Fluid Catalytic Cracking Unit (FCCU) Services. The quarterly combined totals may
not agree to the Item 1 Financial Statements due to rounding.
6
Matrix Service Company
3rd Quarter Results of Operations
($ Amounts in millions)
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Municipal
AST Construction Plant Water FCCU Combined
Services Services Services Services Services Total
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Three Months Ended February 29, 2000
Gross revenues 33.8 1.3 11.7 1.5 0.0 48.3
Less: Inter-segment revenues 0.0 0.0 0.0 (0.2) 0.0 (0.2)
Consolidated revenues 33.8 1.3 11.7 1.3 0.0 48.1
Gross profit 3.3 (0.5) 1.6 0.1 0.0 4.5
Operating income (loss) 1.0 (0.8) 1.1 0.0 0.0 1.3
Income (loss) before income tax 1.0 (0.8) 1.1 0.0 0.0 1.3
expense
Net income (loss) 0.9 (0.8) 1.1 0.0 0.0 1.2
Identifiable assets 56.1 1.4 13.8 6.9 0.0 78.2
Capital expenditures 1.5 0.1 0.2 0.0 0.0 1.8
Depreciation expense 0.7 0.0 0.1 0.0 0.0 0.8
Three Months Ended February 28, 1999
Gross revenues 27.5 6.6 5.5 10.6 0.0 50.2
Less: Inter-segment revenues (2.8) (0.4) 0.0 0.0 0.0 (3.2)
Consolidated revenues 24.7 6.2 5.5 10.6 0.0 47.0
Gross profit 2.8 0.4 0.4 (0.5) 0.0 3.1
Operating income (loss) 1.0 0.2 (0.1) (1.5) 0.0 (0.4)
Income (loss) before income tax 0.9 0.2 (0.2) (1.5) 0.0 (0.6)
expense
Net income (loss) 0.4 0.1 (0.1) (0.8) 0.0 (0.4)
Identifiable assets 56.8 5.9 8.1 29.7 0.0 100.5
Capital expenditures 1.3 0.0 0.0 0.4 0.0 1.7
Depreciation expense 0.7 0.0 0.0 0.2 0.0 0.9
Nine Months Ended February 29, 2000
Gross revenues 93.2 5.8 29.0 19.1 0.0 147.1
Less: Inter-segment revenues (0.1) 0.0 0.0 (0.7) 0.0 (0.8)
Consolidated revenues 93.1 5.8 29.0 18.4 0.0 146.3
Gross profit 12.4 (0.5) 3.2 0.5 (0.1) 15.5
Operating income (loss) 5.6 (1.5) 1.7 0.0 (0.1) 5.7
Income (loss) before income tax 5.6 (1.1) 1.6 0.0 (0.1) 6.0
expense
Net income (loss) 5.3 (1.1) 1.6 0.0 (0.1) 5.7
Identifiable assets 56.1 1.4 13.8 6.9 0.0 78.2
Capital expenditures 4.0 0.3 0.5 0.0 0.0 4.8
Depreciation expense 1.9 0.2 0.2 0.3 0.0 2.6
Nine Months Ended February 28, 1999
Gross revenues 84.5 15.0 22.4 35.3 0.5 157.7
Less: Inter-segment revenues (2.8) (0.4) 0.0 (0.9) 0.0 (4.1)
Consolidated revenues 81.7 14.6 22.4 34.4 0.5 153.6
Gross profit 10.2 1.4 2.2 (0.7) (0.1) 13.0
Operating income (loss) 4.5 0.5 0.8 (3.1) (0.1) 2.6
Income (loss) before income tax 4.3 0.5 0.7 (3.2) 0.0 2.3
expense
Net income (loss) 2.7 0.3 0.4 (1.9) 0.0 1.5
Identifiable assets 56.8 5.9 8.1 29.7 0.0 100.5
Capital expenditures 2.5 0.2 0.1 0.5 0.0 3.3
Depreciation expense 1.9 0.2 0.2 0.8 0.0 3.1
7
NOTE C - REPORTING ACCUMULATED OTHER COMPREHENSIVE LOSS
For the quarter ended February 29, 2000, total other comprehensive loss was $19
thousand as compared to an other comprehensive income of $65 thousand for the
same three-month period ended February 28, 1999. For the nine months ended
February 29, 2000, total other comprehensive loss was $9 thousand as compared to
$131 thousand for the same nine-month period ended February 28, 1999. Other
comprehensive income or loss and accumulated other comprehensive income or loss
consisted of foreign currency translation adjustments.
NOTE D - INCOME TAXES
For the quarter ended February 29, 2000, a provision for state income taxes of
$180 thousand was recorded. The federal income tax provision was offset $0.3
million and $1.9 million for the quarter and nine months ended February 29,
2000, respectively, 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.
NOTE E -SUBSEQUENT EVENTS
On March 6, 2000, Matrix purchased an additional 200,000 shares of treasury
stock for $1.0 million. Additionally, on March 13, 2000, Matrix entered into a
joint venture agreement with a Washington corporation to perform $2.0 million of
construction services on a pulp and paper project.
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:
. 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.
. The timing and planning of maintenance projects at customer facilities in the
refinery industry which could cause adjustments for seasonal shifts in
product demands.
. 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 29, 2000 Compared to Three Months Ended February 28,
1999
AST Services 2000 vs. 1999
- --------------------------
Revenues for AST Services in the quarter ended February 29, 2000 were $33.8
million, compared to $27.5 million in the comparable quarter of the prior year,
an increase of $6.3 million or 22.9%. Gross margin for the quarter ended
February 29, 2000 of 9.8% was slightly less than the 10.2% produced for the
quarter ended February 28, 1999 partially as a result of a change in the mix of
work. Gross margins were also negatively impacted by the International Division
as a result of a $0.3 million gross profit loss on a project in Venezuela.
The increased sales volumes more than offset the effects of the gross margin
decline and resulted in gross profit for the quarter ended February 29, 2000 of
$3.3 million exceeding the $2.8 million for the quarter ended February 28, 1999
by $0.5 million, or 17.9%.
Selling, general and administrative costs as a percent of revenues increased to
6.7% in the quarter ended February 29, 2000 vs. 6.2% in the quarter ended
February 28, 1999 primarily as a result of increased salary and wages, increased
professional services costs and increased information technology costs
associated with the new enterprise-wide management information system discussed
in the "Year 2000 Compliance" section. Current year selling, general and
administrative costs was also negatively impacted by $0.2 million in one time
charges related to the shut down of the International Division.
Operating income and income before income tax expense for the quarter ended
February 29, 2000 of $1.0 million and $1.0 million respectively, were slightly
better than the $1.0 million and $0.9 million respectively produced in the
quarter ended February 28, 1999, primarily as the result of the improvements in
gross profit offset by the increase in selling, general and administrative
expenses discussed above.
Construction Services 2000 vs. 1999
- -----------------------------------
Revenues for Construction Services in the quarter ended February 29, 2000 were
$1.3 million, compared to $6.6 million in the comparable quarter of the prior
year, a decrease of $5.3 million or 80.3%. Gross margin for the quarter ended
February 29, 2000 of (38.5)% was also significantly less than the 6.1% produced
for the quarter ended February 28, 1999 as a direct result of the lack of
significant work to cover the fixed cost structure in place for Construction
Services and one time charges to lower margin jobs in 2000 versus 1999. These
margin declines along with the decreased sales volumes resulted in gross profit
for the quarter ended February 29, 2000 of $(0.5) million being $0.9 million
less than the $0.4 million for the quarter ended February 28, 1999.
Operating loss and loss before income tax expense for the quarter ended February
29, 2000 of $0.8 million and $0.8 million respectively, were worse than the
operating income and income before income taxes of $0.2 million and $0.2 million
respectively produced in the quarter ended February 28, 1999, primarily as the
result of the lack of significant work and the charges to lower margin projects
discussed above.
Plant Services 2000 vs. 1999
- ----------------------------
Revenues for Plant Services in the quarter ended February 29, 2000 were $11.7
million compared to $5.5 million in the comparable quarter of the prior year, an
increase of $6.2 million or 112.7%. The increase was the result of a
significant amount of turnaround work. The increase was primarily a result of a
shift in customer turnaround work performed in the fourth quarter of last year
versus being performed in the third quarter of the current year.
Gross margin for the quarter ended February 29, 2000 of 13.7% was significantly
better than the 7.3% produced for the quarter ended February 28, 1999 as a
result of this higher margin turnaround work.
These margin improvements along with the increased sales volume resulted in
gross profit for the quarter ended February 29, 2000 of $1.6 million being $1.2
million, or 300.0% more than the $0.4 million in the quarter ended February 28,
1999.
Operating income and income before income tax expense for the quarter ended
February 29, 2000 of $1.1 million and $1.1 million respectively, were better
than the operating loss and loss before income tax of $(0.1) million and $(0.2)
million respectively produced in the quarter ended February 28, 1999, primarily
as the result of higher gross margins discussed above.
10
Nine Months Ended February 29, 2000 Compared to Nine Months Ended February 28,
1999
AST Services 2000 vs. 1999
- --------------------------
Revenues for AST Services in the nine months ended February 29, 2000 were $93.2
million, compared to $84.5 million in the comparable nine months of the prior
year, an increase of $8.7 million or 10.3%. Gross margin for the nine months
ended February 29, 2000 of 13.3% was better than the 12.1% produced for the nine
months ended February 28, 1999 as a direct result of higher margin lump sum work
combined with better execution of job plans. These margin improvements were
offset somewhat by the International Division as a result of a $0.6 million
gross profit loss on a project in Venezuela.
These margin improvements along with the increased sales volumes resulted in
gross profit for the nine months ended February 29, 2000 of $12.4 million
exceeding the $10.2 million for the nine months ended February 28, 1999 by $2.2
million, or 21.6%.
Selling, general and administrative costs as a percent of revenues increased to
7.0% in the nine months ended February 29, 2000 versus 6.4% in the nine months
ended February 28, 1999 primarily as a result of increased salary and wages,
increased professional services costs and increased information technology costs
associated with the new enterprise-wide management information system discussed
in the "Year 2000 Compliance" section. Current year selling, general and
administrative costs was also negatively impacted by $0.2 million in one time
charges related to the shut down of the International Division.
Operating income and income before income tax expense for the nine months ended
February 29, 2000 of $5.6 million and $5.6 million respectively, were
significantly better than the $4.5 million and $4.3 million respectively
produced in the quarter ended February 28, 1999, primarily as the result of the
improvements in gross profit offset by the increase in selling, general and
administrative expenses discussed above.
Construction Services 2000 vs. 1999
- -----------------------------------
Revenues for Construction Services for the nine months ended February 29, 2000
were $5.8 million, compared to $15.0 million for the comparable nine months of
the prior year, a decrease of $9.2 million or 61.3%. This decrease was due to a
very low backlog at the beginning of the Company's fiscal year 2000 compared to
last year when Construction Services was in the process of completing two major
projects. Gross margin for the nine months ended February 29, 2000 of (8.6)%
was also significantly less than the 9.3% produced for the nine months ended
February 28, 1999 as a direct result of the lack of significant work to cover
the fixed cost structure in place for Construction Services and one time charges
to lower margin jobs in 2000 versus 1999. These margin declines along with the
decreased sales volumes resulted in gross profit for the nine months ended
February 29, 2000 of $(0.5) million being $1.9 million less than the $1.4
million in the nine months ended February 28, 1999.
Operating loss and loss before income tax expense for the nine months ended
February 29, 2000 of $1.5 million and $1.1 million respectively, were
significantly worse than the operating income and income before tax expense of
$0.5 million and $0.5 million respectively, produced in the nine months ended
February 28, 1999, primarily as the result of the lack of significant work and
the charges to lower margin projects discussed above. Other income includes a
one-time benefit of $0.4 million for the nine months ended February 29, 2000 as
a result of a customer invoice previously reserved as a bad debt being fully
collected.
Plant Services 2000 vs. 1999
- ----------------------------
Revenues for Plant Services in the nine months ended February 29, 2000 were
$29.0 million compared to $22.4 million in the comparable nine months of the
prior year, an increase of $6.6 million or 29.5%. Gross margin for the nine
months ended February 29, 2000 of 11.0% was better than the 9.8% produced for
the nine months ended February 28, 1999 as a direct result of higher margin
turnaround work, slightly offset by a one-time $0.3 million charge related to
one time training expenses. These margin improvements along with increased sales
volume resulted in gross profit for the nine months ended February 29, 2000 of
$3.2 million exceeding the $2.2 million for the nine months ended February 28,
1999 by $1.0 million, or 45.5%.
Operating income and income before income tax expense for the nine months ended
February 29, 2000 of $1.6 million and $1.6 million respectively, were better
than the $0.8 million and $0.7 million respectively produced in the nine months
ended February 28, 1999, primarily as the result of the gross margin
improvements discussed above.
11
Exited Operations
- -----------------
On March 24, 1999, Matrix entered into a Letter of Intent with Caldwell Tanks,
Inc. ("Caldwell") for the sale of Brown Steel Contractors, Inc., ("Brown") a
subsidiary acquired in 1994. In April 1999, the Board of Directors approved the
transaction and a Stock Purchase Agreement was executed on June 9, 1999. Based
upon certain environmental concerns the structure of this transaction was
renegotiated as an asset sale with Matrix retaining temporary ownership of the
land and buildings until environmental remediation is completed.
On August 31, 1999, Matrix sold the assets and the business of Brown to Caldwell
for cash in the amount of $4.3 million and the assumption by the buyer of
ongoing construction contracts ("Work-in-Process Contracts") and certain
environmental liabilities of $0.4 million. Excluded from the assets sold were
cash, accounts receivable, real estate and buildings and other miscellaneous
assets. Included in the assets sold was all inventory of the subsidiaries, net
of $0.7 million used as work-in-process. The cash amount paid at closing was
subject to adjustment after the closing based upon the relationship of future
billings and the cost to complete the Work-in-Process Contracts which was $1.9
million paid to Matrix on October 7, 1999. The buyer has a three-year right to
lease and an option to acquire the real estate and buildings at a specified
price of $2.2 million, and is obligated to acquire, at the same specified price,
if Matrix is able to satisfy specified environmental clean-up measures within
the three-year period. The estimated cost of the clean up has been accrued, and
management believes these clean-up measures will be satisfied within the
specified period.
Matrix has agreed with the buyer not to compete in that business for five years.
For the fiscal years ended May 31, 1997, 1998 and 1999, Brown accounted for
19.8%, 14.4% and 15.9%, respectively, of Matrix's total revenues, and 19.0%,
20.2% and 17.7%, respectively, of Matrix's total assets.
For the nine months ended February 29, 2000, worker's compensation and general
liability reserves for the Brown operations were determined to be $0.4 million
short of anticipated future expenditures, resulting in a charge to income in
this fiscal year.
Also, in May 1999 senior management approved and committed Matrix to an exit
plan related to the San Luis Tank & Piping Construction, Inc. ("SLT") operations
which were acquired in 1991. The exit plan specifically identified all
significant actions to be taken to complete the exit plan, listed the activities
that would not be continued, and outlined the methods to be employed for the
disposition, with an expected completion date of March 2000. Management
obtained Board approval and immediately began development of a communication
plan to the impacted employees under Workers Adjustment and Retraining
Notification Act ("WARN Act").
In June 1999, notices were given as required under the WARN Act and Matrix
announced that it would also pursue potential opportunities to sell SLT. In
January 2000, Matrix sold at fair market value resulting in no gain or loss the
assets of the coating operation, an affiliated company of SLT, to existing
management for $0.3 million. For the nine months ended February 29, 2000, the
exit plan reserves have been re-evaluated and reduced by $0.4 million. This
reduction is a result of a favorable ruling in existing litigation and better
than anticipated environmental findings.
Municipal Water Services 1999 vs. 1998
- --------------------------------------
Municipal Water Services consists of Brown (which was sold on August 31, 1999)
and SLT which is being shut down as discussed above. The only activity for the
quarter and nine months ended February 29, 2000 consisted of completing open
contracts which had been appropriately recorded as loss jobs in prior periods.
As a result, revenues for Municipal Water Services for the quarter ended
February 29, 2000 were $1.5 million versus the $10.6 million for the quarter
ended February 28, 1999. Additionally, revenues for the nine months ended
February 29, 2000 were $19.1 million versus $35.3 million for the nine months
ended February 28, 1999. There was no operating income or pre-tax income for
the quarter or nine months ended February 29, 2000 versus an operating loss and
pre-tax loss of ($1.5) million and ($1.5) million respectively for the quarter
ended February 28, 1999 and an operating loss and pre-tax loss of ($3.1) million
and ($3.2) million respectfully for the nine months ended February 28, 1999.
FCCU Services 2000 vs. 1999
- ---------------------------
Midwest was exited in February 1998 and there was no significant FCCU activity
for the quarters or nine months ended February 29, 2000 or February 28, 1999.
12
Financial Condition & Liquidity
Matrix's cash and cash equivalents totaled approximately $1.3 million at
February 29, 2000 and $3.0 million at May 31, 1999.
Matrix has financed its operations recently with cash generated by operations
and advances under a credit agreement. On November 30, 1999, Matrix amended and
restated 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 which would have provided approximately $12.0
million of availability at February 29, 2000. Revolving loans bear interest at
a Prime Rate or a LIBOR based option, and mature on October 31, 2002. At
February 29, 2000, $1.2 million was outstanding under the revolver at an
interest rate of 7.6%. Prior to the November 30, 1999 amendment, the credit
agreement also provided for a term loan up to $10.0 million. On March 2, 1998,
a term loan of $10.0 million was made to Matrix. The term loan was due on
February 28, 2003 and was to be repaid in 60 equal payments beginning in March
1998 at an interest rate based upon the Prime Rate or a LIBOR Option. As
discussed under "Exited Operations", the sale of Brown provided $6.2 million in
cash during the second quarter of Fiscal 2000. These proceeds were used to pre-
pay the term loan amount which was fully extinguished on October 7, 1999. In
conjunction with the term loan, Matrix entered into an Interest Rate Swap
Agreement with a commercial bank, effectively providing a fixed interest rate of
7.5% for the five-year period of the term loan. On September 3, 1999, the
commercial bank paid Matrix to unwind the Swap Agreement and Matrix began pre-
paying on the term loan with the proceeds from the Brown sale.
Operations of Matrix provided $3.4 million of cash for the nine months ended
February 29, 2000 as compared with providing $14.1 million of cash for the nine
months ended February 28, 1999, representing a decrease of approximately $10.7
million. The decrease was due primarily to changes in net working capital to
fund the increased AST Services and Plant Services activities previously
discussed, offset by significantly improved profitability.
Capital expenditures during the nine months ended February 29, 2000 totaled
approximately $4.8 million. Of this amount, approximately $1.5 million was used
to purchase transportation equipment for field operations, and approximately
$2.1 million was used to purchase welding, construction, and fabrication
equipment. Matrix has invested approximately $1.2 million in office equipment
furniture and fixtures during the quarter, which includes approximately $0.2
million invested for a new enterprise wide management information system. Matrix
has budgeted approximately $6.3 million for capital expenditures for Fiscal
2000. Of this amount, approximately $1.4 million would be used to purchase
transportation equipment for field operations, and approximately $2.7 million
would be used to purchase welding, construction, and fabrication equipment. A
6,000 square foot expansion is planned for the Port of Catoosa fabrication
facility at a cost of approximately $0.7 million and an additional $0.8 million
is anticipated to be spent on the enterprise wide management information system.
Matrix expects to be able to finance these expenditures with operating cash flow
and borrowings under the credit agreement.
On January 5, 2000, Matrix entered into a Purchase Agreement for $4.3 million to
acquire a facility for the relocation of its Anaheim operation. Pending final
resolution of findings of the interim environmental assessment, a closing is
scheduled for April 23, 2000. Matrix expects to be able to finance this
facility with operating cash flow and borrowings under the Credit Agreement.
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 2000 and for the
foreseeable time thereafter unless significant expansions of operations 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" 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.
13
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 Division has improved but it is
still lower than needed to profitably sustain this Division. Bidding remains
strong and the Division was recently a successful bidder on several $1 to $3
million projects; work will begin on these projects in the fourth fiscal
quarter. The International Division has experienced difficulty with its
Venezuelan operations due to cost overruns. The project in Venezuela was
physically completed in the third quarter of fiscal year 2000 and the Division
is currently being shut down. Matrix will continue to pursue international
projects through its existing segment operations when the individual projects
being considered are deemed to be within Matrix's core business lines.
The strengthening experienced in Matrix's AST Services Division from August 1999
through February 2000 was a result of our customer's maintenance budgets being
spent during the remainder of their budget cycles. Preliminary indications are
that these maintenance budgets were approved at comparable levels in the
calendar year of 2000. Management believes that its strategic alliances put
Matrix in a more favorable position than our competition if budgets are
subsequently reduced.
Environmental
Matrix is a participant in certain environmental activities in various stages
involving assessment studies, cleanup operations and/or remedial processes.
An environmental assessment was conducted at the Newnan, Georgia facilities of
Brown upon execution of a Letter of Intent on March 24, 1999 to sell Brown to
Caldwell. 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. One of the properties has been listed by the State of Georgia as a
hazardous waste site.
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 cost for cleanup and remediation is $1.2 million, $0.4
million of which remains accrued at February 29, 2000. Additional testing,
however, could result in greater costs for cleanup and remediation than is
currently accrued. Matrix still retains ownership of $2.2 million in land and
buildings following the sale of Brown on August 31, 1999, which is expected to
be sold to Caldwell after successful remediation of the property.
Matrix is also in the process of closing down SLT. As previously stated, Matrix
sold the assets of West Coast Industrial Coatings, Inc. in January 2000.
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. Matrix continues to operate in the facility by virtue of
its sublease with the previous management of the Coating operation. At the
present time, the environmental liability that could result from testing of this
property is unknown although an environmental liability insurance policy has
been purchased and the third party subleasing the property from Matrix has
assumed liability for the facility from the time of the asset sale forward.
Year 2000 Compliance
Preparations for Y2K began in the fall of 1998. Potential "at risk" systems were
identified and slated for testing and/or Y2K certification from their
manufacturers. Letters were sent to our top 50 vendors requesting Y2K compliance
information. All responses indicated that they would be Y2K ready by the end of
1999. We sent out Y2K compliance letters to our customers indicating that we
would be Y2K compliant by the end of 1999.
Y2K compliance information for hardware platforms, operating systems and
software applications was gathered from a variety of sources, including
manufacturer's Internet web pages, written communications, email and testing.
All responses were analyzed and prioritized. Confirmed Y2K `non-compliant'
systems were evaluated to determine whether they could be upgraded, replaced or
were no longer needed.
14
Proprietary systems that had no formal documentation to confirm Y2K compliance
were tested. Testing consisted of backing up the system, rolling the date
forward into the year 2000, and then operating the software to test for errors.
These systems tested Y2K-compliant. Non-compliant proprietary systems were
upgraded.
All available Y2K patches for existing workstations and file servers were
applied. Y2K testing software was run on all corporate owned computer
workstations and laptops. Bios upgrade, Y2K-compliant clock-cards and software
patches were applied where indicated and when available. All new systems were
evaluated for Y2K compliance prior to purchase. All virus prevention systems
were updated with the most recent virus detection files.
Prior to the end of year rollover, we reviewed our efforts and their results.
We placed all Information Technology personnel on call for the weekend. We
instructed all business units to shut down and power off all workstations at the
close of business for the 1999 calendar year. All servers throughout the
Company were shutdown after their December 31, 1999 data backups were completed.
We disconnected the Internet connection to our internal network on December 31,
1999. On the morning of January 1, 2000 we restarted all servers at our
corporate offices and proceeded to do preliminary testing. We restarted the
corporate office workstations, logged in, and verified that the dates had
successfully rolled over. The mail server and other critical Internet servers
were tested for full functionality after reconnecting our internal network to
the Internet. Further testing was conducted by the Accounting department on
January 2, 2000. All testing was successful.
On Monday January 3, 2000, the regional file servers and workstations were
powered on. We monitored the servers coming up on the network at all the
regional offices. We verified that the servers were functioning normally and
that the date had properly rolled. Time synchronization on the network was
reestablished. We contacted all regional offices to determine if they had
experienced any Y2K related problems. All offices reported no errors, except
Anaheim which had its voice mail system fail Y2K. This was a known problem
prior to the rollover. The replacement system had already been ordered, and was
due to be installed by mid-January. The problem was temporarily remedied by
setting the date back to a prior year.
The cost of the Y2K effort was approximately $0.2 million and was funded through
operating cash flows. Of the total project cost, 40% was attributable to the
purchase of new systems, which were capitalized. The remaining 60% was expensed
as incurred and did not have a material effect on the results of operations.
15
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX SERVICE COMPANY
Date: April 13, 2000 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.
16
EXHIBIT 11
Statements Re Computation of Earnings Per Share
[ARTICLE] 5
[MULTIPLIER] 1,000
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] MAY-31-2000
DEC-01-1999
[PERIOD-END] FEB-29-2000
[COMMON] 8,884
[NET-INCOME] 1,184
[EPS-BASIC] 0.13
[COMMON] 9,079
[NET-INCOME] 1,184
[EPS-DILUTED] 0.13
[FISCAL-YEAR-END] MAY-31-1999
[PERIOD-START] DEC-01-1998
[PERIOD-END] FEB-28-1999
[COMMON] 9,649
[NET-INCOME] (333)
[EPS-BASIC] (0.03)
[COMMON] 9,649
[NET-INCOME] (333)
[EPS-DILUTED] (0.03)
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] MAY-31-2000
[PERIOD-START] JUN-01-1999
[PERIOD-END] FEB-29-2000
[COMMON] 8,920
[NET-INCOME] 5,666
[EPS-BASIC] 0.64
[COMMON] 9,027
[NET-INCOME] 5,666
[EPS-DILUTED] 0.63
[FISCAL-YEAR-END] MAY-31-1999
[PERIOD-START] JUN-01-1998
[PERIOD-END] FEB-28-1999
[COMMON] 9,607
[NET-INCOME] 1,527
[EPS-BASIC] 0.16
[COMMON] 10,182
[NET-INCOME] 1,527
[EPS-DILUTED] 0.15
5
1,000
9-MOS
MAY-31-2000
FEB-29-2000
1,296
0
21,245
(397)
3,054
44,055
40,365
19,746
78,224
22,016
0
0
0
96
54,937
78,224
146,277
146,277
130,798
130,798
9,776
0
(271)
6,016
350
5,666
0
0
0
5,666
0.64
0.63
