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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 ACT OF 1934
For quarterly period ended MARCH 31, 2003
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: 0-23335
MPW INDUSTRIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1567260
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
9711 Lancaster Road, S.E., Hebron, Ohio 43025
(Address of principal executive offices) (Zip code)
(740) 927-8790
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
- --------------------------------------------------------------------------------
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
-------- --------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12-b of the Exchange Act). Yes No X
-------- ---------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 2003, 10,939,957 shares of the issuer's common stock,
without par value, were outstanding.
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MPW INDUSTRIAL SERVICES GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (unaudited) and June 30, 2002.......... 3
Consolidated Statements of Operations for the three and nine months ended March 31, 2003
and 2002 (unaudited).................................................................... 4
Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and 2002
(unaudited)............................................................................. 5
Notes to Consolidated Financial Statements (unaudited).................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 19
Item 4. Controls and Procedures................................................................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 20
Item 2. Changes in Securities and Use of Proceeds............................................... 20
Item 3. Defaults Upon Senior Securities......................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders..................................... 20
Item 5. Other Information....................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................ 20
SIGNATURES.......................................................................................... 21
CERTIFICATIONS...................................................................................... 22
EXHIBIT INDEX....................................................................................... 24
2
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MPW INDUSTRIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30,
2003 2002
---------- ---------
(UNAUDITED)
ASSETS
Cash $ 286 $ 164
Accounts receivable, net 17,148 16,390
Inventories 2,572 2,290
Deferred income taxes 1,453 1,912
Prepaid expenses 475 776
Other current assets 27 672
-------- --------
Total current assets 21,961 22,204
-------- --------
Property and equipment, net 35,883 37,672
Goodwill 6,799 11,508
Other intangibles, net 7,059 7,569
Investment in affiliate 6,597 6,792
Other assets 102 144
-------- --------
Total assets $ 78,401 $ 85,889
======== ========
LIABILITIES
Accounts payable $ 4,408 $ 4,910
Accrued compensation and related taxes 2,091 2,665
Current maturities of long-term debt 1,324 1,382
Other accrued liabilities 6,186 5,775
-------- --------
Total current liabilities 14,009 14,732
-------- --------
Long-term debt 23,448 25,972
Deferred income taxes 3,288 5,424
-------- --------
Total liabilities 40,745 46,128
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, no par value; 30,000,000 shares authorized;
10,939,957 shares issued and outstanding at March 31, 2003
and June 30, 2002 109 109
Additional paid-in capital 41,507 41,507
Accumulated deficit (3,593) (1,416)
Accumulated other comprehensive loss (367) (439)
-------- --------
Total shareholders' equity 37,656 39,761
-------- --------
Total liabilities and shareholders' equity $ 78,401 $ 85,889
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
MPW INDUSTRIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Revenues $ 24,506 $ 22,957 $ 73,157 $ 68,867
Cost of services (including depreciation) 18,102 17,513 56,008 50,872
-------- -------- -------- --------
Gross profit 6,404 5,444 17,149 17,995
Selling, general and administrative expenses 4,369 4,338 13,667 13,401
-------- -------- -------- --------
Income from operations 2,035 1,106 3,482 4,594
Interest expense, net 457 622 1,470 2,012
-------- -------- -------- --------
Income from continuing operations before income taxes
and equity in earnings (loss) of affiliate 1,578 484 2,012 2,582
Provision for income taxes 663 8 845 931
-------- -------- -------- --------
Income from continuing operations before equity in
earnings (loss) of affiliate 915 476 1,167 1,651
Equity in earnings (loss) of affiliate (315) 93 (499) (135)
-------- -------- -------- --------
Income from continuing operations 600 569 668 1,516
Income from discontinued operations, net of tax -- 1,179 -- 1,179
-------- -------- -------- --------
Income before cumulative effect of change in accounting
principle 600 1,748 668 2,695
Cumulative effect of change in accounting principle -- -- (2,845) --
-------- -------- -------- --------
Net income (loss) $ 600 $ 1,748 $ (2,177) $ 2,695
======== ======== ======== ========
Net income (loss) per share:
Income from continuing operations $ 0.05 $ 0.05 $ 0.06 $ 0.14
Income from discontinued operations, net of tax -- 0.11 -- 0.11
-------- -------- -------- --------
Income before cumulative effect of change in accounting
principle 0.05 0.16 0.06 0.25
Cumulative effect of change in accounting principle -- -- (0.26) --
-------- -------- -------- --------
Net income (loss) per share $ 0.05 $ 0.16 $ (0.20) $ 0.25
======== ======== ======== ========
Net income (loss) per share, assuming dilution:
Income from continuing operations $ 0.05 $ 0.05 $ 0.06 $ 0.14
Income from discontinued operations, net of tax -- 0.11 -- 0.11
-------- -------- -------- --------
Income before cumulative effect of change in accounting
principle 0.05 0.16 0.06 0.25
Cumulative effect of change in accounting principle -- -- (0.26) --
-------- -------- -------- --------
Net income (loss) per share, assuming dilution $ 0.05 $ 0.16 $ (0.20) $ 0.25
======== ======== ======== ========
Weighted average shares outstanding 10,940 10,940 10,940 10,940
Weighted average shares outstanding, assuming dilution 10,941 11,347 10,965 10,943
The accompanying notes are an integral part of these
consolidated financial statements.
4
MPW INDUSTRIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
-------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,177) $ 2,695
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 6,802 6,398
Amortization 510 937
Equity in loss of affiliate 499 135
Loss on disposal of assets 46 36
Change in deferred income taxes 132 (855)
Cumulative effect of change in accounting principle 2,845 --
Changes in operating assets and liabilities:
Accounts receivable (758) (1,393)
Inventories (282) 16
Prepaid expenses and other assets 988 (721)
Accounts payable (501) (1,428)
Other accrued liabilities 24 (2,005)
-------- --------
Net cash provided by operating activities 8,128 3,815
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,074) (4,765)
Investment in affiliate (365) --
Proceeds from the disposal of property and equipment 15 25
-------- --------
Net cash (used in) investing activities (5,424) (4,740)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility 24,549 22,286
Payments on revolving credit facility (27,082) (21,154)
Issuance of notes payable 128 --
Payments on notes payable (177) (212)
-------- --------
Net cash provided by (used in) financing activities (2,582) 920
-------- --------
Increase (decrease) in cash 122 (5)
Cash at beginning of year 164 129
-------- --------
Cash at end of period $ 286 $ 124
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS MPW Industrial
Services Group, Inc. and its subsidiaries (the "Company") provide
technically-based services, including industrial cleaning and facility
maintenance, industrial container cleaning and industrial process water
purification. Such services are primarily provided at customer facilities. The
Company serves customers in numerous industries including automotive,
manufacturing, steel, utility, pulp and paper, chemical and construction
primarily throughout the United States and Canada.
The accompanying unaudited consolidated financial statements presented
herein have been prepared by the Company and reflect all adjustments of a normal
recurring nature that are, in the opinion of management, necessary for a fair
presentation of financial results for the three and nine months ended March 31,
2003 and 2002, respectively, in accordance with generally accepted accounting
principles for interim financial reporting and pursuant to Article 10 of
Regulation S-X. Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
interim consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended June 30, 2002 ("Annual
Report"). The results of operations for the three and nine months ended March
31, 2003 and 2002, respectively, are not necessarily indicative of the results
for the full year.
COMPREHENSIVE INCOME (LOSS) Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, requires that an enterprise
report the change in its equity during the period from non-owner sources as
other comprehensive income (loss). The Company has evaluated the statement and
determined that the only items in addition to net income (loss) that would be
included in comprehensive income (loss) are the foreign currency translation
adjustment, the mark-to-market adjustment on interest rate swaps and the
Company's share of the comprehensive loss of its investment in affiliate.
Comprehensive income for the three months ended March 31, 2003 and 2002 was $0.6
million and $1.9 million, respectively. Comprehensive income (loss) for the nine
months ended March 31, 2003 and 2002 was $(2.1) million and $2.4 million,
respectively.
GOODWILL AND OTHER INTANGIBLES Effective July 1, 2002, the Company
adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142,
goodwill and other intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests. Other intangible
assets with identifiable definite lives continue to be amortized over their
useful lives. SFAS No. 142 requires a two-step process for impairment testing of
goodwill. The first step identifies indications of impairment, while the second
step, if necessary, measures the amount of the impairment, if any. The Company
was required to perform a transitional impairment test of goodwill within the
first six months of fiscal 2003 and an annual impairment test thereafter or upon
the occurrence of certain triggering events as defined by SFAS No. 142. The
Company will perform its annual impairment test during the fourth quarter of
each year.
The Company completed step one of the transitional impairment test
during the second quarter of fiscal 2003 for each of its reporting units. The
Company used discounted cash flow and market comparison methodologies to
determine the fair value of the Company's reporting units. As a result of step
one of the transitional impairment test, it was determined that the Industrial
Cleaning and Facility Maintenance reporting unit had no impairment in connection
with its reported goodwill; however, the fair values of the Industrial Container
Cleaning reporting unit and the medical and laboratory water purification
reporting unit of the Industrial Water Process Purification segment ("WTW") were
determined to be less than the book values of these reporting units.
Based on the results of step two of the transitional impairment test,
the Company recorded a $2.3 million, net of tax of $1.6 million, transitional
impairment loss in the Industrial Container Cleaning reporting unit and a $0.5
million, net of tax of $0.3 million, transitional impairment loss in the WTW
reporting unit. These changes were recorded as a cumulative effect of a change
in accounting principle as of July 1, 2002 and primarily reflect a decline in
operating results largely due to the economic downturn that has affected many of
the customers that these reporting units serve.
6
MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
The following table presents the results of operations for the three
months ended September 30, 2002 and the accumulated deficit as of September 30,
2002 after giving effect to the goodwill impairment charge (in thousands):
AS ADJUSTED FOR
AS REPORTED GOODWILL
IN FORM 10-Q IMPAIRMENT
------------ ---------------
Net loss $ (203) $(3,048)
======== =======
Net loss per share, basic and diluted $ (0.02) $ (0.28)
======== =======
Accumulated deficit $ (1,619) $(4,464)
======== =======
The effects of adopting SFAS No. 142 on net income (loss) and the per
share amounts for the three and nine months ended March 31, 2003 and 2002 are as
follows (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
2003 2002 2003 2002
----- ------- ------- -------
Net income (loss):
As reported $ 600 $ 1,748 $(2,177) $ 2,695
Less: Impairment loss related to
the adoption of SFAS No. 142 - - (2,845) -
Add: Goodwill amortization - 109 - 327
----- ------- ------- -------
Net income excluding the
impairment loss related to
the adoption of SFAS No. 142
and goodwill amortization $ 600 $ 1,857 $ 668 $ 3,022
===== ======= ======= =======
Net income (loss) per share,
basic and diluted:
As reported $0.05 $ 0.16 $ (0.20) $ 0.25
Less: Impairment loss related to
the adoption of SFAS No. 142 - - (0.26) -
Add: Goodwill amortization - 0.01 - 0.03
----- ------- ------- -------
Net income excluding the
impairment loss related to
the adoption of SFAS No. 142
and goodwill amortization $0.05 $ 0.17 $ 0.06 $ 0.28
===== ======= ======= =======
7
MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
The changes in the carrying amount of goodwill for the nine months
ended March 31, 2003, by segment, are as follows (in thousands):
INDUSTRIAL INDUSTRIAL
CLEANING AND INDUSTRIAL PROCESS
FACILITY CONTAINER WATER
MAINTENANCE CLEANING PURIFICATION TOTAL
------------ ---------- ------------ --------
Balance as of June 30, 2002 $ 6,011 $ 3,942 $ 1,555 $ 11,508
Impairment loss related to the
adoption of SFAS No. 142,
pre-tax -- (3,942) (800) (4,742)
Earnings contingency payout 33 -- -- 33
-------- -------- -------- --------
Balance as of March 31, 2003 $ 6,044 $ -- $ 755 $ 6,799
======== ======== ======== ========
STOCK OPTIONS Effective January 1, 2003, the Company adopted the
disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation
- - Transition and Disclosure. This Statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition to SFAS
No. 123's fair value method of accounting for stock-based employee compensation
and amends the disclosure provisions of SFAS No. 123 and Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
As of March 31, 2003, the Company has two stock-based compensation
plans, which are described in detail in the annual report on Form 10-K for the
year ended June 30, 2002. The Company accounts for these plans under the
recognition and measurement principles of APB No. 25, Accounting for Stock
Issued to Employees, and related interpretations. No stock-based compensation
cost is reflected in net income (loss), as all options granted under these plans
had an exercise price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net income
(loss) and net income (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ---------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income (loss):
As reported $ 600 $ 1,748 $(2,177) $ 2,695
Less: Stock-based compensation
expense determined under
fair value based method for
all awards, net of related tax
effects 22 30 76 46
------- ------- ------- -------
Pro forma net income (loss) $ 578 $ 1,718 $(2,253) $ 2,649
======= ======= ======= =======
Net income (loss) per share, basic
and diluted:
As reported $ 0.05 $ 0.16 $ (0.20) $ 0.25
======= ======= ======= =======
Pro forma $ 0.05 $ 0.16 $ (0.21) $ 0.25
======= ======= ======= =======
8
MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
USE OF ESTIMATES The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the accompanying consolidated financial statements. Actual results
could differ from those estimates.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial
Accounting Standards Board issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS No.
133. In addition, it clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS No. 149
also amends certain other existing pronouncements. Those changes will result in
more consistent reporting of contracts that are derivatives in their entirety or
that contain embedded derivatives that warrant separate accounting. This
Statement is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. Management
does not expect adoption of this Statement to have a material impact on the
Company's consolidated financial statements.
NOTE 2. OTHER INTANGIBLES
Intangibles are summarized as follows (in thousands):
AS OF MARCH 31, 2003 AS OF JUNE 30, 2002
------------------------------- -------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Amortized intangible assets:
Customer relationships and lists $ 8,295 $ (2,053) $ 8,295 $ (1,699)
Patents 1,393 (650) 1,393 (545)
Non-compete agreements 485 (411) 485 (360)
-------- -------- -------- --------
$ 10,173 $ (3,114) $ 10,173 $ (2,604)
======== ======== ======== ========
Amortization expense was $0.2 million for the three months ended March
31, 2003 and $0.5 million for the nine months ended March 31, 2003. Estimated
amortization expense for the current and next five fiscal years is as follows
(in thousands):
ESTIMATED
AMORTIZATION
EXPENSE
------------
For the year ended June 30, 2003 $ 680
For the year ended June 30, 2004 605
For the year ended June 30, 2005 542
For the year ended June 30, 2006 534
For the year ended June 30, 2007 534
For the year ended June 30, 2008 534
9
MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 3. INVESTMENT IN AFFILIATE
During the first quarter of fiscal 2003, the Company invested
approximately $0.4 million in Pentagon Technologies Group, Inc. ("Pentagon").
Subsequent to March 31, 2003, the Company funded its remaining investment
commitment of approximately $0.1 million.
Summarized operating data for Pentagon is presented in the following
table (in thousands):
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ---------------------------
2003 2002 2003 2002
------- -------- -------- --------
Revenues $ 8,105 $ 10,054 $ 25,935 $ 30,172
======= ======== ======== ========
Income (loss) from operations $ 98 $ 797 $ (1,145) $ 426
======= ======== ======== ========
Net income (loss) $ (180) $ 332 $ (2,475) $ (605)
======= ======== ======== ========
The Company's equity in loss of affiliate of $0.3 million for the
quarter ended March 31, 2003 exceeds the Company's percentage share in the net
loss recorded by Pentagon for the same period due to adjustments to Pentagon's
financial statements for its fiscal year ended December 31, 2002 reported
subsequent to the Company's filing of its Form 10-Q for the period ended
December 31, 2002. These adjustments are included in Pentagon's summarized
operating data for the nine months ended March 31, 2003.
Summarized balance sheet data for Pentagon is presented in the
following table (in thousands):
MARCH 31, JUNE 30,
2003 2002
--------- ---------
Current assets $ 9,743 $ 11,636
Noncurrent assets 46,220 46,869
Current liabilities (8,146) (9,078)
Noncurrent liabilities (19,356) (18,374)
-------- -----------
Equity $ 28,461 $ 31,053
======== ===========
A significant amount of Pentagon's total assets represent goodwill.
Under the equity method of accounting, the Company's recorded investment in
Pentagon would be affected if Pentagon were to record an impairment charge under
the provisions of SFAS No. 142. The Company will closely monitor its investment
in Pentagon and it is possible that continued declines in Pentagon's operating
results could also in the near term materially affect the Company's recorded
investment in Pentagon.
NOTE 4. LONG-TERM DEBT
The Company currently has two pay-fixed interest rate swap agreements
as a hedge against the interest rate risk associated with borrowing at a
variable rate, which mature in June 2003. The objective of the hedge is to
eliminate the variability of cash flows related to interest rate payments on
$20.0 million of variable rate debt. The swap agreements have a notional amount
of $10.0 million each and effectively lock in a portion of the Company's
variable rate revolving credit liability at fixed rates of 4.93% and 4.98%,
respectively plus the Company's applicable margin of 2.25%. These swap
agreements are accounted for as cash flow hedges, as defined under SFAS No. 133.
The Company adjusts the pay-fixed interest rate swaps to current market values
through other comprehensive income (loss). The Company anticipates that these
contracts will continue to be effective. The gain/(loss) deferred in accumulated
comprehensive income (loss) will be recognized immediately in earnings if the
contracts are no longer effective or the forecasted transactions are not
expected to occur.
10
MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
In March 2003, the Company entered into two forward rate locking
pay-fixed interest rate swap agreements as a hedge against the interest rate
risk associated with borrowing at a variable rate, which are effective beginning
June 2003 and mature in June 2006. The objective of the hedge is to eliminate
the variability of cash flows related to interest rate payments on $20.0 million
of variable rate debt. The swap agreements have a notional amount of $10.0
million each and effectively lock in a portion of the Company's variable rate
revolving credit liability at fixed rates of 2.61% and 2.80%, respectively, plus
the Company's applicable margin. These swap agreements are accounted for as cash
flow hedges, as defined under SFAS No. 133. The Company adjusts the pay-fixed
interest rate swaps to current market values through other comprehensive income
(loss). The Company anticipates that these contracts will continue to be
effective. The gain/(loss) deferred in accumulated comprehensive income (loss)
will be recognized immediately in earnings if the contracts are no longer
effective or the forecasted transactions are not expected to occur.
NOTE 5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- --------------------
2003 2002 2003 2002
--------- -------- -------- --------
Numerator for basic and diluted net income (loss) per share:
Income from continuing operations $ 600 $ 569 $ 668 $ 1,516
Income from discontinued operations, net of tax -- 1,179 -- 1,179
--------- -------- -------- --------
Income before cumulative effect of change in
accounting principle 600 1,748 668 2,695
Cumulative effect of change in accounting principle -- -- (2,845) --
--------- -------- -------- --------
Net income (loss) per share $ 600 $ 1,748 $ (2,177) $ 2,695
========= ======== ======== ========
Denominator for basic net income (loss) per share:
Weighted average common shares 10,940 10,940 10,940 10,940
Effect of dilutive securities:
Dilutive employee stock options 1 407 25 3
--------- -------- -------- --------
Denominator for diluted net income (loss) per share-
adjusted weighted average common shares and
assumed conversions 10,941 11,347 10,965 10,943
========= ======== ======== ========
Net income (loss) per share:
Income from continuing operations $ 0.05 $ 0.05 $ 0.06 $ 0.14
Income from discontinued operations, net of tax -- 0.11 -- 0.11
--------- -------- -------- --------
Income before cumulative effect of change in
accounting principle 0.05 0.16 0.06 0.25
Cumulative effect of change in accounting principle -- -- (0.26) --
--------- -------- -------- --------
Net income (loss) per share $ 0.05 $ 0.16 $ (0.20) $ 0.25
========= ======== ======== ========
Net income (loss) per share, assuming dilution:
Income from continuing operations $ 0.05 $ 0.05 $ 0.06 $ 0.14
Income from discontinued operations, net of tax -- 0.11 -- 0.11
--------- -------- -------- --------
Income before cumulative effect of change in
accounting principle 0.05 0.16 0.06 0.25
Cumulative effect of change in accounting principle -- -- (0.26) --
--------- -------- -------- --------
Net income (loss) per share, assuming dilution $ 0.05 $ 0.16 $ (0.20) $ 0.25
========= ======== ======== ========
11
MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
Options to purchase 1,735,550 and 1,417,053 shares of common stock at a
weighted average price of $4.70 and $6.14 per share were outstanding during the
three months ended March 31, 2003 and 2002, respectively, but were not included
in the computation of diluted earnings per share because the exercise price of
the options was greater than the average market price of the shares, therefore,
the effect would be antidilutive. Options to purchase 1,431,050 and 1,820,812
shares of common stock at a weighted average price of $5.32 and $4.78 per share
were outstanding during the nine months ended March 31, 2003 and 2002,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares, therefore, the effect would be antidilutive.
NOTE 6. RELATED PARTY TRANSACTIONS
The Company rents certain land, property, buildings and equipment from
entities controlled by its principal shareholder and Chief Executive Officer
under long-term lease agreements and other arrangements. Total expenses related
to these leases and other arrangements were $0.5 million and $0.4 million for
the three months ended March 31, 2003 and 2002, respectively, and $1.5 million
and $1.4 million for the nine months ended March 31, 2003 and 2002,
respectively.
Subsequent to March 31, 2003, the Company entered into a one-year
agreement to rent an aircraft from Miramonte Aviation, LLC, an entity controlled
by its principal shareholder and Chief Executive Officer, for an annual lease
payment of $420,000, payable monthly, plus applicable state and local taxes.
This lease terminates on May 12, 2004 and includes four one-year options to
renew at the lessor's option upon 30 days written notice.
The Company provides, from time to time, certain fabrication-type
services to Pro-Kleen Industrial Services, Inc. ("Pro-Kleen"), a portable
sanitation services company wholly-owned by the Company's principal shareholder
and Chief Executive Officer. The Company bills Pro-Kleen for services it
renders. The amount of such billings were not significant for the three months
ended March 31, 2003, were $0.1 million for the three months ended March 31,
2002 and were approximately $0.2 million and $0.1 million for the nine months
ended March 31, 2003 and 2002, respectively. These billings represent
reimbursement for the use of parts and supplies and the use of certain of the
Company's employees on certain projects as requested by Pro-Kleen. These
reimbursements by Pro-Kleen are generally treated as an offset to supplies,
repairs and maintenance or labor expense.
NOTE 7. SEGMENT REPORTING
Summarized financial information for the Company's reportable segments
is set forth below (in thousands). Corporate expenses are fully allocated to the
segments. Corporate support services that are attributable to the operating
segments are allocated based on each segment's percentage of total revenues.
General corporate expenses are allocated to each segment equally.
12
MPW INDUSTRIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUE
Industrial Cleaning and Facility Maintenance $ 19,073 $ 18,128 $ 57,399 $ 54,012
Industrial Container Cleaning 2,892 2,901 8,402 8,005
Industrial Water Process Purification 2,541 1,928 7,356 6,850
-------- -------- -------- --------
Total $ 24,506 $ 22,957 $ 73,157 $ 68,867
======== ======== ======== ========
INCOME FROM OPERATIONS
Industrial Cleaning and Facility Maintenance $ 1,216 $ 705 $ 2,102 $ 2,969
Industrial Container Cleaning 307 300 334 394
Industrial Water Process Purification 512 101 1,046 1,231
-------- -------- -------- --------
Total $ 2,035 $ 1,106 $ 3,482 $ 4,594
======== ======== ======== ========
MARCH 31, JUNE 30,
2003 2002
--------- --------
TOTAL ASSETS
Industrial Cleaning and Facility Maintenance $ 38,835 $ 40,542
Industrial Container Cleaning 14,514 19,785
Industrial Water Process Purification 11,692 10,677
Other (1) 13,360 14,885
-------- --------
Total $ 78,401 $ 85,889
======== ========
(1) Other consists of corporate assets.
NOTE 8. SUBSEQUENT EVENTS
Subsequent to March 31, 2003, the Company entered into an agreement
committing to purchase land and a building for $0.6 million in August 2003.
Subsequent to March 31, 2003, the Company entered into a one-year
agreement to rent an aircraft from Miramonte Aviation, LLC, an entity controlled
by its principal shareholder and Chief Executive Officer, for an annual lease
payment of $420,000, payable monthly, plus applicable state and local taxes.
This lease terminates on May 12, 2004 and includes four one-year options to
renew at the lessor's option upon 30 days written notice.
Subsequent to March 31, 2003, the Company funded its remaining
investment commitment of approximately $0.1 million in Pentagon.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information, certain statements in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") are forward-looking. These forward-looking statements are
based on current expectations that are subject to a number of uncertainties and
risks and actual results may differ materially. The uncertainties and risks
include, but are not limited to, competitive and other market factors, customer
purchasing behavior, general economic conditions and other facets of business
operations as well as other risk factors identified in "Investment
Considerations" in the Company's Annual Report. The Company undertakes no
obligation and does not intend to update, revise or otherwise publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect future events or circumstances.
The following information should be read in conjunction with the
Unaudited Consolidated Financial Statements and related notes included elsewhere
in this Form 10-Q. The following information should also be read in conjunction
with the Audited Consolidated Financial Statements and related notes and MD&A
for the year ended June 30, 2002 as contained in the Company's Annual Report.
RESULTS OF OPERATIONS
The following table sets forth revenue and income from operations by
segment for the three and nine months ended March 31, 2003 and 2002. Corporate
expenses are fully allocated to the segments. Corporate support services that
are attributable to the operating segments are allocated based on each segment's
percentage of total revenues. General corporate expenses are allocated to each
segment equally.
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------------ ----------------------------------------
2003 2002 2003 2002
---------------- ---------------- ------------------ ------------------
% OF % OF % OF % OF
ACTUAL REVENUE ACTUAL REVENUE ACTUAL REVENUE ACTUAL REVENUE
------- ------- -------- ------- -------- ------- -------- -------
(UNAUDITED; IN THOUSANDS)
Revenue
Industrial Cleaning and Facility Maintenance $ 19,073 77.8% $ 18,128 79.0% $ 57,399 78.4% $ 54,012 78.5%
Industrial Container Cleaning 2,892 11.8 2,901 12.6 8,402 11.5 8,005 11.6
Industrial Water Process Purification 2,541 10.4 1,928 8.4 7,356 10.1 6,850 9.9
-------- ---- -------- ---- -------- ---- -------- ----
Total revenue 24,506 100.0 22,957 100.0 73,157 100.0 68,867 100.0
Cost of services (including depreciation) 18,102 73.9 17,513 76.3 56,008 76.6 50,872 73.9
-------- ---- -------- ---- -------- ---- -------- ----
Gross profit 6,404 26.1 5,444 23.7 17,149 23.4 17,995 26.1
Selling, general and administrative expenses 4,369 17.8 4,338 18.9 13,667 18.6 13,401 19.4
-------- ---- -------- ---- -------- ---- -------- ----
Income from operations
Industrial Cleaning and Facility Maintenance 1,216 6.4 705 3.9 2,102 3.7 2,969 5.5
Industrial Container Cleaning 307 10.6 300 10.3 334 4.0 394 4.9
Industrial Water Process Purification 512 20.1 101 5.2 1,046 14.2 1,231 18.0
-------- ---- -------- ---- -------- ---- -------- ----
Total income from operations $ 2,035 8.3% $ 1,106 4.8% $ 3,482 4.8% $ 4,594 6.7%
======== ==== ======== ==== ======== ==== ======== ====
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenues. Revenues increased 6.7% to $24.5 million in the third quarter
of fiscal 2003 from $23.0 million in the prior year period. The increase was
primarily the result of the start-up of new branches in the Industrial Cleaning
and Facility Maintenance segment and a new facility in the Industrial Water
Process Purification segment.
14
Cost of Services. Total cost of services was $18.1 million for the
three months ended March 31, 2003 compared to $17.5 million for the three months
ended March 31, 2002. Cost of services as a percentage of revenue decreased to
73.9% in the third quarter of fiscal 2003 from 76.3% in the prior year period.
This decrease was primarily driven by improved operating efficiencies primarily
in labor management and lower depreciation expense, offset slightly by increased
fuel costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenue decreased to 17.8% in the
third quarter of fiscal 2003 from 18.9% in the prior year period. However, total
selling, general and administrative expenses increased slightly to $4.4 million
for the three months ended March 31, 2003 from $4.3 million for the three months
ended March 31, 2002. The increase was primarily the result of additional sales
and business development personnel, increased repair and maintenance costs and
increased bad debt expense related to a customer who filed for bankruptcy, which
were offset by income received from a contract settlement and a decrease in
amortization expense as a result of the Company's adoption of Statement of
Financial Accounting Standard ("SFAS") No. 142, Goodwill and Other Intangible
Assets.
Income from Operations. Income from operations was $2.0 million for the
three months ended March 31, 2003 compared to $1.1 million for the three months
ended March 31, 2002. As a percentage of revenue, income from operations
increased to 8.3% in the third quarter of fiscal 2003 from 4.8% in the prior
year period primarily related to the factors discussed above.
Interest Expense. Interest expense decreased to $0.5 million in the
third quarter of fiscal 2003 from $0.6 million in the prior year period. The
decrease was primarily due to lower average outstanding borrowings and lower
interest rates.
Provision for Income Taxes. The provision for income taxes for the
three months ended March 31, 2003 and 2002 reflects an effective rate of 42% and
2%, respectively. The provision for income taxes for the three months ended
March 31, 2002 includes a non-recurring benefit of $0.2 million related to a
reduction in the Company's valuation allowance against the Company's deferred
tax asset for capital loss carry-forwards associated with the Company's July
2001 sale of Pentagon Technologies Group, Inc. ("Pentagon") stock. The reduction
in the valuation allowance resulted from 2002 developments related to the
finalization of the Company's fiscal 2001 income tax return.
Discontinued Operations. On June 4, 2001 the Company closed on the sale
of the Industrial Products and Services ("Filter") group to CLARCOR Inc., a
filter manufacturer. Income from discontinued operations for the three months
ended March 31, 2002 consists solely of a tax benefit related to a reduction in
the valuation allowance against the Company's deferred tax asset for capital
loss carry-forwards associated with the sale of the Filter group. These tax
benefits resulted from fiscal 2002 developments related to the finalization of
the Company's fiscal 2001 income tax return.
NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO NINE MONTHS ENDED MARCH 31, 2002
Revenues. Revenues increased 6.2% to $73.2 million in the first nine
months of fiscal 2003 from $68.9 million in the prior year period. The increase
was primarily the result of a large project performed by the Company's union
subsidiary, the start-up of new branches and increased work with paper, steel
and construction customers in the Industrial Cleaning and Facility Maintenance
segment and a new facility in the Industrial Water Process Purification segment.
Cost of Services. Total cost of services was $56.0 million for the nine
months ended March 31, 2003 compared to $50.1 million for the nine months ended
March 31, 2002. Cost of services as a percentage of revenue increased to 76.6%
in the first nine months of fiscal 2003 from 73.9% in the prior year period. The
increase was primarily related to additional investments in the business related
to the start-up of new branches, heavier reliance on sub-contract services and
increased repair, maintenance and fuel costs, slightly offset by improved
operating efficiencies primarily in labor management.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenue decreased to 18.6% for the
first nine months of fiscal 2003 from 19.4% in the prior year period. However,
total selling, general and administrative expenses were $13.7 million and $13.4
million for the nine months ended March 31, 2003 and 2002, respectively. The
increase was primarily the result of additional sales and business development
personnel, increased repair and maintenance costs and increased bad debt expense
related to a customer who filed for bankruptcy, which were offset by income
received from a contract settlement and a decrease in amortization expense as a
result of the Company's adoption of Statement of Financial Accounting Standard
("SFAS") No. 142, Goodwill and Other Intangible Assets.
15
Income from Operations. Income from operations was $3.5 million for the
nine months ended March 31, 2003 compared to $4.6 million for the nine months
ended March 31, 2002. As a percentage of revenue, income from operations
decreased to 4.8% in the first nine months of fiscal 2003 from 6.7% in the prior
year period primarily related to the factors discussed above.
Interest Expense. Interest expense decreased to $1.5 million in the
first nine months of fiscal 2003 from $2.0 million in the prior year period. The
decrease was primarily due to lower average outstanding borrowings and lower
interest rates.
Provision for Income Taxes. The provision for income taxes for the nine
months ended March 31, 2003 and 2002 reflects an effective rate of 42% and 36%,
respectively. The provision for income taxes for the nine months ended March 31,
2002 includes a non-recurring benefit of $0.2 million related to a reduction in
the Company's valuation allowance against the Company's deferred tax asset for
capital loss carry-forwards associated with the Company's July 2001 sale of
Pentagon Technologies Group, Inc. ("Pentagon") stock. The reduction in the
valuation allowance resulted from 2002 developments related to the finalization
of the Company's fiscal 2001 income tax return.
Discontinued Operations. On June 4, 2001 the Company closed on the sale
of the Industrial Products and Services ("Filter") group to CLARCOR Inc., a
filter manufacturer. Income from discontinued operations for the nine months
ended March 31, 2002 consists solely of a tax benefit related to a reduction in
the valuation allowance against the Company's deferred tax asset for capital
loss carry-forwards associated with the sale of the Filter group. These tax
benefits resulted from fiscal 2002 developments related to the finalization of
the Company's fiscal 2001 income tax return.
RELATED PARTY TRANSACTIONS
The Company rents certain land, property, buildings and equipment from
entities controlled by its principal shareholder and Chief Executive Officer
under long-term lease agreements and other arrangements. Total expenses related
to these leases and other arrangements were $0.5 million and $0.4 million for
the three months ended March 31, 2003 and 2002, respectively, and $1.5 million
and $1.4 million for the nine months ended March 31, 2003 and 2002,
respectively.
Subsequent to March 31, 2003, the Company entered into a one-year
agreement to rent an aircraft from Miramonte Aviation, LLC, an entity controlled
by its principal shareholder and Chief Executive Officer, for an annual lease
payment of $420,000, payable monthly, plus applicable state and local taxes.
This lease terminates on May 12, 2004 and includes four one-year options to
renew at the lessor's option upon 30 days written notice.
The Company provides, from time to time, certain fabrication-type
services to Pro-Kleen Industrial Services, Inc. ("Pro-Kleen"), a portable
sanitation services company wholly-owned by the Company's principal shareholder
and Chief Executive Officer. The Company bills Pro-Kleen for services it
renders. The amount of such billings were not significant for the three months
ended March 31, 2003 and $0.1 million for the three months ended March 31, 2002
and were approximately $0.2 million and $0.1 million for the nine months ended
March 31, 2003 and 2002, respectively. These billings represent reimbursement
for the use of parts and supplies and the use of certain of the Company's
employees on certain projects as requested by Pro-Kleen. These reimbursements by
Pro-Kleen are generally treated as an offset to supplies, repair and maintenance
or labor expense.
INVESTMENT IN AFFILIATE
The Company holds approximately a 22% interest in Pentagon Technologies
Group, Inc. ("Pentagon"), and accounts for its investment in Pentagon under the
equity method of accounting. The Company's investment and proportionate share of
earnings (loss) in Pentagon are classified in the financial statements as
"investment in affiliate" and "equity in earnings (loss) of affiliate,"
respectively. A significant amount of Pentagon's total assets represent
goodwill. Under the equity method of accounting, the Company's recorded
investment in Pentagon would be affected if Pentagon were to record an
impairment charge under the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets. The Company will closely monitor its investment in Pentagon
and it is possible that continued declines in Pentagon's operating results could
also in the near term materially affect the Company's recorded investment in
Pentagon.
Subsequent to March 31, 2003, the Company funded its remaining
investment committment of $0.1 million in Pentagon.
SUBSEQUENT EVENTS
In addition to the subsequent events discussed in the preceding
Related Party Transactions and Investment in Affiliate sections, subsequent to
March 31, 2003, the Company entered into an agreement committing to purchase
land and a building for $0.6 million in August 2003.
16
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company had cash of $0.3 million and working
capital of $8.0 million. Cash provided by operating activities was $8.1 million
for the nine months ended March 31, 2003, while cash used for investing
activities was $5.4 million. The cash used for investing activities included an
additional investment of approximately $0.4 million in Pentagon Technologies
Group, Inc. Subsequent to March 31, 2003, the Company funded its remaining
investment commitment of approximately $0.1 million.
In June 2002, the Company entered into a new credit agreement with its
principal banks (the "Credit Facility"). The Credit Facility provides the
Company with $35.0 million of revolving credit availability for a three-year
period and a $6.0 million three-year term loan to be repaid in quarterly
installments of $0.3 million. As of March 31, 2003, there was $40.1 million
available for general corporate purposes. The Credit Facility is subject to two
one-year extensions by the banks at the request of the Company.
The Credit Facility is secured by substantially all of the Company's
assets. Under the terms of the Credit Facility, the entire $40.1 million is
available for general corporate purposes, including working capital, capital
expenditures and acquisitions. Borrowings under the Credit Facility currently
bear interest at the Eurodollar market rate plus the applicable margin of 2.25%.
The Company also pays a commitment fee of .45% for unused portions of the Credit
Facility. The interest rate is subject to change based on interest rate formulas
tied to the ratio of consolidated funded debt to earnings before interest,
taxes, depreciation and amortization. Availability of borrowing is subject to
the maintenance of a minimum level of tangible net worth, certain levels of debt
service coverage and maintenance of a specific ratio of funded debt to earnings
before interest, taxes, depreciation and amortization. As of March 31, 2003,
outstanding borrowings under the Credit Facility were $24.5 million.
The Company currently has two pay-fixed interest rate swap agreements
as a hedge against the interest rate risk associated with borrowing at a
variable rate, which mature in June 2003. The objective of the hedge is to
eliminate the variability of cash flows related to interest rate payments on
$20.0 million of variable rate debt. The swap agreements have a notional amount
of $10.0 million each and effectively lock in a portion of the Company's
variable rate revolving credit liability at fixed rates of 4.93% and 4.98%,
respectively plus the Company's applicable margin of 2.25%. These swap
agreements are accounted for as cash flow hedges, as defined under SFAS No. 133,
Accounting for Derivative and Hedging Activities. The Company adjusts the
pay-fixed interest rate swaps to current market values through other
comprehensive income (loss). The Company anticipates that these contracts will
continue to be effective. The gain/(loss) deferred in accumulated comprehensive
income (loss) will be recognized immediately in earnings if the contracts are no
longer effective or the forecasted transactions are not expected to occur.
In March 2003, the Company entered into two forward rate locking
pay-fixed interest rate swap agreements as a hedge against the interest rate
risk associated with borrowing at a variable rate, which are effective beginning
June 2003 and mature in June 2006. The objective of the hedge is to eliminate
the variability of cash flows related to interest rate payments on $20.0 million
of variable rate debt. The swap agreements have a notional amount of $10.0
million each and effectively lock in a portion of the Company's variable rate
revolving credit liability at fixed rates of 2.61% and 2.80%, respectively plus
the Company's applicable margin. These swap agreements are accounted for as cash
flow hedges, as defined under SFAS No. 133. The Company anticipates that these
contracts will continue to be effective. The gain/(loss) deferred in accumulated
comprehensive income (loss) will be recognized immediately in earnings if the
contracts are no longer effective or the forecasted transactions are not
expected to occur.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC issued Financial Reporting Release No. 60,
Cautionary Advice Regarding Disclosure About Critical Accounting Policies ("FR
60"), suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. FR 60 considers an accounting
policy to be critical if it is important to the Company's financial condition
and results, and requires significant judgment and estimates on the part of
management in its application. The Company's critical accounting policies are
described in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" within the Annual Report on Form 10-K for
the year ended June 30, 2002. In addition, a summary of all of the Company's
significant accounting policies, including critical accounting policies, is
included in Note 1 of the Notes to Consolidated Financial Statements in the
Annual Report on Form 10-K for the year ended
17
June 30, 2002. No changes were made to the Company's critical accounting
policies during the nine months ended March 31, 2003 except as indicated in the
following section.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 142, goodwill and other intangible
assets deemed to have indefinite lives are no longer amortized but are subject
to annual impairment tests. Other intangible assets with identifiable definite
lives continue to be amortized over their useful lives. SFAS No. 142 requires a
two-step process for impairment testing of goodwill. The first step identifies
indications of impairment, while the second step, if necessary, measures the
amount of the impairment, if any. The Company was required to perform a
transitional impairment test of goodwill within the first six months of fiscal
2003 and an annual impairment test thereafter or upon the occurrence of certain
triggering events as defined by SFAS No. 142. The Company will perform its
annual impairment test during the fourth quarter of each year.
The Company completed step one of the transitional impairment test
during the second quarter of fiscal 2003 for each of its reporting units. The
Company used discounted cash flow and market comparison methodologies to
determine the fair value of the Company's reporting units. As a result of step
one of the transitional impairment test, it was determined that the Industrial
Cleaning and Facility Maintenance reporting unit had no impairment in connection
with its reported goodwill; however, the fair values of the Industrial Container
Cleaning reporting unit and the medical and laboratory water purification
reporting unit of the Industrial Water Process Purification segment ("WTW") were
determined to be less than the book values of these reporting units.
Based on the results of step two of the transitional impairment test,
the Company recorded a $2.3 million, net of tax of $1.6 million, transitional
impairment loss in the Industrial Container Cleaning reporting unit and a $0.5
million, net of tax of $0.3 million, transitional impairment loss in the WTW
reporting unit. These changes were recorded as a cumulative effect of a change
in accounting principle as of July 1, 2002 and primarily reflect a decline in
operating results largely due to the economic downturn that has affected many of
the customers that these reporting units serve.
Effective January 1, 2003, the Company adopted the disclosure
requirements of SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure. This Statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition to SFAS
No. 123's fair value method of accounting for stock-based employee compensation
and amends the disclosure provisions of SFAS No. 123 and Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The Statement clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS No. 133. In addition, it
clarifies when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 also amends certain other
existing pronouncements. Those changes will result in more consistent reporting
of contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. This Statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Management does not expect
adoption of this Statement to have a material impact on the Company's
consolidated financial statements.
INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented in the Consolidated Financial
Statements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks from transactions that
are entered into during the normal course of business. The Company has not
entered into derivative financial instruments for trading purposes. The
Company's primary market risk exposure relates to interest rate risk. The
Company's revolving credit facility, which is subject to a variable rate of
interest based on the Eurodollar rate, had a balance of $24.5 million at March
31, 2003. The Company has hedged its exposure to changes in interest rates by
fixing its rate of interest on $20.0 million of its variable rate revolving
credit facility through an interest rate swap agreement. Assuming borrowings at
March 31, 2003, a one hundred basis point change in interest rates would impact
interest expense by approximately $45,000 per year.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's chief executive officer and chief financial officer,
after evaluating the effectiveness of the Company's "disclosure
controls and procedures" (as defined in the Securities Exchange
Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this
quarterly report, have concluded that as of the Evaluation Date,
the Company's disclosure controls and procedures were effective
and designed to ensure that material information relating to the
Company and the Company's consolidated subsidiaries would be made
known to them by others within those entities.
It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of
future events and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions, regardless how remote. In addition, a control system,
no matter how well conceived and operated, can provide only
reasonable, not absolute, assurances that the objectives of the
control system are met. Therefore, the Company does not expect
these disclosure controls to prevent all error and fraud.
(b) Changes in internal controls.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect those
controls subsequent to the Evaluation Date.
19
PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions arising in the ordinary course of business are
pending against the Company. None of the litigation pending against the
Company, individually or collectively, is expected to have a material
adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3(a) Amended and Restated Articles of Incorporation of the Company
effective November 4, 1999 (filed as Exhibit 3(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference).
3(b) Amended and Restated Code of Regulations of the Company
effective November 4, 1999 (filed as Exhibit 3(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference)
10(a) Aircraft Lease
99.1 Certification of Principal Executive Officer, Monte R. Black,
Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer, Richard R.
Kahle, Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the period.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
MPW INDUSTRIAL SERVICES GROUP, INC.,
an Ohio corporation
Dated: May 15, 2003 By: /s/ Richard R. Kahle
------------------------ ------------------------------------
Richard R. Kahle
Vice President, Chief Financial Officer,
Secretary and Treasurer
21
CERTIFICATIONS
I, Monte R. Black, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MPW Industrial
Services Group, Inc.;
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 audit
committee of the 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.
Dated: May 15, 2003
------------------------------
/s/ Monte R. Black
------------------------------------------------
Monte R. Black
Chairman of the Board of Directors and Chief
Executive Officer
22
I, Richard R. Kahle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MPW Industrial
Services Group, Inc.;
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 audit
committee of the 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.
Dated: May 15, 2003
------------------------------
/s/ Richard R. Kahle
--------------------------------------------
Richard R. Kahle
Vice President, Chief Financial Officer,
Secretary and Treasurer
23
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------- ----------------------
3(a) Amended and Restated Articles of Incorporation of the Company
effective November 4, 1999 (filed as Exhibit 3(a) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference).
3(b) Amended and Restated Code of Regulations of the Company
effective November 4, 1999 (filed as Exhibit 3(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, and incorporated herein by reference).
10(a) Aircraft Lease
99.1 Certification of Principal Executive Officer, Monte R.
Black, Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Financial Officer, Richard R.
Kahle, Pursuant to 18 U.S.C Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
24