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 November 30, 1997
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 January 13, 1998, there were 9,491,153 shares of the Company's
common stock, $.01 par value per share, issued and 9,428,139 shares
outstanding.
PART I.- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Matrix Service Company
Condensed Consolidated Statements of Income
(in thousands, except share and per share data)
[CAPTION]
Three Months Ended Six Months Ended
November 30 November 30
------------------ ----------------
(unaudited) (unaudited)
1997 1996 1997 1996
------------------ -----------------
[MULTIPLIER] 1,000
Revenues $62,017 $48,212 $111,536 $87,842
Cost of revenues 56,875 43,574 101,652 79,239
------- ------- ------- -------
Gross profit 5,142 4,638 9,884 8,603
Selling, general and
administrative expenses 3,205 2,719 6,211 5,178
Goodwill and noncompete
amortization 296 216 592 432
------- ------- ------- -------
Operating income 1,641 1,703 3,081 2,993
Other income (expense):
Interest income 30 28 74 57
Interest expense (260) (115) (518) (229)
Other 92 116 100 67
------- ------- ------- -------
Income before income
tax expense 1,503 1,732 2,737 2,888
Provision for federal and
state income tax expense 550 778 1,015 1,302
------- ------- ------- -------
Net income $953 $954 $1,722 $1,586
======= ======= ======= =======
Net income per common and
common equivalent shares:
Primary $0.10 $0.10 $0.17 $0.17
Fully diluted $0.10 $0.10 $0.17 $0.17
Weighted average common and
common equivalent shares
outstanding:
Primary 9,858,467 9,569,550 9,926,630 9,555,545
Fully diluted 9,927,143 9,569,550 9,948,677 9,562,788
<FN>
See Notes to Condensed Consolidated Financial Statements
[MULTIPLIER] 1,000
Matrix Service Company
Condensed Consolidated Balance Sheets
(in thousands)
November 30, May 31,
1997 1997
----------- ---------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 162 $ 1,877
Accounts receivable 41,615 37,745
Costs and estimated earnings
in excess of billings on
uncompleted contracts 12,737 11,349
Inventories 6,145 4,989
Prepaid expenses 521 456
Deferred taxes 1,074 1,021
Income tax receivable 976 317
-------- -------
Total current assets 63,230 57,754
Investment in undistributed equity
of a foreign joint venture 174 174
Property, plant and equipment at cost:
Land and buildings 20,944 15,097
Construction equipment 24,630 24,444
Transportation equipment 5,783 5,504
Furniture and fixtures 3,439 3,164
Construction in progress 890 2,614
------- -------
55,686 50,823
Less accumulated depreciation 25,444 20,861
------- -------
Net property, plant and equipment 30,242 29,962
Goodwill, net of accumulated
amortization 30,700 28,721
Other assets 743 261
-------- --------
Total assets $125,089 $116,872
======== ========
See Notes to Condensed Consolidated Financial Statements
[MULTIPLIER] 1,000
Matrix Service Company
Condensed Consolidated Balance Sheets
(in thousands)
November 30, May 31,
1997 1997
------------ ---------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $12,777 $12,307
Billings on uncompleted contracts in
excess of costs and estimated earning 8,434 6,325
Accrued expenses 5,163 9,414
Current portion of long-term debt 2,234 1,495
------- -------
Total current liabilities 28,608 29,541
Long-term debt:
Bank credit agreement 8,750 5,000
Acquisition notes payable 115 407
Term notes payable 5,045 955
------- -------
Total long-term debt 13,910 6,362
Deferred income taxes 4,757 4,757
Stockholders' equity:
Common stock 95 95
Capital in excess of par value 50,903 50,903
Retained earnings 27,573 26,269
Cumulative translation adjustment (220) (145)
------- -------
Total capital and
retained earnings 78,351 77,122
Less:Treasury stock, at cost 537 910
------- -------
Total stockholders' equity 77,814 76,212
------- -------
Total liabilities and stockholders'
equity $125,089 $116,872
======== ========
<FN>
See Notes to Condensed Consolidated Financial Statements
[MULTIPLIER] 1,000
Matrix Service Company
Condensed Consolidated Cash Flow Statements
(in thousands)
Six Months Ended
November 30
(unaudited)
1997 1996
-----------------
Cash flow from operating activities:
Net income $1,722 $1,586
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,037 2,795
Changes in current assets and
liabilities increasing
(decreasing) cash:
Accounts receivable 717 8
Costs and estimated earnings in
excess of billings on uncompleted
contracts (254) (3,441)
Inventories 69 (852)
Prepaid expenses (74) (89)
Accounts payable (2,948) 779
Billings on uncompleted contracts
in excess of costs and estimated
earnings 1,642 1,786
Taxes receivable and other accruals (4,899) (1,340)
Other (5) 34
------ ------
Net cash (used in) provided by
operating activities (993) 1,266
Cash flow from investing activities:
Capital expenditures (1,433) (3,049)
Acquisition of subsidiary,
net of cash acquired (4,182) 47
Other, net 50 36
------ ------
Net cash used in investing
activities (5,565) (2,966)
Matrix Service Company
Condensed Consolidated Cash Flow Statements
(in thousands)
Six Months Ended
November 30,
(unaudited)
1997 1996
------ ------
Cash flows from financing activities:
Issuance of acquisition payable 286 -
Repayment of acquisition payables (281) (265)
Repayment of equipment notes (14) (11)
Issuance under long-term credit
agreement 10,750 3,000
Repayments under long-term
credit agreement (2,000) (2,000)
Repayment of long-term debt (4,042) (544)
Issuance of stock - -
Change in treasury stock 144 19
------ ------
Net cash provided by
financing activities 4,843 199
------ ------
Increase in cash and cash
equivalents (1,715) (1,501)
Cash and cash equivalents at beginning
of period 1,877 1,899
------ ------
Cash and cash equivalents at end
of period $ 162 $ 398
====== ======
<FN>
See Notes to Condensed Consolidated Financial Statements
MATRIX SERVICE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE A - BASIS OF PRESENTATION
The condensed 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 condensed 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, 1997, 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 - BUSINESS ACQUISITIONS
On June 17, 1997, the Company acquired all of the outstanding common stock of
General Service Corporation and its affiliated companies, Maintenance
Services, Inc., Allentech, Inc., and Environmental Protection Services
(collectively "GSC") for up to $7.8 million, subject to certain adjustments.
The purchase price consisted of $4.75 million in cash and a $250 thousand,
prime rate (currently 8.25%) promissory note payable in 12 equal quarterly
installments. In addition, the stockholders of GSC are entitled to receive
in the future up to an additional $2.75 million in cash if GSC satisfies
certain earnings requirements. Under the provision of the contract the
stockholders have the right to elect 70% of the earnout amount upon change
of control of the Company. The stockholders of GSC have elected to receive
70% of the earnout to satisfy this provision, upon the closing of the
transaction between the Company and ITEQ, Inc. (SEE NOTE C - RECENT EVENT)
The transaction was accounted for as a purchase and created approximately
$3.0 million of goodwill and non-competition covenants.
NOTE C - RECENT EVENT
On December 16, 1997, the Company and ITEQ, Inc. ("ITEQ") entered into a Plan
and Agreement of Merger whereby ITEQ will acquire the Company. The
shareholders of the Company will be able to tender a share of Company common
stock for either $10 cash or .8333 of one share of ITEQ common stock, subject
to the cash portion of the purchase price not exceeding 50% nor being less
than 30% of the total consideration. The acquisition is subject to shareholder
and regulatory approval and the absence of any dissenters. The transaction
is expected to close by March 1998, and will be accounted for using the
purchase method of accounting.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
Three Months Ended November 30, 1997 Compared With The Three Months
Ended November 30, 1996
General Service Corporation ("GSC") was acquired by Matrix Service Company
(the "Company") on June 17, 1997. Accordingly, the results of operations
of GSC for the quarter are included for the current period, but none of GSC's
operations are included in the prior year period.
Revenues for the quarter ended November 30, 1997 were $62.0 million as
compared to revenues of $48.2 million for the quarter ended November 30,
1996, representing an increase as compared with the same period in 1996 of
$13.8 million or 28.6%. The increase is due to the inclusion of GSC revenues
and increased revenues from capital projects in the Northwest from the
refinery division.
Gross profit increased to $5.1 million for the quarterly period ended
November 30, 1997 from gross profit of $4.6 million for the quarterly
period ended November 30, l996, an increase of approximately $504 thousand
or 10.9%. Gross profit as a percentage of revenues decreased to 8.3% for the
1997 period from 9.6% for the 1996 period. The decrease in gross profit
percentage for the current period as compared with the prior period is due
to pricing pressure on above ground tank maintenance work in the West and
Gulf Coast areas and additional capital work in the refinery division, which
historically provides lower margins.
Selling, general and administrative expenses increased to $3.2 million for the
quarterly period ended November 30, 1997 as compared to $2.7 million for the
quarterly period ended November 30, 1996, an increase of $486 thousand or
17.9%. Selling, general and administrative expenses as a percentage of
revenues decreased to 5.2% for the current period as compared to 5.64% for
the prior period. The increase in selling, general and administrative
expenses for the period is due mainly to the inclusion of GSC. The decrease
in expenses as a percentage of revenue results from the expenses being spread
over greater revenues.
Operating income decreased to $1.6 million for the quarterly period ended
November 30, 1997 from income of $1.7 million for the quarterly period ended
November 30, 1996, a decrease of $62 thousand or approximately 3.6%. The
decrease in operating profit was due to lower gross profit margins, increased
selling, general and administrative expenses and increased amortization
expense.
Interest expense increased to $260 thousand for the quarterly period ended
November 30, 1997 from $115 thousand of interest expense for the quarterly
period ended November 30, 1996. The increase resulted from an increased
level of borrowing under the Company's credit facility principally as a
result of borrowings for the acquisition of GSC.
The effective tax rate for the quarterly period ended November 30, 1997
decreased to 36.6% as compared to 44.9% for the 1996 period. The reduction
is due principally to the utilization of a net operating loss carryforward
available from GSC.
Net income decreased to $953 thousand for the quarterly period ended November
30, 1997 from net income of $954 thousand for the quarterly period ended
November 30, 1996. The decrease was due to decreased operating profit and
increased interest expense for the 1997 period as compared with the 1996
period.
Six Months Ended November 30, 1997 Compared With The Six Months
Ended November 30, 1996
General Service Corporation ("GSC") was acquired by Matrix Service Company
(the "Company") on June 17, 1997. Accordingly, the results of operations
of GSC for five and one-half months are included for the current period,
but none of GSC's operations are included in the prior year six month period.
Revenues for the six months ended November 30, 1997 were $ 111.5 million as
compared to revenues of $87.8 million for the six months ended November 30,
1996, representing an increase of approximately $ 23.7 million or 27.0%.
The increase was due to increased revenues from the Company's refinery
maintenance and construction operations on the West Coast and the inclusion
of GSC in the six month period ended November 30, 1997, as compared with the
same period in 1996.
Gross profit increased to $9.9 million for the six months ended November 30,
1997 from gross profit of $8.6 million for the six months ended November 30,
1996. Gross profit as a percentage of revenues decreased to 8.9% for the 1997
period from 9.8% for the 1996 period. The decrease in gross profit percentage
for the current period as compared with prior period is due to lower profit
margins on maintenance and repair work on above ground storage tanks in the
Gulf Coast and West Coast markets, elevated water tanks and capital work in
the refinery divisions.
Selling, general and administrative expenses increased to $6.2 million for
the six months ended November 30, 1997 compared to $5.2 million for the six
months ended November 30, 1996, an increase of $1.0 million or approximately
19.9%. The increase in selling, general and administrative expenses is
primarily due to the inclusion of GSC expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 5.6% for
the current period as compared with 5.9% for the 1996 period. The decrease
in the selling, general and administrative expenses as a percentage of
revenues for the current period as compared to the prior period is the
result of the expenses being spread over greater revenues.
Operating income increased to $3.1 million for the six months ended November
30, 1997 from income of $3.0 million for the six months ended November 30,
1996. The increase was due to the inclusion of GSC and increased operations
from the refinery division offset by lower margins for tank maintenance and
repair in certain markets and elevated water tanks.
Net income increased to $1.7 million in the 1997 period from net income of
$1.6 million in 1996. The increase was due principally to the inclusion of
GSC.
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 $25.0 million. The Company may borrow up to $15.0 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 minus
three quarters of one percent (3/4 of 1%), or a LIBOR based option of LIBOR
plus one and one quarter percent (1 and 1/4%), and matures on October 31,
1999. At November 30, 1997, the interest rate was 7.22% and the outstanding
advances under the revolver totaled $8.75 million. The credit facility also
provides for two term loans of up to $5.0 million each. On October 5, 1994
and June 19, 1997 term loans of $4.9 million and $5.0 million, respectively,
were made to the Company. The 1994 term loan is due on August 31, 1999 and
is to be repaid in 54 equal payments beginning in March 1995 at an interest
rate based upon the Prime Rate or a LIBOR option. The 1997 term loan is due
January 23, 2002 and is to repaid in 54 equal payments beginning January 7,
1998 at an interest rate based upon the prime rate or a LIBOR option. At
November 30, 1997, the interest rate on the term loans was 7.72%, and the
outstanding balance was $2.0 million and $5.0 million, respectively.
Operations of the Company used $933 thousand of cash for the six months
ended November 30, 1997 as compared with providing cash from operations of
$1.3 million for the six months ended November 30, 1996, representing a
decrease of approximately $2.3 million. The decrease was primarily the
result of a decrease of $3.7 million in accounts payable and a decrease
in income taxes and other accruals of $3.6 million offset by a net increase
of $3.0 million in billings on uncompleted contracts in excess of costs and
estimated earnings in excess of billings and an increase of $1.6 million in
inventory and receivables.
Capital expenditures during the six month period ended November 30, 1997
totaled approximately $1.4 million. Of this amount approximately $699
thousand was used to purchase welding and construction equipment and $239
thousand was used to purchase transportation equipment for field operations.
The Company has invested approximately $505 thousand for office expansion for
support of field operations. In addition, the Company has currently budgeted
approximately $2.1 million for additional capital expenditures primarily to
be used to purchase construction equipment during the remainder of fiscal
year 1998. The Company expects to be able to finance any such expenditures
with available working capital.
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 1998 and
possibly thereafter unless significant expansions of operations not now
planned are undertaken, in which case the Company would arrange additional
financing as a part of any such expansion.
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders:
The Company's annual meeting of stockholders was held in Tulsa, Oklahoma at
10:00 a.m. local time, on Wednesday, October 29, 1997. Proxies for the
meeting were solicited pursuant to Regulation 14 under the Securities Exchange
Act of 1934, as amended. There was no solicitation in opposition to the
nominees for election as directors as listed in the proxy statement, and all
nominees were elected.
Out of a total of 9,402,139 shares of the Company's common stock outstanding
and entitled to vote, 7,311,462 shares were present at the meeting in person
or by proxy, representing approximately 77.76 percent. Matters voted upon at
the meeting were as follows:
a) Election of six directors to serve on the Company's board of directors.
Messrs. Bradley, Curry, Lee, West, Wood and Zink were elected to serve until
the 1998 Annual Meeting. The vote tabulation with respect to each nominee
was as follows:
Authority
Nominee For Withheld
- -------- ---------- ----------
Doyl D. West 7,166,910 144,552
C. William Lee 7,167,110 144,352
Hugh E. Bradley 7,167,110 144,352
Robert L.Curry 7,167,010 144,452
William P. Wood 7,166,810 144,652
John S. Zink 7,167,010 144,452
b) The stockholders approved an amendment to the Company's 1991 Stock Option
Plan increasing the number of shares issuable under the plan from 970,000 to
1,320,000.
Number of Votes Cast
- --------------------
For Against Abstain Non-Votes
--- ------- -------- ---------
6,391,566 870,892 12,145 36,859
c) There were 7,297,860 shares voted for the ratification of the appointment
of Ernst & Young LLP as the Company's independent public accountants, with
10,602 shares voted against, 3,000 abstentions, and zero broker non-votes.
ITEM 6. Exhibits and Reports on Form 8-K:
A. Exhibit 10.1 - 1991 Stock Option Plan, as amended.
B. Exhibit 11 - Computation of earnings per share.
C. Reports on Form 8-K: None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX SERVICE COMPANY
Date: January 14, 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.