Good day, ladies and gentlemen, and welcome to the Matrix Service Company Conference Call to Discuss Results for the Third Quarter Ended March 31, 2015. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Kevin Cavanah, Vice President and Chief Financial Officer.

Sir, please begin. .

Various remarks that the company may make about future expectations, plans and prospects for Matrix Service Company constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2014, and in subsequent filings made by the company with the SEC..

To the extent the company utilizes non-GAAP measures, reconciliations will be provided in various press releases and on the company's website..

I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company. .

Thank you, Kevin. I want to start with a few comments on safety. Our consolidated fiscal year-to-date total recordable incident rate is 0.64. We continue to focus on achieving 0 incidents and are proud to be recognized by our clients at various job sites for consistently meeting that goal..

It is equally important for us to recognize our own people and their efforts. In that regard, we recently awarded 2 of our divisions with our company's annual safety excellence awards. The Matrix NAC team, our union brand working the U.S.

Steel Gary Works #8 blast furnace turnaround, received our Chairman's safety excellence award for 0 recordable incidents during the outage. This work creates a challenging safety environment, especially as it relates to vertical construction and confined space situations. .

Additionally, our Matrix NAC operating unit at Rahway, New Jersey, received our company CEO's safety excellence award for consistently performing high-voltage electrical work, meeting our clients' high safety standards..

Over the last quarter, our executive team has participated in various safety assessment audits at project sites across the country, demonstrating positive safety leadership and driving our culture..

So let's move on to our quarterly results. Before Kevin gets into the actual numbers, I want to share with you some of the reasons for these disappointing results, but also want to remind you of the positive aspects of the business and our strong future.

This quarter and the balance of the fiscal year have been impacted by an additional charge on the acquired joint venture electrical power project, which we discussed during last quarter's earnings call. At the end of our comments, I'll provide some more detail on the reasons for the additional write-down and status of the project's completion.

Results were also impacted by delays and slow project starts as a result of permitting delays, refinery strikes, high refinery utilization and weather disruptions and contract finalization..

Storage Solutions, Oil Gas & Chemical and Industrial. .

The other half of our business, Matrix NAC, represents the combined assets of our legacy union operation and their acquired Kvaerner business. During the year, this brand has reorganized its management team, integrated its processes and expanded geographically.

It has also been more directly impacted by the specific market conditions mentioned previously..

Exclusive of the EPC power project, gross margins are in line with our expectations, but volumes are down due to delayed project starts..

Our Matrix PDM engineering division is routinely executing multiple FEED studies, which in turn are leading to project opportunities for both Matrix Service and Matrix NAC in the natural gas value chain. Our work at Orascom's greenfield fertilizer plant in Iowa, valued in excess of $100 million, is nearing completion.

With a strong execution on this project, we are ahead of schedule and have created a positive contribution. We are also -- we have also strengthened our industry résumé for future fertilizer-related opportunities as a result of our great safety and high-quality performance..

We've kicked off work on the recently awarded Napanee Generating Station for TransCanada. And we received -- achieved $1.3 billion in project awards over the first 9 months of this fiscal year, including over $700 million in the recently completed quarter.

This record backlog, combined with robust bidding activity, confirm our long-term strategy and set the stage for significant growth in the coming fiscal year..

Against this backdrop, I'll now turn the call over to Kevin to discuss third quarter results.

Kevin?.

Thank you, John. Let's start with the results for the quarter. Revenue was $314.2 million, which was lower than last year's revenue of $381.5 million. The decline was primarily from the Storage Solutions segment, which we will discuss in a minute..

Our results were significantly below our expectations, as we recorded a $28.5 million charge on an acquired EPC joint venture project. Our 65% share of the charge was $18.5 million or $0.43..

As a result of the loss, we reduced short-term incentive accruals by $2.9 million or $0.07 per share..

Finally, our results were impacted by lower volumes as a result of project delays and slow project ramp-ups, as John discussed previously. These delays lowered EPS by $0.08 to $0.12 for the quarter..

As a result of these items, our EPS for the quarter was a loss of $0.11. Excluding the project charge, our EPS in the quarter would have been $0.25. .

Backlog increased to 100 -- $1.24 billion on project awards of $714.4 million..

Now moving on to the segment discussion. Our Industrial segment had a good quarter. Revenues were $63 million. Gross margins were 10.4%, which exceeds our normal expectation of 8% to 10% in the segment. And backlog increased to $144.3 million on $87 million of awards for the quarter, primarily in the steel and mining business..

In Storage Solutions, keep in mind that fiscal 2014 benefited from a large balance-of-plant project in Cushing. The project was unplanned and condensed into a very short period of time, as the project was completed over an 8-month period.

While we are currently executing similar balance-of-plant projects, they are being performed over a much longer period of time. .

Regarding results, revenues were $107.2 million. Gross margins were 10.5% as a result of under-recovery of overheads due to project delays. Backlog of $408.3 million is down quarter-over-quarter, as awards of $68.6 million consisted of smaller tank projects.

With that said, our bid funnel includes numerous larger terminal and specialty tank projects, including LNG and NGL opportunities..

The Oil Gas & Chemical segment included a large, low-margin Gulf Coast turnaround project in the quarter. Revenue was $95.8 million. Gross margins were 7.6%, which is below our normal expectations, as a result of this turnaround project. And backlog was $133.6 million..

Our Electrical Infrastructure segment was significantly impacted as a result of the $28.5 million charge on the acquired EPC joint venture project. Our portion of the charge was $18.5 million. We will discuss this project in more detail later in the call..

Revenue in the segment was $48.2 million as a result of recording a reduction of revenue related to the charge. Exclusive of this charge, gross margins were 11.2% in the quarter. Backlog increased to $553.1 million on $477.1 million of awards during the quarter.

The increase is largely attributable to the previously announced Napanee Generating Station award..

While we expect this segment to improve in the fourth quarter, it will be impacted by the completion of the acquired EPC joint venture project. As we recognize 100% of the expected loss in the project, the remaining revenue will be recognized at 0 margin..

On a consolidated basis for the 9 months, revenue has increased to $978.7 million and our earnings per share is $0.23. Excluding the 9-month loss on the acquired EPC joint venture project and the related impact on incentive compensation, our EPS would have been $0.92..

Next, let's discuss liquidity. As of March 31, 2015, our liquidity stood at $193.1 million, including $103.2 million of cash. While the loss incurred in the quarter will constrain availability under our credit facility, this constraint will decline over the next 4 quarters.

We have sufficient liquidity to achieve our business objectives, including funding working capital and capital expenditures, pursuing bolt-on acquisitions and stock repurchases..

Moving on to guidance for the fourth quarter and fiscal year. Given the results of the first 9 months and our expectations for the remainder of the year, we are revising our guidance. We now expect revenue for the year to be between $1.34 billion and $1.38 billion and EPS of $0.48 to $0.53.

This implies fourth quarter guidance of $360 million to $400 million of revenue and EPS of $0.25 to $0.30. When considering the fourth quarter guidance, please keep in mind that 10% to 12% of revenue in the quarter will be at 0 margin, as it relates to the joint venture project..

Finally, we will complete our fiscal 2016 budget by the end of June and expect to provide guidance for the fiscal year soon thereafter..

With that, I'll turn the call back over to John. .

Thank you, Kevin. Moving on, I want to talk a little bit about the market. The impact from depressed oil prices have been experienced in 3 areas. First, higher margins for our refinery clients is creating some delays in turnarounds and maintenance. Next in our Bakersfield operation, we have seen a drop-off in upstream project opportunities.

With that, we are also experiencing increased competition in some refinery markets due to upstream contractors looking for work. However, high demand for crude storage is creating significant opportunities for tank repair and maintenance as well as new storage facilities and expansion..

Beyond the impact of depressed oil prices, delay in regulatory permitting is impacting not only the completion of book work but the award and start of new projects.

Despite these challenges, bidding activity is as strong as we've seen it in several years and is translating into solid background -- backlog growth, evidenced by over $1.3 billion of new awards this fiscal year..

Let me tell you about some specific opportunities we are pursuing. Unique to Matrix, our strategic vision to bundle cleaning and mechanical services is creating profitable contracts with both new and existing refinery and midstream clients.

Independent refiners that are reaping the benefit of low-price feedstock, with whom we have strategic relationships, offer increased opportunity for maintenance and repair work over the next 12 months. We have a combination of 20 major turnaround events, either awarded or pending, with a preferred contractor position over the next 18 months..

Also, it is part of our strategic vision to leverage our strength in aboveground storage, specialty vessels and terminal construction with our Matrix PDM Engineering capabilities to take full advantage of the significant opportunities across the entire North American oil and gas value chain.

In that regard, we are currently pursuing in excess of $4 billion in near-term projects, including LNG export terminals, LNG storage for transportation fuels, railroad and truck unloading facilities, NGL storage and export facilities, crude storage and terminals as well as fertilizer facilities.

I'm pleased to report that Matrix is a top contender for many of these opportunities. And in some cases, we are the exclusive strategic provider. .

We've expanded our relationship with several mining clients and have strategically added engineering expertise to offer full-service capabilities to these clients. As the global demand for copper improves, we will be uniquely positioned to take advantage of the required project and maintenance spending..

Despite the economic and global market pressure on our integrated iron and steel clients, Matrix continues to maintain a preferred position for maintenance, capital projects and turnaround work, which we expect to deliver consistent results..

Our strategic relationships with TransCanada and Enbridge will provide long-term storage opportunities associated with pipeline expansion projects, such as TransCanada's Energy East program. .

In our Electrical Infrastructure business, we continue to hold a strong market position in power delivery on the East Coast and are expanding our footprint in California. Significant opportunity exists with clients in the Midwest and Ontario that will provide expansion for our service offering over the coming years..

Bottom line, our market position is as strong as ever, and we see this continuing for some time..

With that, I want to discuss in more detail the difficulties we have had on the acquired EPC joint venture power project in our Electrical Infrastructure segment, and then open the call for questions specific to this project. Following that, we'd like to then have general Q&A questions about the rest of the business..

So I know these charges come to -- come as a surprise to many of you. However, as we monitored the project over the quarter, spend in the completion was in alignment with our Q2 re-forecast.

Through the end of the quarter as we progressed commissioning and start-up, more rework, expansive punch list items and weather delays combined to extend the schedule, which escalated our cost to complete..

We supplemented our commissioning management team and added additional supervisory personnel and engineering support. Our site project team completed a bottom-up review of the cost to complete with oversight by executive management.

In addition, we created an independent co-advisory review team with power construction experts from various operating units within Matrix to develop a separate completions estimate. These 2 teams worked independently. And based on the results of this work, we have developed the most likely outcome, which is reflected in our results for the quarter..

Specific cost increases include schedule extension, subcontractor claims, liquidated damages, diminished labor productivity, overtime and increased commissioning expense. We expect substantial completion of the project within the fourth quarter of fiscal 2015.

Currently, we are tracking to the revised schedule during this critical commissioning phase and believe this date is achievable..

I'd now like to open up the call for questions related to this project, followed up by a general Q&A. .

[Operator Instructions] Our first question comes from the line of Mike Shlisky of Global Hunter Securities. .

It's Michael Shlisky. I guess -- I mean, I think we got a lot of the stuff from that of course [ph]. I won't rehash. I guess, I just want to know basically how confident are you that this will be done by the end of June.

Is there any chance that all of this will be completed into 2016?.

I would say we're pretty confident we will be done here in this fiscal year. When you're in this phase of a project, there's always things that can trip you up. Any mechanical equipment that would fail during start-up, any process systems that -- a valve, may have a valve blow out or some electrical piece of equipment that has a fault.

And so there are things that could trip us up. But at the moment, based on where we are through this commissioning phase, which is in, what's called, steam blow, which is about halfway through a commissioning, we feel pretty good about where we're at. .

Okay.

And then secondly, if the work is entirely finished and the full project is actually done by June 30, is there a chance there are other kinds of post-project disputes or contract issues that might happen at some point in '16? Or is it totally done by June 30, both on your site and off?.

Right now, we would anticipate that we would be totally cleaned up this fiscal year. The way our contracts are structured with our partner and our owner leaves little room for any commercial haggling at the end of the project. .

Our next question comes from the line of Tahira Afzal of KeyBanc. .

The first question is in regards to the team that you've been using on this project.

How many of those people are going to transition onto your TransCanada project?.

I don't know the total number. But for instance, the projects -- the Napanee project is in Canada. Just as a general rule, we cannot send anyone into Canada that has not actually worked for us for over 12 months. So that has some limitations on the people that are going there.

So a lot of the project will be staffed from people within our Canadian operations. There will be some people from the other project that will make it to the Napanee job, but I would say it will be a fairly low percentage. .

Got it, okay. And John, if you look at the -- when you estimated what it would take to complete -- and you're absolutely right when it comes to the last few months, these projects always have some nuances.

But I guess, to the extent of the nuances, so if you can separate out the liquidation damages and maybe perhaps provide some color around the cost overruns in themselves. It would be helpful to just get confidence around the teams you have. .

So if you take a look at the 2 estimates to complete that we did between the project team and the co-advisory review team, the major differences in the 2 pricing was really around the schedule and the ability to get done in a certain amount of time.

And so the differences in that time frame drove the potential payment of liquidated damages, which is -- would be in the order of about $3 million that drove our costs, extended overheads and site costs. It drove additional costs in our subcontractors that are going to be there longer.

So if you normalize some of those things between a different view on the schedule, you get back to a number that's -- they're pretty close, like within 5% of one another on the cost to complete to install the scope.

So that gave us some comfort that between the 2, we had -- based on what we knew at the time we did this review, which was in April, that the numbers that we're presenting and the charge we're taking this quarter should be pretty complete. .

Got it, okay. And then just bundle up my 2 questions into one in sheet. If I look at data points between now and your next earnings release, unfortunately, it's such a large period with quiet or no information.

So would you be providing any press releases on the completion of this project in terms of commissioning, start-up happening on time to help allay fears into the summer? And then second question is really in regards to your balance sheet. It remains very strong.

Given what we've seen on the backlog side and your confidence on execution, are we going to see more accelerated buybacks to really support what you're saying?.

So to answer your first question, when we set the party date for the completion of the power project, we'll send you an invitation. So -- but yes, when we complete the job, because this has been so material, we will send an announcement out.

Hopefully, it would be around the same time that we plan on doing an earlier-than-normal release on our guidance for fiscal 2016. So I would imagine sometime, either combined with that release or near that same release period, we would send a notice out to everybody that we have achieved substantial completion of that project. .

Got it. John, I believe I'm pretty close to that project in New York City. So I might take you up on that invite. .

Okay. Well, the party is going to be in Tulsa. .

Nevermind. .

Come on. So anyway, as it relates to share buyback, I mean, that's obviously an option we continue to have. And we also have some acquisitions in mind. So we're going to manage that here over the next few months and decide where is the best application of our cash in the best interest of the business. So it's -- we have an approved plan.

It's an option for us, and we may choose to execute on some portion of that. .

Our next question comes from the line of Matt Duncan from Stephens Inc. .

This is Will on the call for Matt. Kind of following on Tahira's earlier question.

I'm wondering if you can talk about the similarities and the differences between the ongoing JV project and the Napanee project as it relates to the actual scope of work being done, so we can kind of get comfortable that the problems happening now won't arise in the future on the new electrical project. .

Right. So from a construction standpoint, purely construction, the scopes are very similar, right? We are doing earthwork and dirt work. We're doing concrete work. We are doing -- installing combustion turbines and steam turbines and boilers and piping systems. So that work is very similar.

The big difference here is in who's doing the design work, which is being done by the client and provided by the client; who is providing all of the engineered pieces of equipment, which is done by the client; and who has the commercial liability for the delivery, both from a time and a quality perspective, for that engineered equipment and for the engineering.

All of that lies within the owner's hands. So we are getting engineering from him and providing equipment on a timely basis. And it's our responsibility to install it in conformance with those drawings.

So if there's errors in engineering, if there's late equipment deliveries, if there is failure of any of the engineered fabricated parts that's provided, that commercial and time responsibility lies with the owner.

And so our responsibility really there is to do a very good job of monitoring those changes, so handling change management well with the client, notifying them when we have -- find an error in an engineering drawing or an error in a piece of fabricated or delivered engineered equipment. But other than that, we're the constructor.

That's all we -- that's our responsibility of this construction. The other thing I would remind you, too, is that we have responsibility on the Napanee project to mechanical completion. And so what that defines is that we have to provide completed assemblies and pump [ph] motors for the proper rotation, test stroke valves.

But once that piece of installed equipment is turned over to the client, he is 100% responsible for commissioning. So he starts the plant up. And whatever it takes to get that done is his responsibility. So the commercial and risk requirements between the Napanee job and the project that we're dealing with today are really night-and-day different. .

[Operator Instructions] Our next question comes from the line of Martin Malloy of Johnson Rice. .

My questions have been answered. .

At this time, I'm showing no further questions. I'd like to turn the call back over to John Hewitt for closing remarks. .

Open it up for Q&A -- for general Q&A. .

Yes.

So there is no one else with -- for general Q&A?.

We just received a question from the line of Martin Malloy of Johnson Rice. .

I was actually trying to get in the general Q&A. .

Okay, thanks. So is -- so does -- who is -- so I'll open the call for any general Q&A discussions. .

[Operator Instructions] And our first question comes from the line of Robert Connors of Stifel. .

I was just wondering regarding on the new power project, what for -- as you look out to '16 and if you can give out to '17 where you guys expect to be on a cost-to-complete basis. Just sort of give us a flavor.

Is this going to be slow to ramp? Or are you going to be pretty quick to ramp on this project?.

Well, in fiscal '15, we have -- we mobilized on the site in the February time frame. We're setting up trailers. We're clearing and grubbing. We've got rock that we've got to blast, which we're doing. We have to do certain environmental things on the site to protect the local topography.

And that project will start to ramp up fairly quickly, probably in our fiscal 2016 when we'll actually be able to start get into the foundation work and underground piping and electrical services. .

Okay. And then you gave out this sort of a $4 billion in potential work that you guys are pursuing.

Can you just give a frame of reference where that was, like in the previous quarter versus where it potentially was a year ago, if you have those figures?.

I don't. And we generally don't talk about in details on our pipeline, although that's something we want to start providing you guys more information on. But I would say that that's -- it's probably up from a year ago by 25%, the volume of those typical types of projects.

So we're seeing a lot of activity in this -- what I'll call natural gas value chain stuff, so LNG terminals. And on the LNG terminals, our value-add there is on the storage piece of those facilities.

On the NGL opportunity, spear projects and LNG -- NGL export projects, propanes and ethanes, several fertilizer projects that we are tracking, urea projects. So there's just a lot of things that have been coming through the last, say, 6 months that's creating a lot of opportunity for us.

And we feel pretty good in the position we're at with several of those, as we mentioned, that we'll hopefully be able to take a reasonable percentage of that proposal volume into backlog. .

And you'd also say qualitatively, it was up pretty good quarter-over-quarter?.

Yes.

For the quarter -- for the -- of opportunities?.

Yes. .

Yes. So I would say quarter-over-quarter, there's been more opportunities that have come in-house. .

Yes. And I also think that some of those opportunities are a little farther along in the proposal process. .

Okay. I have just one house cleanup.

What was the 0 margin or the problem project revenue in the quarter?.

Oh, in the third quarter?.

Yes. .

It was very small, smaller than you're going to think. Because the -- as a result of taking the loss, you effectively reverse margins or reverse revenues to record the loss. And so the quarter revenues were just under $10 million on that project after you reverse the loss. .

Our next question comes from the line of Mike Shlisky of Global Hunter Securities. .

Just wanted to ask about Industrial. You had mentioned that you had pretty good gross margins in the quarter here.

What was kind of behind those good margins? And can that kind of level keep on going here into fiscal '16?.

So the -- I think the biggest contributor to the positive margins there was the fertilizer project that we've talked about. It's going well, executing according to plan. That project is nearing completion. But that segment has performed well all year, and we've had some good, consistent performance in the other portions of that segment, too.

So we're still in the budget process for fiscal '16. So we're not changing our guidance on margins at this point. But we still feel good about that segment going into next year. .

Great. And I also want to ask about Storage Solutions. As I recall from last quarter, you said you were pretty booked up well through this year into next already. And you seem like you have a lot of opportunities out there across various amounts -- various types of liquids and gases.

I guess, I was wondering, has pricing gotten any better with the capacity to build so constrained right now.

Do you think you're going to be getting a little bit better leverage when it comes down to the actual contract negotiations here?.

I don't think so. I think through the course of this year, I think our pricing leverage has been fairly steady. .

Okay. If I could just squeeze in one more here as well. I guess, I was wondering about M&A. It's something you're still looking at some bolt-ons here.

Have you found any kind of valuations pulling back the last few months, given what's been going on in the oil and gas world? Or you think -- or is it still somewhat a robust pricing environment right now?.

No, I think just for the kind of things that we're looking at -- look, the kind of things that we're looking at and the processes to do an acquisition that we're willing to engage in, which is not auctions, that I think that we're finding the pricing environment similar to what our expectations are.

So we're not a company that's going to -- we want to pay a fair value for the businesses that we are interested in. We're not interested in overpaying for businesses and -- because they may be in an auction environment. So I would say in general, within a reasonable range, the pricing environment has continued to hold over the last 12 or 18 months. .

Our next question comes from the line of Martin Malloy of Johnson Rice. .

Just on the Storage Solutions, so the book to bill for the last 2 quarters has been 0.4 roughly.

Can you talk a little bit more -- any sort of feel you can give us for the timing of when we might start to see some of these awards hit that you spoke about?.

I would say over the next couple of quarters. And some other color around that, so -- and we've talked about this before. So our Storage Solutions segment is made up of not just tanks. So it also has specialty vessels, it has tank maintenance and repair and it has balance-of-plant work.

So there are pieces of that are -- that the bookings are maybe flat or slightly up that get lost in the overall sort of backlog burn-off on bigger projects like a terminal project.

So while we're moving from one terminal project to another, which may be a little slower transition, we're still out there winning tank work and winning tank maintenance and repair work. And so it's a little difficult to judge the quality of the market by seeing our backlog drop.

So for instance, we could within the next 6 months book a large LNG storage facility maybe. And so that would have a big reversal impact on the backlog in that section, and that can be one project.

And so you put that one project into backlog, and it will start to work off faster than we'd be able to add back backlog in just conventional crude storage and maintenance and repair. So I think where we are in our transition and our development is potential that you can see a little more up and down swings in our -- the backlog in storage.

But again as we've said on the call several times before, you need to look at the long-term trend and the kind and quality of projects that we're adding into that backlog. .

Do you think that the backlog has troughed here for Storage Solutions?.

I'd like to think so. Based on what we're looking at, yes. I mean, obviously we've got some work we have to win, but we feel pretty good about our position on some of those projects. .

Okay.

And I was just wondering if you could give us any sort of early commentary on the fall turnaround season -- refinery turnaround season?.

So we're -- for us, I think our expectation is that we would have a similar turnaround season, if not up, for 2016. Now when all that is going to fall in 2016, not totally sure. Because as we said, we've had a lot of these refinery turnarounds. They've been moving around.

Some of the issues we've had this year is turnarounds that we were either verbally awarded or felt pretty good about winning got moved out of the second half of the year into next year. And so we may, in some cases, have to go back out and win those or waiting for our client to tell us when they're going to start that.

So based on what we think we know about the turnarounds out there -- now when they're going to happen probably is a little more obscure to us than the -- whether or not we're going to be able to take those into backlog. So in general, our opinion for next year is that our turnaround market will be up. .

Our next question comes from the line of Tahira Afzal of KeyBanc. .

So John, if you look at what you said earlier to Martin's question in regards to maybe the storage side troughing right now, if you look around all of the projects that are in your backlog on the storage side, alongside the timing, you think, of these opportunities, could we potentially see that directionally up here, at least for storage next year on the revenue side? You've got easier comps as well from last year.

So I would love to get a sense. I know it's too early for guidance, but any help on the direction side would be helpful. .

I would say based on the proposal work that we're seeing and the opportunities in the market, it's certainly our expectation, as we finalize our budgeting for next year, that the -- our Storage Solutions segment will be on an upward trend. .

Got it, okay. Okay, that's great. And then on the electrical side, it seems like this project sort of ramps up in the second half of your fiscal year.

How should we think about the sort of air pockets, in a sense, between now and then? Do you have enough momentum on the more sort of traditional small to midsized transmission projects? Are there other ways you can sort of fill out that fold [ph] maybe through some of those M&A opportunities and cross-selling? Would love to get your thoughts on that as well.

.

Our ability to expand our electrical delivery side of our Electrical Infrastructure segment is really going to be about moving into new markets and expanding our West Coast market as -- that we're able to do. We've got a very strong position on the East Coast.

And so we're -- in that situation, we're very dependent on the ups and downs of our core clients there, on how they're spending their money.

So our ability to move into the Midwest to create opportunities there, which there are opportunities for us, and into Ontario, and then to expand our footprint that we've started out, out in the West Coast is going to create the most opportunities and growth for us.

So it's certainly something that's part of the strategic plan for our electrical group. And I expect sometime over the next 18 months or so that we'll start to get some more growth out of some of those expansion opportunities. And certainly, M&A, potential M&A is part of that. .

Got it. And last question, John, is really on the LNG side. Clearly, those opportunities are pretty big [ph]. But I would love to get a sense of the execution risk and the risk inherent in the terms for a couple of reasons. Number one, as you know, Matrix has legacy history with the one project that you did do in the Gulf Coast area.

And number two, I was talking to a couple of LNG customers out in the Oregon area who have started to see some of the foreign players coming through and putting very competitive bids out there. So would love to get your thoughts around those 2 elements. .

So the LNG projects that we are involved with, we feel pretty good about their potential for going forward and that -- where they are from a permitting standpoint and from offtake agreements. Those -- the ones that we are primarily engaged with are on the Gulf Coast. And so we feel good about the likelihood of those projects going forward.

I'm afraid I can't -- the Cheniere LNG projects for Matrix was prior to my tenure here. So I can't -- it wouldn't be fair for me to speak intelligently about those -- about how those projects and why there were issues with them. I think that we're -- I would say, that we are much related to storage and our capabilities with cryogenic storage.

We're a much more mature company than we were 7 years ago, 8 years ago. And so we're fairly confident about our ability to execute on those projects. .

We've also added a lot of resources with LNG experience over -- since that Cheniere project. We've done the acquisition of PDM. And then a lot of our senior management has extensive LNG experience on those types of projects. So I think we're much -- as John said, a much different company today than we were when that project was executed. .

Our next question comes from the line of Matt Duncan with Stephens Inc. .

It's still Will. You hit on the oil and gas segment a little earlier in the call. I'm wondering if you can give some more detail on what drove that top line strength and why margins were under some pressure there. .

So yes, so we mentioned this large turnaround we had in the Gulf Coast, a strategic turnaround. We've talked about the Gulf Coast in the past as that being an expansion area for us. That contract had significant scope growth. And I think we've been conservative in our approach here.

We've -- that the -- when you look at how that contract was -- the terms and conditions of it, we're going to have to negotiate for any closeout on this. It will be audited by the client on that. So we considered all that when we were recognizing the fee on that project in the quarter.

But that was probably the most significant driver to the higher revenues. .

Our next question comes from the line of Karsub Jakpath [ph] [indiscernible] Partners. .

So you mentioned one large turnaround project, which was below margins.

How frequent are such projects? And I mean, is it a special case? Or should we expect them on an annual basis?.

So all the turnarounds we do have an opportunity for a scope expansion. The clients, and sometimes in conjunction with us, set the scope and the expected repairs for their turnarounds.

When they -- when the plant is shut down and there's opportunity for the client and the client's engineer to do some discovery work there is always opportunity for scope growth. We had, about a year -- a little over a year ago, we had another project that we did that had very extensive scope growth.

I think a $5 million original contract turned into $25 million. So it's not unusual, but it's not the norm. And so as the case with this project, there was extensive scope growth. And as Kevin said, we've taken a fairly conservative view on the final outcome of that on the fees that we would earn on the scope growth.

As the client goes through his audit process, we'd use our gate logs, manpower and those sort of things. .

Okay. And just one other question. How much cash do you need on the balance sheet to bid on projects for your day-to-day operations? So you have $102 million in cash right now. But historically, you have probably needed anywhere between -- or you have had anywhere between $40 million and $60 million, $65 million.

And if you could speak about the extra $50 million, and what you could do with it. .

So cash management is one of our -- behind safety and quality of our clients, it's one of our most important things we'll look at on projects and we'll try to manage. We believe a strong balance sheet, good liquidity is critical for us to be able to capitalize on opportunities in front of us.

So we -- and you've seen, especially when you have a business that has large turnarounds like you mentioned earlier, there'll be quarters where we'll have -- those are always done on a reimbursable basis. So you'll have quarters where you'll have a big need for working capital investments.

So we've tried to keep that $40 million, $50 million for those working capital needs. But for the most part, we've been making money and that cash balance has grown. So that's put us in a position to start capitalizing on some of the other strategic objectives we have, including acquisitions. And so I'll let John talk about acquisition opportunities.

But that has been our focus, to maintain that strong balance sheet. It's something we're going to try to continue to do. .

Plus, I think is we've done a better job with negotiating our payment terms with our clients.

As we've taken on some of these bigger projects, it's given us an opportunity to get into more of a neutral cash position where we have to provide less financing -- unintentional financing to our client and trying to balance that out with the reimbursable work we do that would thus require some more financing because of the timing from billing to payment.

So we've done a good job of driving down the amount of working capital we got to put into our business as it relates to our projects. So what you said is correct. We are actively continuing and looking at strategic bolt-on acquisition targets. Those acquisitions can cost us in the -- anywhere in the range of $5 million to $25 million.

And we continually have 2 or 3 of those that we're sifting through. So it is -- we want to have -- be able to have that, as you say, dry powder in place that we can exercise and attack a key acquisition target when we find the right one. .

Our next question comes from the line of Robert Connors of Stifel. .

Just sort of had a follow-up. The EPS you said was impacted by about $0.08 to $0.12 in the quarter.

That was correct, right?.

Oh, on the project delays?.

Right. .

Yes. .

So it just sounded like to me that the majority of that related to refinery turnaround season possibly being pushed out maybe into '16. So that's sort of been a recurring theme the past couple of years.

So we -- if that's the case as well in '16, is that sort of the run rate where EPS could be impacted by maybe a possible $0.10 per quarter? Or is there SG&A leverage you can bring down if that's the case as well?.

So in the third quarter, that $0.08 to $0.12, that wasn't related to turnarounds. I mean, turnaround revenues were $95 million. That was a fairly strong quarter for that segment. It was more related to some of the capital construction projects in the other segments. And that hasn't been occurring in the past.

We've seen more of that project slippage on those projects this last quarter than we had seen previously. So it's kind of a -- it's higher than normal and it's not what we would expect in the future. .

Can you give any color around sort of what end markets and locations those projects are in?.

So the -- in our storage business, our ability to start some tank work and some small balance-of-plant work was pushed out, delayed 2 or 3 months out of the third quarter into the fourth quarter. So that was probably the biggest piece of that impact.

Two is just some ramp-up on some of our other larger projects didn't -- good news is we didn't spend as much money as we thought we were going to need to, to achieve the same level of progress. Bad news is that has not as much -- we didn't recognize as much revenue.

And on the turnaround side, a lot of the slippage we're seeing is actually more about the fourth quarter than it is about the third, and that things are moving out. .

So on those first 2 items, it sort of looks like you've turned the corner on those in the positive direction already. .

Well, those -- the specific projects that had to delay are now -- we are now in execution mode today. So -- but they were supposed to get started 4 months ago. .

At this time, I am showing no further questions in queue. I would like to turn the call back over to Mr. John Hewitt for any closing remarks. .

Thank you, everybody, for joining us today, and we appreciate your continued support of Matrix Service Company. Thank you. .

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect..