Matrix Service Co (MTRX) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to t he Matrix Service Company third-quarter fiscal 2012 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference call is being recorded. A brief question-and-answer session will follow the formal presentation. I would now like to turn the conference over to today's host, Mr. Kevin Cavanah, Vice President and CFO for Matrix Service Company. Thank you. Mr. Cavanah, you may now begin.

Thank you. I would 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 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 fiscal-year ended June 30, 2011, and in subsequent filings made by the Company with the SEC. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kevin, and good morning. Today we'll provide an update on the Company's strategic plans and investments, discuss the operating segment changes, as well as our results for the quarter and nine-months ended March 31, 2012. In addition, we will comment on the change in our full-year guidance. The Company completed an update of its long-term strategic plan in the third quarter and has begun investing in many strategic growth areas, including mining and metals, material handing, industrial cleaning, high-voltage electrical, and shale energy development opportunities. We are targeting a consolidated average revenue growth rate of 12% to15% per year over the next five years.

This growth will come from organic development of our existing business lines and services, leveraging our existing strong market presence and reputation, recruitment of key leadership, and select acquisitions that provide a strategic and cultural fit. The Company is also investing in critical infrastructure to support our growth, such as safety, corporate development, information systems, employee training, and risk management. While these investments are expected to have a negative effect on our earnings in the short term, the management team believes the actions are necessary to achieve the Company's strategic goals and will result in improved operating results and greater shareholder value over the long term.

In support of the strategic goals discussed above, Matrix Service Company is changing its operating segments effective this quarter. Historically, the Company has reported two operating segments; Construction Services and Repair and Maintenance Services. This segmentation no long fairly represents our strategy or the diversity of the markets in which we will providing services over the next few years. Going forward, the Company will report four operating segments; Electrical Infrastructure; Oil, Gas and Chemical; Storage Solutions; and Industrial. These new operating segments are consistent with the Company's current strategic focus and organizational structure and will provide greater transparency into the business.

The Electrical Infrastructure segment, which represents 20% to 25% of our business, primarily encompasses high-voltage electrical service to investor-owned utilities and construction and maintenance services in power generation facilities. High-voltage services include construction of new substations, existing substation upgrades, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services. Construction and maintenance services are provided to a variety of power-generation facilities, such as combined cycle plants, nuclear facilities, coal fired power stations, and renewable energy.

The Oil, Gas and Chemical segment represents from 20% to 30% of our business volume and includes our traditional turnaround activities, plant services, and capital construction work in the downstream petroleum industry. We provide similar services to chemical, alternative fuels and upstream gas and petroleum facilities. This segment also includes various industrial cleaning services, including hydroblasting and vacuum services.

The Storage Solution segment, which accounts for 40% to 50% of our operations and includes new construction and maintenance services for crude and refined product, above ground storage tanks and terminals. This segment includes cryogenic storage vessels, such as LNG tanks, and other specialty vessels, such as spheres and bullets. All of our engineering and fabrication services related to Storage Solutions will also be captured in this area.

The Industrial segment primarily represents startup businesses in key growth sectors for Matrix Service Company and is currently around 5% of total revenues. Principally, this includes capital projects, maintenance and outages in the mining and metals industry. This segment also includes the engineering, procurement and construction of bulk material handing systems. Other services include equipment installation, millwrighting, instrumentation and control systems, and mechanical construction in a number of end markets, including pharmaceutical, pulp and paper, food and beverage, aerospace, and other industries. These new reporting segments provide a better description of our business aligned with our vision for the future. Consistent with our strategic plan, Matrix Service Company will continue to invest in growth opportunities in order to deliver consistent performance and increased shareholder value.

On the operating side of the business, our refinery turn around and maintenance activity in the Oil, Gas and Chemical segment has enjoyed near record volumes and we are continuing to grow this business. In addition, the inclusion of industrial cleaning in this segment has improved our ability to cross leverage these services. The Storage Solution business is also on track for a record year in volume and bookings, with nearly nine months of backlog in hand. Bidding activity remains very strong, both inside and outside of the Cushing Storage [op]. Growth in western Canada, led by our above-ground storage tank business, has more than tripled year over year as our operations there gain strength. Matrix Service East Coast operation, which primarily includes the Electrical Infrastructure segment, are impacting the last half of our fiscal year due to unusual seasonal and market forces. Uncertainty regarding the future of East Coast refinery ownership, a warm winter weather, low natural gas prices affected the timing of various project start dates, contract awards and normal maintenance activity. The bid flow and proposal activity in this segment remains very strong, and we remain confident on its long-term growth prospects.

At the end of the third quarter, Electrical Infrastructure segment has nearly nine-months backlog in hand, as well. Finally, in our Industrial segment, we are pleased with the progress to date in this key growth area. Our first EPC material handling project, valued at approximately $13 million, was booked in the quarter. Also, our mining and metals business has completed a startup of a Salt Lake City operation and has begun to book maintenance work with several regional clients. Finally, in the Southwest we have hired a number of key personnel to service mining and metals clients in this market area, as well.

Overall, we continue to build on the business as our consolidated backlog increased to $454.9 million as of March 31, 2012, compared to $433.6 million at the end of the second quarter and $405.1 million as of June 30, 2011. The Company continues to see a strong bid pipeline and new opportunities are opened up in connection with our strategic objectives. Matrix Service has booked in excess of $600 million of new work in the nine-months ended March 31, 2012. Backlog has increased in five consecutive quarters, and is at its highest level since the third quarter of fiscal 2009. I'll now turn the call back over to Kevin to discuss details of our financial performance. Kevin?

Thanks, John. Financial results for the three and nine-months ended March 31, 2012 reflect strong revenue growth, as core markets improve and as strategic initiatives begin to contribute to backlog growth, as John noted above. Revenues for the third-quarter ended March 31, 2012, were $183.9 million, an increase of 34.9% from $136.3 million in the same period a year earlier. Net income for the third quarter of fiscal 2012 was $4.9 million, or $0.19 per fully-diluted share. In the comparable period, a year earlier net income was $4.9 million, or $0.18 per fully-diluted share.

Consolidated gross profit was $19.8 million in the third quarter of fiscal 2012 compared to $18.6 million in the same period a year earlier. The increase of $1.2 million was due to higher revenues in the third quarter of fiscal 2012 in our Oil, Gas and Chemical and Storage Solutions segments when compared to the same period a year earlier, largely offset by the impact of lower gross margins. Gross margins decreased to 10.8% in the third quarter of fiscal 2012 compared to 13.6% in the same period a year earlier, largely due to low margins in the Storage Solutions segment and increase in lower-margin maintenance revenues in the Oil, Gas and Chemical segment, and a lower-than-anticipated volume of Electrical Infrastructure activity, as well as investments in strategic growth areas. Selling, general administrative expenses were $12.4 million, or 6.7% of revenues in the third quarter of fiscal 2012, compared to $10.9 million, or 8% of revenue in the third quarter of fiscal 2011.

As disclosed our press release, and as John discussed earlier, we have changed our operating segments. In addition to being consistent with how we are now managing the business, we believe the new operating segments will help us provide more clarity and transparency of our business. The Electrical Infrastructure segment accounted for approximately 20% of our fiscal third-quarter revenues and earned gross margins of 12.8%. These margins are consistent with our normal expect of 11% to 13% for the Electrical Infrastructure segment. Oil, Gas and Chemical experienced a strong revenue quarter and contributed 30% of consolidated revenues, an increase of over 70% from the same period last year. Gross margins for the quarter were 9%, which is at the lower end of our margin expectations for this segment of 9% to 11%, as the quarter included a significant amount of time and material maintenance and turnaround activity.

The Storage Solutions segment revenues for third quarter were 48% of consolidated revenues and produced 11.4% gross margins. Storage Solutions revenues were up 28% from the same period last year as a result of tank construction in new areas, including western Canada. The geographic expansion, combined with unexpected warranty work, contributed to margins at the lower end of our expected range of 11% to 13%. The Industrial segment contributed only 2% of consolidated revenues, as this segment consists primarily of start-up businesses. Quarterly gross profit was a small loss, as investments are being made to develop this business. We would expect Industrial gross margins to be similar to the other operating segments in the long term.

Revenues for the nine months ended March 31, 2012 were $554.2 million, an increase of 19.6%, from $463.4 million in the same period a year earlier. Net income for the nine months ended March 31, 2012 was $15.4 million, an increase of 15.8% from the prior-year net income of $13.3 million, while fully-diluted earnings per share increased 16% to $0.58 as compared to $0.50 per fully-diluted share in the prior year. Consolidated gross profit was $61 million in the nine months ended March 31, 2012 compared to $54 million in the same period a year earlier. The increase of $7 million was due to higher revenues in the nine months ended March 31, 2012 when compared to the same period a year earlier, partially offset by the impact of lower gross margins, which decreased to 11% in the first nine months of fiscal 2012, compared to 11.7% in the same period a year earlier. Selling, general and administrative expenses were $35.7 million, or 6.4% of revenue, in the nine months ended March 31, 2012, compared to $32.7 million, or 7% of revenues in the same period a year earlier.

At the end of the quarter, Matrix Service cash balance was $43.1 million. The cash balance, along with availability under the senior credit facility, gives the Company liquidity of $157.0 million. Earnings guidance, given the strategic investments and market focus discussed earlier, Matrix Service Company is reducing our full-year EPS guidance to a range of $0.77 to $0.85, and our revenue guidance to $725 million to $750 million. That concludes our prepared remarks and we would now like to open the call up to questions.

(Operator Instructions) Our first question today comes from the line of Matt Duncan from Stephens Incorporated. Your line is open, please go ahead.

Morning, guys.

Morning.

Good morning.

First question I've got is, John, maybe you could talk a little bit more detail about the decision to resegment and what changes have you made, if any, to the organizational structure of Matrix that might sync up with the new segment reporting?

Since the -- I'm not sure how long it's been -- Matrix segment reporting in construction services and maintenance and repair, I would say would fit the Company in the past when it was a -- large portion was the work was in the new tank and in the maintenance repairs tanks and then the turn-around business. But as the Company's diversified over the last two or three years, with increasing their electrical revenues, our move now into mining and metals, the addition of the material handling business. I think it's difficult for us to describe to the -- to our investors and our analysts the inner workings of business and some market drivers and it's not exactly how we manage the business, either. So it made sense to categorize the business into these four segments because they represent, to a close degree, how we are looking at the business and how we're managing it. So that came through as we worked through our strategy process of what our vision for the Company is in the future, certainly the role that we want each of these pieces to play in it, it made sense to us to create this segmentation.

Did you make any changes within the organizational structure? Do you have leadership that has been assigned to each of these revenue reporting segments, or is the organizational structure of Matrix still largely unchanged and this is just a different way of reporting the business?

No, I would say we have not done any wholesale structure changing in our organization reporting. Both of our businesses, as you know, we have an union and a merit business, both of them for the most part work across all four of these segments. One of them could be -- is probably heavier than the other in one or the other. For instance, in the Electrical Infrastructure business I'd say is more heavily attuned to our union business, and then the Storage Solutions business is more heavily attuned to the merit side of the shop. So we have made some small organizational changes in both businesses to align ourselves around these market focuses. On our merit side, the Company a year ago was very regionally focused and we found that to be limiting on our potential to grow our business across multiple parts of the country so we've gone to more of a leadership around the end markets. So we have a gentleman that's responsible, for the most part, for our refinery businesses and cleaning -- industrial cleaning. We've got a gentleman that's responsible for the -- in the merit business responsible for Storage Solutions. We are actually out looking for a gentleman -- or a person to be responsible for our mining and metals business. While we have mid-level managers in there now reporting to our President, we are looking for a person there.

And then our union side there's been some organizational changes there to provide additional focus in each of those segments. So I wouldn't say they're great -- they're huge changes, but -- and then underneath them we have been slowly adding key leadership resources, mid-level management people that have skill sets in, say, mining and metals, industrial cleaning, refining, electrical infrastructure that bring contacts and resources with them. But as far as what you might call wholesale organizational structural change, that hasn't happened.

And I would say that --

Okay. When do you think you guys will be able to provide us with historical quarterly results for the new segmentation and in the meantime if you can give us some commentary around the seasonal affects in your business for each of the four new segments?

So, Matt, as we've gone through this segment change, this change occurred in the third quarter and as we talked about previously, we went through the strategy rollout early in the third quarter, and that really triggered the change and once we did the change we were required to change our reporting. Reporting under the old segments would not have been appropriate under GAAP, so we really think that occurred in the third quarter. As John mentioned, we've been making some changes to the organization here and there, tweaking things, realigning some operating units as we've gone throughout fiscal 2012. So once we recognized the change, we started on the process of requantifying the numbers and setting up a process to segment the business under these new -- the new organization, and we focused on getting the first nine months of this year and the first nine months of the prior year completely vetted and ready to be released with this 10-Q. We're currently working on doing the same thing for the prior two years and getting ready for the 10-K process. That being said, we would consider, as we finalize that process over the next few weeks, to -- if disclosing that information earlier than the 10-K is appropriate and that's something we'll be looking at.

Little bit on the seas -- your seasonality question. I would say the two businesses that have the most impact from seasonality, the two segments, are the Electrical Infrastructure and Oil, Gas and Chemical. And Electrical Infrastructure really probably only a piece of that, that's tied to work that we do -- maintenance and repair work, and outage work we do in power generation facilities and investor-owned utilities. So that generally is -- they want to take those plants off-line in low load times, and so that has some seasonality to it. But the other part of that Electrical Infrastructure business isn't just per se electricians work, there is also -- that part of our business where we will capture work we plan to do on combined cycle construction and build out and any maintenance and repair work we would do other than electricians in the rest of the country generating -- generations fleet. In the Oil, Gas and Chemical side, really our refinery turn-around business has got some seasonality to it and that generally is a fall/spring thing, as well, is when the heavy turn-around activity happens. So the other two segments, I would say the seasonality there only happens if we might be working some place where there's bad weather, but that doesn't necessarily stop the work in those segments.

(Inaudible) I've got and I'll hop back in queue. On the revenue guidance for the year, at the mid point of the new range it implies a fourth quarter flat with the third quarter, which has not been the typical seasonality of Matrix in the past. So, is there something you guys are seeing in the business that leads you to believe it will be flat, or is that really more conservatism on your behalf?

Matt, I would think there's a couple things. Number one, if you notice the Oil, Gas and Chemical segment, the revenues for that segment were up 70% from the third quarter of last year. We saw a very strong turn-around activity and it started earlier than we normally see it start, And so I think some of that has contributed to the third quarter and maybe took away a little bit from the fourth quarter. And then, I think the other thing is we mentioned the eastern operations, we just don't see that picking up as much as we originally anticipated in the fourth quarter.

Okay, thanks.

Thank you. Our next question comes from the line of Rich Wesolowski from Sidoti & Company. Your line is open, please go ahead.

Thank you, good morning.

Morning.

Morning, Rich.

It sounds like reduced or postponed utility maintenance programs were the main factor in the guidance reduction. Would you comment on whether this was one or two big customers or rather a widespread phenomenon in the northeast? And secondly, maybe give us insight into how you determine the appropriate field labor numbers for outage periods? Is it based on specific requests from customers or does it involve more educated guesswork by management?

Let me address the second part first. If your -- the question around that is related to refinery turnarounds?

No, more in the utility space.

Okay. So a lot of that work that we do we -- and the answer's probably a little bit of the same for the refinery turnarounds but related to electric utilities is, we're involved with a lot of our clients on COC so we are helping them plan some of their outage work, so it isn't that they call us one day and show up Monday with 100 people. So we're involved with them up front and actually trying to plan out the scope of work and amount of people that's going to be required to fulfill those scope of work packages, so there is some up-front planning through our relationship with our clients on what that looks like. As it relates to the impact in the Electrical Infrastructure business, we had mentioned in the -- we mentioned in our opening remarks that the variety of different things happened that either were unexpected to us, or were greater than what we had anticipated. So we have -- so you got a warm winter, which is causing disruptions on how the power companies are selling their power and how they want to deal with their operating margins, you've got low -- as we all know, very, very low gas prices, which is giving additional financial drivers to both the nuclear industry that we do maintenance work in and coal plants that we do maintenance work in that has created how they are spending their operational budgets. In some cases some coal facilities were shut down.

And then on top of that, with a lot of COC clients that we also do storm restoration work with, they, as we know in its fall, which was a good thing for us, there was the major snow storm event and the hurricane that created work for us in storm restoration, but at the same time, all the people from our -- for our utility clients that build, that prepare work scope packages, that do the contracting, do the ordering of material, they are all tied up for weeks during the storm restoration events, and afterwards just recovering from that whole process. So that had an impact of basically pushing all the things that they were trying to do and affected their overall budgets, and pushed them out greater in time. So they're all still planning on spending the same amount of money. They still have to spend it, it's just a timing issue for us that came together in the third quarter and pushed out into the fourth quarter. So we may have had, and still do in some cases, proposals sitting on their desks that may -- that they were planning on awarding to us in January, it may not be awarded now until April, and they may decide not to do those -- some of those until next fall when they think it's a better outage time for them to do that. So it's a combination of a lot of those events that came together for us that created this problem.

Okay. Since you highlighted this business had really begun to grow and looking at the quarterly contributions in revenue from electrical instrumentation, especially in the construction realm in F '11 and '12, you're going from $30 million in revenue to $13 million, and back again. Is this volatility something you expect to be endemic to this business and does it influence how much you want to invest or expand it beyond the northeast?

I think -- our view is what happened in the third quarter isn't a structural issue, it's an event, and that we continue to see this business as a long-term spend by our clients, not only in the northeast but across the US. There's going to be numbers in the order of trillions spent in transmission distribution and sub-station work across the electrical generation grid within the United States, and so we think that's an area certainly we need -- we intend on playing a part on, and we're going to continue to invest in that business to capture more of that market.

Thank you for that. And then last one, curious about the profitability in your oil and gas business, which is below 10% for the nine months, about similar a year ago despite housing, the high-margin industrial cleaning business. Are the margins in the refinery maintenance work 7% to 8% as would be implied by the back of the envelope math, or am I missing something?

I think with the comment we made -- and I'll let Kevin comment on his envelope -- but we -- as Kevin had said, we had a significant amount of turn-around work that moved into the quarter and a lot of T&M work, and generally T&M work versus -- mixed in with some of the lump-sum capital work will have a tendency to drive the margins down, so that was one thing. Two is, that the industrial cleaning business is such a -- today is such a small percentage of the overall volume that goes on on a quarter-to-quarter basis, that it's not impacting yet the consolidated margins. That's one of the reasons why we want to, and we're actively doing that now, want to grow that business.

Yes, I'm showing that industrial cleaning's about 5% of the margins -- or the revenues for the Oil, Gas, Chemical segment at this point, but we do believe that's a high-growth area and will be a -- represent a larger percentage of that Oil, Gas, Chemical in the future.

I appreciate it, thank you very much.

Thank you. Our next question comes from the line of Matt Tucker from KeyBanc Capital Markets. Your line is open, please go ahead.

Hi, thanks, and good morning.

Good morning.

First couple questions on the Electrical Infrastructure business. Could you give us a rough breakdown of the mix within your business of high voltage versus distribution work, and could you also remind us who your major utility customers are up there in the northeast?

Major utility customers are companies like PECO, PPL --

PSE&G.

PSE&G. Northeastern Utilities, Unitel. Names are escaping me.

That's the major ones.

Right. But that -- so it's the majority of all of the big utility clients up there. I would tell you -- and Kevin can maybe give you a better numerical breakdown -- when you talk about transmission distribution and substations, we are small T, and a little larger D, and very big S. So we are, in our mind, the largest substation builder and constructor in the northeast, that's a big chunk of that business. And we are moving slowly into distribution, the distribution is a -- can be a more competitive market, but it also gives us inroads into storm restoration work and we do occasional transmission-type projects that provide higher margins. That is an aspirational growth area for our business, part of the focus of growing that, both on a -- in a regional and national level, and that -- but today, that's not a huge part of our revenue mix in our Electrical Infrastructure.

The significance of the T and D revenues on electrical similar to the significance of the industrial cleaning on Oil, Gas, Chemical.

Okay, thanks, that was helpful. And I guess, regarding how low natural gas prices have impacted that business and you say you're seeing a shift away from spending on the coal and nuclear side. I'm wondering, was that not accompanied by an equal shift in spending around the natural gas plants and/or are you guys, for whatever reason, not as well positioned over there, are your competitors doing most of that work?

No, we do some -- we do work in existing natural gas-fired generation plants, we do maintenance work and associated electrical work. We also do, which is also housed this section, mechanical work. We are tracking, I think, six to seven potential new builds -- natural gas-fired generating plants. They have not come to market yet, and that we are trying to pick through the projects that provide us the greatest -- the best risk profile and the greatest chance of success, and certainly we anticipate over the next 12 months -- 12 to 18 months as that gas generation fleet starts to get built that we will play a role in those businesses, both on an electrical side and mechanical.

Great, thanks. And then you mentioned that Storage margins, Oil and Gas margins were towards the lower end of your expected range, but it sounds like activity in both of those markets remains pretty strong. Can you discuss what it'll take to get back to the middle or upper end of those margin ranges, and how long could we be at this lower end of the range?

On the Storage side as we have a couple of -- as you mentioned, a couple warranty issues and some margin pressure issues in our Storage business that impacted us down -- that pushed us down into that range. As we move out into other parts of the country, certainly there is some additional margin pressure as we bid that work. The -- one of the things that's happened in our business in some regions in the country we're, instead of bidding a 10 to 15 tank package, we're bidding one to three tanks, and so that has a tendency to provide an opportunity for a smaller contractor to get on a bid list. So instead of us bidding against maybe three contractors, we're bidding against six, and so that provides some margin pressure and that -- but I would tell you that there's, in our bid funnel, in our Storage business there are several significant tank packages out there on both sides of the border in different regions of the country where we anti -- that's why we feel very comfortable about the strength of the business going forward and our ability to get our -- the margins back up into that acceptable range. As I understand, last year in our Storage business we had a couple contracts that were very incentive-laden and that we performed very well on, they provided some, what I would say maybe unusual returns in that business. And that currently in our backlog we don't have those types of projects going forward, that's entirely possible that those kind of projects may reenter our backlog, but we are not bidding right now on any of those types of projects that are heavily incentive laden.

Great, thanks, and just one last question. On the petrochemical side, there's been a lot of positive buzz about spending there in the US over the past several months and I think historically that's been a fairly meaningful market for you guys, I think similar in size to your [fining] exposure, can you talk a little bit about the trends you're seeing in the chemicals business and are you really seeing the strength that we're hearing about, or is it a little early?

No, I think that the amounts of natural gas liquids available in the market and to be available in the market that pure chemical plant-type companies are planning a spend on their existing plants and they're planning on bringing moth-balled plants up and running. There is significant talk, and I think commitment by several companies, to do new build chemical facilities. For instance, one in the Ohio valley that comes to mind immediately by, I believe it's Shell. So we -- from what we see in the marketplace where we can confirm what you read in the Wall Street Journal.

Thanks a lot.

Thank you. Our next question comes from the line of Mike Harrison from First Analysis. Your line is open, please go ahead.

Hi, good morning.

Good morning.

I'm wondering if you could give a us a little bit more color on -- you referred to instability at local refinery operations, help me understand what you mean by that and how that impacted you and where?

Really, the -- I think we might not have said that correctly, but instability in local and northeast refinery ownership, so naturally that plays down into our operations, but certainly it's very well publicized the different refineries in the northeast and what they have been going through related to ownership and closings. Two of the refinies -- refineries that we do maintenance work in have recently announced that they're being bought by different groups. So we -- coming into the year, while we were aware of all that, we were not -- we were a little surprised and taken aback by the amount of work -- maintenance work that we normally do in those plants that they stopped doing. Now, we don't do in the northeast a lot of what I call refinery turnarounds, but our electrical business and our mechanical business in the northeast does a fair amount of maintenance in those plants on a month-to-month basis, and that steady work that we do in those facilities was what, almost overnight, dried up on us.

All right. And in terms of the overall magnitude of P&L investments for growth that we saw in Q3 and then as we look into Q4 and beyond, if you can give us any sense of what the magnitude was in terms of millions of dollars. And then, are the investments going to accelerate over time, or remain at Q3 levels or maybe decline as we go forward on a quarterly basis?

Mike, I would say that the investments that we saw in the third quarter were a little higher than what we initially expected, but I actually view that as a positive. We rolled out our strategy at the beginning of the third quarter and we believe we've got a strategy that not only has senior management bought into but the whole Company bought into, and we see a lot of activity out in our operating units pursuing the strategic goals we've set out. And so that spending was higher than we expected. I'd say -- to put a number to it, I would expect it to be -- it's probably $0.02 higher than what I expected, $0.02 per share, probably $800,000 or so in the quarter. As we move forward, I think that what we'll expect is a similar level of spending that we saw in the third quarter in the fourth, and I think that's what we projected. Just want to be clear that this didn't all start in the third quarter, we did a little bit in the first half of the year, but we definitely see that we've got a lot of momentum on the strategy. I don't think you should expect that you're going to see some huge spike in that spending, probably along the levels you saw in the third quarter.

The other thing, too, as I'd add to that is that we felt specifically in the mining and metal space there was an opportun -- there was a chance for us to be opportunistic. There are people that we knew in the industry that wanted to leave their current employers, or were looking for a new opportunity, or looking for the opportunity to come to work for Matrix to help build a business in an extremely strong market. And those are things that happen in an instant that we've got to take advantage of because we think long term that's creating a foundation for what we see as a good growth market for us. And so we took advantage of those opportunities and brought those people on board, and they definitely have had an impact in the quarter and have certainly had an impact in how we've revised guide -- our full-year guidance for the Company.

And do you have any sense for how long it should take those people to start contributing to the revenue line in mining metals?

Well, we're in the process of working through our forward budgets now. I would you that we are -- our Salt Lake office is beginning to book maintenance work. Some of the time it took, we had to get the right types of licenses in some of the states where we're going to be operating, and the licenses in -- for instance, in one state, the state of Nevada just came through about two weeks ago. And so we're already working in Wyoming, we're getting ready to sign contracts to work in the Utah area and in Nevada. So I can't give you a number of months where this is going to go to from an expense to a break-even and a profit, but certainly, on a long-range perspective we would think within a -- certainly within 2013 fiscal year that these -- our Industrial segment will be showing a profit.

All right. And just looking at your FY '12 guidance, and thinking about -- in the context of these P&L investments and the growth that you expect to see, is it reasonable to assume that from the midpoint of FY '12 EPS that we should see EPS growth in FY '13?

Yes. We haven't finished the budget process, as John mentioned, but when we laid out our strategic plan, we're expecting revenue growth of 12%to 15% a year, and -- obviously expect the bottom line to grow at a rate a little higher than that.

All right, and then the last question is on the warranty work that you referred to in the Storage business. How much was that in terms of expense in the quarter, and what happened?

I would say that we'll have warranty work, we're going to stand behind the products that we provide to our clients, and there will be times when we need to do warranty work and it's not a new thing. I would say in the third quarter is a little higher than normal. And as far as impact, it was probably $0.5 million or so to $1 million of impact in the quarter, probably $0.02 per share impact. So it was a little higher than normal, but it wasn't a big problem from -- a multi million dollar issue.

All right, thanks very much.

Thank you. Our next question comes from the line of Martin Malloy from Johnson Rice. Your line is open, please go ahead.

Good morning.

Morning.

Could you talk about any opportunity that you're seeing out there on the cryogenic tank side with the business that you acquired from CB&I a few years ago, either in LNG or fractionation or anything like that?

One of the -- we have a contract with a client and as you guys know, we don't talk about our clients, but we have a client in the northeast on a cryogenic related project that because of the -- this is another one of those impact issues that we had anticipated starting in the third quarter has slid out now into the fourth quarter because of the warmer winter -- the warmer weather and their ability to burn off existing gas that's in their tanks now. So that -- something like that has created a situation where that contract -- the start of that contract has slid two to three months. But we see a fairly robust market, we are doing, certainly, feed studies on a cryogenic basis, we are keeping our fingers on the pulse of the LNG market and to see where -- the LNG export market to see where that goes, and so -- and plus, like I said, we're doing some feeds and some studies for some clients. So we continue to see that market as strong going forward, principally driven by the price of gas.

And then in the metals and mining area, what types of commodities are your customers involved with there? Is it coal, is it other commodities? And with the direction of natural gas prices and the pressure that might put on their CapEx budgets. How confident are you in being able to grow that business?

Well, the market is in -- so when we talk about mining and metals, we are certainly talking about all of the above ground things, and then its synergies with our material handing business, so it's a lot of transportation and handling and processing of ores. The kind of clients and raw materials we're dealing with are in, say, coal plants, that is ash handling, coal handling, limestone handling. In the pure mining businesses out west, it's copper, it's silver, it's gold, it's molybdenum, so a lot of different raw materials in -- that are available within the North American space. We still continue to feel strongly about the viability of that market and that it is a -- it's a market of nat -- of global size, so a lot of these raw materials actually are -- a lot of them are used here, but a lot them are shipped offshore. Coal definitely being one of them, the transport, loading and off loading the coal, so we continue to see that market as being very strong, and right now we're not seeing any impact one way or the other from natural gas prices.

Just last question --

I'd add to that -- I would add to that I would say that assuming we continue in the US to have a very competitive energy structure between oil and gas and natural gas liquids, I believe that we will see a resurgence and renaissance in our manufacturing and industrial base. That's going to drive not only employment but it's going to drive the opportunity for the use of more of these raw materials and keep them on the home front. So I think the combination of the two is positive.

Just last question, five consecutive quarters of increasing backlog. The overall direction of the margins in the backlog, is it flat, is it up?

I would say that it's fairly consistent with what we've seen. We're not seeing a deterioration overall in the backlog quality.

Okay, thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Ross Taylor of Somerset Capital. Your line is open, please go ahead.

Thank you, gentlemen. My questions have actually been answered. They were concerning the impact of the strategic initiatives, the impact in the upcoming quarter, as well as the backlog margins and you've addressed them all. So thank you, and good luck with your initiatives going forward.

Thank you.

Thank you. Our next question is a follow-up from the line of Rich Wesolowski from Sidoti & Company. Your line is open, please go ahead.

Thanks again. The Company booked $360 million in nine months awards in the tank business. About how much would you guess that is outside of Cushing and what would you imagine that share was for the year-ago period and what kind of gap are you seeing in the margins between tank construction in Cushing and outside of Cushing?

I would say that the back -- that's not really something we track, but I would say that the backlog for AST is --, there's as much outside of Cushing as in Cushing. As far as the margins, I think we've talked before that as we move out geographically from Cushing that there's a 100 to 200-basis point difference in what we can earn on margins, as we establish Cushing east or west or north or south and we develop a center where we're doing a lot of projects in that one location, you'll see -- you should see efficiencies achieved and margins improved.

As you look to establish a Cushing east or south or wherever it is, is the Company considering buying or building a fabrication plant to feed tank projects in any specific area?

That's not -- right now it's not in our strategy to do that. We've been able to, we think, to maintain -- do be very competitive with our operations -- our fabrications operations here and be able to ship our tank parts to most areas of the country. We have small regional fabrication available to us on the West Coast that we use when it fits the project size. Certainly if we get to a point where we find that there is actually another Cushing being constructed someplace -- and in my mind that could be in the northern part of the -- of North America, northern US, or maybe into western Canada, we would certainly then perhaps take a look at a fabrication facility.

Lastly, oil has been drifting lower and I'm wondering which of your businesses you would expect to be most affected and least affected by a sharp drop in oil, say to $60 or $70 a barrel?

That's a good question. I would think -- for me initially, my initial concern would be around our refining and turn-around and maintenance business that that might be an impact on that business. And on the Storage business, it's hard to tell. It's hard to tell on that because we try and run those analytics and need based on the price of oil and flow of oil and the export of refined products. The export of refined products is very, very strong, particularly out of the Gulf Coast and a lot of the oil that flows down from Canada and the Balkans through Cushing and other terminal areas continues to be very strong, so my guess would be refining market first, and then perhaps our -- perhaps storage later.

Great, thank you again. I appreciate it.

Thank you. Our next question comes from the line of Mike Harrison of First Analysis. Your line is open, please go ahead.

Hi, just a couple other ones. First of all for Kevin, the tax rate looks like it came in a little low in Q3, what was driving that? And is 38% still a good estimate going forward, or how should we think about that?

That is a good question. So, in the third quarter we saw the benefit of Section 199 tax credits. These relate to the construction of new facilities. Now, we had anticipated this, it's not a new tax credit that's out there, it's just the amount of credit we were able to earn was higher than we anticipated. And so as we go through the budget process for fiscal '13 we're reevaluating that tax rate. Right another we're assuming at 38%. As we go through the budget process we'll make sure that we evaluate whether this is a one-time blip on that 199 level, or if we think that'll be continued.

And for Q4, is 38% still a good number, or do you have some of those credits that you know are going to be benefiting you in Q4, as well?

Q4, we adjusted everything as of the third quarter that we knew of, and so we're assuming 38% in our forecast.

All right. And then, was hoping that we could get an update on the M&A pipeline. Anything close that you guys have been looking at and potentially closing on in the next two, three quarters?

We've got a -- we continue to have a strong list. We are actively building that list and knocking companies off. We have had manager meetings with a variety of targeted companies that are in different parts of our strategic focus. I would tell you there was two or three companies that we got serious with, but that the pricing points were well above what we thought was reasonable in the market, and that -- so we are continuing to look and continuing to focus on the ones that are in our strategy. So it's still an active part of what we're doing. We're certainly not going to step out and either overspend or buy a company that doesn't have the right cultural and values fit with our organization. So the acquisition part is -- in many cases is key for speed and movement in the geographic areas but it doesn't mean it can't be done on an organic and a leadership acquisition effort either.

And maybe another one for Kevin. What was D&A in the quarter? If it's in here I am not seeing it.

It was at the normal -- that normal rate, it's around $1 million a month, so it's probably around $3 million in the quarter. You did say depreciation and amortization?

That's right.

Yes.

All right, thanks very much.

Thank you. And with no further questions in queue, I would like to turn the conference back over to Mr. John Hewitt for any closing remarks.

Thank you. In closing, Matrix Service Company is -- we're executing on our strategy, we're investing in critical infrastructure and business opportunities, as outlined in our comments this morning. And we are confident about our position and the future prospects in the energy and industrial markets that we service. So I appreciate everybody's time on our call today, and look forward to speaking with you in the future.

Ladies and gentlemen, thank you for your participation in today's conference.