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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended February 29, 2004

or

For the transition period from              to             

Commission File number 0-18716

MATRIX SERVICE COMPANY

(Exact name of registrant as specified in its charter)

10701 E. Ute St., Tulsa, Oklahoma 74116-1517

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (918) 838-8822

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

As of April 7, 2004, there were 19,285,276 shares of the Company’s common stock, $0.01 par value per share, issued and 17,139,126 shares outstanding.

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INDEX

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PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

Matrix Service Company

Consolidated Statements of Income

(in thousands, except share and per share data)

See Notes to Consolidated Financial Statements

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Matrix Service Company

Consolidated Balance Sheets

(in thousands)

See Notes to Consolidated Financial Statements

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Matrix Service Company

Consolidated Balance Sheets

(in thousands, except share data)

See Notes to Consolidated Financial Statements

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Matrix Service Company

Consolidated Cash Flow Statements

(in thousands)

See Notes to Consolidated Financial Statements

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Matrix Service Company

Consolidated Cash Flow Statements

(in thousands)

See Notes to Consolidated Financial Statements

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Matrix Service Company

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

(unaudited)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Matrix Service Company (“Matrix”) and its subsidiaries, all of which are wholly owned. All significant inter-company balances and transactions have been eliminated in consolidation. Effective July 28, 2003, a construction joint venture partnership obtained in the Hake acquisition was dissolved. From the effective date of the dissolution forward, the operations of the joint venture assumed by Matrix are included in Matrix’s results of operations.

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all adjustments, consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods.

Certain amounts in prior period financial statements have been reclassified to conform to the current financial statement presentation.

The accompanying financial statements should be read in conjunction with the audited financial statements for the year ended May 31, 2003, included in Matrix’s Annual Report on Form 10-K for the year then ended. Matrix’s business is seasonal. In addition, Matrix often generates a significant portion of its revenues under a comparatively few major contracts which often do not commence or terminate in the same period from one year to the next. Accordingly, results for any interim period may not necessarily be indicative of future operating results.

NOTE 2 – STOCK OPTION PLANS

Employee stock options are accounted for under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations. Under APB 25, if the exercise price of an employee stock option grant equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. As the exercise price of employee stock option grants equal the market price of Matrix stock on the grant date, Matrix does not recognize compensation expense for employee stock option grants.

Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, provides an alternative method to account for employee stock option grants called the “fair value” method of accounting. Under SFAS No. 123, as amended, the “fair value” of an employee stock option at the date of grant is recognized as a compensation expense in the Consolidated Statement of Income. If the “fair value” method is not elected, SFAS No. 123, as amended, requires pro forma information regarding interim net income and earnings per share to be determined as if the Company had accounted for its employee stock options under the fair value method of accounting. The fair value for employee stock options outstanding as of the end of the periods presented was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 4.09%; dividend yield of 0.0%; volatility factor of the expected market price of the Company’s stock of .564; and an expected life of the options of 4.8 years.

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The Black-Scholes option valuation model is one of several valuation models used in estimating the fair value of options that are traded in an open market, have no vesting restrictions and are fully transferable. In addition, Black-Scholes and other valuation models require the input of highly subjective assumptions, including an assumption as to the volatility in price of the shares of common stock underlying the option. The Company’s employee stock options have characteristics that are significantly different from those required by the Black-Scholes model, i.e., the Company’s employee options are not traded on any open market, do contain restrictions on vesting, and are not fully transferable. In addition, subjective input assumptions are inherently inaccurate, vary from company to company and can materially affect the fair value estimate. In management’s opinion, existing valuation models used to determine the “fair value” of employee options do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.

The following table illustrates the pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” using the Black-Scholes option valuation model:

On March 23, 2004, the Company’s stockholders’ approved the adoption of the Matrix Service Company 2004 Stock Option Plan (the “2004 Plan”). Under the 2004 Plan, 1.2 million shares of common stock are available for grants of both Incentive Stock Options and Non-Qualified Stock Options.

NOTE 3 – SEGMENT INFORMATION

Matrix operates primarily in the United States and has operations in Canada. Prior to the acquisition of The Hake Group of Companies (“Hake”) in the 4^th quarter of fiscal 2003, Matrix was organized into three reportable segments – Aboveground Storage Tank Services, Plant Services and Construction Services. As a result of the Hake acquisition, the structure of the Company’s internal organization changed in a manner that caused the Company’s reportable segments to change. Matrix now has two reportable segments – Construction Services and Repair & Maintenance Services. Accordingly, the corresponding items of segment information for earlier periods have been restated.

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NOTE 4 – ACQUISITION

On March 7, 2003, Matrix acquired all of the issued and outstanding capital stock of Hake Group, Inc. as well as all of the issued and outstanding minority interests in the majority-owned subsidiaries of Hake Group, Inc. As a result, Matrix acquired 100% ownership interests in Hake Group, Inc. and its subsidiaries (“Hake”). Also included in the acquisition was a 50% membership interest in Ragner Hake, LLC, a construction joint venture. Effective July 28, 2003, the construction joint venture was dissolved. From the effective date of the dissolution forward, the operations of the joint venture assumed by Matrix are included in Matrix’s results of operations. Hake’s operating results have been included in Matrix’s consolidated financial statements since the acquisition date.

The acquisition was accounted for by the purchase method, and the purchase price of $53.1 million has been allocated to the assets acquired and liabilities assumed, based upon the estimated fair values of these assets and liabilities at the date of acquisition. The original purchase price of $54.0 million was recently reduced to $53.1 million primarily as a result of working capital adjustments to the purchase price contained in the acquisition agreement that was agreed to on November 6, 2003 and March 5, 2004. The allocation of the purchase price to specific assets and liabilities was based, in part, upon outside appraisals of the fair value of Hake’s property, plant, equipment, and identifiable assets. The Company initially recorded an accrual for estimated restructuring charges primarily related to provisions for costs of redundant facilities and functions. The restructuring plan was completed without significant reduction of facilities resulting in a reduction of $1.3 million to the initial restructuring accrual of $1.5 million and a corresponding decrease to goodwill.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition after giving effect to the working capital adjustments to the purchase price and the reduction to the initial restructuring accrual:

The goodwill of $38.5 million was recorded based on purchase price allocation, which represents the excess of the purchase price paid over the estimated fair value of the net assets at the date of acquisition. Management allocated $27.0 million of goodwill to the Construction Services segment and $11.5 million to the Repair & Maintenance segment.

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NOTE 5 – INCOME TAXES

Deferred income taxes are computed using the liability method whereby deferred tax assets and liabilities are recognized based on temporary differences between financial statement and tax basis of assets and liabilities using presently enacted tax rates.

NOTE 6 – DEBT

At February 29, 2004, $11.8 million was outstanding under the Company’s revolving bank credit agreement at LIBOR interest rates of 3.35% and 3.59%, and a Prime interest rate of 4.00%. In addition, $9.5 million was utilized by outstanding letters of credit maturing in 2004 and 2005, leaving $18.9 million of borrowing availability under the revolver. Availability on the revolver is limited to the Borrowing Base, which is based on the level of the Company’s eligible receivables but cannot exceed $55 million. On December 19, 2003, the Company’s credit agreement was amended to increase the availability on the revolver to the sum of the Borrowing Base plus $15 million, but not to exceed $55 million. The amendment is effective until December 31, 2004, at which time availability will be limited to the Borrowing Base.

At February 29, 2004, the balance on the term loan portion of the credit agreement was $28.4 million, bearing interest at LIBOR rates of 3.59% and 3.67%.

NOTE 7 – REPORTING ACCUMULATED OTHER COMPREHENSIVE INCOME/LOSS

Other comprehensive income (loss) and accumulated other comprehensive income (loss) consisted of foreign currency translation adjustments and fair value adjustments of derivative instruments.