UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended August 31, 1997 Commission File number 0-l87l6 MATRIX SERVICE COMPANY (Exact name of registrant as specified in its charter) DELAWARE 73-1352l74 (State of incorporation) (I.R.S. Employer Identification No.) l070l E. Ute St., Tulsa, Oklahoma 74ll6-l5l7 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (9l8) 838-8822 Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of October 14, 1997, there were shares of the Company's common stock, $.0l par value per share, issued and shares outstanding.
PART I.- FINANCIAL INFORMATION ITEM 1. Financial Statements Matrix Service Company Condensed Consolidated Statements of Income (in thousands, except share and per share data) [CAPTION] Three Months Ended August 31 (unaudited) ----------------- 1997 1996 ------- ------- <TABLE> <S> <C> <C> Revenues $49,519 $39,630 Cost of revenues 44,777 35,665 -------- -------- Gross profit 4,742 3,965 Selling, general and administrative expenses 3,006 2,459 Goodwill and noncompete amortization 296 216 -------- -------- Operating income 1,440 1,290 Other income (expense): Interest income 43 29 Interest expense (258) (114) Other 9 (49) -------- ---- -------- -------- Inome before income tax expense 1,234 1,156 Provision for federal and state income tax expense 465 524 -------- -------- Net Income $ 769 $ 632 ======== ======== Net income per common and common equivalent shares: Primary $ 0.08 $ 0.07 Fully diluted 0.08 0.07 Weighted average common and common equivalent shares outstanding: Primary 9,965,765 9,523,982 Fully diluted 9,965,765 9,523,982 <FN> See Notes to Condensed Consolidated Financial Statements </TABLE> <TABLE> Matrix Service Company Condensed Consolidated Balance Sheets (in thousands) <CAPTION> August 31, May 31, ---------- --------- 1997 1997 ---------- --------- (unaudited) <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $ 1,184 $ 1,877 Accounts receivable 38,211 37,745 Costs and estimated earnings in excess of billings on uncompleted contracts 14,224 11,349 Inventories 5,720 4,989 Prepaid expenses 463 456 Deferred taxes 1,075 1,021 Income tax receivable 1,033 317 --------- --------- Total current assets $ 61,910 $ 57,754 Investment in undistributed equity of a foreign joint venture 174 174 Property, plant and equipment at cost: Land and buildings 19,099 15,097 Construction equipment 24,308 24,444 Transportation equipment 5,761 5,504 Furniture and fixtures 3,298 3,164 Construction in progress 2,950 2,614 --------- --------- Less accumulated depreciation 24,398 20,861 --------- --------- Net property, plant and equipment 31,018 29,962 Goodwill, net of accumulated 30,925 28,721 amortization Other assets 811 261 --------- -------- Total assets $124,838 $116,872 See Notes to Condensed Consolidated Financial Statements </TABLE> <TABLE> Matrix Service Company Condensed Consolidated Balance Sheets (in thousands) <CAPTION> August 31, May 31, ----------- --------- 1997 1997 ----------- --------- (unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable $ 12,620 $ 12,307 Billings on uncompleted contracts in excess of costs and estimated earnings 6,943 6,325 Accrued expenses 7,057 6,583 Earnout payable 0 2,400 Income taxes payable 774 431 Deferred income taxes 177 0 Current portion of long-term debt 2,093 1,495 --------- --------- Total current liabilities 29,664 29,541 Long-term debt: Bank credit agreement 7,750 5,000 Equipment note payable 20 0 Acquisition notes payable 131 407 Term note payable 5,441 955 --------- --------- Total long-term debt 13,342 6,362 Deferred income taxes 4,757 4,757 Stockholders' equity: Common stock 95 95 Additional paid-in capital 50,903 50,903 Retained earnings 26,913 26,269 Cumulative translation adjustment (166) (145) --------- --------- 77,745 77,122 Less: Treasury stock, at cost 670 910 --------- --------- Total stockholders' equity 77,075 76,212 --------- --------- Total liabilities and stockholders' equity $124,838 $116,872 ========= ========= <FN> See Notes to Condensed Consolidated Financial Statements </TABLE>
<TABLE> Matrix Service Company Condensed Consolidated Cash Flow Statements (in thousands) <CAPTION> Three Months Ended August 31 (unaudited) ------------------ 1997 1996 ------- ------- <S> <C> <C> Cash flow from operating activities: Net income $ 769 $ 632 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,546 1,392 Changes in current assets and liabilities increasing (decreasing) cash: Accounts receivable 4,129 3,120 Costs and estimated earnings in excess of billings on uncompleted contract (1,741) 417 Inventories 494 (634) Prepaid expenses (16) (99) Accounts payable (2,900) (1,881) Billings on uncompleted contracts in excess of costs and estimated earnings 151 755 Taxes and other accruals (2,141) (1,432) Other (3) (2) -------- -------- Net cash provided by by operating activities 288 2,268 Cash flow from investing activities: Capital expenditures (932) (1,459) Proceeds from sale of equipment 36 21 Acquisition of subsidiary, net of cash acquired (4,129) 47 -------- -------- Net cash used in investing activities (5,025) (1,391)
Matrix Service Company Condensed Consolidated Cash Flow Statements (in thousands) <CAPTION> Three Months Ended August (unaudited) ------------------ 1997 1996 ------- ------ <S> <C> <C> Cash flows from financing activities: Issuance of acquisition notes 197 - Repayment of acquisition payables (132) (133) Issuance of equipment notes 39 - Repayment of equipment notes (3) (10) Issuance of long-term debt 9,750 1,000 Repayment of long-term debt (5,910) (2,272) Issuance of stock 116 14 ------- ------- Net cash used in financing activities 4,057 (1,401) Cumulative translation adjustment (13) 1 ------- ------- Decrease in cash and cash equivalents (693) (523) Cash and cash equivalents at beginning of period 1,877 1,899 ------- ------- Cash and cash equivalents at end of period $1,184 $1,376 ======= ======= <FN> See Notes to Condensed Consolidated Financial Statements </TABLE>
MATRIX SERVICE COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE A - BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant inter-company balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-0l of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods. The accompanying financial statements should be read in conjunction with the audited financial statements for the year ended May 3l, 1997, included in the Company's Annual Report on Form 10-K for the year then ended. The Company's business is seasonal; therefore, results for any interim period may not necessarily be indicative of future operating results. NOTE B - BUSINESS ACQUISITIONS On June 17, 1997, the Company acquired all of the outstanding common stock of General Service Corporation and its affiliated companies, Maintenance Services, Inc., Allentech, Inc., and Environmental Protection Services (collectively "GSC") for up to $7.8 million, subject to certain adjustments. The purchase price consisted of $4.75 million in cash and a $250 thousand, prime rate (currently 8.25%) promissory note payable in 12 equal quarterly installments. In addition, the stockholders of GSC are entitled to receive in the future up to an additional $2.75 million in cash if GSC satisfies certain earnings requirements. The transaction was accounted for as a purchase and created approximately $3.0 million of goodwill and non-competition covenants. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Three Months Ended August 31, 1997 Compared to Three Months Ended August 31, 1996 General Service Corporation ("GSC") was acquired by Matrix Service Company (the "Company") on June 17, 1997. Accordingly, the results of operations of GSC, for two and one-half months are included for the current period, but none of GSC's operations are included in the prior year period. Revenues for the quarter ending August 31, 1997 were $49.5 million as compared to revenues of $39.6 million for the quarter ended August 31, 1996, representing an increase of approximately $9.9 million or 25%. The increase is due primarily to the inclusion in first quarter data of revenues of $5.3 million from the operations of GSC (referred to above) and increased revenues from refinery capital projects as compared with the same period in 1996. Gross profit for the quarterly period ending August 31, 1997 was $4.7 million, an increase of $777 thousand over the period ended August 31, 1996. Gross profit as a percentage of revenues decreased to 9.6% for the 1997 period compared to 10.0% for the 1996 period. The decrease results mainly from revenue being generated from capital work rather than repair and maintenance which generally produces higher profit margins. Selling, general and administrative expenses increased to $3.0 million for the quarterly period ending August 31, 1997 from expenses of $2.5 million for the quarterly period ended August 31, 1996, an increase of $547 thousand or approximately 22% and representing as a percentage of revenues, a decrease to 6.1% for the 1997 period as compared to 6.2% for the 1996 period. The principal amount of increase is due to the inclusion of expenses of GSC. Operating income increased to $1.4 million for the quarterly period ending August 31, 1997 from income of $1.3 million for the quarterly period ended August 31, 1996, an increase of $150 thousand. The increase was due to higher revenues combined with stable cost of revenues and selling, general and administrative expense offset by increased amortization of goodwill. The increased goodwill is attributed to the GSC acquisition. Interest expense increased to $258 thousand for the quarterly period ending August 31, 1997 from $114 thousand of interest expense for the quarterly period ended August 31, 1996. The increase resulted primarily from increased borrowing under the Company's revolving credit facility and term loans established on August 24, 1994 as amended. During the period there was an average of $6.3 million outstanding under the revolver loan. The term loan increase was due primarily to the GSC acquisition. Net income increased to $769 thousand for the quarterly period ending August 31, 1997 from net income of $632 thousand for the quarterly period ended August 31, 1996. The increase was due to increased revenues and decreased provision for income tax for the 1997 period as compared to the 1996 period. The lower income tax provision for the 1997 period resulted from a net operating loss carry forward acquired with GSC. Liquidity and Capital Resources The Company has financed its operations recently with cash generated by operations and advances under the Company's credit facility. The Company has a credit facility with a commercial bank under which the Company may borrow a total of $25.0 million. The Company may borrow up to $15.0 million under a revolving credit agreement based on the level of the Company's eligible receivables. The agreement provides for interest at the Prime Rate minus three quarters of one percent (3/4 of 1%), or a LIBOR based option, and matures on October 31, 1999. At August 31, 1997, the interest rate was 7.75% and the outstanding advances under the revolver totaled $7.75 million. The credit facility also provides for two term loans up to $5.0 million each. On October 5, 1994, and June 19, 1997 term loans of $4.9 million and $5.0 million, respectively, were made to the Company. The 1994 term loan is due on August 31, 1999 and is to be repaid in 54 equal payments beginning in March 1995 at an interest rate based upon the Prime Rate or a LIBOR option. The 1997 term loan is due January 23, 2002 and is to repaid in 54 equal payments beginning January 7, 1998 at an interest rate based upon the prime rate or a LIBOR option. At August 31, 1997, the interest rate on the term loans was 8.25%, and the outstanding balance was $2.2 million and $5.0 million, respectively. The rates reflected above are based on an agreement made after August 31, 1997. Operations of the Company provided $288 thousand of cash for the three months ended August 31, 1997 as compared with providing cash from operations of $2.3 million for the three months ended August 31, 1996, representing a decrease of approximately $2.0 million. The decrease was primarily the result of a net decrease of $2.8 million in billings on uncompleted contracts in excess of costs and estimated earnings in excess of billings. Capital expenditures during the three month period ended August 31, 1997 totaled approximately $932 thousand. Of this amount approximately $413 thousand was used to purchase welding and construction equipment for field operations. The Company has invested approximately $245 thousand for office expansion for support of field operations. In addition, the Company has currently budgeted approximately $2.6 million for additional capital expenditures primarily to be used to purchase construction equipment during the remainder of fiscal year 1998. The Company expects to be able to finance any such expenditures with available working capital. The Company believes that its existing funds, amounts available for borrowing under its credit facility, and cash generated by operations will be sufficient to meet the Company's working capital needs at least through fiscal 1998 and possibly thereafter unless significant expansions of operations not now planned are undertaken, in which case the Company would arrange additional financing as a part of any such expansion. PART II OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K: A. Exhibit 10.1 - Second Amendment to Credit Agreement B. Exhibit 11 - Computation of earnings per share. C. Reports on Form 8-K: None Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATRIX SERVICE COMPANY Date: October 15, 1997 By: /s/C. William Lee -------------------- C. William Lee Vice President-Finance Chief Financial Officer Signing on behalf of the registrants the registrant's chief financial officer.