Matrix Service Company
Q1 2015 Earnings Call Transcript

Published: 9 May 2015

[Operator:]

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. At this time all participants are in a listen only mode. Later we'll conduct the question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference is being recorded. I would like to introduce your host for today's turn the conference over to Kevin Cavanah, Vice President and Chief Financial Officer. Sir, please begin.

[Kevin Cavanah:]

Thank you. I would now like to now take a moment to read the following. 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 Web site. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

[John Hewitt:]

Thank you, Kevin, I want to start with a few comments on safety. Our consolidated fiscal year-to-date total recorded incident rate is 0.64. We continued to focus on achieving zero-incidents and are proud to be recognized by our clients at various job sites for consistently meeting that goal. It was equally important for us to recognize our own people and their effort. In that regard we recently awarded two of our divisions with the company's annul safety excellence awards. The Matrix NAC team, our union brand working with the U.S. [indiscernible] turnaround received our Chairman's Safety Excellence award for zero recordable incidences during the outage. This work creates a challenging safety environment especially as to realize comparable construction in confined space situations. Additionally, our Matrix NAC operating unit at Rahway, New Jersey received our company's CEO Safety Excellence award for consistently performing high voltage of extra work meeting our client's 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 in driving our culture. First we'll wind 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 over the positive aspects of this 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, refinement strikes, high [re-finally] utilization and weather disruptions and contract finalization. Now let me provide your perspective on the underlined strength of the business. When looking at our business from a brand perspective our nonunion business Matrix Service, which represents half of our consolidated business is meeting or exceeding expectations for revenue and margins across the segments they perform work in. Those segments, storage solutions, oil, gas and chemical and industrial. The other half of our business Matrix NAC represents the combined outsets of our legacy union operation and the acquired Kvaerner business. During the year this brand has reorganized its management team, integrated its processes and expanded geographically. It has also have 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 the late project starts. Our Matrix PDM Engineering division is routinely executing multiple field 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 [Roskam’s] Greenfield fertilizer plant in Iowa valued in excess of $100 million is nearing completion. With the strong execution on this project, we are ahead of schedule and have created positive contribution. We have also strengthened our industry resume for future fertilizer related opportunities as a result of our great safety and high quality performance. We've kicked up work on a recently awarded Napanee Generating Station for TransCanada and we achieved $1.3 billion in project awards over the first nine months of this fiscal year, including our $700 million in a recently completed quarter. This record backlog combined of a robust bidding activity confirmed 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?

[Kevin Cavanah:]

Thank you, John. Let's start with the results for the quarter. Revenue was $314.2 million was lower than last year's revenue of $381.5 million; the decline was primarily from the storage solution segment which we'll 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 $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 expectations of 8% to 10% in this 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 benefitted from a large balance of planned project in Cushing. The project was unplanned and condensed into a very short period of time as the project was completed over an eight month period. While we're currently executing similar balance of planned projects they're 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 think projects including LNG and NGL opportunities. The oil gas and chemical segment included a large low margin golf course 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. Electrical Infrastructure segment was significantly impacted as a result of 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 reporting a reduction in revenue related to the charge. Exclusive of this charge gross margins were 11.2% in the quarter. Backlog increased 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 have recognize 100% of the expected loss on the project. The remaining revenue will be recognized at zero-margin. On a consolidated basis for the nine months, revenue has increased in 978.7 million and our earnings per share is $0.23 excluding the nine months 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 set 193.1 million including 103.2 million of cash. While the loss incurred in the quarter will constrained availability under a credit facility. This constraint will decline over the next four quarters. We have sufficient liquidity to achieve our business objectives including funding working capital and capital expenditures pursuing bolt on acquisition and stock repurchases. Moving on to guidance for the fourth quarter and fiscal year, given the results of the first nine months and our expectations for the remainder of the year, we are reviving our guidance. We now expect revenue for the year to be between 1.34 billion and 1.38 billion, an EPS of $0.48 to $0.53. This implies fourth quarter guidance of 360 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 zero-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 or after. With that I'll turn the call back over to John.

[John Hewitt:]

Moving on I want to talk a little bit about the market. The impact from depressed oil prices have been experienced in three areas

[Operator:]

Ladies and gentlemen [Operator Instructions] Our first question comes from the line of Mike Shlisky of Global Hunter Securities. Your line is open.

[Michael Shlisky:]

Hey guys this is Mike Shlisky. I think we got a lot of stuff from that quarter, I won't rehash, I guess I just want to know basically, how confident are you that this will be done the end of June? Is there any chance at all it will be completed into 2016?

[John Hewitt:]

I would say were pretty confident, we will be done here in this fiscal year. Then when you’re in this phase of a project there is always things that can trip you up. Any mechanical equipment that would fail during start up, any process systems that may blow out or -- some electrical piece of equipment’s that has a fault. So there I think they can trip us up, but at the moment based on where we are through this commissioning phase, which is there in was called steam blow, which is about half way through commissioning, we feel pretty good about where we’re at.

[Michael Shlisky:]

Okay and then secondly, if the work is entirely finished in the -- full part of it is actually done by June 30, is there's chance there are other kinds of post projects disputes or contract issues that might happen at some point in '16 or is it totally done by June 30, both on the work side and off?

[John Hewitt:]

Right now we were 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.

[Michael Shlisky:]

Great sounds good I'll pass it along.

[Operator:]

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

[Tahira Afzal:]

Hi John and Kevin. So the first question is in regards the team that you've been using on this project. How many of those people are going to transition onto your TranCanada project?

[John Hewitt:]

I don’t know the total number but for instance a projects, the Napanee project is in Canada, just as a general rule, we cannot send anyone in Canada that hasn’t actually worked for us for over 12 months so that has some limitations on the people that are going there, so 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 that I would say it will be a fairly low percentage.

[Tahira Afzal:]

Alright. And John if you look at -- when you estimated what it would take to complete -- and your absence be right, when it comes to the last few months. This project always have some nuances but I guess if the extent of the nuances, those you can separate out the liquidation damages and may be provide some colors around, the cost over around themselves, it would be helpful to just get confidence around the team perhaps?

[John Hewitt:]

So, if you take a look at the two estimates to complete that we did between project team and the [coldeyes] review team. The major differences in the two pricing was really around the schedule and the ability to get done in a certain amount of time. And so the differences in that timeframe drove the potential payments of liquidated damages, which is within the order of about 3 million bucks that drove our costs, extended overheads and side costs, it drove additional cost 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 of that -- they are 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 two we had based on what we knew at the time we did this review which was in April that they did -- the numbers that we’re presenting and the charge we’re taking this quarter should be pretty complete.

[Tahira Afzal:]

And then just I would bundle up my two questions into [balance] sheet, if I look at data points between now and your next earnings release unfortunately it’s such a large period with acquired or known information. So will you be providing any press releases on the completion of this project in terms of commissioning start-up happening on time to help layer sales 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 confident on execution, are we going to see more accelerated buybacks to really support what you're saying?

[John Hewitt:]

So the answer to your first question, when we set the party date for the completion of the power project we’ll send you an invitation. 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 some time either combined with that release or near that same release period we would send a notice out there to everybody that we have achieved staying substantial completion of that project.

[Tahira Afzal:]

John, I believe I am pretty close to that project in New York City, so I might take you up on the invite.

[John Hewitt:]

Well, the party is going to be in Tulsa. 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. We have an approved plan, it's an option for us and we may choose to execute on some portion of that.

[Operator:]

Thank you. Our next question comes from the line of Matt Duncan with Stephens Inc. Your line is open.

[Unidentified Analyst:]

This is Will on the call for Matt. Kind of following on to Tahira‘s earlier question, wondering if year 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?

[John Hewitt:]

So from a construction standpoint, purely construction, the scopes are very similar. We are doing earth work 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 in that who’s is 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 giving engineering from him and provided equipment on the timely basis and it's our responsibility to install it in conformance with those drawings. So if there is an engineering, if there is 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 in management well with the client notifying them when we have a -- find an error in an engineering drawing or an error in piece of fabricated or delivered engineered equipment. But other than that we’re the constructors, that’s our responsibility of that construction. The other thing I would remind you too, is that we have responsibility on the Napanee project to mechanical completion. So what that defines is that we have to provide completed assemblies and [bump] motors for the proper rotation, test stoke valves. But once that pieces of installed equipment has turned over to the client. He is 100% responsible for commissioning, so he starts the plant up and whatever that takes to get that done is he 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:]

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

[Martin Malloy:]

My question is been answered. Thank you.

[Operator:]

Thank you. At this time I am showing no further question. I'd like to turn the call back over to John Hewitt for closing remarks.

[John Hewitt:]

Yes, is there anyone else with, for general Q&A.

[Operator:]

Pardon me. We just received the question from the line of Martin Malloy of Johnson Rice. Your line is open.

[Martin Malloy:]

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

[John Hewitt:]

Okay, thanks. Who is -- we wants to open the call for any general Q&A discussions.

[Operator:]

[Operator instructions] Our first question comes from the line of Robert Connors of Stifel. Your line is open.

[Robert Connors:]

I was just wondering regarding on the new power project worked for -- if you look out at '16 and if you can give about to '17, what you guys expect to be on a cost to complete basis, just sort of, give us a flavor, is this going to be slow over the ramp or you are going to be pretty quick to ramp on this project?

[John Hewitt:]

While in fiscal '15 we have -- we've mobilized on the site in February timeframe. 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 the project will start to ramp up fairly, quickly, probably in our fiscal 2016. We'll actually be able to start getting into the foundation work and underground piping and electrical services.

[Robert Connors:]

And then you gave out this sort of $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?

[John Hewitt:]

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 formation on. But I would say that it’s probably up from a year ago by 25%, the volumes of those -- typical types of project. We’re seeing a lot of activity in this -- natural gas value stock, so LNG terminals and on the LNG terminals you may know our value add there was on the storage piece of those facilities, on the NGL opportunities [Sphere] projects and LNG, our NGL export projects for instance propane and ethane. Several fertilizer projects that we're tracking, Urea projects. So there is just a lot of things that have been coming through over last say six months that's creating a lot of opportunities before us and we feel pretty good in the position we're at with several those as we mentioned that that we'll hopefully be able take reasonable percentage of that proposal volume into backlog.

[Robert Connors:]

And we'd also say qualitatively use of pretty good quarter-over-quarter.

[John Hewitt:]

Yes, for the quarter of opportunities?

[Robert Connors:]

Yes

[John Hewitt:]

Yes, I was saying quarter-over-quarter there have been more opportunities come in house.

[Kevin Cavanah:]

Yeah and I also think that some of those opportunities are a little further alone in the proposal process.

[Robert Connors:]

I had just one house cleanup, what was the zero margin or the problem project revenue in the quarter?

[John Hewitt:]

In the third quarter?

[Robert Connors:]

Yes.

[John Hewitt:]

It was very small, smaller than what you're going to think, because 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 reversed the loss.

[Operator:]

Our next question comes from the line of Michael Shlisky of Global Hunter Securities. Your line is open.

[Michael Shlisky:]

Just want to ask about industrial. You guys mentioned that you've had pretty good gross margins in the quarter here. Both kind of are behind those good margins and can that kind of level keep on going here into fiscal '16?

[John Hewitt:]

I think that the biggest contributor to the positive margins there was the fertilizer project that we've talked about. It's gone 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 2016, so we’re not changing our guidance on margins at this point, but we still feel good about that segment going into next year.

[Michael Shlisky:]

And I also want to ask about Storage Solutions. As I recall from last quarter you said you are pretty booked up well through this year into next already and you seem like you have a lot of opportunities out there across a various types of liquids and gases. I guess I was wondering has pricing gotten any better with the capacity to build to a constraint right now, [indiscernible] beginning or there is bit better leverage when it comes down the cash flow contract negotiations here?

[John Hewitt:]

I don’t think so, I think through the course of this year I think our price leverage is in fairly steady.

[Michael Shlisky:]

I guess I was wondering about M&A something you are still looking at some bolt-on’s here. Have you found any kind of evaluation pulling back a last few months given what’s been going on in the oil and gas world or you fiscal -- or is it still somewhat robust pricing around it right now?

[John Hewitt:]

I think for the kind of things that we’re looking at in the process is to do an acquisition that we’re willing to engage in which is not auctions, but 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’re interested in, we’re not interested in overpaying for businesses and because they maybe 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 months or 18 months.

[Operator:]

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

[Martin Malloy:]

Just on the Storage Solutions, the book-to-bill for us two quarters has been 0.4, roughly. Can you talk a little bit more any feel you can give us for the timing of when we might start to see some of these awards hit the [indiscernible]?

[John Hewitt:]

I would say over the next couple of quarters. And some other color around that we've talked about this before. So our Storage Solutions segment is made up of not just tanks, so it’s also has specialty vessels, it has tank maintenance and repair and it has balance of plant work. So there are pieces of that, that the bookings are maybe flat or slightly up that get lost and the overall backlog burn off on bigger projects like terminal project. So while we’re moving from one terminal project to another which maybe 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 different to judge the quality of the market by seeing our backlog drop. So for instance we could within next six 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 could be one project. And so you put that one project in the backlog and it will start to work off faster than we would be able to add back backlog in just conventional crude storage and maintenance and repair. So I think where we’re in our transition and our development is potential as you can see a little more ups and downs swings in our backlog, in storage. But again as we said on the call several times before you need to look at a long-term trend in a kind and quality of projects that we’re adding into that backlog.

[Martin Malloy:]

Do you think that the backlog is [troft] here for Storage Solutions?

[John Hewitt:]

I would like to think so. Base that what we’re looking at yes. Obviously, we've got some work we have to win but we feel pretty good about our position on some of those projects.

[Martin Malloy:]

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

[John Hewitt:]

So for us I think our expectations that we would have a similar turnaround season if not up for 2016. And when all that’s going to fall in 2016, not totally sure because as we said we've had a lot of these and we’ve [firing] 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 some go back out and win or waiting for our client to tell us when they are going to start that. So based on what we think we know about the turnarounds out there; the when they’re going to happens probably is little more obscured to us than whether or not we’re going to be able to take those in the backlog. So in general our opinion for next year is that our turnaround market will be up.

[Operator:]

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

[Tahira Afzal:]

John if you look at what you said earlier to Martin’s question in regards to maybe the storage side [troffing] right now, if you look at all of the projects that are in your backlog on the storage side alongside, the timing you think of these opportunity, could we a potentially see a directionally up here, at least for storage next year on the revenue side. You’ve got easiest comps as well as from last year, we would love to get a sense. I know it's too early for guidance but any help on the directional side would be helpful?

[John Hewitt:]

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 solution segment will be on an upward trend.

[Tahira Afzal:]

And then on the electrical side, there seems like these projects sort of ramps up in the second half of your fiscal year, how should we think about these sorts of air pockets in a sense between now and then? Do you have enough momentum on the more traditional small to midsize transmission projects? Are there other ways you can fill up that [pole], maybe through some of those M&A opportunities in cross selling, would love to get your thoughts on that as well?

[John Hewitt:]

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 down of our core clients there, on how they are spending their money. So our ability to moving to the Midwest to create opportunities there which there are opportunities for us and into Ontario and then to expand our footprint that we started out in the West Coast is going to create the most opportunities in growth for us. So it certainly something that’s part of the strategic plan for electrical group and I expect sometime over the next 18 months or so that we’ll start to get some more -- some more growth out of some of those expansion opportunities. And certainly M&A -- potential for M&A is part of that.

[Tahira Afzal:]

And last question John is really on the LNG side, clearly those opportunities are pretty big, but I would love to get a sense of the execution risk and the risk inherit in the term for a couple of reasons; number one, as you know Matrix’s has legacy history with the one project that you did do in the Gulf Coast area and number two, I was talking to 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 two elements.

[John Hewitt:]

So the LNG projects that we are involved with we feel pretty good about their potential for going forward and where they are from a permitting standpoint and from uptake agreements. Those are the ones that we are primarily engaged with are on the Gulf Coast and we feel good about the likelihood of those projects going forward. I am afraid I can’t -- the [Cheniere] LNG projects for major Matrix was prior to my tenure here, so I can’t - wouldn’t be fair for me to speak [intentionally] about those -- about how those projects and why there were issues with them. I think there were -- I would say that we’re much, we related to storage and our capabilities with Cryogenic Storage, we’re a much more matured company than we were seven years ago -- eight years ago. So we’re fairly confident about our ability execute on those projects.

[Kevin Cavanah:]

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

[Operator:]

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

[Matt Duncan:]

You hit on the oil and gas segment a little earlier in the call, so I am wondering if you can give some more detail on what drove the top-line strength and why margins were under some pressure there?

[John Hewitt:]

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 -- 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, we’ll 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 high revenues.

[Operator:]

The next question comes from the line of Kaustubh Jagtap of Ardsley Partners. Your line is open.

[Kaustubh Jagtap:]

So, you mentioned a one large turnaround project which was below margin. So how frequent are such projects and I mean is it a special case? Or should we expect them on an annual basis?

[John Hewitt:]

So, all the turnarounds as we do have an opportunity for scope expansion, the clients and sometimes in conjunction with set the scope and the expected repairs for the turnarounds, when the plant is shut down and there is opportunity for the client and the client's engineer to do some discovery work. There's always opportunity for scope growth. We had about a year -- a little over year ago we had another project that we did that had very extensive scope growth. I think a $5 million original contract under into 25. So it's not unusual, but it’s not the norm. And so as the case with this project there was excessive 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, you know as the client goes through his audit process. Reviews our gate logs, man power and those sorts of things.

[Kaustubh Jagtap:]

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 $103 million in cash right now? But historically you've probably needed anywhere between -- or you have had anywhere between $40 million and $65 million. And if you could speak about the extra $50 million and what you could do with?

[Kevin Cavanah:]

So, cash management is one of our, you know behind safety and quality of clients it’s one of our most important things we'll look out on projects and we'll try to manage. We believe a strong balance sheet, good liquidities are critical for us to be able to capitalize on opportunities in front of us. And you’ve seen especially we have a business that has large turnarounds like you mentioned earlier. There will be quarters where we’ll have -- those always done on reimbursable basis. So you've quarter where you'll have a big need for working capital investment. So we've tried to keep that $40 million, $50 million for those working capital needs. But for the most part of it, we've been making money and then that cash balance has grown. So that puts us in a position to start capitalizing on some of the other strategic objectives we have including acquisitions. And so, although John talked about acquisition not opportunities, but that has been our focus, to maintain that strong balance sheet, it's something we're going to try continue to do.

[John Hewitt:]

But I think as we've done a better job with negotiating our payment terms with our clients as we’ve taken on us some of these bigger projects, it's given us an opportunity to get into a more of a neutral cash position, where we have to provide less financing, unintentional financing to your clients, trying to bounce that out with the reimbursable work that 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 which relates to our projects. So what you've said is correct. We were actively and continually looking at strategic bolt-on acquisition targets. Those acquisition can cost us in anywhere in a range of $5 million to $25 million and we continually have two of three of those, they were sifting through. So , it is -- we want to have deal the half of that as you say, dry powder, in place that we can exercise and attacked a key acquisition target when we find a right one.

[Operator:]

The next question comes from the line of Robert Connors of Stifel. Your line is open

[Robert Connors:]

Just sort of had a follow up on the EPS, you said was impacted by about $0.08 to $0.12 in the quarter? That was correct, right?

[John Hewitt:]

On the project delays?

[Robert Connors:]

Right.

[John Hewitt:]

Yes.

[Robert Connors:]

So it just sounded like to me that the majority of that related to refinery turnaround fees and impossibly been pushed out may be in the ’16, so that’s sort of been a recurring theme, the past couple of years, so we -- if just as the case as well on ’16 does 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?

[John Hewitt:]

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 a 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 those projects -- [slippage] on those projects this last quarter then we've seen previously. So it's kind of a -- it's higher than normal and it's not we would've expect in the future.

[Robert Connors:]

Can you give any color around with end markets and locations those projects were in?

[Kevin Cavanah:]

So the -- in our storage business, our ability to start some tank work against some small balance of plant work which pushed out, delayed two or three months out of the third quarter into the fourth quarter. So that was probably the biggest piece of that impact to it. It’s 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 achieve the same level of progress; bad news is that sound is much repeated, recognizes as much revenue and on the turnaround side, a lot of the slippage we’re seen is actually more about the fourth quarter than it is about third. And things are moving out.

[Robert Connors:]

Those first two items looks like you turned that corner on those in the positive direction already.

[Kevin Cavanah:]

Well, that’s the specific projects that had to delay are now -- we are not in execution of [indiscernible], but there we were supposed to get started four months ago.

[Operator:]

At this time I'm showing no further question in queue, I would like to turn the callback over to Mr. John Hewitt for any closing remarks.

[John Hewitt:]

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

[Operator:]

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