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Matrix Service Co (MTRX 0.43%)
Q2Â 2020 Earnings Call
Feb 6, 2020, 10:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Matrix Service Company Second Quarter Fiscal 2020 Results Conference Call.
[Operator Instructions] I would now like to hand the conference over to your speaker for today Kellie Smythe, you may begin.
Kellie Smythe -- Senior Director, Investor Relations
Good morning, and welcome to Matrix Service Company's second quarter earnings call. Participants on today's call will include John Hewitt, President and Chief Executive Officer and Kevin Cavanah, Vice President and Chief Financial Officer. The presentation materials we will be using during the webcast today can also be found on the Investor Relations section of the Matrix Service Company website.
Before we begin, please let me remind you that on today's call, the Company may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of the various factors, including those disclosed in our annual report on Form 10-K for our fiscal year-ended June 30, 2019, and in subsequent filings made by the Company with the SEC.
To the extent the Company utilizes non-GAAP measure, reconciliations will be provided in various press releases, periodic SEC filings, and on the Company's website.
I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.
John R. Hewitt -- President and Chief Executive Officer
Thank you, Kellie. And good morning to everyone, and thank you for joining us. As we have referenced on our prior earnings calls and countless conversations, our corporate values and sense of purpose is at the heart of everything we do at Matrix and influences our thinking about the Company's long-term strategy.
The issue of purpose for Matrix Service Company is one that we have given a lot of thought to. Our purpose is to build a brighter future, improve quality of life, and create long-term value for our people, business partners, shareholders and communities. This focus is integrated in our strategy and the commitments we make every day.
Fulfilling our purpose requires that we also achieve a consistent level of performance, which allows us to invest in our people and our business, deliver on our commitments and brand promise, and achieve sustainable long-term value for our stakeholders. This quarter's call will address strategic decisions made to ensure we are able to do so.
Turning now to our business discussion. Our second quarter results were decidedly mixed as market challenges and performance issues in select parts of our business overshadowed strong performance elsewhere. As a result, we have made strategic organizational decisions that we believe are necessary to better position the Company for success in the end markets with the greatest potential for long-term growth.
I'll discuss these decisions further as I comment on each segment. Underpinning these decisions is a strong balance sheet and liquidity, which will allow us to execute our strategy for improved performance and growth. Specifically in the Storage Solutions segment, our project performance and execution has been exceptional creating earnings greater than plan and our opportunity pipeline continues to be strong.
While the book-to-bill for the second quarter may not numerically support this, subsequent bookings in January, verbal awards and contract discussions, along with a strong near-term proposal outflow would indicate otherwise. For example, in January, we announced a formal selection of Matrix Service Company as the EPC contractor for Eagle LNGs mid-scale LNG export facility in Jacksonville, Florida.
Eagle LNG is investing over $500 million to bring this project to fruition. The EPC contract represents a significant portion of this investment. However, it is not in our reported Q2 backlog. The facility will have a production capacity of approximately 1.65 million LNG gallons per day with 12 million gallons of storage plus marine terminal and truck loading capabilities.
This facility is the most recent example of our position as a leader in the small-to-mid-scale LNG terminal market. Overall, the outlook for this segment remains very strong with the potential value of LNG and NGL storage and terminal work to Matrix over the next 12 months to exceed 2 billion.
Oil Gas & Chemical segment performed at a high level with strong direct margins, but a soft turnaround season for our principal clients reduced our overall volumes leaving construction overhead costs under absorbed. Specifically, turnaround activities in the quarter were smaller in scope than previous periods and our principal clients are off cycle for heavy turnarounds, both of which resulted in lower volume.
We expect turnaround volumes to improve in the back half of the calendar year. We're also involved in other activity in the Oil Gas and Chemical space. For example, our construction teams are executing the installation of the previously announced first-ever alkylation unit in the U.S. designed to use ionic liquids, at Chevron's Salt Lake City refinery. This unit will replace an existing HF alkylation unit to produce high octane cleaner burning fuels using a more environmentally friendly process.
In the midstream gas processing space, it is anticipated that the industry requires another 1.2 billion in new gas processing facilities to kick off in the next 12 months. Our EPC service offering is gaining strong brand awareness and the opportunities available to us is growing. We expect this work will add solid incremental value to this segment and our business.
The operating results for the Industrial segment were also strong in the quarter as we reached mechanical completion of a major capital construction project for U.S. Steel. That said, rapidly changing market dynamics in the iron and steel industry which comprises the majority of the revenue for this segment have also resulted in a strategic decision to reduce our reliance on this end market.
We do not come to this decision lightly, but chose this path for the following reasons. We previously communicated that we saw softening in the market in the second half of the year. This downturn is looking more significant than previously expected given the commodity price environment. Contributing factors are trade and global economic issues as well as supply demand imbalances, all of which have resulted in these producers looking to alternative business models, shuttering facilities, furloughing workers, and minimizing maintenance and capital spending.
This combined with the fact that there are very few integrated iron and steel producers left presents a level of client concentration and a business risk that is no longer aligned with our long-term growth strategy or financial targets.
Finally as communicated on previous calls, over the past two years we've been executing a major capital project for a U.S. Steel led joint venture called PRO-TEC that was scheduled to be complete at the end of our fiscal second quarter. We formally achieved mechanical completion on late November and moved our construction team off-site in late December. With this project complete, future earnings for this part of our business were expected to decline. That decline, as I said earlier, has an exacerbated by the other market dynamics just discussed.
Our strategic decision to reduce our focus on this end market, while best for the enterprise long term materially impacts our Industrial segment revenue as well as related construction overhead cost recovery and margin. It also required us to take a non-cash impairment charge in the quarter. We are working to reorganize the operations to reflect the revised focus on this market as well as monetize the associated business assets that no longer fit that strategy.
Turning now to our Electrical Infrastructure segment, results in the quarter continue to be disappointing despite the fact that Matrix has enjoyed a long history of profitable performance as a contractor of choice in the Northeast. As you may recall, we made a shift three years ago away from full EPC project generation and construction projects to one that focuses on smaller package work such as centerline erection, mechanical or electrical service to other EPC contractors or generation owners. That shift has been highly successful for us and there is an underlying strength in the segment.
The balance of the revenue in this segment is provided by power delivery services where localized operating issues have negatively impacted results. Access to the right talent pool has also been an impediment to organic expansion of our transmission and distribution services and led to poor project execution and low volumes.
While over 50% of this segment is and has been operating at or above our expected performance level, albeit with reduced volumes, the impact of the issue just discussed have caused a non-cash impairment in the quarter. After extensive analysis, the Company has implemented a performance improvement plan for this portion of the operation, which we are confident will increased revenue, volume, gross margins overall performance as the changes in that plan take hold.
We remain confident in the strategic direction of this market and our ability to achieve our performance expectations, and while also growing our base through strategic acquisitions. There is no question expanding our work in Electrical Infrastructure segment remains an important part of our long-term strategy. That said, before focusing further on expansion, we want to achieve performance improvement from the corrective actions we have identified and implemented.
Despite the challenges in our Industrial and Electrical Infrastructure segments, Matrix Service Company continues to be in a strong position with very robust opportunities. We remain committed to entering markets with long-term infrastructure spending needs, diversified revenue streams to include markets that are not as commodity price sensitive and creating a better connection to the growing renewable energy market.
We have developed and are implementing a performance improvement plan that includes a reduction of resources, overhead support and capital expenditures as well as organizational changes, all of which will result in improved operating performance across the organization. While there will be some restructuring costs incurred in the third quarter and we may see smaller near term top line, our performance supports our adjusted strategic focus and it's designed to improve our competitive platform, deliver a higher standard of performance and achieve best, better bottom line results.
The big picture for our strategic objectives is to improve overall project and business profitability and predictability, attack the gas value chain for Midstream processing to our core capabilities and specialty vessels and terminals for NGLs and LNG, expand our refining services market share in North America, move into chemicals and petrochemicals with our full suite of services and secure more fixed-base maintenance operations, grow electrical infrastructure to a nationwide footprint for transmission, distribution, substations and storm response.
We will also define our role in renewables, batteries and digital technology. We will maintain our brand leading position in crude tanks and terminals, while further expanding our tank products offering. And finally, we will deploy our storage and terminal capabilities internationally into the Caribbean, Mexico and South America.
While we are operating the business at a lower revenue run rate, Matrix will be leaner and a more focused company. Our business today is anchored by our Storage Solutions segment where we are a leader in EPC and fabrication of aboveground storage tanks, specialty vessels and terminals. Our Oil, Gas and Chemical business lays a great foundation for process industry growth and we are intently focused on fixing issues that have plagued our electrical segment and are confident that we will be able to do so.
Matrix continues to maintain a strong balance sheet and liquidity position, which reflects the Company's financial stability and ability to execute our business plan.
I'll now turn the call over to Kevin.
Kevin S. Cavanah -- Chief Financial Officer
Thanks, John. I'm going to start off by discussing significant non-cash items impacting our financial results. The first item is the goodwill impairment recorded in Electrical Infrastructure segments. The power delivery portion of the segment has a long history of strong financial performance. The segment historically produced gross margins of 9% to 12%.
While portions of this segments power delivery business and the power generation package will still operate at that historical level, every units within the business have recently underperformed. That poor performance increased in the second quarter and deteriorated the overall operating results for the Electrical segment, which required us to record the $24.9 million impairment.
On an after-tax basis, impairment charge on electrical had a $0.70 -- $0.74 per share impact. As John said, the long-term market opportunity remains strong and we are confident we will successfully correct the underperforming portions of this business.
The second item is the impairment of the Industrial segment. The operating results for the Industrial segment have been strong in recent quarters. However, the prospects for the Industrial segment deteriorated significantly in the quarter, as John discussed. Based on that outlook, we recorded an $8 million impairment of goodwill and a $5.6 million impairment of certain intangibles. On an after-tax basis, the non-cash impairment charges in Industrial had a $0.40 per share impact.
The next item is tied to the change in the Industrial business and the associated impact to the operating performance in a specific entity in Canada. This change required us to record a valuation allowance of $2.4 million on certain deferred tax assets. The non-cash valuation allowance had a $0.09 per share impact in the quarter. The earnings per share for the quarter was a loss of $1.04, which included these three non-cash items that reduced earnings by $1.23 per share.
Excluding the non-cash items, the quarterly adjusted earnings per share was $0.19. It is important to note that many portions of the business performed well in the quarter, which I will discuss further in the segment discussion. Now I will move to the operating results for the quarter.
In the second quarter, we produced revenue of $319 million, a modest decrease of 6.4% from revenue of $341 million last year. Our gross margin in the quarter was 9.4% as compared to 8.2% in the second quarter of fiscal 2019. Overall project execution was strong and all segments except Electrical Infrastructure. Margins were also impacted by under recovery of construction overhead costs in a couple of segments.
Our SG&A was $23.2 million in the quarter as compared to $22.4 million in the same quarter last year. Our effective tax rate for the quarter was 10.5% compared to 27.4% for the same period a year ago. We previously expected our fiscal 2020 effective tax rate to be approximately 27%. However, the rate was negatively impacted by the valuation allowance placed on certain deferred tax assets and goodwill impairment charges that were not fully deductible.
We now expect the effective tax rate to be approximately 28% for the remainder of the fiscal year. Adjusted EBITDA for the quarter was $12.6 million or 3.9% of revenue compared to $10.4 million or 3% of revenue in the prior year.
Moving to backlog, our backlog was $872 million at December 31st, 2019, compared to $1.08 billion at September 30th, 2019. The quarterly book-to-bill ratio of 0.6 on project awards of 1.97. In addition, the Company had cancellation of previously awarded -- previously awarded work of $88 million in the quarter related to the changes in the Industrial segment.
Backlog at December 31st, 2019 does not include our selection for the significant multi-year project with Eagle LNG announced in January 2020 with construction expected to begin later this year.
Now let's talk about specific results for each of our segments. Revenue for the Electrical Infrastructure segment decreased from $58 million in the three months ended December 31st, 2018 to $28 million in the recently completed quarter. The decrease is primarily due to lower volumes of power delivery and power generation package work. The segment gross margin was a negative 9.6% in the quarter compared to a positive 6.1% in the fiscal 2019 second quarter.
The fiscal 2020 gross margin was negatively impacted by poor execution in portions of the segment, including a charge on our transmission and distribution upgrade project. The Company is implementing a performance improvement plan for the Electrical segment, which we are confident will increase revenue, volume, gross margins and overall performance as the changes from that plan and take-hold.
Revenue for the Oil Gas and Chemical segment was $56 million in the second quarter compared to $86 million in the same period last year. The decrease of $30 million is due to lower volumes of turnaround work. While our crews were busy on turnarounds, the size and scope of those turnaround activities was lower than normal in the quarter. The segment gross margin was 7.5% for the quarter compared to 10.6% in the same period last year.
Project execution was strong, which resulted in good direct margins, but the lower volume of work led to under recovery of construction overhead costs, which negatively impacted gross margin. Revenue, volumes, and gross margins are expected to increase in the last half of fiscal 2020 from increased capital and engineering work.
Revenue for the Storage Solutions segment was $143 million for the three months ended December 31st 2019, compared to $126 million in the same period last year. The increase resulted from tank and terminal construction work and higher levels of capital work in Canada.
Excellent project execution resulted in a segment gross margin of 13.9% in the quarter compared to 8.9% in the three months ended December 31st 2018. The outlook for the Storage Solutions segment remained strong for both revenue and margins for the remainder of fiscal 2020.
Revenue for the Industrial segment was $90 million in the quarter compared to $70 million in the same period last year. The increase was due to higher volumes of iron and steel work including revenue from the large capital projects. The segment gross margin was 9.9% compared to 5.7% in the same period of fiscal 2019.
Fiscal 2020 segment gross margin was positively impacted by good project execution on both capital and repair and maintenance projects. However, as a result of the change in the business, we expect the revenue and volume in the Industrial segment to decrease significantly, beginning in the third quarter.
Now, I will briefly discuss the results for the year-to-date. Consolidated revenue was $657 million for the six months ended December 31st, 2019, compared to $659 million in the prior fiscal year.
On a segment basis, revenue decreased $48 million in Oil Gas and Chemical and $41 million in Electrical Infrastructure. These decreases were partially offset by a $54 million increase in Storage Solutions and a $33 million increase in Industrial. Consolidated gross profit increased to $62.5 million in the current year compared to $51.3 million in the same period in the prior fiscal year.
Gross margin increased to 9.5% in fiscal 2020 compared to 7.8% in fiscal 2019. Fiscal 2020 gross margin was positively impacted by strong project execution in the Storage Solutions and Industrial segments. In Oil Gas and Chemical segment, project execution was strong with the lower volume of work led to under recovery of construction overhead costs. Gross margin in the Electrical Infrastructure segment was negatively impacted by poor project execution.
Consolidated SG&A expenses were $46.9 million in the first six months of fiscal 2020 compared to $43.6 million in the same period a year earlier. The increase was primarily due to investments to support the business as well as a bad debt charge.
Our effective tax rate for the six 6 months ended December 31st 2019 was 2.6% compared to 23.7% for the same period a year ago. The fiscal 2020 tax rate was impacted by second quarter events, including the valuation allowance placed on certain deferred tax assets and goodwill impairment charges that were not fully deductible.
For the six months ended December 31st, 2019, we produced a loss of $0.81 per fully diluted share compared to earnings of $0.23 per fully diluted share in the six months ended December 31st, 2018. Excluding the impact of the non-cash charges, we produce adjusted earnings per share of $0.41 in the first six months of fiscal 2020. Adjusted EBITDA for the first six months of fiscal 2020 was $26.6 million or 4.1% of revenue compared to $18 million or 2.7% of revenue in the prior year.
Moving on to our balance sheet and liquidity. Our financial position remained strong with current liquidity at $276 million. We ended the quarter with a cash balance of $110 million and borrowings of only $15 million. Availability under our credit facility is $166 million.
Our capital expenditures in the quarter were $5.8 million, which is about 1.8% of revenue. Our capital expenditures were $14.5 million or 2.2% of revenue for the six months of the year. As we previously mentioned, we are reducing our capital spending plans in the last half of the year and expect to end the year with capital expenditures of about 1.5% of annual revenue.
During the quarter, we executed on the stock buyback that we announced in early November. The buyback consisted of 500,000 shares at a total cost of $9.9 million. Given the strength of the Company and our outlook on the business we will utilize our financial resources appropriately to maintain shareholder value including stock buybacks. Our approach of maintaining a strong balance sheet and good liquidity remains.
We intend to continue to pursue acquisitions but will do so in a manner that allows us to maintain a strong financial position. Our primary uses of cash are designed to strengthen shareholder value. These uses includes certain strategic investments related to our business improvement plan and other organic growth initiatives; strategic acquisitions, capital expenditures and do share repurchases.
Now let's discuss guidance. Based on the performance of the Electrical Infrastructure segment, lower projected volumes in the industrial segment and other business priorities, the Company is executing on a business improvement plan. In connection with this improvement plan, the company anticipates a reduction in its annual operating cost of at least $12 million and a reduction of approximately $10 million in fiscal 2020 capital spending.
The Company also expects to incur restructuring costs of $4 million to $6 million primarily in the third quarter of fiscal 2020 related to the plan. Given the changes in our business, we are updating our previous guidance. Taking into account the Company's positive outlook in the Oil Gas and Chemical and Storage Solutions segments, the Business Improvement Plan in the Electrical Infrastructure segment, and the expected revenue reduction in the Industrial segment, we now expect fiscal 2020 revenue to be between $1.2 billion and $1.3 billion and to report a loss per fully diluted share of between $0.45 and $0.65.
Excluding the non-cash charges incurred in the second quarter and the restructuring cost planned in the second half of the year, the Company expects to report adjusted fully diluted earnings per share of between $0.70 and $0.90 for fiscal 2020. We will now open the call for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from the line of John Franzreb with Sidoti. Your line is open.
John Franzreb -- Sidoti & Company, LLC -- Analyst
Good morning, John and Kevin.
John R. Hewitt -- President and Chief Executive Officer
Good morning.
Kevin S. Cavanah -- Chief Financial Officer
Good morning.
John Franzreb -- Sidoti & Company, LLC -- Analyst
I guess I want to start with the Industrial business, could you just kind of clarify what your business plans there are? Are you getting of just the steel side or the entire business? What are your plans there and what kind of timing are we thinking about in exiting it?
John R. Hewitt -- President and Chief Executive Officer
So our Industrial segment, John, is made up of several industries and markets that we work in, iron and steel being the largest on that on both sides of the border, U.S. and Canada. We also have mining and mineral operations. We work -- do thermal vacuum chamber work; we do material handling kind of projects in grain and cement; and so the iron and steel piece is the one that we are minimizing our operations in.
Right now we are sort of downsizing our presence there from day to day maintenance and small project capability. We will continue to be opportunistic to look at say turnarounds or larger capital projects there, like we would do really in any of our businesses. But the -- we're expecting a pretty big reduction in the revenues because of that change and just because of what's going on in that market.
But the iron and steel business, to be clear, in the Industrial segment, the iron and steel business, depending on what was going on in that market represented anywhere from 50% to 75% of revenues in that segment.
John Franzreb -- Sidoti & Company, LLC -- Analyst
Okay. And that steel businesses -- I think you referenced in your press release is the business you would look to sell and not the entire industrial base.
John R. Hewitt -- President and Chief Executive Officer
Yeah, correct. Correct.
John Franzreb -- Sidoti & Company, LLC -- Analyst
And I guess just to stick with the Industrial, what would your plans be to continue to grow the business? The whole point of getting into this marketplace was diversification. How do you continue to plan to diversify the business mix or don't you, for the foreseeable future?
John R. Hewitt -- President and Chief Executive Officer
No, I mean what we, so one of the things we like about the Electrical piece and obviously we've got some pieces that we've got -- we've got to fix, but we think there is a lot of growth potential for us in the Electrical Infrastructure piece.
There is decades of capital spending requirements across North America to improve the overall power delivery segment for the country, the grid. And it's not a commodity -- as commodity price sensitive as some of the other things that we're into. So whether that's being connected to -- into refining and that connection back up into the mid-stream markets for us.
So that's an area of growth for us. Another area of growth for us is in the chemical market. That's an area of business that we do virtually nothing in today. So while we've got a great footprint in refining both in turnarounds and projects and associated storage facilities with that we're -- our work in that chemical -- petrochemical market is really limited only to storage applications.
So we feel that there is a lot of opportunity for us to grow their leading with engineering content for us and then bringing our construction operations to that. And then, one of the other things -- other things we've identified is the international market. So when we talk about international market, we're looking into the Caribbean Mexico Latin and South America.
We are experiencing a lot of pull through opportunity there for our domestic clients that are moving energy resources into those markets. And, so while we're building our facilities here in the U.S., it also gives us the opportunity to, build the receiving terminals in those other markets. So those would be three of the areas for us, where we would see growth opportunities and the Electrical one would help us -- it would help us to minimize the cyclicality of the rest of the business.
John Franzreb -- Sidoti & Company, LLC -- Analyst
So, just to tie a bow around that. How long is this process expected to take, the finding of new personnel to run Electrical, the drawdown in steel? Is that a one quarter process, six month quarter [Phonetic] process and what are we talking about here?
John R. Hewitt -- President and Chief Executive Officer
I think both of those things will be fundamentally put in place by the end of this fiscal year. And improvement -- overall improvement in the Electrical markets, while we expect some improvements through the back end of this fiscal year, we would hope within the 12-month period, we'll start to get back to expected performance level.
John Franzreb -- Sidoti & Company, LLC -- Analyst
Okay. And one last one, I'll get back into queue. The Eagle project, can you give us a sense of the size, scope of the project? When do you expect it to hit the P&L initially and how long of a duration it will be?
John R. Hewitt -- President and Chief Executive Officer
It's approximately -- I don't really know the schedule completely [Phonetic]. It's probably around 30-month project. And we don't normally give out the project sizes but we're the EPC contractor, so all the engineering, the procurement, all the construction of process facility, the marine terminaling works. All the things of Storage, all the balance of plan all that is all within our purview. So you could think about the size of that versus the clients' investment in sort of the 60% to 70% kind of range.
John Franzreb -- Sidoti & Company, LLC -- Analyst
Okay fair enough. Thanks, I'll hop back into queue.
John R. Hewitt -- President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from the line of Bill Newby with D.A. Davidson. Your line is open.
William Newby -- D.A. Davidson & Co. -- Analyst
Good morning, and thanks for taking my questions.
John R. Hewitt -- President and Chief Executive Officer
Going morning, Bill.
Kevin S. Cavanah -- Chief Financial Officer
Good morning.
William Newby -- D.A. Davidson & Co. -- Analyst
I guess, Kevin, just a first one on the guidance. I mean, can you help us a little bit on like what operating assumptions you are taken into account for these two businesses that are undergoing the strategic actions at the low and the high-end.
Kevin S. Cavanah -- Chief Financial Officer
Yeah. So first we looked at in Industrial, we did about $90 million of revenue this quarter produced some good operating income. As John said, the steel business is -- 50% to 75% of the -- that segment. So two-thirds of that segment is kind of going away starting in the third quarter. So you know that segments is not going to produce any measurable operating income in the last half of the year. At least I wouldn't expect it to.
Now the Electrical segment, we did $30 million of revenues this quarter, we did a similar number in the first quarter. We do have an improvement plan in place. It will take time to get it -- get the changes made. So we're not expecting significant improvement on the top line in the back half. I mean the revenue should be in that $30 million to $40 million range. I would think per quarter. And then if you think about margins, you know, we think we'll get it back to that historical range eventually. I wouldn't expect that in this fiscal year.
So you're still going to have mid-single-digit margin probably in that business this year as we implement the changes. Now when you look at the other two segments, the Storage segment was extremely strong, over $140 million of revenue. I think that will grow some here in the last half year and the margin performance should continue to be really strong here. We've got a good backlog of projects.
And when you look at Oil Gas and Chemical segment, we noted that the project execution was strong in the quarter. It was just the volume was low and we think that volume is going to increase in the last half on additional capital work and additional engineering work. So I think we should see a decent increase in volume for Oil Gas and Chemical. So those are the two segments that are going to carry the operating results for the company in the last half.
William Newby -- D.A. Davidson & Co. -- Analyst
Got it. I guess any additional color on what gives you comfort that the volumes in Oil Gas and Chemicals will recover here in the near term? And I guess -- I mean yeah I guess, just any help you can give us there. I think we are all looking for those volumes to recover here in the December quarter. So I guess what gives you guys confidence you'll see it here in March or...
Kevin S. Cavanah -- Chief Financial Officer
Yeah, I think that I think the expectation in this recent quarter was more around turnaround and while our crews were busy, the size and scope of those turnarounds did not end up being -- they didn't have been the type of turnarounds that balloon themselves to a strong quarter, like we had in the, you know, in the third and the four quarter last year.
And when we think about what we expect in the back half, it's not based on turnaround improvement, it's based upon projects in -- that are new construction capital projects or engineering that are -- that are either booked or very high probability of being booked. So that gives us more confidence in where that increase is coming.
John R. Hewitt -- President and Chief Executive Officer
The only other thing to think about too is that contractors -- turnaround contractors follows their client and so we may -- one of our competitors may be saying they're having a strong turnaround session in the fall or the spring and that's because the clients that they normally do business with on a consistent basis happen to be in that cycle at that time. And that the owners that we do business for maybe off cycle so.
So we've had -- this year is a little bit an off-cycle year for our clients. Lower levels of heavy turnarounds and kind of smaller --some smaller scope mechanical turnarounds. We expect that to flip slip for us probably not in the fall -- I'm sorry probably not in the spring. But as we move into the fall of this calendar year, we expect that turnaround mix to flip toward -- more toward clients that we do -- that we consistent business with.
Kevin S. Cavanah -- Chief Financial Officer
Yeah and the engineering work I referenced is -- lot of that is only gas value chain, which is a growth area we've talked about.
William Newby -- D.A. Davidson & Co. -- Analyst
Got it, that's helpful. And then, just another one on Electrical. I mean it sounds like there is one specific T&D project that's causing a lot of the headaches there. I mean, any color on how much you guys have left on that project.
John R. Hewitt -- President and Chief Executive Officer
I think we're about 70% complete.
Kevin S. Cavanah -- Chief Financial Officer
Yeah, I think that's about right.
William Newby -- D.A. Davidson & Co. -- Analyst
Okay, thank you. And then just one quick kind of housekeeping. The $12 million in operating cost reductions. Any -- I mean it sound -- I mean, it's all on the obviously in Electrical and Industrial. Any color on how you expect that to be split as we kind of think about modeling it out?
John R. Hewitt -- President and Chief Executive Officer
Split between like line items in the income statement or segment?
William Newby -- D.A. Davidson & Co. -- Analyst
No, just in terms of -- I mean, how much of the cost are you taking out of Electrical versus how much of the cost will be coming out of Industrial, just how -- any what kind of how it will be allocated between the two segments?
John R. Hewitt -- President and Chief Executive Officer
You know I think more of it's coming out of the industrial piece but there are probably 60%, 70% of that will be Industrial. But for both businesses, there is also support related costs that are included in that amount that support the whole business, because that's part of a larger subsidiary that the volume for that larger subsidiary is decreasing. So they've got to right size the overall structure and that's already been going on.
William Newby -- D.A. Davidson & Co. -- Analyst
Got it. I got a couple more, but I'll jump back in queue for now. Thanks guys.
John R. Hewitt -- President and Chief Executive Officer
Thanks you.
Operator
Thank you. [Operator Instructions] We have a follow-up question from the line of John Franzreb. Your line is open.
John Franzreb -- Sidoti & Company, LLC -- Analyst
Yeah, just maybe to continue a little bit on the Electrical. John, when you look at the bookings know you've been working to kind of right-size that business to make it more profitable. You've announced sweeping changes on the managerial and mid-level managerial levels. Could you just talk about what you feel that the opportunities that you've been missing out on, that warrants such changes? I mean, what type of business have you not gotten your fair share of? Now some sort of color as what you think this -- the unit has missed.
John R. Hewitt -- President and Chief Executive Officer
Some of the things that's going on here. There has been some structural changes in their market. So we've talked forever about being too centric on the Northeast that we're too dependent on too few clients and it's necessary for us to grow that business. That thesis still exists and it's still something we need to do and there's just -- but there's been some changes there on how are those clients, particularly that are associated with this one -- this one unit within that business. They're buying their work. So there used to be a lot of more reimbursable kind of projects. They were more callout kind of maintenance. They were not bidding as many as possible.
And so the people within that business unit weren't necessarily used to operate in that fashion and as that market changed over, it changes the dynamics of how we chased work, how we win work, how we execute work, how we estimate it. And, so those are things that we've got to catch up on and we've got fix within those businesses. So, and there's been a lot of money spent over the last few years on storm hardenings and things that were done associated with Hurricane Sandy. A lot of that work has been identified, has been completed.
And so now as those utilities move back into sort of more of a normal cadence and repair cycle we've got to get ourselves aligned with where they're spending their dollars. So those are kind of the issues and so it kind of changes our, the way we sell ourselves there.
The way market our services into those regions and so we got to make sure that we've got the right folks in place to be able to market and sell the business. So it's more, there is going to be more aggressive selling by the organization than as opposed to the client fixes a times and gives you a call.
John Franzreb -- Sidoti & Company, LLC -- Analyst
So, to expand geographically, are you thinking that we need some sort, outside the Northeast, some nearby adjacent geography is the best way to go or do you look further out for the opportunities that might be in -- I don't know, the Southwest for -- just to throw something out there. How does that work?
John R. Hewitt -- President and Chief Executive Officer
So I think for the purposes of expansion we're going to be looking for acquisitions to do that. If you're moving or if you're moving organically, especially in this business, the ability to bring and know the local labor market to bring the capabilities in to know the clients are kind of one of the things that's stinging us on the transmission, distribution project we talked about, where we've had some charges on.
From an acquisition standpoint you're buying into -- you're buying into that client resources as client contacts the labor resources, the supervision in the companies that are operating in the region. So it's till probably less than -- it's less important on an acquisition standpoint for that that acquired business to be adjacent to our existing operations because you're really -- there you're buying that knowhow, you're buying that knowledge of the clients in the region and -- as opposed to trying to put your own folks in there.
John Franzreb -- Sidoti & Company, LLC -- Analyst
Okay. Okay, fair enough. And one last question. Did I hear correctly that you used about half of your share repurchase authorization?
Kevin S. Cavanah -- Chief Financial Officer
Our authorization is limited to $30 million a year, calendar year. So no one expect us to do that much, but we're in a position where we could do significant buyback here. That's what we choose to do.
John Franzreb -- Sidoti & Company, LLC -- Analyst
Okay, all right guys. Thanks for taking my questions.
John R. Hewitt -- President and Chief Executive Officer
Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Noelle Dilts with Stifel. Your line is open.
Noelle Dilts -- Stifel, Nicolaus & Company, Inc. -- Analyst
Hi guys, thanks. Just one really quick question. On the T&D project that's 70% complete, are you just booking the remainder of that revenue at no margin at this point or at lower margin? Just curious how the rest of that plays out?
John R. Hewitt -- President and Chief Executive Officer
I would expect it to be booked at a -- it is zero margin, assuming the forecast we have in there is correct.
Noelle Dilts -- Stifel, Nicolaus & Company, Inc. -- Analyst
Okay, perfect. Thanks so much.
John R. Hewitt -- President and Chief Executive Officer
Thank you.
Operator
Thank you. I'm not showing any further questions. I would now like to turn the call over to John Hewitt for closing remarks.
John R. Hewitt -- President and Chief Executive Officer
Well, thank you for visiting with us today. I want to remind everybody in the wintery driving conditions that we've got around the country of late. So please keep safe and be mindful of the slippery roads. And finally remind everybody that our business is strong, our storage opportunities are very deep, our strategic positioning is built for growth, and we will fulfill our purpose. So thank you, again, for joining us today and look forward to talking to you on future calls.
Operator
[Operator Closing Remarks]
Duration: 46 minutes
Call participants:
Kellie Smythe -- Senior Director, Investor Relations
John R. Hewitt -- President and Chief Executive Officer
Kevin S. Cavanah -- Chief Financial Officer
John Franzreb -- Sidoti & Company, LLC -- Analyst
William Newby -- D.A. Davidson & Co. -- Analyst
Noelle Dilts -- Stifel, Nicolaus & Company, Inc. -- Analyst
