Matrix Service Company (MTRX) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Matrix Service Company conference call to discuss results for the first quarter ended September 30. [Operator Instructions] I would now like to introduce your host for today's program, Kevin Cavanah, Vice President and CFO for Matrix Service Company. Sir, you have the floor.

Thank you. 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 purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2014, and in subsequent filings made by the company with the SEC. To the extent the company utilizes non-GAAP measures, reconciliations will be provided in various press releases and on the company's website. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kevin, and good morning, everyone. To start, I'd like to discuss our safety performance in the first quarter of fiscal 2015. Whether we're rolling out our safety program in the new market, discussing expectations with current or future employees or integrating a newly acquired business, our safety culture is at the forefront of all the work we do. So while we work in challenging environments and markets, we believe a 0 incident workplace is achievable. Continuing on this journey to 0, our total recordable incident rate for the 3 months ended September 30, 2014 was 0.67%. I'd like to thank all Matrix employees for their dedication to a 0 incident mindset and fostering safe environments at work and at home. Before we discuss our segments and markets that we serve, I want to provide some commentary on energy prices and their impact on our business. As we have stated in the past, we work closely with our customers to understand their capital programs and plan our resources accordingly. Changes in the global and domestic price of oil is but one indicator of the market strength in at least 2 of our segments, Oil Gas & Chemical and Storage Solutions. Our clients' capital programs are generally based on a long-term outlook that's not significantly moderated by near-term energy price fluctuations. Additionally, our strong relationships provide us with a better understanding of their capital and maintenance spending plans. As such, we are not seeing any reduction in the midstream storage and terminal spending plans with either crude, refined products, LNG or NGL projects. From a short-term perspective, a reduction in drill rigs does not immediately create a reduction in infrastructure spending. The demand for pipeline internal logistics capacity has been a market highlight for us and that continues to exist. The potential lull in drilling in our view allows for our clients to catch up on badly needed infrastructure expansion. On the refining side, the majority of our unintegrated clients do not have an upstream component so lower oil prices provide them little operational stress. In the short term, reduced demand can provide opportunities for increased maintenance activities as they work to catch up on critical plant repairs. In addition, while low oil prices domestic -- and domestic refined product demand might limit capital expansion activities, spending on federally mandated environmental compliance and plant optimization improvement projects will continue. To date, we have not seen any project cancellations in our business and our project funnel has not been impacted by these price declines. In fact, as we have stated on other occasions, overall strength in the North American economy is a key component for all of our segments. For example, lower prices at the pump will, over the short-term drive increased consumer spending, which has an impact on our industrial markets. Continued cheap natural gas has a direct impact on our Storage Solutions, Industrial and Electrical Infrastructure segments by creating more opportunities in electrical generation, cryogenic storage, fertilizer facilities and general manufacturing. Our strategic move to diversify the company across multiple energy and industrial markets is important so that we can take advantage of opportunities as they are presented. In summary, we don't view the current decline in energy prices changing outlook for our business. Moving on to our Electrical Infrastructure segment. Although quarter-over-quarter backlog is down slightly, band [ph] activity is robust. Our customer's spending plans are substantial and reflect the need to replace and/or upgrade significant infrastructure in their geographies. The funnel of new power generation projects continues to be full and we are actively tracking and bidding on projects we see as providing Matrix the best opportunity for success and fits our risk profile. Likewise, opportunities for substation and other power delivery work has picked up. Despite the quarter being slower than expected on a volume basis, we anticipate this to improve as projects are awarded and backlog increases. Performance in our Oil Gas & Chemical segment has been strong under reduced revenues. These reduced revenues impacted our ability to absorb the entire construction -- overhead cost structure, given the strength in our proposal and bidding activity, as well as improved bookings, we expect both revenue and margins to increase through the balance of the year. The majority of the activity in this segment is related to our downstream work. These activities are underpinned by anticipated turnaround activity and we continue to bid on and win throughout our service areas. Additionally, as we integrate HDB into our business, we are already providing expanded services to upstream clients in Central California such as Oxy, Chevron, Arrow Energy and Freeport-McMoran. Our business development teams continue to cross-sell our breadth of services, including mechanical trades, industrial cleaning, pad management and various advanced capabilities. The response to these efforts are positive for new and existing clients who are increasingly interested in minimizing the number of contractors employed to service their needs. Moving on to the Storage Solutions segment. Backlog of $538 million represents an all-time record for Matrix. This backlog includes a mix of new tank work, maintenance and repair to existing tanks as well as growing terminal project activities. In fiscal 2014, we experienced significant growth in this segment while increasing our backlog year-over-year. The market provides an opportunity to achieve similar results in fiscal 2015. Additionally, while the growth in our crude tanks and terminal construction business continues to be a headline for Matrix, our specialty vessel opportunities, including LNG and other cryogenic applications is robust, with projects that stretch from Alaska to the Gulf Coast. Lastly, performance in our Industrial segment was stronger this quarter due to strong project execution, including positive project closeouts. The outlook for the 3 markets included in this segment is positive. There continue to be many opportunities in new and expanded fertilizer facilities, our mining and minerals operating unit has proven itself as a viable business line with repeat customers viewing Matrix as their go-to choice for construction and maintenance services. And finally, the iron and steel business has a strong outlook in general facility maintenance, capital projects and critical outages. In all of our segments, we are looking for acquisition opportunities that bring added bench strength, market penetration or a unique specialty component to complement our existing services. Overall, the business is performing as envisioned in our strategy and we see growth opportunities in all of our segments. Before I turn the call over to Kevin, I'd like to discuss our overall margin performance. We are currently in the third year of the 5-year strategic plan we commenced at the beginning of fiscal 2013. That plan included a number of strategic objectives that we are on track to achieve or exceed, including enhancement of our safety culture; achieving annual revenue growth of 12% to 15%, through a combination of organic growth and strategic acquisitions; improved cash management and balance sheet strength; top-quartile performance against our peer group; diversification of markets, operations, customer base and geographic presence; and infrastructure improvements to support the growth in our business. While we have made significant progress in these areas, there's one strategic objective for which our progress has not met our expectations, the improvement in our operating margins of 150 to 200 basis points as we grow the business. We are proud that our growth has significantly exceeded our original targets, but that growth and growth-related investments has created complexities in our business and organizational inefficiencies, which is limiting our ability to achieve the top-quartile margin as compared to our peer group. This is not a surprise. It was contemplated in our tactical plan for the back half of the strategy that I just discussed. Our business success has been directly tied to leadership at all levels and focuses on a critical task at hand. Margin improvement is just one of those tasks. So again, in line with our strategy and while we continue to grow the business, this fiscal year we will also commence an initiative that will focus the entire company on the achievement of this objective through process improvement, analysis of business efficiency and organizational excellence. Improving of operating margins will be a key measurable of this initiative. We expect margin improvement will occur in increments over the next 3 years. We'd be glad to discuss this initiative during the Q&A, so now I'll turn the call back to Kevin, to discuss the details of our financial performance. Kevin?

Thanks, John. The revenue for our first quarter was $321.7 million compared to $226.2 million in the same period last year. Consolidated gross profit increased from $25.5 million in the 3 months ended September 30, 2013 to $28.4 million in the 3 months ended September 30, 2014. SG&A expenses were $19.8 million in the current quarter as compared to $14.7 million in the same period last year. SG&A expense as a percentage of revenue decreased to 6.2% in the quarter compared to 6.5% for the 3 months ended September 30, 2013. Quarterly net income was $5.9 million as compared to $6.6 million in the first quarter of fiscal 2014 and our fully diluted earnings per share was $0.22 in the current quarter as compared to $0.25 in the first quarter of last year. In order to evaluate the operating performance in the quarter, we need to consider a couple of items. First of all, while revenues increased significantly over the first quarter of last year, the volume was less than we expected. We anticipate revenue will pick up through the remainder of fiscal 2015. Secondly, the lower revenue volumes contributed to an under recovery of our over -- construction overhead cost structure, which reduced gross margins 180 basis points to 8.8%. Thirdly, other than our project charge in our Electrical Infrastructure segment related to a joint venture power generation project, the overall project execution of the business was strong. As the joint venture associated with the project is consolidated, 100% of the charge is reflected in our operating results, including our partner's share. The total charge was $3.3 million of which $1.2 million is attributable to our partner. That $1.2 million is excluded from net income and earnings per share. Moving on to segment results. Revenues for the Electrical Infrastructure segment increased $22.8 million or 69.3% to $55.7 million in the 3 months ended September 30, 2014, as compared to $32.9 million in the same period last year. The increased revenue volume was due to the inclusion of Matrix NAC activity, which was not included in the first quarter of last year, partially offset by lower business volumes in the legacy transmission and distribution business. This segment operated at a net loss on the gross margin line for the 3 months ended September 30, 2014 compared to 10.1% in the same period a year earlier. Fiscal 2015 margins were negatively affected by the charge I previously mentioned. Despite this charge, the project remains profitable and will be completed this fiscal year. Gross margins will continue to be impacted by this project through completion, however, excluding the joint venture project, the Electrical Infrastructure segment produced gross margins consistent with the previous quarter. The Oil Gas & Chemical segment revenues were $53.3 million in the 3 months ended September 30, 2014 as compared to $62.5 million in the first quarter last year. This segment continued a string of strong consistent project execution, but on a lower level of revenues. The revenue shortfall was primarily due to the timing of turnaround work, which resulted in under recovery of construction overhead costs and reduced gross margins in the segment from 12.1% in the first quarter of last year to 8.2% in the current quarter. We expect revenues and margins to increase as we move through the remainder of fiscal 2015. The first quarter revenues for the Storage Solutions segment increased from $108.1 million in fiscal 2014 to $133.3 million in fiscal 2015. The 23.3% increase was primarily due to higher levels of work in our domestic AST business and increased terminal work. We experienced strong execution in the quarter on our portfolio projects throughout the U.S. and Canada. Gross margins decreased to 10.9% compared to 11.9% in the same period in the prior year due to under recovery of construction overhead cost structure by approximately 130 basis points. Revenues for the Industrial segment increased to $79.4 million in the 3 months ended September 30, 2014 as compared to $22.7 million in the same period a year earlier. The increase of $56.7 million was primarily due to the inclusion of Matrix NAC activity, which was not included in the same period a year earlier. Gross margins were 12.6% in the current quarter as compared to 7.8% in the same period last year. Gross margins were higher than the top end of our expected range, primarily due to profit recognized on favorable project completions. During the first quarter of fiscal 2015, backlog increased to a record $984.7 million as compared to $672.8 million a year earlier. Our book-to-bill was 1.2, as a result of $390.5 million in new projects. The growth occurred as a result of turnaround awards in our Oil Gas & Chemical segment and tank and terminal awards in our Storage Solutions segment. The increase in the quarter continues the growth trend in our overall backlog, which has increased 46.4% over the last 12 months. At September 30, 2014, our balance sheet is strong with a cash balance of $72.8 million and liquidity of $236.8 million. The management of our balance sheet is extremely important to the company's success as our strong financial position provides us with the necessary liquidity to support the expected growth and business volumes as we enter the second quarter. In addition, we are in the position to execute acquisitions that support our strategic growth plan. The company's stock buyback program, which was scheduled to expire December 31, 2014, has been replaced with a new program that expires December 31, 2016. Under the new plan, the company may annually purchase, on a calendar year basis, up to $25 million of the company's common stock. The plan will be utilized to repurchase shares in the event management believes the stock is undervalued based upon peer comparisons and the company's liquidity requirements. We believe having this program in place is appropriate, but we currently have no intention to repurchase shares as we believe better use of our liquidity is funding acquisitions and our expected organic growth. I will now turn the call back over to John to discuss our guidance.

Thanks, Kevin. So before I provide the guidance -- turn the call over for questions, I want to hit a couple of key points. First of all, Matrix is a very healthy, values led company. We're in great diversified markets. We have very strong tailwinds. We have some of the best employees in the industry and we have strong leadership at every level. And we have accomplished many of our strategic goals. So when we talk about construction overhead structure, margin improvement, business efficiency, I want you to remember I'm talking about fine-tuning, incremental improvement. As it relates to our operating margins, we are not satisfied with being average. We expect to be the best at everything we do. So when you have a goal to be the best as we do, you have to set very high expectations for yourself. And we have confidence in our ability to achieve those expectations. So for now, our guidance. We are maintaining our revenue guidance range of $1.425 billion to $1.525 billion and our fully diluted EPS range of $1.40 to $1.60 per fully diluted share. So with that, we've completed our prepared remarks and I'd like to open the call up for questions.

[Operator Instructions] First question is from the line of Kevin Malloy from Johnson Rice. Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division: Could you talk maybe a little bit more about what's causing -- what caused the delays in revenues during the quarter? And when I look at your revenue, it's trended down the past 2 quarters and you had a fourth quarter earnings call in early September where you talked about short-term growth opportunities in addition to the longer-term ones. What is -- is it permitting or just customer-driven delays? What is happening with the revenues not coming out of backlog?

So there's probably 2 or 3 key projects that had the majority of the impact on the revenue shortfalls. They were primarily in the tank and storage and pumping station projects. And they're primarily related to finalizing contracts and agreeing with terms and lining up start dates with our clients. So there was -- they weren't market-driven. They're just -- part of the way we do business and the way that our clients do business. So it's just whether we would able to get a contract finalized and commercial terms agreed to between the parties, the time it takes to do that, waiting for that point in time the client is positioned to either provide us with engineering or provide us with an opening to his site because of his existing operations that we're able to start from 1 month to another. So it's not a systemic issue, it's just the way our business goes.

That was primarily in this -- for the Storage business. I think the Oil Gas & Chemical and Electrical businesses, the first quarter is naturally our slowest period of the year for both of those segments. Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division: Okay. And then on your last call you talked about Electrical and Infrastructure -- Electrical Infrastructure target gross profit margin of 11% to 13%. Do you mind updating maybe what your thoughts are around that for this year?

Sure. So we believe that we'll get back to our range of 11% to 13%. Obviously the margins in that segment were a little lower last year, around 10%. As we book new work, as we grow that segment and fully leverage the cost structure, we'll get back up to that range. It may take us the remainder of the year to get there, but we'll start to move back to that range in the future.

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

Kevin, on the project delays, is there a way you can quantify for us the impact it had on those sales and gross margin?

Well I would say this from a top line perspective, we were probably 10% below what we were expecting as far as the volume when we look at these for the quarter. And obviously that impacted the gross margins and I think we talked about what the impact was on under absorption in the quarter. So...

These are all Storage jobs then, I mean, that implies Storage should have been, if these jobs have been going when you expected them to be, north of $160 million of revenue this quarter. Is that a good run rate for us to think about going forward?

No, and I -- most of the delays were in Storage, but there was some in the other segments. I think we'll get back to that level, if we can get through the latter part of the year. But -- and I think we'll see a positive trend in the second quarter but it may not get back to the -- I wouldn't expect to get back to the $160 million level in the second quarter.

Okay, that's helpful. John, let's talk a little more about the drop in oil prices and how we should think about it for your business. I think one thing that we all want to get some comfort with is that these project delays that you're seeing in Storage are not in any way tied to the fall in oil prices. So can you talk about since the end of the quarter, if those jobs, have those contracts been signed, those jobs are now going? And have you seen anything in your backlog get delayed or slow played by a customer due to this drop in oil prices? Or is it really all full steam ahead?

Yes, I would say that we're not -- we are not seeing any impact in delays in our back -- either our backlog or the proposal funnel related to the price of oil. So if you look at our key clients in the midstream space, we've had direct conversations with their executives. We've had, in fact, some of our management team spent time with one of our top midstream client recently. And I would say every one of those clients' executives say the same thing, that they view this oil price dip as a short-term fluctuation, that they feel very strong about the long-term outcome -- outlook for oil pricing, for the demand of oil and they are looking at -- they look at this infrastructure on a long-term basis. So they're not delaying their spending plans. Many of them have billions of dollars of spending that they are planning over the next 5 years. And they are telling us and the rest of their suppliers that they're not slowing down. So they see the need, they see the demand, that this dip in oil pricing into the 70s is a short-term occurrence. And that several of them have even been fairly clear that they think that we're in a 6 to 18 month oil price dip, but that it's going to stabilize out sometime in the next 6 to 12 months in the $90 range. So we're not seeing that. Our clients who we do the majority of our business with are talking about that. They're, in fact, I was on the phone with one of the -- our clients' executives this morning anticipating your question. And he -- their company had just announced the continuation with a new pipeline out of the Rocky Mountains. And that they've got no intention of slowing any of that down.

Okay, that's all very helpful color, John. It -- looking at the Oil Gas & Chemical segment, I noticed the backlog there is up over 30% since the end of June. Kevin, how much of that is tied to fall turnaround projects versus the spring? And then looking at the fall, I guess we've heard that the start up of fall turnaround season was kind of 2 or 3 weeks later than normal, which is meaningful for you guys because it normally starts right after Labor Day. So if it was late September, it really didn't help your quarter, but that does seem to suggest that you've got a much better quarter coming in the December quarter in that segment, just sort of taking into account when it started and looking at your backlog.

Yes, so the backlog increase was the result of turnaround activity for that segment. And it relates to turnarounds in the second and the third quarters. I think we'll see a significant increase in the revenues in Oil Gas & Chemical in the second quarter as a result of increased activity.

Okay, and then last thing, John, you opened the door in the prepared comments saying you would talk more about the margin plan if anybody asks, so let's dig into that a little bit more if we can, please.

Well, you weren't supposed to ask. I think a lot of things that we're trying to do with the organization, and we're accomplishing a lot of things, I think one of those is that -- and we talked before, you guys, that we benchmarked ourselves against our peer group and we want to be a top quartile performance and while our margin performance is, like I said, is average, we know we can be better than that. And there's a lot of areas of the company that I think we can find ways to improve to drive better margin performance. And it's kind of above the line and below the line, so above the line in our cost base and in our cost of sales, are we procuring at the best prices that we can? Are we making the best commercial arrangements with our clients? Are we taking advantage of the right risk profiles on our projects? Are we executing the best we can with the best people to convert contingency to margin? Kind of below the line in that cost -- in the construction cost overhead piece, how are we managing our people? How are we managing our equipment? How we're thinking about our insurance, all those things, are areas where we can make incremental changes in our margin performance. And -- so those are all things that we've been thinking about, we're focused on doing. But as we've grown the business and try to maintain with the growth over the last 3 years, the tendency is to throw people and machinery and -- at the execution. So that's not necessarily the most efficient way for us to operate, so we need to be able to do 2 things. One is, to keep our foot on the gas pedal, but two is to -- is to look at how we are actually operating, how we're processing paper, how we're thinking about the utilization of our equipment, how are we thinking about the utilization of our people and are we being as efficient at that as we can. And I think as we move through that and that's -- we can't just stop growing the business and sort of shut everything down and go back and relook at everything, so we've got to do the 2 things simultaneously and -- so it's going to take some time as we pick at each individual piece and find areas for improvement. And -- but we're very confident we're going to be able to make that happen and we internally -- what we're going to do to bring focus to that is we will actually sort of make that as a company-wide project, as a continuous improvement effort like what we've done with safety, where we want to build a culture around being as efficient as we can in our business. And so we'll be -- that's something we'll be working on as we go forward here in time.

And may I add, I'd say, if you look at the last 3 years, we've had organic revenue growth of -- on average of 20% per year plus we've done a number of acquisitions. And I think our employees have done an exceptional job of growing the business and executing on the strategic plan. But I think it's just natural that there's inefficiencies or opportunities for improvement in the way we do things that get -- that present themselves because of the growth. And now it's time for us to go attack those and see if we can take advantage of it.

Our next question is from the line of Tahira Afzal from KeyBanc Capital Markets.

So first question is, the execution, kind of disappointing in the quarter. Even if I was to take your part of the power plant project and take out what you got from the joint venture, therefore showing it still means you could have got a meaningful 20%-plus EPS upside versus where you ended up in the first quarter. So I guess first question really, given that -- is as you look at all your strategic objectives you've outlined, John, how many are really focused on execution? Particularly given power plants do tend to be a little more tricky on the combined cycle side in terms of the track record out there for a lot of your peers. And also given the welding environment, which is probably pricing up. And then second of all, you haven't changed guidance. So would that suggest you're seeing some other portions of your business in terms of outlook improving, which is why you kept your range intact?

So let me address the first part, and I'll let Kevin get you with the second part on the numbers. But -- so we've talked many times and again, you guys only hear about the bad stuff. You don't hear about the good stuff. So this is a business that's made up of pluses and minuses and the better job we do of minimizing the minuses, it accentuates the positives. So in this quarter, so while we've had a project with some stress on it, we've had other products that have done very well. So I take exception to the project execution, operation of the company, we had a very good strong execution this quarter in a lot of areas of the company, in fact, to some extent, much that well overshadows that one individual project. So from an execution side, on the business, taken in whole, we were, I would say we're a plus rather than a negative. And so what we really need to focus on is how we support that execution with our construction overheads. And that's really, I think, the story in the quarter. With the revenues down a little bit, our ability and how we've structured the fundamental infrastructure and foundation of the company to deal with our revenues is a thing that we've got to work on and those -- in those efficiencies. But our project execution, the risk profiles we're looking for in our projects, I think we're doing a very good job at that. As it relates to combined cycle work, that is -- that project was -- came with the acquisition. We're very comfortable with where we are at in that project. And we see that as a continuing part of our -- those types of projects continuing to be a key part of our backlog into the future and a key growth engine for our company. And so you asked a question about welders. Currently, today, I would say that is not a big problem with us being able to recruit welders into our company. In most places across the country, we are seeing -- starting to see a little bit of tightness in that market in the Gulf Coast. But it's something that we think we can manage and that will be considered in the risk profile of our jobs we go forward.

So Tahira, I would echo John's comments on the execution of the work. I think if you looked at the Industrial segment, the project execution produced gross margin well above our range. If you look at the Oil Gas & Chemical and Storage, both of those were in the upper end of our range. We did have the issue in Electrical, but overall, it was very good execution. And for the quarter, we have $321 million of revenue. We've maintained our revenue guidance, the midpoint of that is about $1.475 million. So that implies an average revenue per quarter around $380 million. So that's $60 million higher than what we did in the first quarter. So if we were successful in achieving that, that under absorption issue, which was the story of the quarter, gets minimized. We essentially fully absorb at those levels and as a result, the earnings are going to improve. So I'm expecting that we'll see some good pickups in revenue volumes beginning with the second quarter.

Got it. Second question I had was, John, you referred to average margins and really taking them to the next level. And as I look at the specialty contractor group as a whole, the average margins, in fact, even the NAC [ph] as a whole, are already in the 5% to 6% operating margin range. With -- maybe the really good performers giving sort of a high single digit operating margin range. So when you're talking about really migrating from average margins and fairly kind of close to hit 5% in 2014, where are you taking them in terms of timeline? How do you really view operating margins in terms of what you perceive to be above average?

As for our peer group, and I would probably would have to lay [ph] peer group, who you think your peer group is against that we think our peer group is side-by-side and have that discussion separately, but -- so for us, operating in the 4.5% to 5% range, operating margin range, right, we think we're -- that's about -- in our peer group, that we see as our, is that we're in a 50 percentile. And so we want to be up in the 6.5% range, and so as we said in the call, that's 150 basis points improvement. And that will put us up in the top quartile of the people that we consider to be our peer group. And so I -- if we were a private company, the owner of the company would be very happy with the kind of margins that we're putting out. But we're not satisfied with that, and we want to be, as I said, we want to be in the upper quartile of our peer group, because we think that's just going to help us continue to drive improved shareholder value and our view in the market. And -- so those are incremental improvements in our operating margin performance in a whole lot of areas. So it isn't just one thing, as I talked about, there's a whole lot of different things that we're doing, that we're investing in, that we're analyzing that are going to help us get that incremental improvement. So it's kind of like safety performance. So you -- when you drive your safety performance down into the area where we are, which we consider ourselves a world-class performance of 0.67 recordable incident rate today, to get those next changes, to get the 0.67 down to 0.5 and 0.4, it's incremental changes, they're fine-tuning and adjustments in the company. There's is -- so that next extra 150 basis points is possible for -- in the margins. But we have areas we know we can work on to make that happen so it's just going to take some time. But we're confident we're going to get there.

Got it, that is helpful. And last small question for you. The award you announced this morning, which is tied to the Sandpiper Pipeline, would love to get your thoughts on how you perceive that as a booking and flow-through. The Sandpiper Project looks like it's being contested on a state legislative level from a permitting standpoint, there are some alternatives being considered. So just to give us a perspective, it seems a lot of these delays, as you've mentioned, are permitting oriented and would love to take that as an example and really talk around in terms of how you would book it and how you would see the timing of flow-through.

Well, with the project we announced today, we are working on engineering, we are prepped up for fabrication and we're going to crews together, our client, Enbridge, is one of our key clients there. They have talked, again they're one of the clients that I referenced that is basically saying that the -- they're looking long-term that this dip in the price of oil is not affecting their long-range plans. And so all of these pipelines have permitting issue, from one way or another, depending on what state you're going through, what federal state regulatory agents got to look at it. But I don't -- they've contracted with us with a nice contract sum to start engineering and fabrication, which we're already doing. And so I do think that they'd be out spending that money if they didn't have confidence that, that was going to go through.

Our next question is from the line of Mike Harrison from First Analysis.

Just in terms of the timing -- project timing and the overhead absorption issue. Obviously, you need to have personnel and equipment in place, ahead of a project moving forward. How much flexibly do you really have if you see that a project is going to be delayed by a few weeks or a month? What can you do about that? What can't you do in order to reduce the margin impact?

From an overhead perspective, there's probably not a lot you can do from a project that is delayed such a short, short time. There may be things that you can do to delay certain direct project costs, but from an overhead perspective, I don't think there's a lot you can -- a lot of costs you could take out of your business on a -- for a month or 2.

That's why we've said in the past that you really got to look at our business on a, sort of an annual basis that the -- these quarter-to-quarter swings of projects and project starts can be a little unsettling if you're just focused on -- from 1 quarter to the next. But we're confident that those revenues and those costs are going to become -- those revenues are going to occur, and those costs, they're going to become fully applied as you move out in time, as we execute those projects that slide from 1 quarter to another. Another thing is that, so you take pieces of that overhead, like our construction equipment. Are we doing a very -- are we doing as good a job as we can, applying that equipment into our projects where are we -- as we have some delays in project starts, can we take some of our -- owned construction equipment and put that on to projects that, where we're renting equipment and minimize some of those impacts. So those are some of the, sort of the business efficiency things that we've got to be able to do and take a good look at.

And then just looking at the 3 -- or $3.3 million charge, can you give a little bit more color on exactly what was driving that? And I think I understood you to say, that if you excluded that project over all, gross margin in the EI segment was about similar year-on-year. So were there further headwinds on that project beyond just the charge that you took?

No. It's the -- I think the -- Kevin can confirm that, but I think if you exclude that project, the gross margins are in the 11% range in that segment. So now I mean, it's a -- the project's in -- it's in fairly decent shape. It was a -- we had some -- I don't want to get in the details and what all the issues on the project, but I think, we've captured those issues, the project is over 70% complete. We'll be essentially complete with all the construction, the actual construction work sometime in January. And so we're fairly comfortable where that's going. There's still, certainly on any project, there's still risk to get to the end, but we think we've got a very -- our hands on the job and issues related to what caused us to reduce the forecast on the profit output on the job. And so we thought it was prudent to make us -- make that adjustment.

And then just lastly, on the recent elections. I think it's easy to view that as kind of positive for you guys on a national and a state level in terms of energy policy maybe moving forward after being stalled for quite a while here. Do you think that's going to happen or are you -- you're still a little skeptical that we're going to see significant changes in policy anytime soon?

So anything I would say here will be my opinion. So my personal opinion is, is that because of the -- got another election in 2 years for our new President who's going to be -- probably the prime contender will be a female Democrat and the desire for the Democrats to get recontrol of the House and the Senate, that I think they're not going to want to be perceived as getting in the way of improved energy policy and the economy and jobs. And so my glass half-full thinking here is that they're going to push through an energy policy that's going to allow faster approval of LNG projects that's going to allow the approval of the Keystone pipeline and for potentially even the export of crude oil. So all those things, obviously, I think would be good for our business. We have not accounted for that one way or the other within our guidance. And because that's a who knows what's going to happen there. But I think, in our view, what's going on with the elections is going to be positive for our business. The other thing, I think is potentially, maybe is potentially positive, too, is that will there be some reform on the corporate taxes. And what impact will that have, not only on our business, but on the economy in general. So I would say I'm cautiously optimistic that the results of the polls this week are going to create additional tailwinds for our business out into the future here.

Our next question is from the line of Tristan Richardson from D.A. Davidson. Tristan Richardson - D.A. Davidson & Co., Research Division: Appreciate you sort of laying out the clear margin goals, and I get it that you guys want to be the Johnny McEnroe of your peer group. Curious about the timeline though. I mean, is this a, by the end of fiscal '16 we think we've got it or is this -- I'm curious on that front.

So what was your question again? Tristan Richardson - D.A. Davidson & Co., Research Division: Timeline.

Timelines, like I said, it's -- these are incremental things that we're going to have to do, I think that our goal, or our goal is at the end of -- when we get to the end of fiscal 2017 and '18, that we'll be in that top-quartile of our peer group in our margins. So I can't tell you whether we're going to get 25% improvement this year and 25% the next year. We're going to start picking off some of the low-hanging fruit that we see and then improving our processes and efficiencies and so I think we've said in our prepared statements that there's going to be incremental changes as we move forward and we're not -- I'm not prepared to commit that there's going to be a certain percentage per year for the next 3 years.

I do think that it's, for us to achieve these, it will take some changes that will take a little bit of time to work through to the margins. So the -- it will take a little while to get started before we you start seeing that improvement, but it -- hopefully as we move through this year, we'll start to see it. Tristan Richardson - D.A. Davidson & Co., Research Division: Okay. And then in the past, you guys have talked about a couple of power gen opportunities on the horizon that you're looking at, and just curious the update of the timing there, has anything changed? I mean, still looking at possible awards this year, this fiscal year?

Yes, yes. So we are looking at opportunities that would be awards in this fiscal year. And so we are balancing that, our desire to move that strategy forward with accepting projects that have a risk profile that fit our appetite. And -- but we're -- we remain optimistic that in this fiscal year that we will be able to add some power generation project or projects into our portfolio. Tristan Richardson - D.A. Davidson & Co., Research Division: Great. And then lastly, could you talk a little bit about the new awards profile in Storage? Just generally, I mean, is it sort of plain vanilla tanks or I mean, you talked about diversifying the scope of work. I'm curious what the jobs look like in the quarter that you've sold.

So one of the jobs that was added to the backlog this quarter is a full tank terminal project in the Gulf Coast. That booking was in excess of $75 million. And so that's one of the profiles we are still doing, tank-only projects. We have some -- we actually have some projects that are terminal only and, or maybe manifold systems or pumping stations. And so I think the full breadth of the tank and terminal opportunities as we are getting our share of, and that we think there's increased opportunities for us to provide full EPC solutions where we can do all the engineering besides all the construction on these terminal projects and we see -- continue to see many opportunities out there with our -- not only our core clients, but some of the other clients that we do work for on a off and on basis. So we're still pretty comfortable with where we are in that market and we think we're going to continue to have our unfair share of the -- unfair share of what was going on there. Tristan Richardson - D.A. Davidson & Co., Research Division: That's helpful. And then I guess lastly on the profile, where the backlog sits today specifically in Storage. Could you talk about split between U.S. versus Canada?

I think it's, Canada's probably 25%, 30% of the backlog.

Our next question is from the line of Robert Connors from Stifel. Robert V. Connors - Stifel, Nicolaus & Company, Incorporated, Research Division: Just wondering if, since the close of the quarter, can you comment at all if on those 3 projects that were delayed, have you started to see any improvement and been able to gain access to the site? And then also to the extent that you're able to comment if these projects are already financed and/or permitted.

So one of the projects I know we are moving ahead at full speed, and I believe all those projects are -- specifically one of them is on an on-balance-sheet project. So the other ones I believe they are too, I think most of these projects are coming out of the these client's cash flows. Robert V. Connors - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, that's helpful. And then, I guess, just generally speaking on the cost structure and business inefficiencies that you guys are targeting, just wondering how much of it is driven by some of the recent M&A, where after peeling back the onion, you find out that maybe the cost structure was a little bit higher. You see opportunities there or just how much is related to just the overall growth that we've seen in some of your end markets?

So it's both. Certainly the acquisitions create opportunities were there's some overlap, where we're not doing our best to utilize, and all the resources that we brought together, both on a -- from a sales side and from a cost side and -- so it's both. For instance in our union business that we brought together, with the Kvaerner acquisition, while they were using the same finance and accounting system, we were, it was a different version. And so that creates a lot of double entry and a lot of stress in the finance and accounting group for people pulling information together, which is just inefficient and takes up people's time from doing other things they could be doing. So that's an example of, from an acquisition standpoint where we've got to get that sort of out and get those systems and it may not be the choice of one or the other, the possible choice is something a little bit different than the 2 of them. So that's something we have to work through, and that's why these things are going to take time, it doesn't happen overnight and as we pull those together, that's going to create more efficiency in how we report. So each of those little -- so while that may seem like a small thing, each of those provide -- each of those things within our entire business add up to areas where we can be more efficient and quicker. Robert V. Connors - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay, and then I know you've recently -- or earlier you'd said that you'd still continue to look at M&A, but do you just think that with some of the things you're discovering maybe M&A is put on hold for a little bit or is it still -- you're still considering targets out there?

No, no, we're still considering targets. We're comfortable, we have our hands around what we have and how that's coming together. And we have plans along those lines. A lot of these things that -- some of the things we've talked about here, while we mentioned in the call that we're going to commence this initiative, some of these things actually have already started related to these acquisitions. They've been ongoing for, since we did the deals. So we're just broadening that, we're just broadening these moves in business efficiency. So no, we're still actively in the market, looking for acquisition opportunities that fits our strategy in all 4 of our segments.

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

Just wanted to touch on the balance of the year, given what happened here in this past quarter. So it sounds like you're going to have pretty high utilization of your staff going forward. Is this going to be perhaps what we might see as the more near-term peak margins for you, just -- is it essentially, is there any way, any example of what your company can do going forward if all goes well? Or is what's in your backlog currently at a bit higher margin than what you currently got that was kind of like delayed from the first quarter here?

So I think we're going to let Kevin provide an answer. I think going forward, we're going to minimize the impact of the under absorption of our cost structure, but that doesn't necessarily mean that, that's the best we can do.

Yes, and I think when you look at the quarter -- first quarter, we had strong, operate direct margins on -- throughout most of the business. And the quality of the backlog is similar to what we've just executed. And so if we're able to fully absorb, then we should be able to produce margins, for the most part, in the ranges that we've previously provided. Again, Electrical may take a little longer to get there. But overall, I think we can produce good margins that are in line with our overall expectations.

[Operator Instructions] And there are no further questioners in the queue at this time.

Okay, well, thank you, everybody, for participating in today's call. As I mentioned at the beginning of this call, the business is performing as envisioned in our strategy. We see growth opportunities in all of our segments and we are focused on improving operating margins to achieve top-quartile performance. Again, we expect to be the best and have every confidence in our ability to achieve those high expectations. So we look forward to talking with you again in the future. And thanks, everybody, for participating.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This now concludes the program. You may all disconnect. Everyone, have a great day.