Matrix Service Co (MTRX) 2011 Q3 法說會逐字稿

Greetings. Welcome to the Matrix Service Company Third Quarter 2011 Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kevin Cavanah, CFO. Thank you, sir. You may begin.

Thank you, Dan. I would now like to 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 the 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, 2010, and in subsequent filings made by the Company with the SEC.

I would now like to turn the call over to Mike Hall, Chairman of the Board of Directors of Matrix Service Company. Mike?

Thank you, Kevin. And good morning to everybody. We appreciate you joining us today to discuss the results of our third quarter ended March 31, 2011.

Joining me on the call today, along with Kevin Cavanah, is John Hewitt, the Company's newly appointed President and Chief Executive Officer. Throughout his career, John has demonstrated his strong leadership and extensive industry experience through the successful management of many large and diverse EFPC companies. John brings a strategic vision for the future direction and growth of the Company and the Board of Directors believes John is highly qualified and well prepared to lead Matrix Service. I'm pleased to have John as a key member of our management team.

I would now like to turn the call over to John for a few comments.

Thank you very much, Mike, for the kind introduction. I'm very pleased to be joining the outstanding team here at Matrix Service Company. And look forward to working with our leadership as we continue to execute on the Company's strategic growth plans. I cannot tell you how excited I am to become part of the Matrix Service Company family.

I've spent my entire career in the industrial engineering and construction business working throughout North America and some international locations. Over the past 25 years, I have held various operating and leadership positions at Aker Solutions ASA and it's predecessors companies. Most recently, I served as Senior Vice President of Aker Solutions, where I was responsible for providing executive oversight on major capital projects in the power and LNG markets. Prior to that, from 2007 to 2009, I served as President of Aker Solutions Engineering and Construction, US Operations, where I was responsible for managing all of their construction services in North America. From 2004 to 2007, I served as President of Aker Construction, where I had complete P&L responsibility for a multidisciplined industrial construction business operating, once again, throughout North America. My market experience is spread among power, oil and gas, metals, chemicals and other miscellaneous industrial arenas. I have executed capital and maintenance projects in excess of $2 billion.

Over the next three months, I will be spending time at all of the Company's offices to meet managers and employees to get a deeper understanding of the Company. I will also be visiting some of our project sites and meeting our key clients. Once again, I'm very excited to be part of the excellent management team at Matrix Service Company and working with them to achieve our growth ambitions.

I'll be happy to answer any questions at the conclusion of our call today. And look forward to meeting many of you in the coming months.

Thanks, John. The Company continues to experience generally improving market conditions and strong bid volume, in both the construction services and repair and maintenance services segments. As we discussed on our last call, our long-term outlook for backlog is positive, which is reflected in the backlog growth in both segments in the third quarter and from the fiscal year ended June 30, 2010.

Safety performance remains a critical focus area and is essential to our long-term success. As we mentioned on our last conference call, we completed calendar year 2010 with the lowest total recordable incident rate in the Company's history. Further, our results for the nine months to date in fiscal 2011 are also positive, with a recordable rate trending below that achieved in fiscal 2010.

Revenues for the three month and nine month periods increased over the same periods last year, with backlog also up over the three and nine month periods. The operating results for the quarter are inline with our expectations, driven by stronger demand for construction services in the above ground storage tank market and repair and maintenance services in the electrical and instrumentation and downstream petroleum markets. AST construction revenues increased 42% in the third quarter, compared to the same period last year. And the electrical and instrumentation repair and maintenance business increased 210% over the same period. The repair and maintenance service segment, which has been soft during the past few quarters, experienced strong growth in third quarter compared to the same period last year.

Consolidated gross margins improved in the third quarter, driven by better recovery of overhead costs due to higher business volume and a lower cost structure. We realized strong gross margins in the construction service segment largely due to outstanding project execution and project specific performance bonuses, which resulted in recognition of margins above historic levels. Cost reductions implemented in fiscal 2009 and 2010 continue to positively impact our operating results in the three and nine month periods. As a result of these cost reductions, the Company has increased our absorption of construction overhead costs, which has contributed to our gross margin improvements.

SG&A expenses were lower for the three and nine month periods compared to the prior year. However, when normalizing for non-routine charges related to acquired claims receivables in the three and nine month period last year, SG&A expenses were up $1.2 million and $2.4 million in the respective three and nine month period this fiscal year. Additional SG&A expenses relate primarily to incentive compensation increases versus the prior year, based on improved performance. We will continue to manage our cost structure as the business grows, in order to maintain the appropriate level of resources.

Our outlook remains positive and we continued to see attractive project opportunities across our core markets. We believe demand for AST construction services will continue to be strong, as will E&I opportunities in both the construction services and repair and maintenance service segments.

The above ground storage tank business continues to gain momentum with a number of projects planned in Cushing, Oklahoma, and other terminal facilities in North America. The development of the Canadian oil sands and related pipelines to transport crude oil to the Gulf Coast continues to be a key driver for the AST market. Recent research reports have highlighted the excess crude inflow capacity into Cushing compared to the smaller outflow capacity to the Gulf Coast as a key driver for additional storage capacity over the next several quarters. This, combined with improving economics for terminal operators, is expected to support additional investment in storage assets. Matrix Service remains a leading provider in this market given our reputation for quality engineering, fabrication and construction services. Further, our proximity to key terminal facilities in Cushing, coupled with our significant equipment and personnel capabilities, positions the Company to respond quickly to the growing number of opportunities.

The AST repair and maintenance business has improved somewhat in the recent months, and we continue to pursue opportunities in the United States and Canada. However, the level of competition in the repair and maintenance market remains high, which is keeping margins below historic levels.

The electrical and instrumentation business continues to be a significant part of our growth strategy. We are targeting opportunities in the power delivery, power generation, downstream petroleum and renewable energy markets, which we believe will allow us to expand our marketshare in the Northeast corridor, the Mid Atlantic states and in other growth area throughout North America. We have added equipment, tools and personnel to position the Company to capture a significant amount of work required to construct and upgrade power systems. We are also expanding beyond our traditional substation business to improve transmission and distribution construction and maintenance, as we see a growing market for capital expansion and maintenance to the high voltage infrastructure required by many of our utility customers. Our capabilities also position the Company to construct and maintain generating stations, compressor stations, renewable facilities and other energy-related electrical infrastructure projects.

As we mentioned on our last conference call, the calendar year 2011 outlook for the downstream petroleum market is positive, based on refinery utilization rates and improving crack spreads. This trend also bodes well for improved construction activity in this market. Turnaround activity in the third fiscal quarter was higher compared to the prior year, and we expect turnaround activity in the fourth fiscal quarter to be strong as well. The timing of future awards continues to be uncertain. In addition, it is difficult to achieve attractive margins given the high level of competition in the turnaround market.

We are pleased with the results through the nine months of fiscal 2011 and are encouraged by the level of business activity going into the fourth quarter. As a result, we expect earnings for fiscal 2011 will be at the higher end of our guidance range of $0.60 to $0.75 per fully diluted share. We now expect that revenues for fiscal 2011 will be in the range of $630 million to $650 million.

I will now turn the call over to Kevin to discuss the financial results.

Thanks, Mike. In the third quarter, the Company earned $0.18 per fully diluted share on revenues of $136.3 million, compared to breakeven earnings on revenues of $122 million in the same period of last year.

Construction services segment revenues decreased marginally to $75.7 million, compared to $76.3 million in the same quarter last year.

Above ground storage tank revenues in the construction services segment increased 42%, offset by lower sin the downstream petroleum and electrical and instrumentation markets.

Repair and maintenance services segment revenues increased to $60.6 million inthe quarter, compared to $45.7 million in the prior year. The improvements in the repair and maintenance services segment were driven by significant growth in E&I. Repair and maintenance service revenue increase in downstream petroleum market due to higher turn around activity in the third quarter compared to the last year.

Consolidated gross profit was $18.6 million in the quarter versus $13.3 million in the third quarter last year.

Construction services gross margins were 17.4% in the quarter compared to 13.2% in the prior year. The increase in construction services gross margins is due to improved recovery of overhead costs,a favorable mix of higher margin work and strong project execution.

Repair and maintenance services gross margins were 8.9%in the quarter compared to 7% in the prior year. The repair and maintenance services margins continued to be impacted by the high level of competition, which is keeping pricing below historic levels.

Consolidated gross margins were 13.6% in the quarter compared to 10.9% in the prior year period.

Third quarter SG&A expenses were $10.9 million as compared to $13.2 million in the prior year. The prior year included non-routine charges of $3.5 million related to acquired claim receivables, while the current quarter included higher incentive compensation costs due to improved operating results.

In the nine month period, the Company earned $0.50 per fully diluted share of revenue of $463.4 million, compared to $0.34 per fully diluted share on revenues of $410.1 million in the same period last year.

Construction services revenues increased to $278.8 million for the nine months compared to $234.6 million in the same period last year. While the repair and maintenance services segment revenues increased to $184.6 million in the nine months compared to $175.5 million the prior year.

Consolidated gross profit was $54 million for the nine months versus $49.2 million last year. In the nine month period, construction services gross margins were 13.4%. And repair and maintenance services gross margins were 9%.

Consolidated gross margins were 11.7 in the nine months as compared to 12% in the prior year period.

SG&A expenses for the nine month period were $32.7 million compared to $34.7 million in the prior year.

Consolidated backlog increased to $383.9 million at March 31, 2011, an increase of $17.9 million or 4.9% in the three months ended March 31, 2011, and a $30.7 million or 8.7% increase in the nine months ended March 31, 2011.

Our cash balance was $63.4 million at the end of the third quarter, as compared to $50.9 million at the end of fiscal 2010. The increase in our cash balance reflects the growth in our business volume and improved profitability during fiscal 2011.

Overall liquidity remains strong and we continue to fund the Business with cash flow from operations. Our strong balance sheet and bonding capacity provides significant financial flexibility in the future for our strategic plans.

With that, we would like to open the call up for questions.

Thank you. (Operator Instructions). Our first question comes from Matt Duncan of Stephens Incorporated. Caller, please proceed with your question.

Hi, guys.

Good morning.

John, first question I have is for you. First of all, congrats on your new position there with Matrix. Can you talk a bit about what attracted you to your new role?

The company -- was very attractive to me because I felt there was great opportunities there for growth in the organization and growth for me personally. I'm -- about the challenges and growth opportunities and felt as though that this Company would provide those opportunities to me. And that the -- I was very impressed with the management team that I met and the Board of Directors and felt that that was an extremely strong group and that it had a very good foundation to build upon.

Kevin, can you talk a little bit about the impact that weather had on you this quarter? I know you had told us on your last conference call you expected your June quarter to be much stronger than March. I was still a little surprised about how low revenues were. Clearly, weather had some impact, when you look at the shortfall versus -- my model anyway was all in construction. Talk a bit about how you think your revenue may have been impacted by winter weather.

I think the impact on revenues from weather was -- it did impact us, but it was minimal. We picked up some work in emergency work for E&I because of weather, but it did have some negative impacts on a lot of our construction [inaudible]. Overall, I don't think it was the primary driver to the lower revenues. As Mike said earlier, the results in the quarter, including the revenue volume, were pretty much inline with our expectations. We expected lower revenues in the quarter. We knew our E&I revenues would be lower. It's that time of the year that -- they are not going to take down the infrastructure due to the power demands. We also have construction projects planned that are going to be commencing in the fourth quarter that didn't start in the third quarter. And then we did have -- we expect improved turn around. It was good in the quarter. But we think it will be even better in the fourth.

That's helpful. And then on the gross margin side on construction, you mentioned that you got some performance bonuses for good project execution. Can you quantify those for us ? And maybe what would gross margin have looked like without those? And then help us think about what we ought to think about, in terms of gross margins on a go-forward basis? It seemed like 13.6% is a little high go forward. Just try to make sure that we calibrate our models properly.

Okay, let's start on a segment basis, and we'll start with construction services. There is really two things that led to it. Number one is just -- we are doing a better job of absorbing our overhead costs, controlling our cost structure and has been a big driver on the construction services side. Now, strong execution was a big impact in this quarter in construction services. It allowed to us achieve the 17.4% margins. There was a number of areas in which that impacted us.

Number one, we had minimal margin fade this quarter. We did a good job on all of our projects and we didn't have a big bad project offsetting good work.

Secondly, we did earn some project incentives on projects due to the strong execution. We will always have some level of incentives in our -- we hope we'll always have some level of incentives in our operating income. But I think it was higher in the third quarter. And then we also -- the execution allowed us to come in under our cost estimates. Whenever we are estimating a project we are going to have a contingency estimate in there. And if with we do a good of operating -- executing the work, then we are going to be able to come in under our cost estimates. We did that.

I don't think you can expect 17% gross margins on construction services work every quarter. This quarter it was just -- everything was working well. Even without the incentives, we still -- because of that project execution -- we still would have been inline with the really strong gross margins we earned back in the hayday, back in the 2008 time frame. We still have a competitive environment and as our mix of work changes, construction service margins maybe, I don't know -- 12%, 13%.

On the repair and maintenance services segment side it was really two factors;better absorption offset by the continued pressure we see on pricing.

Kevin, is something around 12% for a consolidated gross margin probably more realistic, at least the next couple of quarters?

I think that is probably more realistic.

That's helpful. Last thing I've got and then I will jump back in queue; Mike, can you talk about the acquisition pipeline?You guys continue to build a cash balance. You are now at $63 million and no debt. Probably you, yourselves, are a bit underlevered. What are you plans for putting your cash to use and growing the business through acquisitions?

As I have mentioned in the past, we really don't comment on acquisitions as to where we are with respect to any specific acquisition. So, in terms of where we are now there is really no comment.

Our approach on a go-forward basis to use our liquidity is to have it available to grow the Business, whether that be organically or through acquisitions. And obviously, John is new and will have some thoughts on the types of acquisitions and what areas and what kinds of diversifications we will be looking at. Acquisitions, particularly tuck-in acquisitions, are still critical to the Company's future success and growth strategy. And we intend to use our liquidity to fund our future needs, both organically and through acquisitions. And in the fourth quarter, we'll be using cash because of all of the turnaround activity. There is no question about it. In the third quarter we built cash significantly because of some positive working capital changes. It can swing significantly from month-to-month. But we do have substantial liquidity that we do plan to use to grow the business on a go-forward basis.

Okay. Thanks, guys.

Our next question from Fred Buonocore from CJS Securities. Caller, please proceed with your question.

Good morning. And welcome, John, congratulations.

Thank you.

John, I will start out with a question for you, as well, realizing that you have only been with the Company for a very short period of time. As you look at the business and bringing in the various experiences that you have had in the past, what are the single most --or the most significant opportunities that you see to improve or gain some upside to what the business is currently generating?

Like you said, I have been with the Company a short time, like two hours. But obviously, I have sat and looked at some of the financials and strategic plans. I think the strategic plans in the organization are solid. I think there is opportunities for both geographic expansion --I think there is some opportunities to be looking at different markets that the Company is not in now. And I think there is also opportunities to expand and grow -- and strengthen the markets that they're in currently. Without, certainly -- my thoughts and visions aren't totally solidified today. But spending quite a bit of time with the management group and the Board of Directors to look at those opportunities. And we going to be working through those over the course of the next couple of months.

That's great. Thank you. Secondly, just asking about backlog. The outlook for year end backlog, can we see another increase as we move through into the next quarter, finishing up the year? And any comments that you have on outlook for 2012 -- would seem to make sense that it would be a growth year. Can it be can you give us any more color on expectations there?

Well, in terms of the backlog, and I've mentioned it before, backlog could be lumpy. The long-term trend is positive. And when I say long-term trend, it may be down for a quarter and go up for a couple of quarters and could go down and up for four quarters in a row. But the long-term trend is up.

We are looking at a significant number of projects now. And we are somewhat at the mercy of when they execute those contracts. And if it happens to be in June or May, it will show up in our quarterly backlog. If it is July, it will not show up in backlog. We had a -- and I won't quantify it -- but a very good April, in terms of booking additional business. And we expect that to continue because the bidding activity is up significantly. And we are going continue to capture our fair share. So the long-term trend for backlog is up. And then that will translate into next year 's performance.

We would expect next year's performance to be substantially better than this year, as we are taking advantage of a market that is pretty positive and continues to be positive. When you look at [crack spreads] -- crack spreads are increasing. That bodes well for construction activity in the downstream petroleum industry. You look at oil prices and oil prices are high and some people say they are going higher and some people say they are going lower, but that helps our business. We are seeing -- global storage is increasing and storage at Cushing is expected to increase over the next few quarters next year. We are seeing opportunities in aviation fueling, gas market opportunities. Our read is that the engineering houses are getting very active, which is a leading indicator.

So our AST construction remains strong, our turnaround activities for the rest of calendar year 2011 are very positive, which falls into our fiscal 2012. Some of back-end technology opportunities are starting to come along. And the opportunities are improving there. The only thing that is some what unclear right now, we think, is the nuclear industry. We are not sure where that is going. Except to say that there will probably be more maintenance and safety regulations coming out for existing plants. And that would help our business. Because we did receive our NR stamp, which is going to help us in that area of focus. So overall, we're pretty positive. And that's really all I want to say about 2012, except to say, it should be pretty good.

Okay, that's helpful. I'll get back in line, thanks.

Our next question from Rich Wesolowski of Sidoti & Company. Caller, please proceed with your question.

Good morning.

Good morning, Rich.

John, congrats. Look forward to working with you.

Thank you, look forward to working with you.

Mike, you had the -- you mentioned the backup in Cushing. With the oil futures curve having flattened out over the last few months, has the bidding activity at the terminal flattened out as well?

Not really. We are seeing significant bidding activity in Cushing and in other areas in the country, really.

Is it something that -- you mentioned that Cushing will be good for the next few quarters or even into next year. Is it something that you that can be exhausted over the next year? Or is it something with a longer tail than that?

It's a longer tail than that.

If you look at the last couple -- say a year of award tallies in the construction segment; the June and September quarters really stand out as off-the-charts and you guys hadn't really announced any big awards over that time. It has been good after that, but not as high. What accounted for that spurt?

Well, I think when you look at the announcements -- we had a number of projects that we combined together and put out a news release on some of the projects. When you look at the backlog growth over the last nine months, it has really been driven by our AST business,which has made up the bulk of the increase. It is really our AST business. The others have done well, but the AST has really driven the growth.

And the AST, while we haven't seen individual projects that have been the size where we have announced them, there has been a lot of smaller award -- smaller tank packages. As companies came out of the recession they were a little more hesitant, they wouldn't do a 20 tank package, they would do a four tank package.

And they are taking bigger projects and dividing them into smaller segments. So you may have a 20 tank project that they are going to stage at four tanks or five tanks each, and do one and then four or five months later do the second one and the third one. They are not doing the 20 tanker like they used to.

Okay. You had reported an abrupt fall-off in construction revenues from refineries and also in the E&I. Is that timing of projects -- a couple were completed? Or is that something else?

We had a large project in the E&I business that was completed in the second quarter. And that really caused the drop-off in the E&I construction side of the business. Repair and maintenance continues to be very strong on the E&I side. We would expect to replace that backlog and construction activity to grow in the future in E&I. Again, it can be lumpy because it is construction work.

The E&I revenue is now a quarter of the Company. So how much of that comes from utilities versus oil and gas versus other heavy industrial sectors?

I would say the bulk of it is utilities.

Okay. And then lastly, the R&M margin has settled in that 8% to 9% range. Whereas, in the past, even revenue of $250, $275, you were to 10% and even up to 15%. Is pricing the big difference between today and the prior years? And is there the potential for real sizable R&M expansion in 2012 and 2013?

Pricing is really what's driving the margins in the repair and maintenance side. Because the man hours utilization is really up and the volume is up, but because of much lower pricing it has really had a negative impact on the ability to grow margins. We have been able to grow margins, which we did in the last quarter, but that is really the result of a cost structure that's much better now than it was a year or so ago.

In the future, we would expect -- and when you start looking at some of the repair and maintenance, whether it is AST, which can take place in marketing terminals or in [vouching] petroleum, or you look at E&I work, which takes place primarily in utilities, where we have a number of contractor of choice arrangements. If in fact the whole volume of activity starts picking up, we hopefully will see a less competitive environment which would allow for a little better pricing. I don't see in the near term, though, where we are going to be able to get our repair and maintenance margins back to the historic levels that we saw two or three years ago.

Appreciate it, thank you.

Our next question from Martin Malloy of Johnson Rice. Caller, please proceed with your question.

Congratulations on the quarter.

Thank you.

In terms of the large amount of AST capacity that's expected to be added at Cushing, in the amount that's been announced by the owners and operators; how much of that, would you say, has been awarded thus far? Is it 25% or 50% or --?

I really don't have -- I don't have the answer to that, to be honest with you. We can try to do some research and find out in that.

And then you mentioned getting into -- or expanding into electric transmission distribution construction and maintenance. Can you talk a little bit about your strategy for doing that? Is that through acquisitions or hiring people and growing organically?

It is primarily going to be through hiring people and growing organically. When we picked up the SM Electric acquisition, it provided some capabilities in that area that we are now starting to expand and grow. It is going be primarily through organic internal growth.

Okay. Thank you.

Our next question is from Tahira Azfal of KeyBanc Capital Markets. Caller, please proceed with your are question.

Good morning, gentlemen. And many congratulations on the quarter, as well.

Thank you.

Thank you, appreciate it.

John, of course, first question for you; you are coming from Aker. Aker has obviously been seeing a lot of changes with [Jacobs] buying [quotients], et cetera. Would love to know how much that influenced your decision to look outside.

And number two. Aker has had great traction on an international basis. As you look at Matrix, do you see any opportunities there that you can really strategically leverage outside of the US? And as you said, perhaps it's early, at this point.

The changes at Aker had -- I would say did not have a great impact on my decision to come to Matrix. Aker is a good company and they have a good strong management team. This was an opportunity for me, I felt, to come to an organization that I really had alot of -- that I really felt very strongly about as a platform to grow the business.

On an international basis, I think international work has got to be part of the portfolio of this Company. And that we -- but we need to do that in a very measured and a very strategic basis, with a good strong tactical plan and not rush into an international expansion. As a company, as a construction services business, where you are selling know how and logistics management and labor management -- management of labor, you need to be able to find the best way to export that off-shore. And that certainly is something that is going be in our planning and thinking here going forward.

Thank you. That is helpful.

Second question is for Mike. Mike, it has been awhile since we really talked about leveraging Hake Group and it's potential. Now, there a lot of talk about EPA regulations around scrubbers, retrofits. And the first word coming out of utilities is that the spending is going to be very high, much more than the last cycle. And the timeframe right now seems pretty compressed. Would love to get a sense, in terms of how you are positioning Matrix to take advantage of that opportunity? And as we look into 2012, more so for you, maybe the back half of the fiscal year, how you see that opportunity playing out?

Well, it is a very good opportunity for us. We have experience, not only in the Hake Group, but also in our merit operations -- and the old Hake Group being our union environment. We have experience in both sides of our business to take advantage of the scrubber work and we do a lot of that and have done a lot of that. I think it is not really going to be required until another two or three years, I believe, in 2015. And we are seeing more and more activity but it is slower than we thought it was going to be. We really think it going to have a much bigger impact for us in 2013 and 2014 and into 2015. There will be some activity next year. But we think the growth is really going be in the following two or three fiscal years after 2012.

Got it. That's very helpful. And last question is in terms of AST tanks. Obviously that the lynchpin or the core are of focus, or has been for Matrix in the past. We talked about the fact that maybe diversification is a great idea. Because this market has such sharp ups and downs, strategically speaking. And it seems from your commentary today, Mike, it seems like we are going to see a nice spurt. But would love to see that as we go far into 2013, 2014. Strategically, which are the end markets you would like to grow in?

The end markets -- and you hit a very good point, we do rely a lot on the petroleum industry and we would very much like to diversify in other industrial areas and in the power industry, and even moving into some of the upstream versus downstream or midstream versus downstream. So, that will be where we are going to be focusing our growth, both internally and through acquisition. It really has to make sense and we really do need to diversify, which is in our long-term strategy to do just that.

Thank you very much.

Our next question is from Mike Harrison of First Analyis Securities Corporation. Caller, please proceed with your question.

Good morning, guys. It's actually Steve Schwartz sitting in for Mike today.

Hi. Good morning, Steve.

And just -- if I heard you guys right, E&I construction actually benefited from some weather issues? Did I hear that correctly?

No, I didn't mean to -- if I said that, that is not what my intention was. I think that there could have been some E&I emergency work that benefited. But the normal new construction work probably would have been negatively impacted.

And on the construction side for that part of the business, E&I, I think you mentioned it was pretty lumpy. But I'm wondering if there is an opportunity to return to revenue levels in the mid 20s as a quarterly run rate?

Yes, but I don't think that is going to happen this next quarter. We're going to be growing at that -- when you start looking at run rates at that level, yes, that's the plan and that's the objective as we continue to expand the areas that we're really focusing on for E&I construction.

Okay. Just as far as the better absorption and the overhead costs -- if I frame it up this way, help me understand this;last quarter -- that December quarter, you guys had $136 million in revenue -- I'm sorry $175 and in this quarter $136. How on a lowered level of revenue do now end up getting much better absorption?

When we were talking about the better absorption, we are comparing third quarter of this year to third quarter of last year. Our revenues were up in that period. It is not just a man-hour driven item. It's related to --we have done a lot of work to improve our cost structure. Make sure our staffs, our infrastructure is at the right size for the volume of business that we have.

Just one last one, and this is regarding the nuclear opportunity. You mentioned you got your NR stamp. Is that relatively new?

Yes.

So that happened in the first quarter?

Yes, it do. About three or four weeks ago.

Fantastic. That's great. Thanks for taking the questions.

You're welcome.

Our next question is a follow-up question from Rich Wesolowski of Sidoti and Company.

Thanks. Will you comment on where your costs are for steel versus six months ago? And what you can do and what you are doing to limit the effect on profitability?

Steel is up considerably from six months. Availability is still pretty good, we are not having any difficulty getting the steel. We typically lock in our steel purchases with our contracts when we bid the contract. And if there is increases, we really negotiate contracts where the customer takes the risk on the steel. If he does not want -- or they don't want us to lock it in. We typically lock it in when we get it awarded or have a 30 day period after our bid. So we really don't have significant commodity risk in our bidding and construction activity.

Is the ability to negotiate that with the customer an improvement in the bidding terms that you had seen 18 months or two years ago?

No, it really hasn't changed much.

And last one for Kevin. How much cash would you say you need to leave on the balance sheet to bond large bids and to absorb any working capital growth that would come with the backlog?How much is really excess cash on the balance sheet?

I like all of the cash. But I don't -- I don't know if we have an optimal level we are looking for. Right now we do have the flexibility to do some things strategically with the level of cash. We've obviously got more than what would be required. But as we look into fourth quarter, we're going to see significant increase in the volume of work. And we're going to see some of that cash be used to fund some working capital. And we're still looking at other things to do with that cash, such as strategic acquisitions, tuck-in acquisitions. We're always going try to keep $20, $30 million of cash on hand. But we feel good with the balance we've got right now.

Thanks again.

Our next question is a follow-up from Fred Buonocore of CJS Securities. Caller, please proceed with your question.

Not to beat a dead horse, but following up on Matt's and other previous questions about the margin in the construction services in the quarter. We talked about the gross margins in that business reverting to -- more like the 12% to 13% range, where they had been in recent -- previous quarters. Does that -- and realizing that you're not giving specific guidance there, but does that range factor in more average type execution? Or does it factor in the kind of execution that you saw this quarter, but no big bonuses?Just trying to think about how normalized that range is.

I think it's more of an average. It's -- we had [inaudible] margins with that kind of performance this quarter. If we repeated that type of execution on our projects, we'd be able to achieve strong margins like that again. I think the 12% or 13% range we talked about is kind of a normal margin -- normal level of execution.

Okay, thank you.

It appears there are no further questions at this time. I would now like to turn the conference back over to John Hewitt for closing statements.

Thank you for joining us on the call today. And we look forward to talking with you all in the near future.

Thank you very much.

This concludes today's teleconference. You may now disconnect your lines at this time. And thank you for your participation.