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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, 2001
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, 2001 there were 9,642,638 shares of the Company's common
stock, $.01 par value per share, issued and 7,962,166 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, 2001 and February 29, 2000............................................. 1
Consolidated Balance Sheets February 28, 2001 and May 31, 2000.......................... 2
Consolidated Statements of Cash Flow for the Nine Months Ended
February 28, 2001 and February 29, 2000............................................. 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
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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 29, February 28, February 29,
2001 2000 2001 2000
------------- ------------- -------------- -------------
Revenues $ 49,135 $ 48,033 $ 132,049 $ 146,277
Cost of revenues 43,373 43,552 117,699 130,798
------------- ------------- -------------- -------------
Gross profit 5,762 4,481 14,350 15,479
Selling, general and administrative expenses 3,617 3,064 10,462 9,425
Goodwill and non-compete amortization 91 132 267 351
------------- ------------- -------------- -------------
Operating income 2,054 1,285 3,621 5,703
Other income (expense):
Interest expense (119) (28) (248) (271)
Interest income 32 9 113 63
Other 230 98 278 521
------------- ------------- -------------- -------------
Income before income tax expense 2,197 1,364 3,764 6,016
Provision for federal, state and
foreign income tax expense 747 180 1,317 350
------------- ------------- -------------- -------------
Net income $ 1,450 $ 1,184 $ 2,447 $ 5,666
============= ============= ============== =============
Earnings per share of common stock:
Basic $ 0.17 $ 0.13 $ 0.28 $ 0.64
Diluted $ 0.17 $ 0.13 $ 0.28 $ 0.63
Weighted average number of common shares:
Basic 8,326,372 8,884,456 8,522,326 8,920,222
Diluted 8,591,324 9,079,420 8,686,031 9,026,844
See Notes to Consolidated Financial Statements
1
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
February 28, May 31,
2001 2000
----------- ----------
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $ 1,414 $ 1,806
Accounts receivable, less allowances
(February 28 - $30, May 31 - $150) 26,795 24,188
Costs and estimated earnings in excess
of billings on uncompleted contracts 11,951 11,029
Inventories 2,330 3,049
Income tax receivable 17 146
Deferred income taxes 988 --
Prepaid expenses 2,969 2,559
----------- ----------
Total current assets 46,464 42,777
Investment in joint venture 366 279
Property, plant and equipment at cost:
Land and buildings 9,441 9,992
Construction equipment 19,187 17,892
Transportation equipment 7,416 7,220
Furniture and fixtures 4,773 4,399
Construction in progress 2,298 1,995
----------- ----------
43,115 41,498
Less accumulated depreciation 22,053 20,211
----------- ----------
Net property, plant and equipment 21,062 21,287
Goodwill, net of accumulated amortization
(February 28 - $2,345, May 31 - $2,092) 11,348 11,660
Other assets 1,858 2,303
----------- ----------
Total assets $ 81,098 $ 78,306
=========== ==========
See Notes to Consolidated Financial Statements
2
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
February 28, May 31,
2001 2000
--------------- --------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,630 $ 8,759
Billings on uncompleted contracts in
excess of costs and estimated earnings 8,148 5,138
Accrued insurance 2,546 3,112
Accrued environmental reserves 203 432
Earnout payable - 968
Income taxes payable 553 412
Other accrued expenses 3,881 4,560
Current portion of long-term debt - 22
--------------- --------------
Total current liabilities 21,961 23,403
Long-term debt 4,195 -
Deferred income taxes 1,657 -
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,596 51,596
Retained earnings 10,144 7,785
Accumulated other comprehensive income (789) (693)
--------------- --------------
61,047 58,784
Less: Treasury stock, at cost (7,762) (3,881)
--------------- --------------
Total stockholders' equity 53,285 54,903
--------------- --------------
Total liabilities and stockholders' equity $ 81,098 $ 78,306
=============== ==============
See Notes to Consolidated Financial Statements
3
Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
Nine Months Ended
(unaudited)
----------------------------------------
February 28, February 29,
2001 2000
------------- ----------------
Cash flow from operating activities:
Net income $ 2,447 $ 5,666
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,379 2,984
Deferred income taxes 669 -
Gain on sale of equipment (158) (20)
Changes in current assets and liabilities
increasing (decreasing) cash:
Accounts receivable (2,607) 12,620
Costs and estimated earnings in excess
of billings on uncompleted contracts (922) (8,459)
Inventories 719 911
Prepaid expenses (410) (1,802)
Accounts payable (2,129) (3,279)
Billings on uncompleted contracts in
excess of costs and estimated earnings 3,010 (1,653)
Accrued expenses (2,442) (3,509)
Income taxes receivable/payable 270 (65)
Other (35) 6
-------------- --------------
Net cash provided by operating activities 1,791 3,400
Cash flow from investing activities:
Capital expenditures (3,386) (4,758)
Proceeds from sale of exited operations 480 6,408
Investment in joint venture (87) -
Proceeds from sale of assets 638 46
-------------- --------------
Net cash provided by (used in) investing activities $ (2,355) $ 1,696
See Notes to Consolidated Financial Statements
4
Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
Nine Months Ended
(unaudited)
-----------------------------------------------
February 28, February 29,
2001 2000
---------------- -----------------
Cash flows from financing activities:
Repayment of acquisition payables $ (17) $ (63)
Repayment of equipment notes (5) (7)
Issuance of long-term debt 40,260 30,710
Repayments of long-term debt (36,065) (37,035)
Purchase of treasury stock (4,212) (366)
Issuance of stock 243 27
---------------- -----------------
Net cash provided by (used in) financing activities 204 (6,734)
Effect of exchange rate changes on cash (32) (38)
---------------- -----------------
Decrease in cash and cash equivalents (392) (1,676)
Cash and cash equivalents at beginning of period 1,806 2,972
---------------- -----------------
Cash and cash equivalents at end of period $ 1,414 $ 1,296
================ =================
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.
In March 2000, Matrix entered into a joint venture partnership agreement for the
construction of a pulp and paper project. The joint venture is accounted for
under the equity method.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, as amended in June 2000 by
Statement of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting
for Certain Derivative Instruments and Certain Hedging Activities," will be
adopted effective June 1, 2001, but is not expected to materially impact the
Company's financial statements.
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, 2000, included in
Matrix's Annual Report on Form 10-K for the year then ended. Matrix's business
is seasonal; therefore, results for any interim period may not necessarily be
indicative of future operating results.
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
3rd Quarter Results of Operations
($ Amounts in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
AST Construction Plant Other Combined
Services Services Services Services Total
- ------------------------------------------------------------------------------------------------------------------------------------
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
Three Months Ended February 29, 2000
Gross revenues 33.8 1.3 11.7 1.5 48.3
Less: Inter-segment revenues 0.0 0.0 0.0 (0.2) (0.2)
Consolidated revenues 33.8 1.3 11.7 1.3 48.1
Gross profit 3.3 (0.5) 1.6 0.1 4.5
Operating income (loss) 1.0 (0.8) 1.1 0.0 1.3
Income (loss) before income tax expense 1.0 (0.8) 1.1 0.0 1.3
Net income (loss) 0.9 (0.8) 1.1 0.0 1.2
Identifiable assets 56.1 1.4 13.8 6.9 78.2
Capital expenditures 1.5 0.1 0.2 0.0 1.8
Depreciation expense 0.7 0.0 0.1 0.0 0.8
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
Nine Months Ended February 29, 2000
Gross revenues 93.2 5.8 29.0 19.1 147.1
Less: Inter-segment revenues (0.1) 0.0 0.0 (0.7) (0.8)
Consolidated revenues 93.1 5.8 29.0 18.4 146.3
Gross profit 12.4 (0.5) 3.2 0.4 15.5
Operating income (loss) 5.6 (1.5) 1.7 (0.1) 5.7
Income (loss) before income tax expense 5.6 (1.1) 1.6 (0.1) 6.0
Net income (loss) 5.3 (1.1) 1.6 (0.1) 5.7
Identifiable assets 56.1 1.4 13.8 6.9 78.2
Capital expenditures 4.0 0.3 0.5 0.0 4.8
Depreciation expense 1.9 0.2 0.2 0.3 2.6
7
NOTE C - REPORTING ACCUMULATED OTHER COMPREHENSIVE LOSS
For the quarter ended February 28, 2001, total other comprehensive loss was $2
thousand as compared to $19 thousand for the same three-month period ended
February 29, 2000. For the nine months ended February 28, 2001, total other
comprehensive loss was $96 thousand as compared to $9 thousand for the same
nine-month period ended February 29, 2000. Other comprehensive loss and
accumulated other comprehensive 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. At February 28, 2001, the
valuation allowance had been fully consumed and Matrix began recording deferred
tax assets and liabilities to reflect the impact of temporary differences as
required under Statement of Financial Accounting Standards No. 109.
NOTE E - SUBSEQUENT EVENTS
On March 1, 2001, Matrix purchased an additional 55,000 shares of treasury stock
for $0.3 million.
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, 2001 Compared to Three Months Ended February 29,
2000
AST Services 2001 vs. 2000
- --------------------------
Revenues for AST Services in the quarter ended February 28, 2001 were $36.2
million, compared to $33.8 million in the comparable quarter of the prior year,
an increase of $2.4 million or 7.1%. Gross margin for the quarter ended February
28, 2001 of 13.8% was significantly better than the 9.8% produced for the
quarter ended February 29, 2000 partially as a result of a good business
environment and the effective utilization of fixed costs. In addition, gross
margins were negatively impacted in fiscal year 2000 as a result of a $0.3
million gross profit loss on a project in Venezuela.
The increased sales volumes and the gross margin increases resulted in gross
profit for the quarter ended February 28, 2001 of $5.0 million exceeding the
$3.3 million for the quarter ended February 29, 2000 by $1.7 million, or 51.5%.
Selling, general and administrative costs as a percent of revenues increased to
7.7% in the quarter ended February 28, 2001 vs. 6.7% in the quarter ended
February 29, 2000 primarily as a result of increased salary and wages, increased
professional services costs and increased information technology costs
associated with the enterprise-wide management information system. Prior year
selling, general and administrative costs were 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 28, 2001 of $2.2 million and $2.4 million respectively, were
significantly better than the $1.0 million and $1.0 million respectively
produced in the quarter ended February 29, 2000, primarily as the result of the
improvements in gross profit offset by the increase in selling, general and
administrative expenses discussed above.
Construction Services 2001 vs. 2000
- -----------------------------------
Revenues for Construction Services in the quarter ended February 28, 2001 were
$4.7 million, compared to $1.3 million in the comparable quarter of the prior
year, an increase of $3.4 million or 261.5%. Gross margin for the quarter ended
February 28, 2001 of 0.0% was also better than the (38.5)% produced for the
quarter ended February 29, 2000 as a direct result of higher volumes relative to
the Division's fixed cost structure and higher margin jobs in fiscal 2001 versus
fiscal 2000. These margin increases along with the higher sales volumes resulted
in gross profit for the quarter ended February 28, 2001 of $0.0 million being
$0.5 million better than the $(0.5) million for the quarter ended February 29,
2000.
Operating loss and loss before income tax expense for the quarter ended February
28, 2001 of $0.3 million and $0.4 million respectively, were better than the
operating loss and loss before income taxes of $0.8 million and $0.8 million
respectively produced in the quarter ended February 29, 2000, primarily as the
result of higher gross profits discussed above.
Plant Services 2001 vs. 2000
- ----------------------------
Revenues for Plant Services in the quarter ended February 28, 2001 were $8.5
million compared to $11.7 million in the comparable quarter of the prior year, a
decrease of $3.2 million or 27.4%. The decrease was the result of more scheduled
turnarounds in the third fiscal quarter of last year compared to this year.
Gross margin for the quarter ended February 28, 2001 of 8.2% was significantly
worse than the 13.7% produced for the quarter ended February 29, 2000 as a
result of higher unabsorbed fixed costs and one large low-margin project.
These margin declines along with the decreased sales volume resulted in gross
profit for the quarter ended February 28, 2001 of $0.7 million being $0.9
million, or 56.3% less than the $1.6 million in the quarter ended February 29,
2000.
10
Operating income and income before income tax expense for the quarter ended
February 28, 2001 of $0.2 million and $0.2 million respectively, were worse than
the $1.1 million and $1.1 million respectively produced in the quarter ended
February 29, 2000, primarily as the result of lower gross margins discussed
above.
Nine Months Ended February 29, 2000 Compared to Nine Months Ended February 28,
1999
AST Services 2001 vs. 2000
- --------------------------
Revenues for AST Services for the nine months ended February 28, 2001 were
$101.1 million, compared to $93.2 million in the comparable nine months of the
prior year, an increase of $7.9 million or 8.5%. Gross margin for the nine
months ended February 28, 2001 of 13.4% was slightly better than the 13.3%
produced for the nine months ended February 29, 2000 as higher third-quarter
fiscal year 2001 margins were offset by lower margins in the first two quarters
of fiscal 2001 due to less than satisfactory execution on a number of large
maintenance jobs and lower margins in the Gulf Coast and from the Tank Capital
Construction group. Margin comparisons were also impacted by a $0.6 million
gross profit loss on a project in Venezuela for the nine months ended February
28, 2000.
These margin improvements along with the increased sales volumes resulted in
gross profit for the nine months ended February 28, 2001 of $13.5 million
exceeding the $12.4 million for the nine months ended February 29, 2000 by $1.1
million, or 8.9%.
Selling, general and administrative costs as a percent of revenues increased to
7.9% in the nine months ended February 28, 2001 versus 7.0% in the nine months
ended February 29, 2000 primarily as a result of increased salary and wages,
increased professional services costs and increased information technology costs
associated with the enterprise-wide management information system. Prior year
selling, general and administrative costs were 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 28, 2001 of $5.3 million and $5.5 million respectively, were slightly
worse than the $5.6 million and $5.6 million respectively produced for the nine
months ended February 29, 2000, primarily as the result of higher gross profits
offset by an increase in selling, general and administrative expenses discussed
above.
Construction Services 2001 vs. 2000
- -----------------------------------
Revenues for Construction Services for the nine months ended February 28, 2001
were $13.5 million, compared to $5.8 million for the comparable nine months of
the prior year, an increase of $7.7 million or 132.8%. This increase was due to
entering fiscal year 2001 with a higher backlog than the previous year. Gross
margin for the nine months ended February 28, 2001 of 0.7% was significantly
better than the (8.6)% produced for the nine months ended February 29, 2000 as a
direct result of better absorption of fixed costs associated with higher volume
of business. These margin increases along with the higher sales volumes resulted
in gross profit for the nine months ended February 28, 2001 of $0.1 million
being $0.6 million more than the $(0.5) million in the nine months ended
February 29, 2000.
Operating loss and loss before income tax expense for the nine months ended
February 28, 2001 of $0.9 million and $1.1 million respectively, were
significantly better than the $1.5 million and $1.1 million respectively,
produced in the nine months ended February 29, 2000, primarily as the result of
a higher volume of work. 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 2001 vs. 2000
- ----------------------------
Revenues for Plant Services in the nine months ended February 28, 2001 were
$18.6 million compared to $29.0 million in the comparable nine months of the
prior year, a decrease of $10.4 million or 35.9%. Gross margin for the nine
months ended February 28, 2001 of 6.5% was worse than the 11.0% produced for the
nine months ended February 29, 2000. This decrease was due to significantly less
turnaround work this
11
fiscal year compared to last fiscal year slightly offset by a one-time $0.3
million charge in fiscal 2000 related to training expenses. These margin
declines along with decreased sales volume resulted in gross profit for the nine
months ended February 28, 2001 of $1.2 million falling short of the $3.2 million
for the nine months ended February 29, 2000 by $2.0 million, or 62.5%.
Operating loss and loss before income tax expense for the nine months ended
February 28, 2001 of $0.2 million and $0.2 million respectively, were worse than
the operating income and income before income tax expense of $1.7 million and
$1.6 million respectively produced in the nine months ended February 29, 2000,
primarily as the result of the gross margin declines discussed above.
Other Services
Other services consist of 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 quarter and nine months
ended February 28, 2001 consists mainly of increased worker's compensation
claims activity of these exited activities. The only activity for the quarter
and nine months ended February 29, 2000 consisted of completing open contracts,
which had been appropriately recorded in prior periods.
Financial Condition & Liquidity
Matrix's cash and cash equivalent totaled approximately $1.4 million at February
28, 2001 and $1.8 million at May 31, 2000.
Matrix has financed its operations recently with cash from operations and from
advances under a credit agreement. On October 31, 2000, 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 which would have provided approximately $17.8 million of total
availability at February 28, 2001. Revolving loans bear interest at a Prime Rate
or a LIBOR based option and mature on October 31, 2003. At February 28, 2001,
$4.2 million was outstanding under the revolver at an interest rate of 7.4%. The
agreement requires maintenance of certain financial ratios, limits the amount of
additional borrowings and prohibits the payment of dividends. The credit
facility is secured by all accounts receivable, inventory, intangibles, and
proceeds related thereto.
Operations of Matrix provided $1.8 million of cash for the nine months ended
February 28, 2001 as compared with providing $3.4 million of cash for the nine
months ended February 29, 2000, representing a decrease of approximately $1.6
million. The decrease was due primarily to decreased profitability and changes
in net working capital.
Capital expenditures during the nine months ended February 28, 2001 totaled
approximately $3.4 million. Of this amount, approximately $0.9 million was used
to purchase transportation equipment for field operations, and approximately
$1.0 million was used to purchase welding, construction, and fabrication
equipment. Matrix has invested approximately $0.7 million in an office expansion
in Houston during the period. Matrix has budgeted approximately $6.5 million for
capital expenditures for fiscal 2001. Of this amount, approximately $2.2 million
would be used to purchase transportation equipment for field operations, and
approximately $3.3 million would be used to purchase welding, construction, and
fabrication equipment. A 20,000 square foot, 50-acre facility is under
construction in Tulsa, Oklahoma in order to consolidate Matrix's four facilities
in the Tulsa market now containing fabrication, operations and administration.
Matrix signed a 40-year lease for a 50-acre tract of land at the Port of
Catoosa, Oklahoma in March, 2001. Additionally, on December 19, 2000, the Tulsa
operations facility was sold for $0.6 million, with an option to lease back
until March 2002. This consolidation should take 18 to 24 months at an estimated
cost of approximately $11.0 million. The cost is expected to be offset by the
sale of the remaining three facilities for approximately $5.4 million.
Matrix purchased $0.5 million in treasury shares in the quarter ended August 31,
2000, which fully exhausted the authorized amounts available under the Share
Buyback Plan approved in March 1999. In October 2000, the Board of Directors
authorized a new Share Buyback Plan for up to 20% of the outstanding shares or
1,723,753 shares. Matrix purchased $3.7 million in Treasury shares for the nine
12
months ended February 28, 2001 under this new plan.
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 2001 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 and we anticipate that the balance
of the year's performance will be significantly above last year's fourth quarter
results. Although the Construction Services Division showed a substantial
improvement over last year's performance it continues to operate below an
acceptable level of performance and management will continue to evaluate
alternatives to enhance this Division's profitability.
Environmental
Matrix is a participant in certain environmental activities in various stages
involving assessment studies, cleanup operations and/or remedial processes.
In connection with the Company's sale of Brown and affiliated entities in 1999,
an environmental assessment was conducted at Brown's Newnan, Georgia facilities.
The assessment turned up a number of deficiencies relating to storm water
permitting, air permitting and waste handling and disposal. An inspection of the
facilities also showed friable asbestos that needed to be removed. In addition,
Phase II soil testing indicated a number of VOC's, SVOC's and metals above the
State of Georgia notification limits. Ground water testing also indicated a
number of contaminants above the State of Georgia notification limits.
In February 2001, the first of two properties in Newnan, Georgia was certified
remediated by the State of Georgia. Final transfer of title to this property was
completed in a transaction that resulted in Matrix receiving $0.5 million, the
carrying value of property.
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 $1.7 million, $0.2 million of which remains accrued at February
28, 2001. Additional testing, however, could result in greater costs for cleanup
and remediation than is currently accrued.
Matrix closed or sold the business operations of its San Luis Tank Piping
Construction Company, Inc. and West Coast Industrial Coatings, Inc.
subsidiaries, which are located in California. Although Matrix does not own the
land or building, it would be liable for any environmental exposure while
operating at the facility, a period from June 1, 1991 to the present. At the
present time, the environmental liability that could result from the testing is
unknown, however, Matrix has purchased a pollution liability insurance policy
with $5.0 million of coverage.
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Matrix has other fabrication operations in Tulsa, Oklahoma; Bristol,
Pennsylvania; and Anaheim, California which could subject the Company to
environmental liability. It is unknown at this time if any such liability exists
but based on the types of fabrication and other manufacturing activities
performed at these facilities and the environmental monitoring that the Company
undertakes, Matrix does not believe it has any material environmental
liabilities at these locations.
Matrix builds aboveground storage tanks and performs maintenance and repairs on
existing aboveground storage tanks. A defect in the manufacturing of new tanks
or faulty repair and maintenance on an existing tank could result in an
environmental liability if the product stored in the tank leaked and
contaminated the environment. Matrix currently has liability insurance with
pollution coverage of $1 million, but the amount could be insufficient to cover
a major claim. Matrix is currently involved in one claim which occurred before
pollution coverage was obtained. The Company does not believe that its repair
work was defective and is not liable for any subsequent environmental damage.
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PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
(A) Exhibits:
Exhibit 11 - Computation of Earnings Per Share
(B) Reports on Form 8-K: None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX SERVICE COMPANY
Date: April 11, 2001 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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