[MATRIX SERVICE LOGO]
QUARTERLY REPORT
FOR PERIOD ENDING
AUGUST 31, 2002
10701 E. Ute Street . Tulsa, Oklahoma 74116-1517
(918) 838-8822 . Fax (918) 838-8810
NASDAQ MARKET SYSTEM -- SYMBOL: MTRX
First Quarter FY 2003 Letter to Stockholders
Net income for the quarter ended August 31, 2002 was $1.6 million or $0.19 per
fully diluted share on consolidated revenues of $53.7 million, compared to net
income of $1.2 million or $0.15 per fully diluted share on consolidated revenues
of $47.7 million for the same period of the prior year.
We were very pleased with our performance in the first quarter of $0.19 per
fully diluted share, even though Plant Service volumes were lower than the prior
year. We believe that the consolidated performance in the second quarter should
be similar to the first quarter results, as the Plant Services segment will
continue to be slow as no significant turnaround activity is anticipated. Our
estimate of earnings for the full year remains unchanged at this time at $0.88
to $0.93 per fully diluted share and we anticipate fully diluted earnings per
share for the second quarter of fiscal 2003 to be in the $0.17 to $0.21 range
versus $0.20 per fully diluted share for the second quarter last year.
The overall demand environment remains very positive with strong bidding
activity. We are committed to continuous improvement and appreciate the
continued support of our shareholders.
/s/ Bradley S. Vetal
-----------------------------------
Bradley S. Vetal
President & Chief Executive Officer
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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 August 31, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to ___________
Commission File number 0-18716
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 73-1352174
(State of incorporation) (I.R.S. Employer Identification No.)
10701 E. Ute St., Tulsa, Oklahoma 74116-1517
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (918) 838-8822
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of October 8, 2002, there were 9,642,638 shares of the Company's common
stock, $0.01 par value per share, issued and 7,864,658 shares outstanding.
================================================================================
INDEX
PAGE NO.
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PART I FINANCIAL INFORMATION
---------------------
ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Income for the Three Months Ended
August 31, 2002 and 2001 ................................... 1
Consolidated Balance Sheets August 31, 2002 and May 31, 2002 ... 2
Consolidated Statements of Cash Flow for the Three Months Ended
August 31, 2002 and 2001 ................................... 4
Notes to Consolidated Financial Statements ..................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ..... N/A
ITEM 4. Controls and Procedures ........................................ 16
PART II OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings .............................................. N/A
ITEM 2. Changes in Securities .......................................... 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
Signature ...................................................................... 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
August 31,
(unaudited)
----------------------------------------
2002 2001
---------------- -----------------
Revenues $ 53,717 $ 47,739
Cost of revenues 47,090 41,860
---------------- -----------------
Gross profit 6,627 5,879
Selling, general and administrative expenses 4,271 3,681
Goodwill amortization -- 82
Restructuring, impairment and abandonment cost -- 49
---------------- -----------------
Operating income 2,356 2,067
Other income (expense):
Interest expense (94) (123)
Interest income 8 30
Other 293 (26)
---------------- -----------------
Income before income tax expense 2,563 1,948
Provision for federal, state and foreign income
tax expense 987 755
---------------- -----------------
Net income $ 1,576 $ 1,193
================ =================
Earnings per share of common stock:
Basic $ 0.20 $ 0.16
Diluted $ 0.19 $ 0.15
Weighted average number of common shares:
Basic 7,858,532 7,643,025
Diluted 8,251,207 8,003,463
See Notes to Consolidated Financial Statements
-1-
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
August 31, May 31,
---------------------------------------
2002 2002
----------------- ------------------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 998 $ 826
Accounts receivable, less allowances
(August 31-$317; May 31-$242) 35,749 35,209
Costs and estimated earnings in excess
of billings on uncompleted contracts 11,590 13,096
Inventories 2,700 2,815
Income tax receivable -- 359
Deferred income taxes 416 348
Prepaid expenses 2,403 2,267
Other assets 1,740 --
----------------- ------------------
Total current assets 55,596 54,920
Property, plant and equipment at cost:
Land and buildings 17,427 15,452
Construction equipment 22,911 22,312
Transportation equipment 8,483 8,719
Furniture and fixtures 5,405 5,269
Construction in progress 6,295 5,912
----------------- ------------------
60,521 57,664
Less accumulated depreciation 25,694 25,242
----------------- ------------------
Net property, plant and equipment 34,827 32,422
Goodwill, net of accumulated amortization
(August 31-$2,777; May 31-$2,777) 10,894 10,929
Other assets 1,179 2,919
----------------- ------------------
Total assets $ 102,496 $ 101,190
================= ==================
See Notes to Consolidated Financial Statements
-2-
Matrix Service Company
Consolidated Balance Sheets
(in thousands)
August 31, May 31,
------------------------------
2002 2002
------------ -----------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 9,209 $ 12,954
Billings on uncompleted contracts in
excess of costs and estimated earnings 9,483 9,108
Accrued insurance 1,897 2,086
Accrued environmental reserves 58 92
Income tax payable 815 210
Other accrued expenses 2,522 4,072
Current portion of long-term debt 622 589
--------- --------
Total current liabilities 24,606 29,111
Long-term debt 13,730 9,291
Deferred income taxes 2,530 2,588
Stockholders' equity:
Common stock 96 96
Additional paid-in capital 51,876 51,868
Retained earnings 19,702 18,126
Accumulated other comprehensive income (1,075) (894)
--------- --------
70,599 69,196
Less: Treasury stock, at cost -
August 31-1,777,980
and May 31-1,784,856 (8,969) (8,996)
--------- --------
Total stockholders' equity 61,630 60,200
--------- --------
Total liabilities and stockholders' equity $ 102,496 $101,190
========= ========
See Notes to Consolidated Financial Statements
-3-
Matrix Service Company
Consolidated Statements of Cash Flow
(in thousands)
Three Months Ended
August 31,
(unaudited)
-------------------------
2002 2001
-------- ---------
Cash flow from operating activities:
Net income $ 1,576 $ 1,193
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,267 1,205
Deferred income tax (52) 143
Gain on sale of equipment (57) (27)
Changes in current assets and liabilities
increasing (decreasing) cash:
Accounts receivable (540) 3,864
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,506 (1,713)
Inventories 115 232
Prepaid expenses (136) 137
Accounts payable (3,744) (4,043)
Billings on uncompleted contracts in
excess of costs and estimated earnings 375 (812)
Accrued expenses (1,773) (2,857)
Income taxes receivable/payable 964 286
Other - 24
-------- --------
Net cash used by operating activities (499) (2,368)
Cash flow from investing activities:
Capital expenditures (3,703) (5,603)
Proceeds from other investing activities 75 48
-------- --------
Net cash used in investing activities $ (3,628) $ (5,555)
See Notes to Consolidated Financial Statements
-4-
Matrix Service Company
Consolidated Cash Flow Statements
(in thousands)
Three Months Ended
August 31,
(unaudited)
--------------------------
2002 2001
-------- ----------
Cash flows from financing activities:
Issuance of long-term debt $ 30,255 $ 26,150
Repayments of long-term debt (25,970) (18,525)
Purchase of treasury stock 34 -
Issuance of stock - 125
-------- --------
Net cash provided in financing activities 4,319 7,750
Effect of exchange rate changes on cash (20) 57
-------- --------
Decrease in cash and cash equivalents 172 (116)
Cash and cash equivalents at beginning of period 826 835
-------- --------
Cash and cash equivalents at end of period $ 998 $ 719
======== ========
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 3l, 2002, 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.
-6-
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, and Plant Services.
AST Construction Plant Combined
Services Services Services Total
- ---------------------------------------------------------------------------------------------
Three Months ended August 31, 2002
Gross revenues 42.6 7.6 4.0 54.2
Less: Inter-segment revenues (0.5) 0.0 0.0 (0.5)
Consolidated revenues 42.1 7.6 4.0 53.7
Gross profit 5.7 0.9 0.0 6.6
Operating income (loss) 2.5 0.5 (0.6) 2.4
Income (loss) before income tax expense 2.7 0.5 (0.6) 2.6
Net income (loss) 1.6 0.3 (0.3) 1.6
Identifiable assets (excluding goodwill) 76.9 9.3 5.4 91.6
Goodwill 9.6 0.5 0.8 10.9
Capital expenditures 3.3 0.2 0.2 3.7
Depreciation expense 1.1 0.1 0.1 1.3
Three Months ended August 31, 2001
Gross revenues 38.5 3.9 5.4 47.8
Less: Inter-segment revenues (0.1) 0.0 0.0 (0.1)
Consolidated revenues 38.4 3.9 5.4 47.7
Gross profit 5.2 0.3 0.4 5.9
Operating income (loss) 2.4 0.0 (0.3) 2.1
Income (loss) before income tax expense 2.3 0.0 (0.4) 1.9
Net income (loss) 1.4 0.0 (0.2) 1.2
Identifiable assets (excluding goodwill) 60.6 5.1 8.5 74.2
Goodwill 9.8 0.6 0.8 11.2
Capital expenditures 5.3 0.1 0.2 5.6
Depreciation expense 1.0 0.0 0.1 1.1
NOTE C - REPORTING ACCUMULATED OTHER COMPREHENSIVE INCOME/LOSS
For the quarter ended August 31, 2002, total other comprehensive loss was $181
thousand resulting in $1.4 million of comprehensive income as compared to $245
thousand resulting in $0.9 million of comprehensive income for the same
three-month period ended August 31, 2001. Other comprehensive loss and
accumulated other comprehensive loss consisted of foreign currency translation
adjustments and fair value adjustments of derivative instruments.
NOTE D - INCOME TAXES
Deferred income taxes are computed using the liability method whereby deferred
tax assets and liabilities are recognized based on temporary differences between
financial statement and tax basis of assets and liabilities using presently
enacted tax rates.
-7-
NOTE E - NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" in June
2001. SFAS No. 141 establishes accounting and reporting standards for business
combinations and requires all business combinations to be accounted for by the
purchase method. The Statement is effective for all business combinations
initiated after June 30, 2001, and any business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or later.
SFAS No. 142 addresses accounting and reporting standards for goodwill and other
intangible assets. Under the provisions of this Statement, goodwill and
intangible assets with indefinite useful lives are no longer amortized, but will
be tested annually for impairment. Matrix applied the new rules on accounting
for goodwill and other intangible assets beginning June 1, 2002. Application of
the nonamortization provisions of the Statement would have resulted in prior
years basic and fully diluted earnings per share being $0.16 and $0.16
respectively. On August 31, 2002, Matrix completed the impairment tests of
goodwill as of June 1, 2002. The results of these tests have indicated that
there was no impairment impact in adopting this standard.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" in October, 2001. This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and amends Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations- Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The Statement retains the basic framework of SFAS No.
121, resolves certain implementation issues of SFAS No. 121, extends
applicability to discontinued operations, and broadens the presentation of
discontinued operations to include a component of an entity. The Statement is
being applied prospectively, beginning June 1, 2002. Initial adoption of the
Statement did not have any impact on Matrix results of operations or financial
position.
NOTE F - DEBT
At August 31, 2002, $8.4 million was outstanding under the Company's $20 million
revolving bank credit agreement, with $7.0 million at a LIBOR interest rate of
2.81%, and $1.4 million at a prime interest rate of 3.625%. There was $11.6
million remaining in availability with $3.1 million utilized by outstanding
letters of credit which mature in 2004. At August 31, 2002, the balance on the
term loan stands at $5.5 million at a LIBOR interest rate of 3.89%.
NOTE G - CONTINGENCIES
As of August 31, 2002, accounts receivable and costs and estimated earnings in
excess of billings on uncompleted contracts included revenues for unapproved
change orders of approximately $0.6 million and claims of approximately $1.8
million. Generally, amounts related to unapproved change orders and claims will
not be paid by the customer to Matrix until final resolution of related claims,
and accordingly, collection of these amounts may extend beyond one year.
-8-
The Company is currently in litigation in the Tulsa County district court for
the State of Oklahoma over matters arising out of its worker's compensation
program with a former insurance provider. These matters involve contests over
certain collateral pledged to secure Matrix's obligations under this prior
program. The defendants have filed a motion to transfer venue to the courts in
Bermuda. A hearing on this motion and on whether current court ordered
restraints on the collateral will remain in place is scheduled for October 30,
2002. The Company is not able to predict the outcome of this hearing. The
Company is vigorously defending against this matter and it is the opinion of
management that this legal action will not have a material effect on the
Company's financial position.
NOTE H - SUBSEQUENT EVENTS
Under the terms of the August 31, 1999 Asset Sales Agreement between Matrix and
Caldwell Tanks, Inc. ("Caldwell") relating to the sale of Brown Steel
Constructors Inc. ("Brown"), Caldwell entered into a three-year lease agreement
with an option to acquire for $1.7 million the real estate and buildings under
lease. In August 2002, Caldwell indicated their intent to exercise the option to
acquire the real estate and buildings. This sale closed on September 27, 2002.
-9-
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.
Forward-looking statements can generally be identified or recognized as those
statements predicated upon or preceded by words such as "believe," "expect",
"plan", or "should" and like words of similar affect. Matrix is making these
forward-looking statements in reliance on the "safe harbor" protections provided
under the Private Securities Litigation Reform Act of 1995.
Forward-looking 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 comparisons of results in one
period to another to differ materially.
.. Changes in general economic conditions in the United States.
.. Changes in laws and regulations to which Matrix and its customers are
subject, including tax, environmental, and employment laws and regulations
which could cause increased costs to Matrix, a decline in customer demand
for services designed to meet new laws and regulations and a decline in the
amount of services outsourced by customers.
.. 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 ability of Matrix 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 an adequate number of 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.
-10-
.. The risk of using significant production estimates for determining percent
complete on construction contracts could differ materially 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.
Results of Operations
Consolidated Overview
Matrix operates in three segments - AST Services, Construction Services and
Plant Services. All operations are contained within these segments, therefore,
significant fluctuations in gross revenues, gross profits, selling, general and
administrative costs and operating income will be discussed below.
Other income in the first quarter of 2003 consists largely of $0.2 million in
proceeds from an insurance settlement for flood damage sustained in the previous
year in Houston.
The effective tax rates for the quarters ended August 31, 2002 and 2001 were
38.5% and 38.8% respectively.
AST Services Fiscal Year 2003 vs. 2002
Gross revenues for AST Services in the quarter ended August 31, 2002 were $42.6
million, compared to $38.5 million in the comparable quarter of the prior year,
an increase of $4.1 million or 10.6% due to a strong business environment in the
western and eastern United States. Gross margins for the quarter ended August
31, 2002 of 13.4% were slightly worse than the 13.5% for the quarter ended
August 31, 2001 as a direct result of tighter margins in our midwestern
division. Increased sales volumes slightly offset by the margin declines
resulted in gross profit for the quarter ended August 31, 2002 of $5.7 million
exceeding the $5.2 million for the quarter ended August 31, 2001 by $0.5 million
or 9.6%.
Selling, general and administrative expense as a percent of revenues increased
to 7.6% in the quarter ended August 31, 2002 vs. 7.1% in the quarter ended
August 31, 2001 primarily due to higher fixed salary costs.
Operating income and income before income tax expense for the quarter ended
August 31, 2002 of $2.5 million and $2.7 million respectively, were similar to
the $2.4 million and $2.3 million respectively produced for the quarter ended
August 31, 2001, when excluding the insurance settlement discussed above.
Construction Services Fiscal Year 2003 vs. 2002
Gross revenues for Construction Services in the quarter ended August 31, 2002
were $7.6 million, compared to $3.9 million in the comparable quarter of the
prior year, an increase of $3.7 million or 94.9% due to continued business
development efforts. Gross margins for the quarter ended August 31, 2002 of
11.8% were significantly better than the 7.7% produced for the quarter ended
August 31, 2001 as a direct result of higher margin work. These margin
improvements along with the increased sales volumes
-11-
resulted in gross profit for the quarter ended August 31, 2002 of $0.9 million
exceeding the $0.3 million for the quarter ended August 31, 2001 by $0.6 million
or 200%.
Operating income and income before income tax expense for the quarter ended
August 31, 2002 of $0.5 million and $0.5 million respectively, were
significantly better than the $0.0 million and $0.0 million respectively
produced for the quarter ended August 31, 2001 primarily as a result of the
higher gross profits discussed above.
Plant Services Fiscal Year 2003 vs. 2002
Gross revenues for Plant Services in the quarter ended August 31, 2002 were $4.0
million, compared to $5.4 million in the comparable quarter of the prior year, a
decrease of $1.4 million or (25.9)% due to lower maintenance and turnaround work
in the first quarter of this year. Gross margins for the quarter ended August
31, 2002 of 0.0% were worse than the 7.4% produced for the quarter ended August
31, 2001 as a direct result of less absorption of fixed costs due to reduced
volumes. These margin declines along with the decreased sales volumes resulted
in gross profit for the quarter ended August 31, 2002 of $0.0 million falling
short of the $0.4 million in gross profit for the quarter ended August 31, 2001.
Operating income and income before income tax expense for the quarter ended
August 31, 2002 of $(0.6) million and $(0.6) million respectively, were slightly
worse than the $(0.3) million and $(0.4) million respectively produced for the
quarter ended August 31, 2001.
Financial Condition & Liquidity
Matrix's cash and cash equivalents totaled approximately $1.0 million at August
31, 2002 and $0.8 million at May 31, 2002.
Matrix has financed its operations recently with cash from operations and from
advances under a credit agreement. Matrix has a 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 costs in
excess of billings. Matrix can elect revolving loans which bear interest on a
Prime or LIBOR based option and mature on October 31, 2004. At August 31, 2002,
$8.4 million was outstanding under the revolver with $7.0 million at a LIBOR
interest rate of 2.81%, and $1.4 million at a prime interest rate of 3.625%.
There was $11.6 million remaining in availability with $3.1 million utilized by
outstanding letters of credit which mature in 2004. 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.
In fiscal 2002, the Company also borrowed $5.9 million under a term loan that
matures June 6, 2006. The term loan is secured by a mortgage on certain
facilities under construction at the Port of Catoosa in Oklahoma. The term loan
bears interest at LIBOR + 1.5%.
Effective June 1, 2001, the Company entered into an interest rate swap agreement
for an initial notional amount of $6 million with a commercial bank, effectively
providing a
-12-
fixed interest rate of 7.23% for the five year period on the term note. The
company will pay 7.23% and receive LIBOR + 1.5%, calculated on the notional
amount. Net receipt or payments under the agreement will be recognized as an
adjustment to interest expense. The related debt was initially drawn under the
credit agreement revolving loan, and was rolled into the term loan on September
26, 2001. At August 31, 2002, the balance on the term loan stands at $5.5
million at a LIBOR interest rate of 3.89%. The swap agreement expires in 2006.
If LIBOR decreases, interest payments received and the market value of the swap
position decrease.
Operations of Matrix used $0.5 million of cash for the three months ended August
31, 2002 as compared with $2.4 million of cash for the three months ended August
31, 2001, representing a decrease of approximately $1.9 million. The decrease
was due primarily to higher net income and reduced working capital needs.
Capital expenditures during the quarter ended August 31, 2002 totaled
approximately $3.7 million. Of this amount, approximately $2.3 million was used
in the construction of the Port of Catoosa facility, $0.2 million was used to
purchase transportation equipment for field operations, and approximately $0.7
million was used to purchase welding, construction, and fabrication equipment.
Matrix invested approximately $0.5 million in office equipment, computer
hardware and software, and furniture and fixtures during the quarter. Matrix has
budgeted approximately $15.8 million for capital expenditures for fiscal 2003 of
which $7.3 million is included for the Tulsa Port of Catoosa construction.
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. Currently, the Tank
Construction Division and Tulsa Regional office have relocated to the Port of
Catoosa in a new 33,000 square foot facility and construction is in progress on
the new 153,000 square foot fabrication facility .
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 2003 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.
Outlook
The current backlog in the Construction Services suggests that the second
quarter will show stronger sales volumes and higher profitability. The
performance experienced in Matrix's AST Services Division in the first quarter
should continue as our customers'
-13-
maintenance budgets are spent during the last four months 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 2003 in light of the current state of uncertainty that exists.
Environmental
Matrix is a participant in certain environmental activities in various stages
involving assessment studies, cleanup operations and/or remedial processes.
In connection with the Company's sale of Brown and affiliated entities in 1999,
an environmental assessment was conducted at Brown's Newnan, Georgia facilities.
The assessment turned up a number of deficiencies relating to storm water
permitting, air permitting and waste handling and disposal. An inspection of the
facilities also showed friable asbestos that needed to be removed. In addition,
Phase II soil testing indicated a number of volatile organic compounds,
semi-volatile organic compounds and metals above the State of Georgia
notification limits. Ground water testing also indicated a number of
contaminants above the State of Georgia notification limits.
Appropriate State of Georgia agencies have been notified of the findings and
corrective and remedial actions have been completed, are currently underway, or
plans for such actions have been submitted to the State of Georgia for approval
on the remaining property. The current estimated total cost for cleanup and
remediation is $2.1 million, $0.1 million of which remains accrued at August 31,
2002.
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 for all operations.
Matrix has other fabrication operations in Tulsa, Oklahoma; Bristol,
Pennsylvania; and Orange, 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.
-14-
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
A. Exhibit 10.1: Section 906 Certification - CEO
Exhibit 10.2: Section 906 Certification - CFO
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
/s/ Michael J. Hall
Date: October 10, 2002 By: Michael J. Hall
--------------------------------------
Michael J. Hall Vice President-Finance
Chief Financial Officer signing on
behalf of the registrant and as the
registrant's chief accounting officer.
-15-
Item 4. Controls and Procedures
CERTIFICATIONS
I, Bradley S. Vetal, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Matrix Service
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 10, 2002
/s/ Bradley S. Vetal
Bradley S. Vetal
President and Chief Executive Officer
-16-
CERTIFICATIONS
I, Michael J. Hall, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Matrix Service
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 10, 2002
/s/ Michael J. Hall
Michael J. Hall
Vice President - Finance
and Chief Financial Officer
-17-