UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended November 30, 1997 Commission File number 0-l87l6 MATRIX SERVICE COMPANY (Exact name of registrant as specified in its charter) DELAWARE 73-1352l74 (State of incorporation) (I.R.S. Employer Identification No.) l070l E. Ute St., Tulsa, Oklahoma 74ll6-l5l7 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (9l8) 838-8822 Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of January 13, 1998, there were 9,491,153 shares of the Company's common stock, $.01 par value per share, issued and 9,428,139 shares outstanding.
PART I.- FINANCIAL INFORMATION ITEM 1. Financial Statements Matrix Service Company Condensed Consolidated Statements of Income (in thousands, except share and per share data) [CAPTION] Three Months Ended Six Months Ended November 30 November 30 ------------------ ---------------- (unaudited) (unaudited) 1997 1996 1997 1996 ------------------ ----------------- [MULTIPLIER] 1,000 <TABLE> <S> <C> <C> <C> <C> Revenues $62,017 $48,212 $111,536 $87,842 Cost of revenues 56,875 43,574 101,652 79,239 ------- ------- ------- ------- Gross profit 5,142 4,638 9,884 8,603 Selling, general and administrative expenses 3,205 2,719 6,211 5,178 Goodwill and noncompete amortization 296 216 592 432 ------- ------- ------- ------- Operating income 1,641 1,703 3,081 2,993 Other income (expense): Interest income 30 28 74 57 Interest expense (260) (115) (518) (229) Other 92 116 100 67 ------- ------- ------- ------- Income before income tax expense 1,503 1,732 2,737 2,888 Provision for federal and state income tax expense 550 778 1,015 1,302 ------- ------- ------- ------- Net income $953 $954 $1,722 $1,586 ======= ======= ======= ======= Net income per common and common equivalent shares: Primary $0.10 $0.10 $0.17 $0.17 Fully diluted $0.10 $0.10 $0.17 $0.17 Weighted average common and common equivalent shares outstanding: Primary 9,858,467 9,569,550 9,926,630 9,555,545 Fully diluted 9,927,143 9,569,550 9,948,677 9,562,788 <FN> See Notes to Condensed Consolidated Financial Statements </TABLE> [MULTIPLIER] 1,000 <TABLE> Matrix Service Company Condensed Consolidated Balance Sheets (in thousands) <CAPTION> November 30, May 31, 1997 1997 ----------- --------- (unaudited) <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $ 162 $ 1,877 Accounts receivable 41,615 37,745 Costs and estimated earnings in excess of billings on uncompleted contracts 12,737 11,349 Inventories 6,145 4,989 Prepaid expenses 521 456 Deferred taxes 1,074 1,021 Income tax receivable 976 317 -------- ------- Total current assets 63,230 57,754 Investment in undistributed equity of a foreign joint venture 174 174 Property, plant and equipment at cost: Land and buildings 20,944 15,097 Construction equipment 24,630 24,444 Transportation equipment 5,783 5,504 Furniture and fixtures 3,439 3,164 Construction in progress 890 2,614 ------- ------- 55,686 50,823 Less accumulated depreciation 25,444 20,861 ------- ------- Net property, plant and equipment 30,242 29,962 Goodwill, net of accumulated amortization 30,700 28,721 Other assets 743 261 -------- -------- Total assets $125,089 $116,872 ======== ======== See Notes to Condensed Consolidated Financial Statements </TABLE> [MULTIPLIER] 1,000 <TABLE> Matrix Service Company Condensed Consolidated Balance Sheets (in thousands) <CAPTION> November 30, May 31, 1997 1997 ------------ --------- (unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable $12,777 $12,307 Billings on uncompleted contracts in excess of costs and estimated earning 8,434 6,325 Accrued expenses 5,163 9,414 Current portion of long-term debt 2,234 1,495 ------- ------- Total current liabilities 28,608 29,541 Long-term debt: Bank credit agreement 8,750 5,000 Acquisition notes payable 115 407 Term notes payable 5,045 955 ------- ------- Total long-term debt 13,910 6,362 Deferred income taxes 4,757 4,757 Stockholders' equity: Common stock 95 95 Capital in excess of par value 50,903 50,903 Retained earnings 27,573 26,269 Cumulative translation adjustment (220) (145) ------- ------- Total capital and retained earnings 78,351 77,122 Less:Treasury stock, at cost 537 910 ------- ------- Total stockholders' equity 77,814 76,212 ------- ------- Total liabilities and stockholders' equity $125,089 $116,872 ======== ======== <FN> See Notes to Condensed Consolidated Financial Statements </TABLE>
[MULTIPLIER] 1,000 <TABLE> Matrix Service Company Condensed Consolidated Cash Flow Statements (in thousands) <CAPTION> Six Months Ended November 30 (unaudited) 1997 1996 ----------------- <S> <C> <C> Cash flow from operating activities: Net income $1,722 $1,586 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,037 2,795 Changes in current assets and liabilities increasing (decreasing) cash: Accounts receivable 717 8 Costs and estimated earnings in excess of billings on uncompleted contracts (254) (3,441) Inventories 69 (852) Prepaid expenses (74) (89) Accounts payable (2,948) 779 Billings on uncompleted contracts in excess of costs and estimated earnings 1,642 1,786 Taxes receivable and other accruals (4,899) (1,340) Other (5) 34 ------ ------ Net cash (used in) provided by operating activities (993) 1,266 Cash flow from investing activities: Capital expenditures (1,433) (3,049) Acquisition of subsidiary, net of cash acquired (4,182) 47 Other, net 50 36 ------ ------ Net cash used in investing activities (5,565) (2,966)
Matrix Service Company Condensed Consolidated Cash Flow Statements (in thousands) <CAPTION> Six Months Ended November 30, (unaudited) 1997 1996 ------ ------ <S> <C> <C> Cash flows from financing activities: Issuance of acquisition payable 286 - Repayment of acquisition payables (281) (265) Repayment of equipment notes (14) (11) Issuance under long-term credit agreement 10,750 3,000 Repayments under long-term credit agreement (2,000) (2,000) Repayment of long-term debt (4,042) (544) Issuance of stock - - Change in treasury stock 144 19 ------ ------ Net cash provided by financing activities 4,843 199 ------ ------ Increase in cash and cash equivalents (1,715) (1,501) Cash and cash equivalents at beginning of period 1,877 1,899 ------ ------ Cash and cash equivalents at end of period $ 162 $ 398 ====== ====== <FN> See Notes to Condensed Consolidated Financial Statements </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. Under the provision of the contract the stockholders have the right to elect 70% of the earnout amount upon change of control of the Company. The stockholders of GSC have elected to receive 70% of the earnout to satisfy this provision, upon the closing of the transaction between the Company and ITEQ, Inc. (SEE NOTE C - RECENT EVENT) The transaction was accounted for as a purchase and created approximately $3.0 million of goodwill and non-competition covenants. NOTE C - RECENT EVENT On December 16, 1997, the Company and ITEQ, Inc. ("ITEQ") entered into a Plan and Agreement of Merger whereby ITEQ will acquire the Company. The shareholders of the Company will be able to tender a share of Company common stock for either $10 cash or .8333 of one share of ITEQ common stock, subject to the cash portion of the purchase price not exceeding 50% nor being less than 30% of the total consideration. The acquisition is subject to shareholder and regulatory approval and the absence of any dissenters. The transaction is expected to close by March 1998, and will be accounted for using the purchase method of accounting. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Three Months Ended November 30, 1997 Compared With The Three Months Ended November 30, 1996 General Service Corporation ("GSC") was acquired by Matrix Service Company (the "Company") on June 17, 1997. Accordingly, the results of operations of GSC for the quarter are included for the current period, but none of GSC's operations are included in the prior year period. Revenues for the quarter ended November 30, 1997 were $62.0 million as compared to revenues of $48.2 million for the quarter ended November 30, 1996, representing an increase as compared with the same period in 1996 of $13.8 million or 28.6%. The increase is due to the inclusion of GSC revenues and increased revenues from capital projects in the Northwest from the refinery division. Gross profit increased to $5.1 million for the quarterly period ended November 30, 1997 from gross profit of $4.6 million for the quarterly period ended November 30, l996, an increase of approximately $504 thousand or 10.9%. Gross profit as a percentage of revenues decreased to 8.3% for the 1997 period from 9.6% for the 1996 period. The decrease in gross profit percentage for the current period as compared with the prior period is due to pricing pressure on above ground tank maintenance work in the West and Gulf Coast areas and additional capital work in the refinery division, which historically provides lower margins. Selling, general and administrative expenses increased to $3.2 million for the quarterly period ended November 30, 1997 as compared to $2.7 million for the quarterly period ended November 30, 1996, an increase of $486 thousand or 17.9%. Selling, general and administrative expenses as a percentage of revenues decreased to 5.2% for the current period as compared to 5.64% for the prior period. The increase in selling, general and administrative expenses for the period is due mainly to the inclusion of GSC. The decrease in expenses as a percentage of revenue results from the expenses being spread over greater revenues. Operating income decreased to $1.6 million for the quarterly period ended November 30, 1997 from income of $1.7 million for the quarterly period ended November 30, 1996, a decrease of $62 thousand or approximately 3.6%. The decrease in operating profit was due to lower gross profit margins, increased selling, general and administrative expenses and increased amortization expense. Interest expense increased to $260 thousand for the quarterly period ended November 30, 1997 from $115 thousand of interest expense for the quarterly period ended November 30, 1996. The increase resulted from an increased level of borrowing under the Company's credit facility principally as a result of borrowings for the acquisition of GSC. The effective tax rate for the quarterly period ended November 30, 1997 decreased to 36.6% as compared to 44.9% for the 1996 period. The reduction is due principally to the utilization of a net operating loss carryforward available from GSC. Net income decreased to $953 thousand for the quarterly period ended November 30, 1997 from net income of $954 thousand for the quarterly period ended November 30, 1996. The decrease was due to decreased operating profit and increased interest expense for the 1997 period as compared with the 1996 period. Six Months Ended November 30, 1997 Compared With The Six Months Ended November 30, 1996 General Service Corporation ("GSC") was acquired by Matrix Service Company (the "Company") on June 17, 1997. Accordingly, the results of operations of GSC for five and one-half months are included for the current period, but none of GSC's operations are included in the prior year six month period. Revenues for the six months ended November 30, 1997 were $ 111.5 million as compared to revenues of $87.8 million for the six months ended November 30, 1996, representing an increase of approximately $ 23.7 million or 27.0%. The increase was due to increased revenues from the Company's refinery maintenance and construction operations on the West Coast and the inclusion of GSC in the six month period ended November 30, 1997, as compared with the same period in 1996. Gross profit increased to $9.9 million for the six months ended November 30, 1997 from gross profit of $8.6 million for the six months ended November 30, 1996. Gross profit as a percentage of revenues decreased to 8.9% for the 1997 period from 9.8% for the 1996 period. The decrease in gross profit percentage for the current period as compared with prior period is due to lower profit margins on maintenance and repair work on above ground storage tanks in the Gulf Coast and West Coast markets, elevated water tanks and capital work in the refinery divisions. Selling, general and administrative expenses increased to $6.2 million for the six months ended November 30, 1997 compared to $5.2 million for the six months ended November 30, 1996, an increase of $1.0 million or approximately 19.9%. The increase in selling, general and administrative expenses is primarily due to the inclusion of GSC expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 5.6% for the current period as compared with 5.9% for the 1996 period. The decrease in the selling, general and administrative expenses as a percentage of revenues for the current period as compared to the prior period is the result of the expenses being spread over greater revenues. Operating income increased to $3.1 million for the six months ended November 30, 1997 from income of $3.0 million for the six months ended November 30, 1996. The increase was due to the inclusion of GSC and increased operations from the refinery division offset by lower margins for tank maintenance and repair in certain markets and elevated water tanks. Net income increased to $1.7 million in the 1997 period from net income of $1.6 million in 1996. The increase was due principally to the inclusion of GSC. Liquidity and Capital Resources The Company has financed its operations recently with cash generated by operations and advances under the Company's credit facility. The Company has a credit facility with a commercial bank under which the Company may borrow a total of $25.0 million. The Company may borrow up to $15.0 million under a revolving credit agreement based on the level of the Company's eligible receivables. The agreement provides for interest at the Prime Rate minus three quarters of one percent (3/4 of 1%), or a LIBOR based option of LIBOR plus one and one quarter percent (1 and 1/4%), and matures on October 31, 1999. At November 30, 1997, the interest rate was 7.22% and the outstanding advances under the revolver totaled $8.75 million. The credit facility also provides for two term loans of up to $5.0 million each. On October 5, 1994 and June 19, 1997 term loans of $4.9 million and $5.0 million, respectively, were made to the Company. The 1994 term loan is due on August 31, 1999 and is to be repaid in 54 equal payments beginning in March 1995 at an interest rate based upon the Prime Rate or a LIBOR option. The 1997 term loan is due January 23, 2002 and is to repaid in 54 equal payments beginning January 7, 1998 at an interest rate based upon the prime rate or a LIBOR option. At November 30, 1997, the interest rate on the term loans was 7.72%, and the outstanding balance was $2.0 million and $5.0 million, respectively. Operations of the Company used $933 thousand of cash for the six months ended November 30, 1997 as compared with providing cash from operations of $1.3 million for the six months ended November 30, 1996, representing a decrease of approximately $2.3 million. The decrease was primarily the result of a decrease of $3.7 million in accounts payable and a decrease in income taxes and other accruals of $3.6 million offset by a net increase of $3.0 million in billings on uncompleted contracts in excess of costs and estimated earnings in excess of billings and an increase of $1.6 million in inventory and receivables. Capital expenditures during the six month period ended November 30, 1997 totaled approximately $1.4 million. Of this amount approximately $699 thousand was used to purchase welding and construction equipment and $239 thousand was used to purchase transportation equipment for field operations. The Company has invested approximately $505 thousand for office expansion for support of field operations. In addition, the Company has currently budgeted approximately $2.1 million for additional capital expenditures primarily to be used to purchase construction equipment during the remainder of fiscal year 1998. The Company expects to be able to finance any such expenditures with available working capital. The Company believes that its existing funds, amounts available for borrowing under its credit facility, and cash generated by operations will be sufficient to meet the Company's working capital needs at least through fiscal 1998 and possibly thereafter unless significant expansions of operations not now planned are undertaken, in which case the Company would arrange additional financing as a part of any such expansion. PART II OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders: The Company's annual meeting of stockholders was held in Tulsa, Oklahoma at 10:00 a.m. local time, on Wednesday, October 29, 1997. Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the nominees for election as directors as listed in the proxy statement, and all nominees were elected. Out of a total of 9,402,139 shares of the Company's common stock outstanding and entitled to vote, 7,311,462 shares were present at the meeting in person or by proxy, representing approximately 77.76 percent. Matters voted upon at the meeting were as follows: a) Election of six directors to serve on the Company's board of directors. Messrs. Bradley, Curry, Lee, West, Wood and Zink were elected to serve until the 1998 Annual Meeting. The vote tabulation with respect to each nominee was as follows: Authority Nominee For Withheld - -------- ---------- ---------- Doyl D. West 7,166,910 144,552 C. William Lee 7,167,110 144,352 Hugh E. Bradley 7,167,110 144,352 Robert L.Curry 7,167,010 144,452 William P. Wood 7,166,810 144,652 John S. Zink 7,167,010 144,452 b) The stockholders approved an amendment to the Company's 1991 Stock Option Plan increasing the number of shares issuable under the plan from 970,000 to 1,320,000. Number of Votes Cast - -------------------- For Against Abstain Non-Votes --- ------- -------- --------- 6,391,566 870,892 12,145 36,859 c) There were 7,297,860 shares voted for the ratification of the appointment of Ernst & Young LLP as the Company's independent public accountants, with 10,602 shares voted against, 3,000 abstentions, and zero broker non-votes. ITEM 6. Exhibits and Reports on Form 8-K: A. Exhibit 10.1 - 1991 Stock Option Plan, as amended. B. Exhibit 11 - Computation of earnings per share. C. Reports on Form 8-K: None Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATRIX SERVICE COMPANY Date: January 14, 1998 By: /s/C. William Lee ----------------- C. William Lee Vice President-Finance Chief Financial Officer Signing on behalf of the registrant and as the registrant's chief financial officer.