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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 November 30, 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 January 10, 2002 there were 9,642,638 shares of the Company's common
stock, $.01 par value per share, issued and 7,736,916 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 Six Months Ended
November 30, 2001 and 2000 ............................................. 1
Consolidated Balance Sheets November 30, 2001 and May 31, 2001.............. 2
Consolidated Statements of Cash Flow for the Six Months Ended
November 30, 2001 and 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
-----------------
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 ........................ 15
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 Income
(in thousands, except share and per share data)
Three Months Ended Six Months Ended
November 30, November 30,
(unaudited) (unaudited)
-------------------------- ------------------------
2001 2000 2001 2000
------------ ---------- ---------- ----------
Revenues $ 54,404 $ 45,052 $ 102,143 $ 82,914
Cost of revenues 47,445 40,284 89,305 74,326
---------- ---------- ---------- ----------
Gross profit 6,959 4,768 12,838 8,588
Selling, general and administrative expenses 3,619 3,189 7,300 6,845
Goodwill and non-compete amortization 86 86 168 176
Restructuring, impairment and abandonment 546 -- 595 --
---------- ---------- ---------- ----------
Operating income 2,708 1,493 4,775 1,567
Other income (expense):
Interest expense (226) (65) (349) (129)
Interest income 1 27 31 81
Other 86 100 60 48
---------- ---------- ---------- ----------
Income before income tax expense 2,569 1,555 4,517 1,567
Provision for federal, state and
foreign income tax expense 972 566 1,727 570
---------- ---------- ---------- ----------
Net income $ 1,597 $ 989 $ 2,790 $ 997
========== ========== ========== ==========
Earnings per share of common stock:
Basic $ 0.21 $ 0.12 $ 0.36 $ 0.12
Diluted $ 0.20 $ 0.11 $ 0.35 $ 0.11
Weighted average number of common shares:
Basic 7,670,989 8,566,366 7,656,798 8,618,220
Diluted 7,966,175 8,691,460 7,987,852 8,734,145
See Notes to Consolidated Financial Statements
1
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
November 30, May 31,
----------------- --------------
2001 2001
----------------- --------------
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $ 844 $ 835
Accounts receivable, less allowances
(November 30 - $269, May 31 - $375) 33,604 29,184
Costs and estimated earnings in excess
of billings on uncompleted contracts 12,867 12,951
Inventories 2,233 2,772
Deferred income taxes 310 442
Prepaid expenses 2,430 2,573
---------------- --------------
Total current assets 52,288 48,757
Property, plant and equipment at cost:
Land and buildings 10,202 10,108
Construction equipment 20,349 19,550
Transportation equipment 8,286 7,560
Furniture and fixtures 4,994 4,841
Construction in progress 8,863 2,306
---------------- --------------
52,694 44,365
Less accumulated depreciation 24,436 22,507
---------------- --------------
Net property, plant and equipment 28,258 21,858
Goodwill, net of accumulated amortization
November 30 - $2,590, May 31 - $2,427) 11,052 11,258
Other assets 1,801 1,848
---------------- --------------
Total assets $ 93,399 $ 83,721
================ ==============
2
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
November 30, May 31,
---------------- -------------
2001 2001
---------------- -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 6,234 $ 10,229
Billings on uncompleted contracts in
excess of costs and estimated earnings 8,564 7,148
Accrued insurance 2,184 2,362
Accrued environmental reserves 150 471
Income tax payable 530 400
Other liabilities 2,772 4,307
Current portion of long-term debt 400 --
------------ -------------
Total current liabilities 20,834 24,917
Long-term debt 14,570 3,515
Deferred income taxes 1,890 1,983
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,596 51,596
Retained earnings 15,106 12,245
Accumulated other comprehensive income (1,116) (813)
------------ -------------
65,682 63,124
Less: Treasury stock, at cost -
1,953,880 and 2,021,972 at
November 30 and May 31, respectively (9,577) (9,818)
------------ -------------
Total stockholders' equity 56,105 53,306
------------ -------------
Total liabilities and stockholders' equity $ 93,399 $ 83,721
============ =============
See Notes to Consolidated Financial Statements
3
Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
Six Months Ended
November 30,
(unaudited)
------------------------------
2001 2000
----------- ---------------
Cash flow from operating activities:
Net income $ 2,790 $ 997
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,478 2,278
Deferred income taxes 39 --
(Gain) loss on sale of equipment (39) (30)
Changes in current assets and liabilities
increasing (decreasing) cash:
Accounts receivable (4,420) 726
Costs and estimated earnings in excess
of billings on uncompleted contracts 84 (4,180)
Inventories 539 306
Prepaid expenses 143 (801)
Accounts payable (3,995) (4,114)
Billings on uncompleted contracts in
excess of costs and estimated earnings 1,416 4,670
Other liabilities (2,335) (2,900)
Income taxes receivable/payable 130 277
Other 47 (10)
----------- ---------------
Net cash used in operating activities (3,123) (2,781)
Cash flow from investing activities:
Capital expenditures (8,747) (2,420)
Investment in joint venture -- (87)
Proceeds from other investing activities 66 53
----------- ---------------
Net cash used in investing activities $ (8,681) $ (2,454)
4
Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
Six Months Ended
November 30,
(unaudited)
-------------------------
2001 2000
----------- ------------
Cash flows from financing activities:
Repayment of acquisition payables $ -- $ (17)
Repayment of equipment notes -- (5)
Issuance of long-term debt 65,750 25,650
Repayments of long-term debt (54,295) (20,325)
Purchase of treasury stock -- (1,660)
Issuance of stock 312 31
----------- ------------
Net cash provided in financing activities 11,767 3,674
Effect of exchange rate changes on cash 46 (33)
----------- ------------
Increase (decrease) in cash and cash equivalents 9 (1,594)
Cash and cash equivalents at beginning of period 835 1,806
----------- ------------
Cash and cash equivalents at end of period $ 844 $ 212
=========== ============
See Notes to Consolidated Financial Statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Matrix Service
Company ("Matrix") and its subsidiaries, all of which are wholly owned. All
significant inter-company balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-0l 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 31, 2001, included in
Matrix's Annual Report on Form 10-K for the year then ended. Matrix's business
is seasonal; therefore, results for any interim period may not necessarily be
indicative of future operating results.
NOTE B - SEGMENT INFORMATION
Matrix operates primarily in the United States and has operations in Canada.
Matrix's industry segments are Aboveground Storage Tank (AST) Services,
Construction Services, Plant Services, and Other Services.
6
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Matrix Service Company
2nd Quarter Results of Operations
($ Amounts in millions)
- --------------------------------------------------------------------------------------------------------------------
AST Construction Plant Other Combined
Services Services Services Services Total
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended November 30, 2001
Gross revenues 43.9 6.0 4.8 0.0 54.7
Less: Inter-segment revenues (0.3) 0.0 0.0 0.0 (0.3)
Consolidated revenues 43.6 6.0 4.8 0.0 54.4
Gross profit 6.0 0.6 0.3 0.0 6.9
Operating income (loss) 3.3 0.2 (0.2) (0.6) 2.7
Income (loss) before income tax expense 3.3 0.1 (0.2) (0.6) 2.6
Net income (loss) 2.1 0.1 (0.2) (0.4) 1.6
Identifiable assets 77.5 5.8 7.9 2.2 93.4
Capital expenditures 3.1 0.0 0.0 0.0 3.1
Depreciation expense 1.0 0.1 0.1 0.0 1.2
Three Months Ended November 30, 2000
Gross revenues 33.5 5.1 6.6 0.0 45.2
Less: Inter-segment revenues (0.1) (0.1) 0.0 0.0 (0.2)
Consolidated revenues 33.4 5.0 6.6 0.0 45.0
Gross profit 4.6 0.0 0.5 (0.3) 4.8
Operating income (loss) 2.1 (0.3) 0.1 (0.4) 1.5
Income (loss) before income tax expense 2.1 (0.3) 0.1 (0.3) 1.6
Net income (loss) 1.4 (0.2) 0.0 (0.2) 1.0
Identifiable assets 62.7 4.4 10.0 3.7 80.8
Capital expenditures 1.3 0.1 0.2 0.0 1.6
Depreciation expense 1.0 0.0 0.1 0.0 1.1
Six Months Ended November 30, 2001
Gross revenues 82.4 9.9 10.2 0.0 102.5
Less: Inter-segment revenues (0.4) 0.0 0.0 0.0 (0.4)
Consolidated revenues 82.0 9.9 10.2 0.0 102.1
Gross profit 11.2 0.9 0.7 0.0 12.8
Operating income (loss) 5.7 0.2 (0.5) (0.6) 4.8
Income (loss) before income tax expense 5.6 0.1 (0.6) (0.6) 4.5
Net income (loss) 3.5 0.1 (0.4) (0.4) 2.8
Identifiable assets 77.5 5.8 7.9 2.2 93.4
Capital expenditures 8.4 0.2 0.1 0.0 8.7
Depreciation expense 2.0 0.2 0.1 0.0 2.3
Six Months Ended November 30, 2000
Gross revenues 64.9 8.8 10.1 0.0 83.8
Less: Inter-segment revenues (0.8) (0.1) 0.0 0.0 (0.9)
Consolidated revenues 64.1 8.7 10.1 0.0 82.9
Gross profit 8.5 0.1 0.5 (0.5) 8.6
Operating income (loss) 3.1 (0.6) (0.4) (0.5) 1.6
Income (loss) before income tax expense 3.1 (0.7) (0.4) (0.4) 1.6
Net income (loss) 2.1 (0.5) (0.3) (0.3) 1.0
Identifiable assets 62.7 4.4 10.0 3.7 80.8
Capital expenditures 2.0 0.1 0.3 0.0 2.4
Depreciation expense 1.9 0.0 0.2 0.0 2.1
7
NOTE C - REPORTING ACCUMULATED OTHER COMPREHENSIVE LOSS
For the quarter ended November 30, 2001, total other comprehensive loss was $140
thousand as compared to $152 thousand for the same three-month period ended
November 30, 2000. For the six months ended November 30, 2001, total other
comprehensive loss was $303 thousand as compared to $94 thousand for the same
six-month period ended November 30, 2000. Other comprehensive income or loss and
accumulated other comprehensive loss consisted of foreign currency translation
adjustments and fair value adjustments of derivative instruments. There was no
accumulated gain or loss on derivative instruments at May 31, 2001.
NOTE D - NEW ACCOUNTING STANDARDS
In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which was subsequently amended in June of 2000 by
Financial Accounting Standards No. 138. The statement requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedged must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the derivative are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedge item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. On June 1, 2001, the Company entered into an interest
rate swap agreement to manage interest rate exposure and modify interest
characteristics of its long-term debt. The agreement is designated with specific
debt obligations, and involves the exchange of amounts based on the difference
between variable and fixed interest rates calculated by reference to an
agreed-upon notional amount. The interest rate swap currently in place
effectively modifies the Company's exposure to interest rates by converting a
portion of the Company's variable rate debt to a fixed rate. The derivative has
been designated as a cash flow hedge and is effective. As a result, there is no
current impact to earnings due to hedge ineffectiveness or due to the exclusion
of a component of the derivative from the assessment of effectiveness. The fair
value of the cash flow hedge at November 30, 2001 is a liability of $301
thousand.
NOTE E - SUBSEQUENT EVENTS
The Company has been in litigation over a contested contract since fiscal 1997.
In January 2000, the Company won its case and was awarded $1.1 million. In July
2001, the appellate court upheld the original verdict plus accrued interest and
attorney's fees. In October 2001, the Oklahoma Supreme Court upheld the ruling
of the appellate court. On December 6, 2001, the Company received $1.6 million
in settlement of the original judgment, accrued interest and attorney's fees,
resulting in a $1.3 million gain which will be recognized in the third quarter
ended February 28, 2002.
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 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.
. 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 November 30, 2001 Compared to Three Months Ended November 30,
2000
AST Services Fiscal Year 2002 vs. 2001
Gross revenues for AST Services for the quarter ended November 30, 2001 were
$43.9 million, compared to $33.5 million for the comparable quarter of the prior
year, an increase of $10.4 million or 31.0% due to an increase in field manhours
worked, an increase in power projects, a 38% increase in revenues in the new
tank construction group, and a good business environment in tank repair and
maintenance. Gross margin for the quarter ended November 30, 2001 of 13.7% was
identical to the margin produced for the quarter ended November 30, 2000 as a
portion of the increased revenue with new customers was at lower margins than
the traditional AST Services work. The increased sales volume and similar
margins year over year resulted in gross profit for the quarter ended November
30, 2001 of $6.0 million, exceeding the $4.6 million produced for the quarter
ended November 30, 2000 by $1.4 million or 30.4%.
Selling, general and administrative costs as a percent of revenues decreased to
6.1% for the quarter ended November 30, 2001 vs. 7.0% for the quarter ended
November 30, 2000 primarily as a result of the fixed costs being spread over a
larger revenue base.
Operating income and income before income tax expense for the quarter ended
November 30, 2001 of $3.3 million and $3.3 million respectively, were better
than the $2.1 million and $2.1 million respectively produced for the quarter
ended November 30, 2000, primarily the result of the increase in revenues and
slower growth in selling, general and administrative costs.
Construction Services Fiscal Year 2002 vs. 2001
Gross revenues for Construction Services for the quarter ended November 30, 2001
were $6.0 million, compared to $5.1 million for the comparable quarter of the
prior year, an increase of $0.9 million or 17.6% resulting from increased
business development efforts in the prior year. Gross margin for the quarter
ended November 30, 2001 of 10.0% was significantly better than the 0.0% produced
for the quarter ended November 30, 2000 as a direct result of better job
execution of a higher margin backlog. This margin improvement along with
increased sales volume resulted in gross profit for the quarter ended November
30, 2001 of $0.6 million being $0.6 million better than the $0.0 million for the
quarter ended November 30, 2000.
Operating income and income before income tax expense for the quarter ended
November 30, 2001 of $0.2 million and $0.1 million respectively, were better
than the $(0.3) million and $(0.3) million produced in the quarter ended
November 30, 2000, primarily as the result of revenue and gross profit
improvements discussed above.
Plant Services Fiscal Year 2002 vs. 2001
Gross revenues for Plant Services for the quarter ended November 30, 2001 were
$4.8 million compared to $6.6 million for the comparable quarter of the prior
year, a decrease of $1.8 million or 27.3%. The decrease was the result of higher
turnaround activity in the second fiscal quarter of last year compared to the
second fiscal quarter of this year. Gross margin for the quarter ended November
30, 2001 of 6.3% was worse than the 7.6% produced for the quarter ended November
30, 2000 as a result of a lower volume of work. These margin declines along with
the decreased sales volume resulted in gross profit for the quarter ended
November 30, 2001 of $0.3 million being $0.2 million less than the $0.5 million
for the quarter ended November 30, 2000.
Operating loss and loss before income tax expense for the quarter ended November
30, 2001 of $(0.2) million and $(0.2) million respectively, were worse than the
operating income and income before income tax expense of $0.1 million and $0.1
million respectively produced for the quarter ended November 30, 2000, primarily
as the result of lower gross margins discussed above.
10
Six Months Ended November 30, 2001 Compared to Six Months Ended November 30,
2000
AST Services Fiscal Year 2002 vs. 2001
Gross revenues for AST Services for the six months ended November 30, 2001 were
$82.4 million, compared to $64.9 million for the comparable six months of the
prior year, an increase of $17.5 million or 27.0%. The increase was due
primarily to a strong business environment in all tank repair and maintenance
regions, particularly in new tank construction. Gross margin for the six months
ended November 30, 2001 of 13.6% was better than the 13.1% produced for the six
months ended November 30, 2000 as a result of margin improvements in the
traditional tank repair and maintenance and new tank construction AST Services
business. The gross margin improvement coupled with the increased sales volume
resulted in gross profit for the six months ended November 30, 2001 of $11.2
million being $2.7 million or 31.8% better than the $8.5 million for the six
months ended November 30, 2000.
Selling, general and administrative costs as a percent of revenues decreased to
6.5% in the six months ended November 30, 2001 versus 8.1% in the six months
ended November 30, 2000 primarily as a result of the fixed costs being spread
over a larger revenue base.
Operating income and income before income tax expense for the six months ended
November 30, 2001 of $5.7 million and $5.6 million respectively, were
significantly better than the $3.1 million and $3.1 million respectively
produced for the six months ended November 30, 2000, primarily as the result of
the gross margin improvement discussed above.
Construction Services Fiscal Year 2002 vs. 2001
Gross revenues for Construction Services for the six months ended November 30,
2001 were $9.9 million, compared to $8.8 million for the comparable six months
of the prior year, an increase of $1.1 million or 12.5%. This increase was due
to better business development practices with our core customer base. Gross
margin for the six months ended November 30, 2001 of 9.1% was a significant
improvement over the 1.1% gross margin produced for the six months ended
November 30, 2000 as a direct result of better absorption of fixed costs
associated with the higher revenue volume and a favorable mix of projects in the
current fiscal year backlog. This gross margin improvement along with the
increased sales volume resulted in gross profit for the six months ended
November 30, 2001 of $0.9 million being $0.8 million better than the $0.1
produced in the six months ended November 30, 2000.
Operating income and income before taxes for the six months ended November 30,
2001 of $0.2 million and $0.1 million respectively, were significantly better
than the operating loss and loss before income taxes of $(0.6) million and
$(0.7) million respectively, produced for the six months ended November 30,
2000, primarily as the result of the increased revenues and improved gross
margins discussed above.
Plant Services Fiscal Year 2002 vs. 2001
Gross revenues for Plant Services for the six months ended November 30, 2001
were $10.2 million compared to $10.1 million for the comparable six months of
the prior year, a slight increase of $0.1 million or 1.0%. The revenue increase
in Plant Services was due to a marginal increase in turnaround work in the first
quarter of fiscal 2002. Gross margin for the six months ended November 30, 2001
of 6.9% was better than the 5.0% produced for the six months ended November 30,
2000 as a direct result of an improved cost structure. These margin improvements
resulted in gross profit for the six months ended November 30, 2001 of $0.7
million being $0.2 million or 40.0% better than the $0.5 million for the six
months ended November 30, 2000.
Operating loss and loss before income tax expense for the six months ended
November 30, 2001 of $(0.5) million and $(0.6) million respectively, were worse
than the operating loss and loss before income taxes of $(0.4) million and
$(0.4) million respectively produced in the six months ended November 30, 2000,
primarily as the result of the higher allocated selling, general and
administrative expenses offset somewhat by the gross profit improvement
discussed above.
11
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 six months
ended November 30, 2001 consists mainly of $0.4 million in increased
environmental costs related to the remediation at Brown and $0.1 million of
increased worker's compensation claims activity of these exited operations. The
only activity for the quarter and six months ended November 30, 2000 consisted
of increased worker's compensation claims activity of these exited operations.
12
Financial Condition & Liquidity
Matrix's cash and cash equivalents totaled approximately $0.8 million at
November, 2001 and $0.8 million at May 31, 2001.
Matrix has financed its operations recently with cash from operations and from
advances under a credit agreement. On September 26, 2001, Matrix amended its
credit agreement with a commercial bank under which a total of $20.0 million may
be borrowed on a revolving basis based on the level of Matrix's eligible
receivables and cost in excess of billings. In addition, $5.9 million was
borrowed as a term loan. Matrix can elect revolving loans which bear interest at
a Prime Rate or a LIBOR-based option and mature on October 31, 2004. At November
30, 2001, $9.2 million was outstanding under the revolver with $8.0 million at
LIBOR interest rates of 3.21% to 3.35% and $1.2 million at a prime interest rate
of 3.875% with $10.8 million remaining in availability. Additionally, $5.8
million was outstanding under the term loan at a LIBOR interest rate of 3.45%.
The agreement requires maintenance of certain financial ratios, limits the
amount of additional borrowings and the payment of dividends. The credit
facility is secured by all accounts receivable, inventory, intangibles, certain
real property, and proceeds related thereto.
On June 1, 2001, Matrix entered into an interest rate swap agreement with a
commercial bank, effectively providing a fixed interest rate of 7.23% for a
five-year period on $6.0 million of debt with a 15-year amortization. This debt
was initially drawn under the credit agreement revolving loan and was rolled
into the term loan on September 26, 2001 in the amount of $5.9 million. The term
loan is subject to certain mortgage restrictions on the Port of Catoosa and
California facilities currently under construction.
Operations of Matrix used $3.1 million of cash for the six months ended November
30, 2001 as compared with $2.8 million of cash for the six months ended November
30, 2000, representing an increase of approximately $0.3 million. The increase
was due primarily to an increase in net working capital needs, offset by
significantly greater net income.
Capital expenditures during the six months ended November 30, 2001 totaled
approximately $8.7 million. Of this amount, approximately $4.5 million was used
in the construction of the Anaheim facility, $1.5 million was used in the
construction of the Port of Catoosa facility, $1.0 million was used to purchase
transportation equipment for field operations, and approximately $1.4 million
was used to purchase welding, construction, and fabrication equipment. Matrix
invested approximately $0.3 million in office equipment, computer hardware and
software, furniture and fixtures during the period. Matrix has budgeted
approximately $19.8 million for capital expenditures for fiscal 2002. Of this
amount, approximately $1.6 million would be used to purchase transportation
equipment for field operations, and approximately $2.5 million would be used to
purchase welding, construction, and fabrication equipment. Matrix signed a
40-year lease for a 50-acre facility planned in Tulsa, Oklahoma in order to
consolidate Matrix's four facilities in the Tulsa market now containing
fabrication, operations and administration. This consolidation should take 18 to
24 months at an estimated cost of approximately $11.0 million. The cost would be
offset by the sale of the existing three owned facilities in Tulsa for
approximately $5.4 million.
Matrix believes that its existing funds, amounts available from borrowings under
its existing credit agreement and cash generated by operations will be
sufficient to meet the working capital needs through fiscal 2002 and for the
foreseeable time thereafter.
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
The current turnaround schedule at Plant Services suggests that the third
quarter will show stronger sales volume and higher profitability. The
strengthening experienced in Matrix's AST Services Division in the first and
second quarter should continue as our customers' maintenance budgets are spent
during the last month of the calendar year. It is unclear, however, whether or
not these maintenance budgets will be approved at levels comparable, greater or
lower in the upcoming calendar year of 2002 in light of current oil and gas
prices and the world recessionary economy. Management believes, however, that
its strategic alliances put Matrix in a more favorable position than our
competition if budgets are either reduced or increased.
Environmental
Matrix is a participant in certain environmental activities in various stages
involving assessment studies, cleanup operations and/or remedial processes.
In connection with the Company's sale of Brown and affiliated entities in 1999,
an environmental assessment was conducted at Brown's Newnan, Georgia facilities.
The assessment turned up a number of deficiencies relating to storm water
permitting, air permitting and waste handling and disposal. An inspection of the
facilities also showed friable asbestos that needed to be removed. In addition,
Phase II soil testing indicated a number of volatile organic compounds,
semi-volatile organic compounds and metals above the State of Georgia
notification limits. Ground water testing also indicated a number of
contaminants above the State of Georgia notification limits.
Appropriate State of Georgia agencies have been notified of the findings and
corrective and remedial actions have been completed, are currently underway, or
plans for such actions have been submitted to the State of Georgia for approval.
The current estimated total cost for cleanup and remediation is $2.1 million,
$0.2 million of which remains accrued at November 30, 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.
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.
14
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 Tuesday, October 23, 2001.
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 7,663,116 shares of the Company's common stock
outstanding and entitled to vote, 7,360,592 shares were present at
the meeting in person or by proxy, representing approximately 96.05
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, Hall, Hendrix, Lackey, Vetal and
Zink were elected to serve until the 2002 Annual Meeting. The
vote tabulation with respect to each nominee was as follows:
Authority
Nominee For Withheld
------------------- ------------ ------------
Hugh E. Bradley 7,309,291 51,301
Michael J. Hall 7,346,491 14,101
I. Edgar Hendrix 7,308,391 52,201
Paul K. Lackey 7,303,291 57,301
Bradley S. Vetal 7,060,591 300,001
John S. Zink 7,026,416 334,176
b. The stockholders ratified the appointment of Ernst & Young LLP as
the Company's independent public accountants.
Number of Votes Cast
--------------------
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
7,350,491 1,600 8,501 -0-
15
ITEM 6. Exhibits and Reports on Form 8-K: None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATRIX SERVICE COMPANY
Date: January 11, 2002 By: /s/ Michael J. Hall
---------------------------------------------
Michael J. Hall, Vice President-Finance,
signing on behalf of the registrant and as
the registrant's chief accounting officer.
16