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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2012
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 No. 1-15461
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE | 73-1352174 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
5100 East Skelly Drive, Suite 700, Tulsa, Oklahoma 74135
(Address of principal executive offices and zip code)
Registrants telephone number, including area code: (918) 838-8822
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 has submitted electronically and posted on its corporate Web site, if any, every Inter Active Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 1, 2012 there were 27,888,217 shares of the Companys common stock, $0.01 par value per share, issued and 25,910,013 shares outstanding.
Table of Contents
Table of Contents
Matrix Service Company
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
Three Months Ended | ||||||||
September 30, | September 30, | |||||||
2012 | 2011 | |||||||
Revenues |
$ | 209,608 | $ | 169,321 | ||||
Cost of revenues |
187,364 | 151,228 | ||||||
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Gross profit |
22,244 | 18,093 | ||||||
Selling, general and administrative expenses |
14,320 | 11,483 | ||||||
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Operating income |
7,924 | 6,610 | ||||||
Other income (expense): |
||||||||
Interest expense |
(183 | ) | (277 | ) | ||||
Interest income |
8 | 3 | ||||||
Other |
57 | (676 | ) | |||||
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Income before income tax expense |
7,806 | 5,660 | ||||||
Provision for federal, state and foreign income taxes |
3,122 | 2,151 | ||||||
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Net income |
$ | 4,684 | $ | 3,509 | ||||
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Basic earnings per common share |
$ | 0.18 | $ | 0.13 | ||||
Diluted earnings per common share |
$ | 0.18 | $ | 0.13 | ||||
Weighted average common shares outstanding: |
||||||||
Basic |
25,788 | 26,400 | ||||||
Diluted |
26,148 | 26,722 |
See accompanying notes.
-1-
Table of Contents
Matrix Service Company
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
Three Months Ended | ||||||||
September 30, 2012 |
September 30, 2011 |
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Net income |
$ | 4,684 | $ | 3,509 | ||||
Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
467 | (959 | ) | |||||
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Comprehensive income |
$ | 5,151 | $ | 2,550 | ||||
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See accompanying notes.
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Table of Contents
Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands)
(unaudited)
September 30, | June 30, | |||||||
2012 | 2012 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 17,170 | $ | 39,726 | ||||
Accounts receivable, less allowances (September 30, 2012$1,906 and June 30, 2012$1,201) |
156,844 | 108,034 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
77,598 | 68,562 | ||||||
Inventories |
3,267 | 2,482 | ||||||
Deferred income taxes |
5,760 | 6,024 | ||||||
Other current assets |
5,560 | 5,688 | ||||||
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Total current assets |
266,199 | 230,516 | ||||||
Property, plant and equipment at cost: |
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Land and buildings |
29,357 | 28,846 | ||||||
Construction equipment |
60,207 | 59,176 | ||||||
Transportation equipment |
26,027 | 25,865 | ||||||
Office equipment and software |
17,391 | 16,892 | ||||||
Construction in progress |
5,984 | 2,910 | ||||||
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138,966 | 133,689 | |||||||
Accumulated depreciation |
(81,407 | ) | (78,814 | ) | ||||
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57,559 | 54,875 | |||||||
Goodwill |
28,763 | 28,675 | ||||||
Other intangible assets |
6,392 | 6,504 | ||||||
Other assets |
3,937 | 2,565 | ||||||
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Total assets |
$ | 362,850 | $ | 323,135 | ||||
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See accompanying notes.
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Table of Contents
Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
September 30, | June 30, | |||||||
2012 | 2012 | |||||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
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Accounts payable |
$ | 61,664 | $ | 48,931 | ||||
Billings on uncompleted contracts in excess of costs and estimated earnings |
45,637 | 30,293 | ||||||
Accrued wages and benefits |
15,281 | 15,298 | ||||||
Accrued insurance |
7,055 | 6,912 | ||||||
Income taxes payable |
3,238 | 1,115 | ||||||
Acquisition payable |
400 | 400 | ||||||
Other accrued expenses |
3,334 | 3,014 | ||||||
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Total current liabilities |
136,609 | 105,963 | ||||||
Deferred income taxes |
6,063 | 6,075 | ||||||
Long term debt |
3,355 | | ||||||
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Total liabilities |
146,027 | 112,038 | ||||||
Commitments and contingencies |
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Stockholders equity: |
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Common stock$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of September 30, 2012, and June 30, 2012 |
279 | 279 | ||||||
Additional paid-in capital |
117,297 | 116,693 | ||||||
Retained earnings |
122,103 | 117,419 | ||||||
Accumulated other comprehensive income |
1,238 | 771 | ||||||
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240,917 | 235,162 | |||||||
Less: Treasury stock, at cost2,051,764 shares as of September 30, 2012, and 2,141,990 shares as of June 30, 2012 |
(24,094 | ) | (24,065 | ) | ||||
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Total stockholders equity |
216,823 | 211,097 | ||||||
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Total liabilities and stockholders equity |
$ | 362,850 | $ | 323,135 | ||||
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See accompanying notes.
-4-
Table of Contents
Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Three Months Ended | ||||||||
September 30, | September 30, | |||||||
2012 | 2011 | |||||||
Operating activities: |
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Net income |
$ | 4,684 | $ | 3,509 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
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Depreciation and amortization |
2,826 | 2,826 | ||||||
Deferred income tax |
98 | (977 | ) | |||||
Gain on sale of property, plant and equipment |
(33 | ) | (42 | ) | ||||
Allowance for uncollectible accounts |
705 | (33 | ) | |||||
Stock-based compensation expense |
866 | 969 | ||||||
Other |
8 | 34 | ||||||
Changes in operating assets and liabilities increasing (decreasing) cash: |
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Accounts receivable |
(49,515 | ) | (965 | ) | ||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
(9,036 | ) | (10,445 | ) | ||||
Inventories |
(785 | ) | (79 | ) | ||||
Other assets |
(1,292 | ) | (1,591 | ) | ||||
Accounts payable |
12,541 | 7,474 | ||||||
Billings on uncompleted contracts in excess of costs and estimated earnings |
15,344 | (9,943 | ) | |||||
Accrued expenses |
2,591 | (2,858 | ) | |||||
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Net cash used by operating activities |
(20,998 | ) | (12,121 | ) | ||||
Investing activities: |
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Acquisition of property, plant and equipment |
(5,092 | ) | (2,988 | ) | ||||
Proceeds from asset sales |
37 | 166 | ||||||
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Net cash used by investing activities |
$ | (5,055 | ) | $ | (2,822 | ) |
See accompanying notes.
-5-
Table of Contents
Matrix Service Company
Condensed Consolidated Statements of Cash Flows (continued)
(In thousands)
(unaudited)
Three Months Ended | ||||||||
September 30, | September 30, | |||||||
2012 | 2011 | |||||||
Financing activities: |
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Issuances of common stock |
$ | 61 | $ | 49 | ||||
Capital lease payments |
(22 | ) | (108 | ) | ||||
Excess tax benefit of exercised stock options and vesting of deferred shares |
30 | | ||||||
Advances under credit agreement |
7,828 | | ||||||
Repayments of advances under credit agreement |
(4,473 | ) | | |||||
Treasury shares purchased by Employee Stock Purchase Plan |
8 | 14 | ||||||
Open market purchase of treasury shares |
| (4,872 | ) | |||||
Other treasury share purchases |
(350 | ) | (108 | ) | ||||
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Net cash provided (used) by financing activities |
3,082 | (5,025 | ) | |||||
Effect of exchange rate changes on cash |
415 | (704 | ) | |||||
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Net decrease in cash and cash equivalents |
(22,556 | ) | (20,672 | ) | ||||
Cash and cash equivalents, beginning of period |
39,726 | 59,357 | ||||||
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Cash and cash equivalents, end of period |
$ | 17,170 | $ | 38,685 | ||||
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for: |
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Income taxes |
$ | 776 | $ | 169 | ||||
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Interest |
$ | 126 | $ | 207 | ||||
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Non-cash investing and financing activities: |
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Purchases of property, plant and equipment on account |
$ | 649 | $ | 683 | ||||
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See accompanying notes.
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Table of Contents
Matrix Service Company
Condensed Consolidated Statements of Changes in Stockholders Equity
(In thousands, except share data)
(unaudited)
Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income(Loss) |
Total | |||||||||||||||||||
Balances, June 30, 2012 |
$ | 279 | $ | 116,693 | $ | 117,419 | $ | (24,065 | ) | $ | 771 | $ | 211,097 | |||||||||||
Net income |
| | 4,684 | | | 4,684 | ||||||||||||||||||
Other comprehensive income |
| | | | 467 | 467 | ||||||||||||||||||
Exercise of stock options (16,600 shares) |
| 18 | | 43 | | 61 | ||||||||||||||||||
Tax effect of exercised stock options and vesting of deferred shares |
| (10 | ) | | | | (10 | ) | ||||||||||||||||
Issuance of deferred shares (106,394 shares) |
| (276 | ) | | 276 | | | |||||||||||||||||
Employee Stock Purchase Plan (686 shares) |
| 6 | | 2 | | 8 | ||||||||||||||||||
Other treasury share purchases (33,454 shares) |
| | | (350 | ) | | (350 | ) | ||||||||||||||||
Stock-based compensation expense |
| 866 | | | | 866 | ||||||||||||||||||
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Balances, September 30, 2012 |
$ | 279 | $ | 117,297 | $ | 122,103 | $ | (24,094 | ) | $ | 1,238 | $ | 216,823 | |||||||||||
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Balances, June,30 2011 |
$ | 279 | $ | 113,686 | $ | 100,231 | $ | (15,961 | ) | $ | 1,436 | $ | 199,671 | |||||||||||
Net income |
| | 3,509 | | | 3,509 | ||||||||||||||||||
Other comprehensive loss |
| | | | (959 | ) | (959 | ) | ||||||||||||||||
Exercise of stock options (5,400 shares) |
| 35 | | 14 | | 49 | ||||||||||||||||||
Tax effect of exercised stock options and vesting of deferred shares |
| (34 | ) | | | | (34 | ) | ||||||||||||||||
Issuance of deferred shares (40,787 shares) |
| (106 | ) | | 106 | | | |||||||||||||||||
Employee Stock Purchase Plan (1,012 shares) |
| 11 | | 3 | | 14 | ||||||||||||||||||
Open market purchase of treasury shares (517,088 shares) |
| | | (4,872 | ) | | (4,872 | ) | ||||||||||||||||
Other treasury share purchases (10,835 shares) |
| | | (108 | ) | | (108 | ) | ||||||||||||||||
Stock-based compensation expense |
| 969 | | | | 969 | ||||||||||||||||||
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Balances, September 30, 2011 |
$ | 279 | $ | 114,561 | $ | 103,740 | $ | (20,818 | ) | $ | 477 | $ | 198,239 | |||||||||||
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See accompanying notes.
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Table of Contents
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 Basis of Presentation
The condensed consolidated financial statements include the accounts of Matrix Service Company (Matrix, we, our, us, its or the Company) and its subsidiaries, all of which are wholly owned. Intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed 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 of normal recurring adjustments and other adjustments described herein, that are, in the opinion of management, necessary for a fair statement of the results of operations and financial position for the interim periods presented. The accompanying condensed financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2012, included in the Companys Annual Report on Form 10-K for the year then ended.
The Companys business is cyclical due to the scope and timing of projects released by our customers. Therefore, results from year to year can vary. Turnarounds and planned outages at customer facilities are typically scheduled in the spring and the fall when the demand for energy is lower. As a result, quarterly operating results can exhibit seasonal fluctuations, especially in our Oil Gas & Chemical segment. We typically see a lower level of operating activity relating to construction projects during the winter months and early in the calendar year because many of our customers capital budgets have not been finalized. Our business can also be affected both positively and negatively by seasonal factors such as energy demand or weather conditions, including hurricanes, snowstorms, and abnormally low or high temperatures. Accordingly, results for any interim period may not necessarily be indicative of future operating results.
Note 2 Customer Contracts
Contract terms of the Companys construction contracts generally provide for progress billings based on project milestones. The excess of costs incurred and estimated earnings over amounts billed on uncompleted contracts is reported as a current asset. The excess of amounts billed over costs incurred and estimated earnings recognized on uncompleted contracts is reported as a current liability. Gross and net amounts on uncompleted contracts are as follows:
September 30, | June 30, | |||||||
2012 | 2012 | |||||||
(in thousands) | ||||||||
Costs incurred and estimated earnings recognized on uncompleted contracts |
$ | 823,597 | $ | 774,749 | ||||
Billings on uncompleted contracts |
791,636 | 736,480 | ||||||
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$ | 31,961 | $ | 38,269 | |||||
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Shown on balance sheet as: |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
$ | 77,598 | $ | 68,562 | ||||
Billings on uncompleted contracts in excess of costs and estimated earnings |
45,637 | 30,293 | ||||||
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$ | 31,961 | $ | 38,269 | |||||
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Progress billings in accounts receivable at September 30, 2012 and June 30, 2012 included retentions to be collected within one year of $21.3 million and $22.3 million, respectively. Contract retentions collectible beyond one year totaled $2.6 million at September 30, 2012 and $1.2 million at June 30, 2012.
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Table of Contents
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
SME Receivables
The Company continues to pursue collection of certain receivables acquired in connection with the purchase of S.M. Electric Company, Inc. in February 2009. The recorded values at September 30, 2012 include $0.7 million in claim receivables, which represents the Companys best estimate of the amount to be collected under a claim, and an additional $2.9 million for amounts due under the related contract. Recovering the remaining receivables will require mediation or litigation and the ultimate amount realized may be significantly different than the recorded amounts, which could result in a material adjustment to future earnings.
Note 3 Intangible Assets Including Goodwill
Goodwill
The changes in the carrying value of goodwill by segment are as follows:
Electrical Infrastucture |
Oil Gas & Chemical |
Storage Solutions |
Industrial | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Goodwill |
$ | 29,666 | $ | 5,841 | $ | 11,071 | $ | 7,097 | $ | 53,675 | ||||||||||
Cumulative impairment loss (A) |
(17,653 | ) | (3,000 | ) | (922 | ) | (3,425 | ) | (25,000 | ) | ||||||||||
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Balance at June 30, 2012 |
12,013 | 2,841 | 10,149 | 3,672 | 28,675 | |||||||||||||||
Translation adjustment |
| | 88 | | 88 | |||||||||||||||
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Net balance at September 30, 2012 |
$ | 12,013 | $ | 2,841 | $ | 10,237 | $ | 3,672 | $ | 28,763 | ||||||||||
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(A) | A $25.0 million impairment charge was recorded in February 2005 as a result of the Companys operating performance in fiscal 2005. |
Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
At September 30, 2012 | ||||||||||||||
Useful Life | Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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(Years) | (In thousands) | |||||||||||||
Intellectual property |
6 to 15 | $ | 2,460 | $ | (627 | ) | $ | 1,833 | ||||||
Customer based |
1 to 15 | 2,657 | (330 | ) | 2,327 | |||||||||
Other |
3 to 5 | 547 | (185 | ) | 362 | |||||||||
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Total amortizing intangibles |
5,664 | (1,142 | ) | 4,522 | ||||||||||
Trade name |
Indefinite | 1,870 | | 1,870 | ||||||||||
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Total intangible assets |
$ | 7,534 | $ | (1,142 | ) | $ | 6,392 | |||||||
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Table of Contents
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
At June 30, 2012 | ||||||||||||||
Useful Life | Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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(Years) | (In thousands) | |||||||||||||
Intellectual property |
6 to 15 | $ | 2,460 | $ | (586 | ) | $ | 1,874 | ||||||
Customer based |
1 to 15 | 2,657 | (285 | ) | 2,372 | |||||||||
Other |
3 to 5 | 547 | (159 | ) | 388 | |||||||||
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Total amortizing intangibles |
5,664 | (1,030 | ) | 4,634 | ||||||||||
Trade name |
Indefinite | 1,870 | | 1,870 | ||||||||||
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Total intangible assets |
$ | 7,534 | $ | (1,030 | ) | $ | 6,504 | |||||||
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Amortization expense totaled approximately $0.1 million in the first quarter of fiscal 2013 and the first quarter of fiscal 2012. Amortization expense is expected to be $0.4 million annually in fiscal years 2013 to 2016 and $0.3 million in fiscal 2017.
Note 4 Debt
The Company has a five-year senior secured revolving credit facility (the Credit Agreement) of $125.0 million that expires November 7, 2016. Advances under the Credit Agreement may be used for working capital, issuance of letters of credit and other lawful corporate purposes.
The Credit Agreement includes the following covenants and borrowing limitations:
| Our Senior Leverage Ratio, as defined in the agreement, may not exceed 2.50 to 1.00 as of the end of each fiscal quarter. |
| We are required to maintain a Fixed Charge Coverage Ratio, as defined in the agreement, greater than or equal to 1.25 to 1.00 as of the end of each fiscal quarter. |
| Asset dispositions (other than inventory and obsolete or unneeded equipment disposed of in the ordinary course of business) are limited to $15.0 million per 12-month period. |
Amounts borrowed under the Credit Agreement bear interest at LIBOR or an Alternate Base Rate, plus in each case, an additional margin based on the Senior Leverage Ratio. The Credit Agreement includes additional margin ranges on Alternate Base Rate loans between 0.75% and 1.5% and between 1.75% and 2.5% on LIBOR-based loans.
The Credit Agreement also permits us to borrow in Canadian dollars with a sublimit of U.S. $15.0 million. Amounts borrowed in Canadian dollars will bear interest either at the CDOR Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 1.75% to 2.5%, or at the Canadian Prime Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 2.25% to 3.0%. The CDOR Rate is equal to the sum of the annual rate of interest, which is the rate determined as being the arithmetic average of the quotations of all institutions listed in respect of the relevant CDOR interest period for Canadian Dollar denominated bankers acceptances, plus 0.1%. The Canadian Prime Rate is equal to the greater of (i) the rate of interest per annum most recently announced or established by JPMorgan Chase Bank, N.A., Toronto Branch as its reference rate in effect on such day for determining interest rates for Canadian Dollar denominated commercial loans in Canada and (ii) the CDOR Rate plus 1.0%.
The Unused Credit Facility Fee is between 0.30% and 0.45% based on the Senior Leverage Ratio.
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Table of Contents
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Credit Agreement includes a Senior Leverage Ratio covenant which provides that Consolidated Funded Indebtedness, as of the end of any fiscal quarter, may not exceed 2.5 times Consolidated EBITDA, as defined in the Credit Agreement, over the previous four quarters. For the four quarters ended September 30, 2012, Consolidated EBITDA, as defined in the Credit Agreement, was $48.1 million. Accordingly, at September 30, 2012, Consolidated Funded Indebtedness in excess of $120.2 million would have violated the Senior Leverage Ratio covenant. The Consolidated Funded Indebtedness at September 30, 2012 was $4.5 million.
Availability under the senior credit facility was as follows:
September 30, 2012 |
June 30, 2012 |
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(In thousands) | ||||||||
Senior credit facility |
$ | 125,000 | $ | 125,000 | ||||
Capacity constraint due to the Senior Leverage Ratio |
4,767 | 9,662 | ||||||
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Capacity under the credit facility |
120,233 | 115,338 | ||||||
Borrowings outstanding |
3,355 | | ||||||
Letters of credit subject to the credit facility |
8,446 | 8,499 | ||||||
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Availability under the senior credit facility |
$ | 108,432 | $ | 106,839 | ||||
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The Company is in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.
Note 5 Income Taxes
The Company complies with ASC 740, Income Taxes. Deferred income taxes are computed using the liability method whereby deferred tax assets and liabilities are recognized based on temporary differences between the financial and tax basis of assets and liabilities using presently enacted tax rates. Valuation allowances are established against deferred tax assets to the extent management believes that it is not probable the assets will be recovered.
The Company provides for income taxes regardless of whether it has received a tax assessment. Taxes are provided when it is considered probable that additional taxes will be due in excess of amounts included in the tax return. The Company regularly reviews exposure to additional income taxes due, and as further information is known or events occur, adjustments may be recorded.
Note 6 Commitments and Contingencies
Insurance Reserves
The Company maintains insurance coverage for various aspects of its operations. However, exposure to potential losses is retained through the use of deductibles, coverage limits and self-insured retentions.
Typically our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. The Company may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. Matrix maintains a performance and payment bonding line sufficient to support the business. The Company generally requires its subcontractors to indemnify the Company and the Companys customer and name the Company as an additional insured for activities arising out of the subcontractors work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of the Company, to secure the subcontractors work or as required by the subcontract.
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Table of Contents
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers.
Unapproved Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unapproved change orders of $9.4 million at September 30, 2012 and $8.5 million at June 30, 2012. There were no revenues related to claims included in costs and estimated earnings in excess of billings on uncompleted contracts at September 30, 2012 or June 30, 2012. Generally, collection of amounts related to unapproved change orders and claims is expected within twelve months. However, customers may not pay these amounts until final resolution of related claims, and accordingly, collection of these amounts may extend beyond one year.
Other
The Company and its subsidiaries are participants in various legal actions. It is the opinion of management that none of the known legal actions will have a material adverse impact on the Companys financial position, results of operations or liquidity.
Note 7 Earnings per Common Share
Basic earnings per share (Basic EPS) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (Diluted EPS) includes the dilutive effect of stock options and nonvested deferred shares.
The computation of basic and diluted earnings per share is as follows:
Three Months Ended | ||||||||
September 30, | September 30, | |||||||
2012 | 2011 | |||||||
(In thousands, except per share data) | ||||||||
Basic EPS: |
||||||||
Net income |
$ | 4,684 | $ | 3,509 | ||||
|
|
|
|
|||||
Weighted average shares outstanding |
25,788 | 26,400 | ||||||
|
|
|
|
|||||
Basic EPS |
$ | 0.18 | $ | 0.13 | ||||
|
|
|
|
|||||
Diluted EPS: |
||||||||
Weighted average shares outstanding basic |
25,788 | 26,400 | ||||||
Dilutive stock options |
70 | 87 | ||||||
Dilutive nonvested deferred shares |
290 | 235 | ||||||
|
|
|
|
|||||
Diluted weighted average shares |
26,148 | 26,722 | ||||||
|
|
|
|
|||||
Diluted EPS |
$ | 0.18 | $ | 0.13 | ||||
|
|
|
|
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Table of Contents
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS:
Three Months Ended | ||||||||
September 30, | September 30, | |||||||
2012 | 2011 | |||||||
(In thousands) | ||||||||
Stock options |
327 | 105 | ||||||
Nonvested deferred shares |
32 | 48 | ||||||
|
|
|
|
|||||
Total antidilutive securities |
359 | 153 | ||||||
|
|
|
|
Note 8 Segment Information
The Company completed an update of its long-term business strategy in fiscal 2012. This strategic update along with certain changes in our organizational structure led to a reassessment of our operating segments. As a result of these events, we have revised our reportable segments to better align with the current management of the business. Accordingly, our segments are: Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial.
The Electrical Infrastructure segment primarily encompasses high voltage services to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants, nuclear facilities, coal fired power stations, and renewable energy installations.
The Oil Gas & Chemical segment includes our traditional turnaround activities, plant maintenance services and construction in the downstream petroleum industry. Another key offering is industrial cleaning services, which include hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the renewable energy, industrial and natural gas, gas processing and compression, and upstream petroleum markets.
The Storage Solutions segment includes new construction of, as well as planned and emergency maintenance services for, crude and refined products aboveground storage tanks. Also included in the Storage Solutions segment is work related to specialty storage tanks including liquefied natural gas (LNG), liquid nitrogen/liquid oxygen (LIN/LOX), liquid petroleum (LPG) tanks and other specialty vessels including spheres. Finally, the Storage Solutions segment includes balance of plant work in storage terminals and tank farms.
The Industrial segment includes work in the mining and minerals industry, bulk material handling, thermal vacuum chambers, as well as work for clients in other industrial and manufacturing markets.
Other consists of corporate asset balances.
The chief operating decision maker evaluates performance and allocates resources based primarily on operating income. The results of each operating segment include an allocation of corporate costs. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at cost and eliminated in consolidation; therefore, no intercompany profit or loss is recognized.
Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, goodwill and other intangible assets.
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Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Results of Operations
(In thousands)
Three Months Ended | ||||||||
September 30, 2012 |
September 30, 2011 |
|||||||
Gross revenues |
||||||||
Electrical Infrastructure |
$ | 33,270 | $ | 22,012 | ||||
Oil Gas & Chemical |
67,097 | 45,999 | ||||||
Storage Solutions |
105,418 | 95,922 | ||||||
Industrial |
4,975 | 6,575 | ||||||
|
|
|
|
|||||
Total gross revenues |
$ | 210,760 | $ | 170,508 | ||||
|
|
|
|
|||||
Less: Inter-segment revenues |
||||||||
Electrical Infrastructure |
$ | | $ | | ||||
Oil Gas & Chemical |
| 175 | ||||||
Storage Solutions |
1,152 | 1,012 | ||||||
Industrial |
| | ||||||
|
|
|
|
|||||
Total inter-segment revenues |
$ | 1,152 | $ | 1,187 | ||||
|
|
|
|
|||||
Consolidated revenues |
||||||||
Electrical Infrastructure |
$ | 33,270 | $ | 22,012 | ||||
Oil Gas & Chemical |
67,097 | 45,824 | ||||||
Storage Solutions |
104,266 | 94,910 | ||||||
Industrial |
4,975 | 6,575 | ||||||
|
|
|
|
|||||
Total consolidated revenues |
$ | 209,608 | $ | 169,321 | ||||
|
|
|
|
|||||
Gross profit (loss) |
||||||||
Electrical Infrastructure |
$ | 4,706 | $ | 2,785 | ||||
Oil Gas & Chemical |
7,867 | 4,347 | ||||||
Storage Solutions |
9,969 | 10,387 | ||||||
Industrial |
(298 | ) | 574 | |||||
|
|
|
|
|||||
Total gross profit |
$ | 22,244 | $ | 18,093 | ||||
|
|
|
|
|||||
Operating income (loss) |
||||||||
Electrical Infrastructure |
$ | 2,319 | $ | 729 | ||||
Oil Gas & Chemical |
3,775 | 1,412 | ||||||
Storage Solutions |
3,449 | 4,226 | ||||||
Industrial |
(1,619 | ) | 243 | |||||
|
|
|
|
|||||
Total operating income |
$ | 7,924 | $ | 6,610 | ||||
|
|
|
|
|||||
Segment assets |
||||||||
Electrical Infrastructure |
$ | 56,826 | $ | 40,550 | ||||
Oil Gas & Chemical |
71,848 | 54,036 | ||||||
Storage Solutions |
186,600 | 139,820 | ||||||
Industrial |
14,179 | 17,949 | ||||||
Other |
33,397 | 46,918 | ||||||
|
|
|
|
|||||
Total segment assets |
$ | 362,850 | $ | 299,273 | ||||
|
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|
|
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Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes in our critical accounting policies from those reported in our fiscal 2012 Annual Report on Form 10-K filed with the SEC. For more information on our critical accounting policies, see Part II, Item 7 of our fiscal 2012 Annual Report on Form 10-K. The following section provides certain information with respect to our critical accounting estimates as of the close of our most recent quarterly period.
Unapproved Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unapproved change orders of $9.4 million at September 30, 2012 and $8.5 million at June 30, 2012. There were no revenues related to claims included in costs and estimated earnings in excess of billings on uncompleted contracts at September 30, 2012 or June 30, 2012. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.
SME Receivables
The Company continues to pursue collection of certain receivables acquired in connection with the purchase of S.M. Electric Company, Inc. in February 2009. The recorded values at September 30, 2012 include $0.7 million in claim receivables, which represents the Companys best estimate of the amount to be collected under a claim, and an additional $2.9 million for amounts due under the related contract. Recovering the remaining receivables will require mediation or litigation and the ultimate amount realized may be significantly different than the recorded amounts, which could result in an adjustment to future earnings.
Insurance Reserves
We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, coverage limits and self-insured retentions. We establish reserves for claims using a combination of actuarially determined estimates and management judgment on a case-by-case basis and update our evaluations as further information becomes known. Judgments and assumptions, including the assumed losses for claims incurred but not reported, are inherent in our reserve accruals; as a result, changes in assumptions or claims experience could result in changes to these estimates in the future. If actual results of claim settlements are different than the amounts estimated, we may be exposed to gains and losses that could be significant.
Goodwill
The Company has four significant reporting units with goodwill representing 42%, 21%, 14% and 11% of the total goodwill balance. Our most recent annual goodwill impairment test, performed in the fourth quarter of fiscal 2012, indicated that the fair value of these reporting units exceeded their respective carrying values by 46%, 84%, 106% and 40%, respectively. Based on the excess of estimated fair value over carrying value and the absence of any indicators of impairment at September 30, 2012, the Company does not currently anticipate recording a goodwill impairment charge for any of its operating units.
Recently Issued Accounting Standards
There are no recently issued accounting standards that we believe will have a material affect on our financial statements.
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Table of Contents
RESULTS OF OPERATIONS
Overview
During fiscal 2012, the Company completed an update of its long-term business strategy. This strategic update along with certain changes in our organizational structure led to a reassessment of our operating segments. As a result of these events, we have revised our reportable segments to better align with the current management of the business. Our segments are as follows:
| The Electrical Infrastructure segment primarily encompasses high voltage services to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants, nuclear facilities, coal fired power stations, and renewable energy installations. |
| The Oil Gas & Chemical segment includes our traditional turnaround activities, plant maintenance services and construction in the downstream petroleum industry. Another key offering is industrial cleaning services, which include hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the renewable energy, industrial and natural gas, gas processing and compression, and upstream petroleum markets. |
| The Storage Solutions segment includes new construction of, as well as planned and emergency maintenance services for, crude and refined products aboveground storage tanks. Also included in the Storage Solutions segment is work related to specialty storage tanks including liquefied natural gas (LNG), liquid nitrogen/liquid oxygen (LIN/LOX), liquid petroleum (LPG) tanks and other specialty vessels including spheres. Finally, the Storage Solutions segment includes balance of plant work in storage terminals and tank farms. |
| The Industrial segment includes work in the mining and minerals industry, bulk material handling, thermal vacuum chambers, as well as work for clients in other industrial and manufacturing markets. |
Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011
Consolidated
Consolidated revenues were $209.6 million for the three months ended September 30, 2012, an increase of $40.3 million, or 23.8%, from consolidated revenues of $169.3 million in the same period in the prior fiscal year. The increase in consolidated revenues was a result of increases in Oil Gas & Chemical, Electrical Infrastructure and Storage Solutions revenues, which increased $21.3 million, $11.3 million and $9.3 million, respectively, partially offset by a decrease of $1.6 million in Industrial revenues.
Consolidated gross profit increased from $18.1 million in the three months ended September 30, 2011 to $22.2 million in the three months ended September 30, 2012. The increase of $4.1 million, or 22.7%, was primarily due to higher revenues in the first quarter of the current fiscal year. Gross margins were 10.6% in the three months ended September 30, 2012 compared to 10.7% in the same period a year earlier.
Consolidated SG&A expenses were $14.3 million in the three months ended September 30, 2012 compared to $11.5 million in the same period a year earlier. The increase of $2.8 million, or 24.3%, was primarily related to our planned investments in the branding initiative and strategic growth areas. In addition, the first quarter results include a bad debt charge of $0.7 million. SG&A expense as a percentage of revenue remained unchanged at 6.8%.
Net interest expense was $0.2 million in the three months ended September 30, 2012 and $0.3 million in the three months ended September 30, 2011.
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Table of Contents
Other income in the three months ended September 30, 2012 was $0.1 million compared to a loss of $0.7 million in the three months ended September 30, 2011. The prior period loss was related primarily to foreign currency transaction losses.
The effective tax rate was 40.0% for the three months ended September 30, 2012 and 38.0% for the three months ended September 30, 2011. The increase in the effective tax rate in the first quarter of fiscal 2013 was due to a change in the deductibility limitations applying to certain items that had previously been fully deducted.
Electrical Infrastructure
Revenues for the Electrical Infrastructure segment increased $11.3 million, or 51.4%, to $33.3 million in the three months ended September 30, 2012 compared to $22.0 million in the same period a year earlier. The higher revenue was primarily due to an increase in high voltage work in the Northeastern United States. Gross margins were 14.1% in the three months ended September 30, 2012 compared to 12.7% in the same period a year earlier. The improvement in gross margins in the first quarter of fiscal 2013 is due to the favorable effect of the improved recovery of overhead costs caused by a higher business volume.
Oil Gas & Chemical
Revenues for the Oil Gas & Chemical segment increased to $67.1 million in the three months ended September 30, 2012 compared to $45.8 million in the same period a year earlier. The increase of $21.3 million, or 46.5%, was primarily due to a higher level of turnaround and capital construction projects. Gross margins were 11.7% in the three months ended September 30, 2012 compared to 9.5% in the same period a year earlier. The improvement in gross margins in the first quarter of fiscal 2013 is primarily due to improved project execution and the favorable effect of the improved recovery of overhead costs caused by a higher business volume.
Storage Solutions
Revenues for the Storage Solutions segment increased to $104.2 million in the three months ended September 30, 2012 compared to $94.9 million in the same period a year earlier. The increase of $9.3 million, or 9.8%, was due to higher levels of work both domestically and in Canada in our aboveground storage tank business. Gross margins decreased from 10.9% in the three months ended September 30, 2011 to 9.6% in the same period in the current year. The lower margins in the current quarter were due to geographic expansion and short-term softening of the market as expected.
Industrial
Revenues for the Industrial segment totaled $5.0 million in the three months ended September 30, 2012 compared to $6.6 million in the same period a year earlier. The decrease of $1.6 million, or 24.2%, was largely due to the timing of projects related to legacy industrial work, offset in part by higher revenues in our mining and minerals and bulk material handling businesses. Gross margins decreased from 8.7% in the three months ended September 30, 2011 to (6.0%) in the same period in the current year. Gross margins in the current quarter were negatively impacted by startup costs related to our entry into the bulk material handling and mining and minerals markets.
Backlog
We define backlog as the total dollar amount of revenues that we expect to recognize as a result of performing work that has been awarded to us through a signed contract, notice to proceed or other type of assurance that we consider firm. The following arrangements are considered firm:
| fixed-price awards; |
| minimum customer commitments on cost plus arrangements; and |
| certain time and material arrangements in which the estimated value is firm or can be estimated with a reasonable amount of certainty in both timing and amounts. |
For long-term maintenance contracts we include only the amounts that we expect to recognize into revenue over the next 12 months. For all other arrangements, we calculate backlog as the estimated contract amount less revenues recognized as of the reporting date.
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Table of Contents
The following table provides a summary of changes in our backlog for the three months ended September 30, 2012:
Electrical Infrastructure |
Oil Gas & Chemical |
Storage Solutions |
Industrial | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Backlog as of June 30, 2012 |
$ | 127,699 | $ | 117,862 | $ | 236,571 | $ | 15,320 | $ | 497,452 | ||||||||||
Net awards |
40,889 | 66,092 | 132,603 | 7,218 | 246,802 | |||||||||||||||
Revenue recognized |
(33,270 | ) | (67,097 | ) | (104,266 | ) | (4,975 | ) | (209,608 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Backlog as of September 30, 2012 |
$ | 135,318 | $ | 116,857 | $ | 264,908 | $ | 17,563 | $ | 534,646 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measure
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. We have presented EBITDA because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses. We believe that the line item on our Consolidated Statements of Income entitled Net Income is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. EBITDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure is not necessarily a measure of our ability to fund our cash needs. As EBITDA excludes certain financial information compared with net income, the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded. Our non-GAAP performance measure, EBITDA, has certain material limitations as follows:
| It does not include interest expense. Because we have borrowed money to finance our operations, pay commitment fees to maintain our credit facility, and incur fees to issue letters of credit under the credit facility, interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore, any measure that excludes interest expense has material limitations. |
| It does not include income taxes. Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations. |
| It does not include depreciation or amortization expense. Because we use capital and intangible assets to generate revenue, depreciation and amortization expense is a necessary element of our cost structure. Therefore, any measure that excludes depreciation or amortization expense has material limitations. |
A reconciliation of EBITDA to net income follows:
Three Months Ended | ||||||||
September 30, 2012 |
September 30, 2011 |
|||||||
(In thousands) | ||||||||
Net income |
$ | 4,684 | $ | 3,509 | ||||
Interest expense |
183 | 277 | ||||||
Provision for income taxes |
3,122 | 2,151 | ||||||
Depreciation and amortization |
2,826 | 2,826 | ||||||
|
|
|
|
|||||
EBITDA |
$ | 10,815 | $ | 8,763 | ||||
|
|
|
|
-18-
Table of Contents
FINANCIAL CONDITION AND LIQUIDITY
Overview
We define liquidity as the ongoing ability to pay our liabilities as they become due, fund business operations and meet all monetary contractual obligations. Our primary sources of liquidity for the three months ended September 30, 2012 were cash on hand at the beginning of the year, capacity under our senior revolving credit facility and cash generated from operations. Cash on hand at September 30, 2012 totaled $17.2 million and availability under the senior revolving credit facility totaled $108.4 million resulting in total funding availability of $125.6 million. We expect to fund our operations for the next twelve months through the use of cash generated from operations, existing cash balances and borrowings under our credit facility.
Factors that routinely impact our short-term liquidity and may impact our long-term liquidity include, but are not limited to:
| Changes in costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs due to contract terms that determine the timing of billings to customers and the collection of those billings |
| Some cost plus and fixed price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collections from our customers. |
| Time and material contracts are normally billed in arrears. Therefore, we are routinely required to carry these costs until they can be billed and collected. |
| Some of our large construction projects may require significant retentions or security in the form of letters of credit. |
| Other changes in working capital |
| Capital expenditures |
Other factors that may impact both short and long-term liquidity include:
| Acquisitions of new businesses |
| Strategic investments in new operations |
| Purchases of shares under our stock buyback program |
| Contract disputes or collection issues |
| Capacity constraints under our senior revolving credit facility and remaining in compliance with all covenants contained in the credit agreement |
We have an effective shelf registration statement on file with the SEC under which we may issue, from time to time, up to $400 million of senior debt securities, subordinated debt securities, common stock, preferred stock and warrants. This shelf gives us additional flexibility, when capital market conditions are favorable, to grow our business, finance acquisitions or to optimize our balance sheet in order to improve or maintain our financial flexibility. We may also elect to issue term debt or increase the amount of our revolving credit facility. We will continue to evaluate our working capital requirements and other factors to maintain sufficient liquidity.
Cash Flow in the Three Months Ended September 30, 2012
Cash Flows Used for Operating Activities
Cash flows used for operating activities for the three months ended September 30, 2012 totaled $21.0 million. Major components of cash flows used for operating activities for the first quarter of fiscal 2013 are as follows:
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Table of Contents
Net Cash Provided by Operating Activities
(In thousands)
Net income |
$ | 4,684 | ||
Non-cash expenses |
4,445 | |||
Deferred income tax |
98 | |||
Cash effect of changes in operating assets and liabilities |
(30,152 | ) | ||
Gain on disposition of property, plant and equipment |
(33 | ) | ||
Other |
(40 | ) | ||
|
|
|||
Net cash used by operating activities |
$ | (20,998 | ) | |
|
|
The cash effect of significant changes in operating assets and liabilities include the following:
| The net change in the combined balances of costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs and estimated earnings caused an increase in operating assets and liabilities and an increase to cash of $6.3 million in the three months ended September 30, 2012. This change was primarily attributable to our project portfolio permitting a higher degree of advanced billings in the first quarter of fiscal 2013. |
| Accounts receivable increased by $49.5 million. The accounts receivable increase is due to a higher level of business and the timing of billings particularly in the Storage Solutions and Electrical Infrastructure segments. We view this increase as a short-term fluctuation. The receivable aging categories have not deteriorated and we do not anticipate any unusual collection difficulties. |
| Accounts payable increased by $12.5 million. The increase was primarily due to an increase in business activity. |
Cash Flows Used For Investing Activities
Investing activities used $5.1 million of cash in the three months ended September 30, 2012 due to capital expenditures. Capital expenditures included $2.4 million for the purchase of construction equipment, $1.4 million for transportation equipment, $1.2 million for office equipment and software and $0.1 million for land and buildings.
Cash Flows from Financing Activities
Financing activities provided $3.1 million of cash in the three months ended September 30, 2012 primarily due to net cash borrowings of $3.4 million, offset in part by treasury share purchases of $0.4 million. Cash borrowings were Canadian dollar advances under our credit agreement to mitigate foreign exchange rate risks.
Senior Revolving Credit Facility
The Company has a five-year senior secured revolving credit facility (the Credit Agreement) of $125.0 million that expires November 7, 2016. Advances under the Credit Agreement may be used for working capital, issuance of letters of credit and other lawful corporate purposes.
The Credit Agreement includes the following covenants and borrowing limitations:
| Our Senior Leverage Ratio, as defined in the agreement, may not exceed 2.50 to 1.00 as of the end of each fiscal quarter. |
| We will be required to maintain a Fixed Charge Coverage Ratio, as defined in the agreement, greater than or equal to 1.25 to 1.00 as of the end of each fiscal quarter. |
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Table of Contents
| Asset dispositions (other than inventory and obsolete or unneeded equipment disposed of in the ordinary course of business) are limited to $15.0 million per 12-month period. |
Amounts borrowed under the Credit Agreement bear interest at LIBOR or an Alternate Base Rate, plus in each case, an additional margin based on the Senior Leverage Ratio. The Credit Agreement includes additional margin ranges on Alternate Base Rate loans between 0.75% and 1.5% and between 1.75% and 2.5% on LIBOR-based loans.
The Credit Agreement also permits us to borrow in Canadian dollars with a sublimit of U.S. $15.0 million. Amounts borrowed in Canadian dollars will bear interest either at the CDOR Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 1.75% to 2.5%, or at the Canadian Prime Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 2.25% to 3.0%. The CDOR Rate is equal to the sum of the annual rate of interest which is the rate determined as being the arithmetic average of the quotations of all institutions listed in respect of the relevant CDOR interest period for Canadian Dollar denominated bankers acceptances, plus 0.1%. The Canadian Prime Rate is equal to the greater of (i) the rate of interest per annum most recently announced or established by JPMorgan Chase Bank, N.A., Toronto Branch as its reference rate in effect on such day for determining interest rates for Canadian Dollar denominated commercial loans in Canada and (ii) the CDOR Rate plus 1.0%.
The Unused Credit Facility Fee is between 0.30% and 0.45% based on the Senior Leverage Ratio.
As noted previously, the Credit Agreement includes a Senior Leverage Ratio covenant which provides that Consolidated Funded Indebtedness may not exceed 2.5 times Consolidated EBITDA, as defined in the agreement, over the previous four quarters. For the four quarters ended September 30, 2012, Consolidated EBITDA was $48.1 million. Accordingly, at September 30, 2012, Consolidated Funded Indebtedness in excess of $120.2 million would have violated the Senior Leverage Ratio covenant. The Consolidated Funded Indebtedness at September 30, 2012 was $4.5 million.
Dividend Policy
We have never paid cash dividends on our common stock, and the terms of our Credit Agreement limit the amount of cash dividends we can pay. Under our Credit Agreement, we may declare and pay dividends on our capital stock during any fiscal year up to an amount which, when added to all other dividends paid during such fiscal year, does not exceed 50% of our cumulative net income for such fiscal year to such date. While we currently do not intend to pay cash dividends, any future dividend payments will depend on our financial condition, capital requirements and earnings as well as other relevant factors.
Stock Repurchase Program and Treasury Shares
Treasury Shares
The Companys existing stock buyback program, which was approved by the Board of Directors on February 4, 2009, was scheduled to expire on December 31, 2012. The program permits the Company to purchase up to 3,000,000 shares of common stock provided that such purchases do not exceed $25.0 million in any calendar year. Since its inception, the Company has purchased a total of 886,503 shares under our stock buyback program at an average price of $9.17. On November 6, 2012, our Board of Directors approved a two year extension of the stock buyback plan, which will allow the Company to purchase up to an additional 2,113,497 shares through the end of calendar year 2014 if sufficient liquidity exists and we believe that it is in the best interest of the stockholders.
In addition to the stock buyback program, the Company may withhold shares of common stock to satisfy the tax withholding obligations upon vesting of an employees deferred shares. Matrix withheld 33,454 shares in the first quarter of fiscal 2013 to satisfy these obligations. These shares were returned to the Companys pool of treasury shares.
The Company has 2,051,764 treasury shares as of September 30, 2012 and intends to utilize these treasury shares solely in connection with equity awards under the Companys stock incentive plans.
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FORWARD-LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-Q which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words believes, intends, expects, anticipates, projects, estimates, predicts and similar expressions are also intended to identify forward-looking statements.
These forward-looking statements include, among others, such things as:
| amounts and nature of future revenues and margins from each of our segments; |
| the likely impact of new or existing regulations or market forces on the demand for our services; |
| expansion and other trends of the industries we serve; |
| our ability to generate sufficient cash from operations or to raise cash in order to meet our short and long-term capital requirements; and |
| our ability to comply with the covenants in our credit agreement. |
These statements are based on certain assumptions and analyses we made in light of our experience and our historical trends, current conditions and expected future developments as well as other factors we believe are appropriate. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including:
| the risk factors discussed in our Form 10-K for the fiscal year ended June 30, 2012 and listed from time to time in our filings with the Securities and Exchange Commission; |
| the inherently uncertain outcome of current and future litigation; |
| the adequacy of our reserves for contingencies; |
| economic, market or business conditions in general and in the oil, gas, power and mining and minerals industries in particular; |
| changes in laws or regulations; and |
| other factors, many of which are beyond our control. |
Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences or effects on our business operations. We assume no obligation to update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk faced by us from those reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed with the Securities and Exchange Commission. For more information on market risk, see Part II, Item 7A in our fiscal 2012 Annual Report on Form 10-K.
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Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of disclosure controls and procedures in Rule 13a-15(e).
The disclosure controls and procedures are designed to provide reasonable, not absolute, assurance of achieving the desired control objectives. The Companys management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all errors or fraud. The design of our internal control system takes into account the fact that there are resource constraints and the benefits of controls must be weighed against the costs. Additionally, controls can be circumvented by the acts of key individuals, collusion or management override.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level at September 30, 2012.
There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting during the quarter ended September 30, 2012.
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OTHER INFORMATION
We are a party to a number of legal proceedings. We believe that the nature and number of these proceedings are typical for a company of our size engaged in our type of business and that none of these proceedings will result in a material effect on our business, results of operations, financial condition, cash flows or liquidity.
There were no material changes in our Risk Factors from those reported in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases made by the Company of its common stock during the first quarter of fiscal year 2013.
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs |
|||||||||||||
July 1 to July 31, 2012 |
||||||||||||||||
Share Repurchase Program (A) |
| | | 2,113,497 | ||||||||||||
Employee Transactions (B) |
224 | $ | 11.68 | | ||||||||||||
August 1 to August 31, 2012 |
||||||||||||||||
Share Repurchase Program (A) |
| | | 2,113,497 | ||||||||||||
Employee Transactions (B) |
33,230 | $ | 10.46 | | ||||||||||||
September 1 to September 30, 2012 |
||||||||||||||||
Share Repurchase Program (A) |
| | | 2,113,497 | ||||||||||||
Employee Transactions (B) |
| $ | | |
(A) | Represents shares purchased under our stock buyback program. |
(B) | Represents shares withheld to satisfy the employees tax withholding obligation that is incurred upon the vesting of deferred shares granted under the Companys stock incentive plans. |
Dividend Policy
We have never paid cash dividends on our common stock, and the terms of our Credit Agreement limit the amount of cash dividends we can pay. Under our Credit Agreement, we may declare and pay dividends on our capital stock during any fiscal year up to an amount which, when added to all other dividends paid during such fiscal year, does not exceed 50% of our cumulative net income for such fiscal year to such date. While we currently do not intend to pay cash dividends, any future dividend payments will depend on our financial condition, capital requirements and earnings as well as other relevant factors.
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Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
There were no mine safety violations or other regulatory matters required to be disclosed in this Form 10-Q under Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K.
None
Exhibit 10: |
Amendment 1 to Amended and Restated Matrix Service Company Deferred Compensation Plan for Members of the Board of Directors. | |
Exhibit 31.1: |
Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 CEO. | |
Exhibit 31.2: |
Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 CFO. | |
Exhibit 32.1: |
Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) CEO. | |
Exhibit 32.2: |
Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) CFO. | |
Exhibit 101.INS: |
XBRL Instance Document. | |
Exhibit 101.SCH: |
XBRL Taxonomy Schema Document. | |
Exhibit 101.CAL: |
XBRL Taxonomy Extension Calculation Linkbase Document. | |
Exhibit 101.DEF: |
XBRL Taxonomy Extension Definition Linkbase Document. | |
Exhibit 101.LAB: |
XBRL Taxonomy Extension Labels Linkbase Document. | |
Exhibit 101.PRE: |
XBRL Taxonomy Extension Presentation Linkbase Document. |
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: November 9, 2012 | By: /s/ Kevin S. Cavanah | |
Kevin S. Cavanah Vice President and Chief Financial Officer signing on behalf of the registrant and as the registrants principal financial officer |
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EXHIBIT INDEX
Exhibit 10: |
Amendment 1 to Amended and Restated Matrix Service Company Deferred Compensation Plan for Members of the Board of Directors | |
Exhibit 31.1: |
Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 CEO. | |
Exhibit 31.2: |
Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 CFO. | |
Exhibit 32.1: |
Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) CEO. | |
Exhibit 32.2: |
Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) CFO. | |
Exhibit 101.INS: |
XBRL Instance Document. | |
Exhibit 101.SCH: |
XBRL Taxonomy Schema Document. | |
Exhibit 101.CAL: |
XBRL Taxonomy Extension Calculation Linkbase Document. | |
Exhibit 101.DEF: |
XBRL Taxonomy Extension Definition Linkbase Document. | |
Exhibit 101.LAB: |
XBRL Taxonomy Extension Labels Linkbase Document. | |
Exhibit 101.PRE: |
XBRL Taxonomy Extension Presentation Linkbase Document. |
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