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Executives

Truc Nguyen – Investor Relations

Michael J. Bradley – President and Chief Executive Officer

Thomas Long – Chief Financial Officer

Analysts

Matt Duncan – Stephens Inc.

Michael Harrison – First Analysis Corp.

Martin Malloy – Johnson Rice & Company

Rich Wesolowski – Sidoti & Company

Tahira Afzal – Keybanc Capital Markets

David Yuschak – SMH Capital

Matrix Service Co. (MTRX) F1Q10 Earnings Call November 3, 2009 12:00 PM ET

Operator

Welcome to the Matrix Service Company First Quarter Fiscal Year 2010 Earnings Results conference call. (Operator Instructions) It is now my pleasure to introduce your host, Truc Nguyen, investor relations for Matrix Service Company.

Truc Nguyen

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 last fiscal year and in subsequent filings made by the company with the SEC.

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

Michael Bradley

Thank you for joining us today for our first quarter conference call. Before I get to my comments though, I would like to turn the call over to Tom Long, our CFO, to discuss our financial results.

Thomas Long

Before I discuss the results, I would like to remind everyone about the previously announced change to our fiscal year end from May 31 to June 30. As this change was effective during the first quarter, the results we discuss today will be for the quarter ended September 30, 2009.

In addition, we will also discuss the results for the June, 2009, which is the one-month transition period for the fiscal year change. The press release we issued this morning discloses specific details of the results of the first quarter ended September 30 and the transition period.

In the first quarter, we earned $0.17 per fully diluted share on $138 million of revenue. The first quarter results included a charge of $1.2 million or $0.03 per share related to a legal matter. While we do not discuss the specifics of any litigation, the significance of the charge is important in understanding our results for the quarter.

Revenues for both segments were negatively impacted by the economic downturn, which has continued to slow the capital spending by our customers and impact the timing and scope of maintenance work. Our construction services segment revenues were $78 million in the quarter as compared to $115 million in the same quarter last year, while our repair and maintenance services segment revenues were $60 million in the quarter compared to $72 million in the prior year.

Consolidated gross profit was $17 million in the quarter versus $27 million in the first quarter last year. Although our project execution continues to be strong, the lower volume of business-related available to recover construction overhead costs has led to reductions in gross margins. Our gross margins were 12.7% in the quarter as compared to 14.3% in the prior year period.

We are actively managing our cost structure as we work through the economic downturn. SG&A expenses have decreased more than 16% since the first quarter of last year. The reduction from $12 million to $10 million was primarily associated with employee-related costs and professional fees. Our focus is to manage costs while maintaining sufficient resources to address the opportunities we see currently developing.

For the transition period, net income was $1 million or $0.04 per fully diluted share on total revenues of $46 million. The comparable prior year results were revenues of $60 million and net income of $4 million or $0.14 per fully diluted share. The results for June 2009 were impacted by the same factors as the first quarter of fiscal 2010.

Since the end of fiscal 2009, we have increased our cash position by $22 million to a balance of $56 million at the end of the quarter. We did not borrow against a $75 million revolving credit facility during the period. As a result, we have a strong financial position and liquidity exceeding $120 million.

We also continue to have the bonding capacity necessary to support our business. Our strong balance sheet and financial flexibility should allow us to capitalize on future business opportunities and with that, I'll turn it back over to Mike.

Michael J. Bradley

I would like to discuss a few key points before we open the call up for questions. First is our operating performance, second our look at the market, and third, our focus and outlook for Matrix Service.

As we discussed in August, we expected that calendar 2009 would be a challenging market environment. During June, in the first quarter, we continued to see clients defer spending in both capital construction and repair maintenance.

Some of our markets experienced a very mild wet summer, which reduced demand for our services as well. The financial results Tom reported reflect these conditions, which were in line with our expectations for the quarter.

Even with the difficult economic conditions, our project teams have continued to execute well. Safety remains a key focus, demonstrated by solid performance and proactive culture. Our strong execution has further strengthened our financial position.

As Tom mentioned, our cash position increased to $56 million and our liquidity has grown to more than $120 million. We have ample bonding capacity to support growth in our business, which we also view as a competitive advantage.

Additionally, we continue to focus on managing our costs. We have reduced our SG&A costs as reflected in our results and can make further reductions in this area as well as in our construction overhead costs. While we will closely manage our cost structure, it is important we maintain our ability to capture and execute new projects and remain focused on our long-term strategy.

There's no question about it that the current economic conditions have been difficult and there remains a level of uncertainty. We continue to experience a very competitive market. Increased competition, coupled with a tough environment, have put pressure on contractors to decrease margins and accept a shift in risk allocation including more demanding contractual terms and conditions.

While we work with customers to consistently provide high-quality solutions at a competitive price, we remain disciplined in our approach to project selection, contract risk management and project execution.

Capital construction awards have been slow to develop, which has impacted our backlog.

On a positive note though, the level of bid activity has increased significantly in the past couple of months, which is encouraging. Our job funnel today is as strong as it has ever been and includes a broader array of projects including more extensive opportunities in power, power delivery, and alternative energy along with more promising prospects in AST and refinery turnarounds into calendar 2010.

We are pursuing projects of greater scale, which is reflective of our expanded capabilities and include select opportunities outside of North America in our core businesses. We believe our continued emphasis on strengthening our business development efforts in this tough market will lead to a more diverse range of project opportunities.

Regarding the SME acquisition, electrical and instrumentation infrastructure opportunities are developing as expected. We remain pleased with the integration and performance of S.M. Electric, which has accelerated the expansion of our electrical and instrumentation business. Targeted business development and marketing efforts have been effective as our customers are beginning to see the value and growth potential of the combined SME Matrix Service brand.

While challenging, this market also presents opportunities for us to strengthen our position. Today, we were able to add key talent to expand our expertise and geographic reach, focusing on avenues to increase our market presence.

We are enhancing processes in specific areas to improve operating efficiency and continue to reduce costs. We also believe this is a good time to identify and evaluate acquisitions that compliment and grow our capabilities and geographic reach. By focusing now on adding talent, improving cost and efficiency, and pursuing strategic acquisitions, we are strengthening our overall position and building towards future growth.

Looking forward, the view of our business environment and annual plan remains consistent with what we expected when we talked last August. This assumes an improving market in calendar 2010 resulting in higher demands for our services, which is currently supported by the indicators we see emerging.

Regarding our focus and outlook for Matrix service, beginning in fiscal 2009 and continuing into fiscal 2010, we have advanced our long-term strategic growth objectives. As we look forward, we remain committed to the organic growth of our core AST and refinery maintenance business in North America.

Additionally, our strength and capabilities in engineering, procurement, fabrication and construction for AST and terminals has positioned us well to move into select international markets. We plan to leverage our expanding capabilities to diversify further and into power, power delivery, specialty structures, renewable energy, and industrial applications including broadening of our overall repair and maintenance service offerings.

Our expanded engineering capabilities enables us to pursue large scale turn-key terminal projects and more complex steel plate structure projects such as thermal vacuum chambers, nuclear and cryogenic vessels.

Finally, as I mentioned, we will continue to seek acquisitions that facilitate and support these long-term strategic objectives. The company is well-positioned to manage through the current economic environment and, very importantly, poised to be opportunistic. Our business development and project capabilities enable us to expand the type and scale of opportunities in the energy and industrial infrastructure markets.

Energy independence and a greater emphasis on multiple energy sources, along with revitalizing the existing infrastructure, will drive our nation's long-term energy policies, which present our business with significant opportunities.

While the current market conditions do present challenges and some uncertainty remains, we are maintaining our earnings guidance range of $0.80 to $1.10 for fully diluted share for fiscal 2010. During our year-end earnings call, I stated our plans assumed a challenging environment in calendar year 2009 with some improvement starting late this year and into calendar year 2010.

Our view today is the same. As I mentioned earlier, we are seeing some indications the market is starting to improve. In closing, we have the financial strength, capabilities and talent to facilitate and support growth in our business. We remain committed to our strong safety culture and to the high quality project execution for our clients.

These sound fundamentals enable us to be disciplined, selective and strategic in our pursuits. This market has its challenges, but we also believe it presents interesting opportunities today to continue to strengthen and improve our position. We are confident with the steps we have taken. We remain strategically focused on the long-term growth and diversification of our business. With that I would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions).Your first comes from Matt Duncan – Stephens Incorporated.

Matt Duncan - Stephens Inc.

First question I've got is you're going back to this increased bid activity you're talking about. If I remember correctly on the August call you mentioned that as well and I'm curious, has bid activity increased further from then to now? Are you seeing, kind of, a continued increase in this bid activity and when do you think you might start to see some of this bid activity turn into backlog?

Michael J. Bradley

To answer the first part of your question, Matt, the bid activity has picked up since the August call and it's really across a broader range of project opportunities, which is encouraging. I think that there's a lot of budget activity going on. There seems to be more serious planning on projects into 2010, all of which right now we see as encouraging.

I think the question remains as to when projects will get awarded, you know - we've continued to see at least starting early to mid last year, or calendar year 2009, you know, companies pulling back on spending and deferring capital. We're hopefully seeing some of that start to shift. We have seen an up-tick in maintenance activity recently so, you know, right now we're encouraged with what we're seeing.

Matt Duncan - Stephens Inc.

Mike, if I look at your margin levels that you posted this quarter, you know, the construction growth margin, I guess, was up pretty significantly from about 50 basis points, I guess, from the May quarter, and that's all in $23 million less revenue.

I'm just curious, kind of, what drove that? Was that maybe sold project execution on some projects that you were finishing that were fixed priced in nature or was there something else helping with that gross margin?

Michael J. Bradley

Well I think it was primarily just good execution on our projects. That's been a focus of ours, Matt, for some time in improving, you know, our project execution. And I think, you know, we're seeing that in our gross margins, so I think that's really what I think is driving that.

Matt Duncan - Stephens Inc.

Do you think you can hold gross margin around these levels or is the pricing pressure and higher contract risk that you've talked about maybe competitively maybe going to weigh on the margin level that you posted this quarter? And then, as a follow up to that and I guess, kind of, a little bit different question, Tom, can you tell us where that $1.2 million legal flee flowed through the P&L?

Thomas Long

Yes, regarding margins, the environment today remains very competitive, Matt. I think that, you know, one impact on our margins in the last quarter was due to under absorption of our construction overhead.

I think, very important, as I mentioned, we continue to look at our cost structure and compare it to the bid activity and the opportunities that we see coming. And so, you know, we've been holding onto some costs in anticipation of some good opportunities developing, so that had an impact on margins as well during the quarter.

Matt Duncan - Stephens Inc

Tell me where that flow through?

Thomas Long

Yes, and that flowed through the gross margin line, Matt.

Matt Duncan - Stephens Inc

If I'm doing my math correct, your gross margin was 13.5% if I backed that cost out?

Thomas Long

Yes that's about right, Matt.

Matt Duncan - Stephens Inc

And the last thing here guys and I'll jump back in queue and, Mike, you touched on this a little bit, but you guys are building a very nice cash balance. It was up another $20 million this quarter. I guess kind of want to dive in a little bit more on what your plans are for that cash.

I know you've got a $3 million share repurchase program out there. Your stock looks fairly cheap here to us. I'm curious if you would have any plans to maybe buy stock, and if you could elaborate a little bit on the acquisition front, sort of what type of deals are you seeing out there, and are you getting close to anything?

Michael J. Bradley

Well, in terms of utilizing our cash, obviously, we have built up a strong cash balance. And our focus is looking for opportunities to grow this company, expand our market share, in particular, looking at both what I would call organic growth opportunities as well as acquisitions.

We've seen several acquisition opportunities. We continue to assess. I won't comment as to where we are or what status is other than we are very active in that acquisition market today. As it relates to buying back shares, obviously, that's another potential use of our cash.

But also as we continue to bid up, and I'm talking about project scale, we also want to maintain a strong cash balance for working capital needs. So we're looking at all those sources, Matt, but stock buyback is obviously something that's out there. But as long as we see good opportunities to grow and expand our business that's where our focus is going to be for utilizing our cash.

Operator

Our next question comes from Mike Harrison – First Analysis.

Michael Harrison - First Analysis Corp.

I was wondering if you could comment a little bit on with regard to delays that you're seeing from customers, what is it that seems to be causing those delays? Are they waiting for some macroeconomic improvement? Are they waiting to see higher oil and gas prices? Is it lower steel costs or waiting for an uptick in steel, so that they can lock in a low rate? Is it financing credit issues still? Maybe some color on that.

Michael J. Bradley

I think you covered the gamut, Mike. But, I think this past year there's been a lot of caution about spending, period. I think that what we have seen is a very or an extended time period between bid and award, much longer than what we've seen previously. So I just think it's just a general cautious tone on spending. And that a lot of companies are looking for higher return thresholds on their projects.

They're being more selective on those, which I think again it's about capital allocation. And on top of that on the maintenance side of the business, what we've seen up until recently is more reduced scope of maintenance, getting by with less maintenance, deferring some of the major maintenance to later in the year or into next year, so I think it's just been a kind of a general cautious theme across the entire business.

In terms of financing, a lot of the clients that we do work for are very strong financially and we haven't really seen any issues related to that. I think when you get into some of the project developers, that's when you see financing is still a bit of a challenge, particularly on alternative energy. So I think it's just a combination. But again, what we're seeing now, it appears to be more encouraging.

Michael Harrison – First Analysis Corp.

As you look at the maintenance side of the business and customers, it sounds like you're talking about sort of patching or band-aid type solutions in deferring maintenance. Do you see a glut of kind of pent up demand building up there and how do you guys feel like you're positioned to be able to capitalize on that demand if the customers move forward with some of these larger projects?

Michael J. Bradley

Well, I do feel like a lot of the maintenance spending has been deferred. It has a limited life and so there will have to be more maintenance performed, particularly I think as we get into next year. I think we're positioned very well to respond to increased maintenance activities.

Our turnaround business is something that we are very focused on growing, expanding and positioning ourselves in new markets and I think we've done very well at that. It's a challenging business. As we know, we're finding business is a big challenge right now. But maintenance has to occur and catalysts and parts of the refinery process have to be repaired and replaced, so I think we are anticipating to see that pick up in 2010.

Michael Harrison – First Analysis Corp.

And you talked a little bit about plans to expand internationally. It sounded like the focus there was going to be on AST. But can you give us any more detail on if there's a particular customer or any particular projects you're looking at internationally?

Michael J. Bradley

I won't comment on any particular customer or project specifically, Mike, but our focus internationally is what we do best. So I think the steel placed structures, AST business, large scale terminals is a skill set that we have and can execute well and so that would probably be the focus of our international opportunities at this point.

Michael Harrison – First Analysis Corp.

Right and the last question I had is related to this special item as well. Was there a split between the two segments?

Michael J. Bradley

Yes, there was, Mike and let me just give you kind of ballpark. The majority of it did go toward the repair and maintenance.

Michael Harrison – First Analysis Corp.

Was it in kind of a 60/40 type split?

Michael J. Bradley

Yes, that's probably a good estimate, maybe a 70/30, somewhere in that range.

Operator

Your next question comes from Martin Malloy – Johnson Rice & Company.

Martin Malloy – Johnson Rice & Company

The first question I had was on the legal cause. Is this something that is going to continue on into future quarters or was this pretty much just for this past quarter?

Thomas Long

No, we anticipate this to be the past quarter. No, this was an accrual of a charge.

Martin Malloy – Johnson Rice & Company

Okay and where did this show up in the income statement? Was it in the corporate line?

Thomas Long

No, it showed up in the gross margin line.

Martin Malloy – Johnson Rice & Company

Okay and in terms of the CBI acquisition, the engineering account that you acquired there, can you talk a little bit about the outlook and the types of projects that perhaps they're capable of doing that previously you didn't have the capability?

Thomas Long

Sure, I think a couple things on that, Marty, is one, today with the addition of the Pittsburg office as well as some additional talent that we have brought into this organization, we have very strong capabilities in doing full turnkey larger scale terminal design and construction, which I think is a skill set that we definitely have today that we didn't.

I think getting into more complex structures such as nuclear containment is another area that we're prepared to move forward with now, more complex steel place structures, such as thermal vacuum chambers, is a full turnkey capability that we have. So I think it's positioned us very well with what we want to do with our business and we're aggressively pursuing those opportunities.

Operator

Your next question comes from Rich Wesolowski – Sidoti & Company

Rich Wesolowski – Sidoti & Company

Mike, I was hoping you'd dive a little deeper into the construction margin specifically, which if you look at it over the past two quarters of pretty tough business has been a good deal better than what you were reporting when the industry was going strong.

Can it be that there was so much room to improve on the execution relative to what Matrix has historically done even before you got there, that those efforts have outweighed the reductions that contractors are facing everywhere in the market?

Michael J. Bradley

Well, like I mentioned earlier, Rich, project execution, project management has been a strong focus of ours in training, developing and really adding to the talent base and improving the processes that we have.

So that's been a strong focus of ours and I think that's reflected in our gross margins. We're seeing less margin fade today. I think we've got a good strong focus on it. So I think that those factors are definitely playing a strong role.

Rich Wesolowski – Sidoti & Company

So would you be comfortable saying that the days of forget single digits but even maybe 10%, 11% margins on a sustainable basis are over and that we should expect 12%,13% plus in the days ahead?

Michael J. Bradley

I think market conditions will drive that. But I feel very good about the capabilities that we have in Matrix and the talent and the focus that we've put on this, so I guess more importantly is consistent execution is a focus of ours.

And I think the lump sum project presents some good opportunities for us for, we do have somewhat increased backlog and lump sum compared to the last couple of years. Also, I think as the activity picks up and utilization of our work force continues to increase that will help as well.

Rich Wesolowski – Sidoti & Company

Do you sense there's a difference in your bidding prospects over a period of say the next two to three years for construction work in the storage tank arena relative to [down shoe] oil & gas?

Michael J. Bradley

I'm sorry, do I see –

Rich Wesolowski – Sidoti & Company

Do you think your prospects in the storage tanks, in the tank farms in Cushing and Patoka, etc. are going to bring up a larger portion of the revenue than in refineries, which has been strong up until the last year or so?

Michael J. Bradley

Yes, well, I think looking out over the long-term we see some pretty good prospects for terminals. I think some of that's driven by restoring the production in the oil sands. We'll drive storage opportunities. And the other aspect I think the change in supply patterns and quality accrued and blending, those were the things, I think, will change in drive, good opportunities for us and above ground storage.

The maintenance, on the refinery side of the business, we're going to continue to focus on expanding out maintenance presence in that arena. I think we're starting to see air quality projects emerge, which fits very nicely with our capabilities, so we're not abandoning either one.

We continue to see some good opportunities on the long-term horizon in both those areas. I think very importantly though is that the diversification efforts we have in power, alternative energy, and other industrial markets will continue to increase its share of our revenue going forward.

Rich Wesolowski – Sidoti & Company

On the power, you previously noted that SME has held to your initial expectations about $70 million in sales if I remember correctly. Is that the basis of growth that you would expect for calendar 10 and 11 or were they working off a good backlog when you bought them and has been tough to replace?

Michael J. Bradley

No I think they were working off a decent backlog when we acquired them and as I mentioned the infrastructure opportunities that we expected to occur are developing. So we feel very good about the opportunities with SM Electric but I think very importantly we're really working to combine the brand of SME and Matrix to broaden the solutions for our clients in those markets. So that's definitely one area that we continue to be very encouraged about.

Rich Wesolowski – Sidoti & Company

So just to be clear in 10 and 11 your best guess is that SME's revenue is higher than the first year you bought them?

Michael J. Bradley

Well I think we close on that in February, so obviously there are revenues associated with SME and fiscal 2009 will be lower than 2010. But I think everything remains on track with our expectations as we'd laid out previously to answer that question.

Rich Wesolowski – Sidoti & Company

Finally on the spring maintenance rebound that you're expecting is that more from a faith that maintenance has to be done at some point, which is logical, or rather on tangible conversations with customers regarding their spring turn around plans?

Michael J. Bradley

Well I think it's primarily based on conversations and the expectations that a lot of this maintenance is going to have to go forward. We've kind of been through within the last several months a cycle of let's push them out and then a month later they get pulled back.

So I think it's kind of going back and forth right now, but our expectation is that refinery maintenance is still very critical part of the infrastructure and we do expect more maintenance to pick up.

I think the other comment on maintenance that we really didn't touch on is the AST repair maintenance business, which is also included in those numbers and we have seen the same things happening in that market as we have in other markets as well, where there's been less than smaller projects, which again I think is reflective of the current environment to the first spending. So we had also expected to see repair maintenance and the AST market pick up down the road as well.

Operator

Our next question comes from Tahira Afzal – Keybanc Capital Markets.

Tahira Afzal – Keybanc Capital Markets

Just in terms of your bookings for the quarter, they were a little below what I expected. I would love to hear where the bookings came in for the quarter, what's your expectations and if you look at your guidance, the top end and the bottom end of your guidance [inaudible] a low bookings rate really sustained, still the bottom end of your guidance given that you indicated there's a lot of flex in terms of the cost?

Michael J. Bradley

Well I think in terms of the bookings for the quarter, I think going into the quarter we were expecting a difficult environment. I think that probably on the downside we saw projects that we thought were going to get booked in Q1 get deferred.

So I think that's been continuing as you know this past year. So I'd say our bookings came in a little bit below what we had hoped primarily because of just deferrals but on the other hand I think again based on the activity we're seeing today we're encouraged with what we're seeing there.

Tahira Afzal – Keybanc Capital Markets

Then if I was to look at the June quarter that was around $0.04 in earnings, if I really take your fiscal first quarter performance really got bad on a monthly basis. It's roughly around $0.07. That seems it's largely coming from cost control et cetera.

Was June sort of a pronounced quarter for you in terms of perhaps maybe being the lowest water point or was any seasonality in it? And as you look past June and into what's been your fiscal first quarter, do you feel that you've past the low point of the utilization cycle for you?

Michael J. Bradley

To answer your question, I think in general we see some bottoming. Let me talk a little bit about this summer because this summer we expected it to be challenging and it was. A couple of factors that led into that, I think one, was just the reduced spending environment that we had expected but also I think we saw much less emergency work Tahira then we did say a year ago.

And I think that's kind of also a result of the weather but also I think with less utilization refineries and those sorts of things that there wasn't as much emergency calling out or wasn't emergency work they would just schedule it according to their needs versus the emergency call out work. So we saw a reduction in that area as well.

Tahira Afzal – Keybanc Capital Markets

So I mean you probably, it seems like even though the revenues were light you were able to contain costs and therefore it seems like you're actually meeting the bottom end of your guidance at this point in say doables?

Michael J. Bradley

Based on our outlook today we're maintaining that guidance.

Tahira Afzal – Keybanc Capital Markets

To get to the upper end of your guidance would one have to see bookings pick up by a certain amount in your opinion?

Michael J. Bradley

Well I think for the year there's a combination of things Tahira. I think that one is that we'll continue to manage costs, but as I stated we're doing it very selectively because of the bid activity and opportunities that we see developing.

So we've got to maintain our talent base because we still are very bullish on the long-term. We positioned this company well and so we're going to keep our focus on the long-term. Obviously, I think depending on whether an emergency work occurs and then just, I think, an increased environment in maintenance spending right now keeps us comfortable within that range.

Tahira Afzal – Keybanc Capital Markets

Last question, this is along the lines of what Matt asked earlier on. If you're looking at what you're doing on [inaudible] and you have a huge amount of cash now on your balance sheet. Any chance of any buybacks, stock purchases, or do you see most of this money really going towards potential acquisitions and keeping something on the balance sheet for some of the larger awards in terms of collateral, etc.?

Thomas Long

I think, to answer your question, it's the latter. Our focus right now is looking at opportunities today that can facilitate our growth, and we do see several opportunities out there. I think keeping a good cash balance, particularly as we expect to increase the scale of our projects going forward. But again, we look at share buybacks as well, but our focus right now is, how do we grow this company? And I think now is a good time to be positioning for that.

Tahira Afzal – Keybanc Capital Markets

And if you look at your acquisition opportunities, Mike, what would you love to buy if you had to buy one acquisition today from all the broad base that you're seeing? In terms of end markets, where would you like to be a little bigger?

Michael J. Bradley

I think clearly we've been focusing more on power and power delivery, Tahira. So I think that's obviously an important market for us, electric infrastructure. But I'm also going to tell you right now that we wouldn't turn down certain opportunities in the downstream petroleum business if they were the right ones and complemented our geographic reach as well. So we're [AUDIO GAP].

Operator

Our next question comes from David Yuschak – SMH Capital.

David Yuschak – SMH Capital

As far as your gross margin in the quarter, did SE or the CBI acquisition help in boosting those margins at all, because they certainly had to help somewhat in mitigating some of the weakness from your other core oil and energy-related businesses the past 12 months. Is that fair to say?

Michael J. Bradley

I'm not sure that - I think the SME acquisition is performing well and gross margins are good. I'm not sure that that in itself had a significant impact on our margins. I think the PDM Pittsburgh office is really about future growth and developing more expanded opportunities in all turnkey EPCF opportunities, so that really hasn't had impact on margins, but we do expect it to have an impact on our growth.

David Yuschak – SMH Capital

So SE probably helped you somewhat here, but the PDM really is still kind of maybe even a drag?

Michael J. Bradley

I wouldn't call it a drag. We're very excited about it.

David Yuschak – SMH Capital

I meant as far as current operations versus the expectations you can get out of it.

Michael J. Bradley

No, we still have backlog on that, so that's not an issue.

David Yuschak – SMH Capital

As far as turnaround activities, certainly can see a recovery here, kind of on a cyclical basis, but you're seeing a lot of refineries getting concerned about the markets and what kind of returns in capital they're getting today.

Have you thought about what can happen in that space? Should we go back to that era when the refineries were kind of orphan stepchilds, whatever you might want to call it, for the oil industry because of poor returns, and you had very little way of new builds, not of new builds but expansions. You had all those expansions.

There are companies out there who are arguing maybe we have too much capacity. Think we have to shrink it down. Have you guys thought about that from a longer-term point of view, as what could complicate potential turnaround opportunities if in fact the companies who provide those potential services are having some financial problems on a longer-term basis?

Thomas Long

I think, David, that when we do our strategic planning, we look at all of our markets and look at plans that you know, “What if,” and how would we respond during different market conditions. But I think that we as a company particularly focus on the downstream petroleum business.

Our niche is in the maintenance refinery turnaround and I would say more of the smaller capital work, upgrade replacements, which I think will continue in this business going forward. I mean, gasoline demand is down, we know that. Refinery utilization is down and it's putting a lot of stress on the refinery business, as we all know.

But I think that these facilities are going to need to continue to run. They're going to need to continue to be maintained. They are focusing very hard on reducing capital spending, so I think our business plan reflects that, but it's a market that we continue to see opportunities to penetrate.

David Yuschak – SMH Capital

As far as your own capital spending is concerned, any thoughts about where you might want to see this as the year enfolds?

Michael J. Bradley

I think we're still planning - I think we laid out a capital budget of $12 million a year. We haven't changed our view on that at this time. We watch our capital spending like everybody else does.

David Yuschak – SMH Capital

Is the prospects though that that could go up if in fact some of the things you think about could happen the second half of the year? Would you think about ramping it up a notch or two, particularly if you see more potential larger opportunities for bidding?

Michael J. Bradley

I think that right now where we would look at ramping up would be in terms of acquisition opportunities.

David Yuschak – SMH Capital

So your thoughts more of – you'd be a buyer of assets than you would be a buyer of capital equipment?

Michael J. Bradley

Today I would say that. Again, we're pretty well positioned where we're at. I think that as we take on new business we'll have to add capital equipment, but I don't see us having to spend a lot of capital to grow our existing operations.

David Yuschak – SMH Capital

Now, one last thing on the acquisitions the whole industry is kind of, on a relative basis, cheap. How does that present a problem when it comes to the owner of a potential acquisition looking at their business knowing, we're probably approaching some [trough] conditions maybe in the next, say, six to nine months.

Stocks are reflecting some weak business conditions. From your own point of view the Matrix stock is cheap. How do you kind of reconcile all that when you come down to bidding for assets when the seller's saying, look, I remember this thing 18 months ago and it's a heck of a lot higher than what it is today, or the value of [inaudible] to be a lot more valuable, how do you handle that kind of tradeoff?

Michael J. Bradley

I think it does present an interesting dilemma, David, given the market today and multiples and the outlook, but I think the types of acquisitions that we focus on are opportunities that we can combine with another company, focused on a win-win solution.

In other words, that their skills combined with our skills and our financial capabilities can accelerate the growth of both companies, so that the benefits are achieved as the combination, versus maybe just the upfront value.

So I think that giving some upside opportunities in potential acquisitions makes sense today, so that owners in other businesses feel that they can participate in the benefits of a combination.

David Yuschak – SMH Capital

So this would be a little different than what we've seen with the SEE and the PDM, because both of those are really kind of good, deep value kind of acquisitions. This is kind of a little different approach than what your last two acquisitions are as far as the thought process?

Michael J. Bradley

Yes, we'll look at value acquisitions as well, but also I think in this market you've got to be careful with the value because sometimes depending on the issues that you run into, there may not be any value there. So we're being cautious in this environment in acquisitions as well. Our focus is on, how do you combine two companies to really accelerate the growth of the combination? I think that's where we're seeing some opportunities and that's what we'll get excited about.

Operator

Your next question comes from Matt Duncan – Stephens Inc.

Matt Duncan – Stephens Inc.

I've got just a couple of real quick follow-ups here. On you last conference call you gave revenue guidance that your sales should be relatively flat versus FY '09, which was about 690 million. I'm curious if you care to update that guidance at all at this point?

Thomas Long

No, we're going to hold that guidance the same, Matt. We said in that range where we came in for our fiscal year 2009.

Matt Duncan – Stephens Inc.

So that implies obviously a pretty big ramp in quarterly revenues. I guess just to kind of help us think through our modeling here, would you expect to see sort of the typical seasonal uptick in your second quarter of your fiscal year in December? And then probably the June quarter would be really where you would see everything kind of start to come back both on the construction and repair maintenance side, with the spring turnaround season as some of the bid activity your seeing today?

Thomas Long

I would say that's fairly accurate, Matt. I think that the challenge we have is the seasonal aspects aren't playing out like they normally do because of [inaudible] companies continuing to focus on minimizing spending but I think that, again, what we're seeing today is encouraging and falls pretty much in line with what you said.

Matt Duncan – Stephens Inc.

Then another question, if I may, on sort of the mix between how you look at revenues and gross margins both. I know in the past you guys have said you aren't going to take on any other contracts that were out there that would have had terms that were too risky and you could have been building backlog if you wanted to, you just weren't going to sign a bunch of these riskier contracts.

And is that maybe part of why you had such a good margin performance this quarter on revenues that fell short of estimates that you've kind of chosen to pass a few things in an effort to maintain margins, would that be fair to say?

Michael J. Bradley

I think we've been very disciplined, Matt, in our bid process. And I think that has definitely been a factor in our ability to maintain decent margins. But also, I think that as we focus on projects we're looking for opportunities where maybe more specialty opportunities that require special talent to execute.

Where I think that you start to separate from the pack is really kind of where we're focusing right now. I think that construction overhead is one that we continued to reduce cost, but right now our focus is on our long-term strategy and what we see developing. So, I think that all plays into it as well.

Matt Duncan – Stephens Inc.

A couple of housekeeping items. Tom, do you have what the depreciation and amortization was this quarter?

Thomas Long

You're saying just for the quarter, it's going to probably be just a little less than three, it's three, right at three, Matt.

Matt Duncan - Stephens Inc.

Has it been a little hesitant to breakout the SM Electric and CBI asset related revenue streams? Just any kind of broad strokes you can give us there to kind of help us breakout what the acquired revenues were this quarter would be helpful?

Thomas Long

I think that there'll be more information in the Q, but let me comment on that. And that is that when you look at the revenues associated with SME, part of our strategy continues to be to really combine with our Matrix Service brand. But I think it also creates opportunities for us in segments such as transportation, heavy industrial, we're starting to do some solar work. So I think going forward our plan is to talk about the business in general and not so much separate out SME because that's how we're approaching the business or approaching our markets.

Operator

(Operator Instructions) Our next question comes from Tahira Afzal – Keybanc Capital Markets.

Tahira Afzal – Keybanc Capital Markets

I just had one follow-up question. With October now over, has the bidding activity really translated into bookings that really support the revenue outlook you have?

Michael J. Bradley

Obviously, we'll talk about that at the next quarter, Tahira. I think that as we've stated we've seen an uptick in bidding activity, which is encouraging. We've seen some uptick in repair and maintenance in October. But we don't give guidance by quarter, but we will definitely be updating you as the quarter ends.

Operator

There are no further questions in the queue. At this time I'd like to turn the floor back over to Michael Bradley for closing comments.

Michael J. Bradley

Well again, we appreciate everybody's time today and think just in quick summary, again, we're very excited about our position at Matrix particularly as it looks to the long-term opportunities that we see developing. As I stated, the market has it challenges but we also see it as a very opportunistic time for this company and given our financial strength we're poised to take advantage of those opportunities. Again, we're confident with the steps we have taken and remain strategically focused for the long-term growth and diversification of our business. So we appreciate your time today and with that hope everybody has a good day and a good week. Thank you.

Operator

This does conclude today's program. You may disconnect your lines at this time.

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Source: Matrix Service Co. F1Q10 (Qtr End 09/30/2009) Earnings Call Transcript
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