Great Lakes Dredge & Dock Corp (GLDD) 2004 Q3 法說會逐字稿

Good afternoon. My name is Latasha (ph) and I will be your conference facilitator today. At this time I would like to welcome everyone to Great Lakes Dredge & Dock third quarter financial update conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS.)

Thank you. Ms. Wensel, you may begin your conference.

Thank you. This is Deb Wensel, Chief Financial Officer of Great Lakes and I welcome you to our quarterly update call. I do apologize for our technical difficulties here, but hopefully the rest of the call will go smoothly.

The purpose of the conference call is to provide you with a summary of Great Lakes’ third quarter 2004 financial results, debt-income liquidity levels, operating and bidding activities, market outlook and other relevant information. Following the presentation, as has been said, you will be given an opportunity to ask any questions you may have.

Before I begin, however, I need to remind you that certain matters discussed may be considered forward-looking statements and the participants in this call are cautioned not to place undo reliance on such forward-looking statements. Furthermore, any forward-looking statements speak only as of the date hereof and Great Lakes assumes no obligation to provide any future update.

I’ll now start this quarter’s call with a discussion of our operations during the period and then I’ll provide some updated information as to the current state of the domestic dredging industry and the impact that it’s likely to have on the remainder of our year.

Now turning to our operations for the quarter, similar to our second quarter revenue levels, our revenue for the third quarter of 66.5 million is appreciably reduced from what is typical for the Company and compares to the 2003 third quarter revenue of 98.1 million. The decline in revenues was again due to the slowdown in domestic dredging bid activity that began in the second half of 2003, and continued through the first half of 2004. This lower level of bid activity led to intense competition within the industry for work that has been bid this year, which has significantly compressed margins.

We have continued to maintain a higher percentage of capital dredging backlog, however, performance on certain of these projects has been postponed by the Army Corps of Engineers, due to a lack of current funding. This combination of the reduced bid market and the postponement of work resulted in the decreased utilization of our fleet during the second and third quarters.

EBITDA for the third quarter of 2004 was 2.7 million, which compares to 15.7 million for the same period of 2003, with the decline driven by the reduction in drudging volume. Our EBITDA margin declined to 4.1 percent for the quarter ended September 30, 2004, compared to 16 percent for the same quarter of 2003. The margin decline is attributable in part to the mix of projects performed, some of which were further impacted by the severe weather in the Southeast. T

he margin also reflects the continued impact of fixed costs relative to the reduced level of utilization. Additionally in the third quarter, we took a $1.3 million charge relating to the tentative settlement of an ongoing legal claim in our demolition business, which I will discuss a bit further in a moment.

Revenues and EBITDA for the nine-month period ended September 30, 2004, were $242.5 million and $23.1 million, respectively, which compare to $302.2 million and $44.3 million for the same 2003 period. The reduction in revenues and EBITDA for the nine months of 2004, was again, attributable primarily to reduced domestic capital dredging revenue, which, as I just mentioned, has declined due to the reduced bidding activity and the funding delays, which have caused postponement of certain capital project work within our backlog.

Now I would like to review some of the specifics for the contracts performed during the third quarter, within the context of our drudging market and our demolition segment. Revenue during the third quarter of ’04 included 40 million of capital, 3 million of beach, 14 million of maintenance, 9 million of demolition, for a total of 66 million. The comparable numbers for the second quarter of ’04 were 40 million of capital, 12 million of beach, 10 million of maintenance, 10 million of demolition, for a total of 72 million. And the corresponding numbers for the third quarter of ’03 were 76 million of capital, no beach work, 12 million of maintenance, 10 million of demolition, for a total of 98 million.

Our capital drudging revenue for the quarter totaled 40 million and was generated by the following – we had work on five new port (ph) projects, which added 19 million in revenue to the third quarter, including some final dredging to clean up high spots on the 50-foot KVK-5 project with the backhoe dredge in New York. Overall the project concluded at a solid margin, however, the clean up dredging performed in the last few months was more than anticipated, reducing the current year’s contribution.

We continued work on the Manatee Harbor project in Florida. We employed the hydraulic dredge, Texas, which encountered some production variances due to the material being heavier than anticipated, as well as weather delays due to the hurricanes along the Gulf Coast. The hydraulic dredge, Alaska, will complete this project in the fourth quarter. We continue dredging on the Houston Channel deepening, with our electric hydraulic dredge, California, which has performed in line with the current estimates. We received a modification on this project that will extend the dredging into the first quarter of 2005.

Late in the quarter we recommenced dredging on the LA deepening project and expect to complete this work in the fourth quarter with our dredge, Florida. We also realized the mobilization revenue on the Brunswick deepening project. The dredge, Texas, will perform on this project through the remainder of 2004, and into the first quarter of 2005, then set down and do the funding and recommence in late 2005 when funds are available again.

Other domestic capital in the quarter included continuing work on the Providence River project and a terminal project in New Jersey, which on a combined basis contributed another 5.6 million of revenue for the quarter. The New Jersey project concluded during the quarter, favorably to estimate, and the Providence project is on track to be completed in the fourth quarter.

The majority of the 9 million third quarter foreign capital drudging revenue was generated by two projects. One being the Hidd Terminal project in Bahrain, which continue to employ our hydraulic dredge, Carolina, and performed at estimates. The project remains on track to conclude at the end of this year.

The second project was the maintenance phase of the Idku, Egypt project, which is being performed by our hopper dredge, Victoria Island, and will continue through May of next year. This is the second phase of the Channel project for a liquid natural gas plant. We completed the initial deepening phase of this project in 2003.

Beach revenue in the third quarter totaled 3 million and related primarily to subcontract work to construct an erosion control structure on the $22 million Absecon Island beach project in New Jersey.

Maintenance revenue in the third quarter totaled 14 million, which was generated by numerous projects. The scope of the maintenance project in Tampa Harbor and the Alafia River was expanded, but the project continued to encounter production inefficiencies due to the project design, as well as weather delays due to the hurricanes in Florida.

The quarter benefited from a maintenance project performed by our hopper drudge, Sugar Island, along the entrance to the Columbia River and Coos Bay in Oregon.

So while we continue to perform on a number of drudging projects from our backlog during the quarter, clearly our volume was down relative to recent quarters and a number of drudges sat idle during the period. Therefore, like we saw in the second quarter, our third quarter and year-to-date EBITDA margins reflect a greater portion of fixed costs, relative to the levels of revenue generated, given the lower than typical utilization levels for the Company.

Nasdi (ph) generated third quarter of 9 million, representing a solid quarter for the demolition business. As usual, the majority of the quarter’s demolition revenues was generated by numerous small projects, including a variety of demolition projects for Boston area universities. Nasdi’s two projects in Florida have continued to progress well also.

As I mentioned earlier, in the third quarter, the Company recorded a $1.3 million charge for the anticipated settlement cost of ongoing litigation against Nasdi. This related to a claim a claim that was initiated in 1999. The Boston Housing Authority, for whom Nasdi had done some work, asserted that Nasdi and its subcontractors were responsible for improperly disposing of some contaminated materials. At the time we acquired Nasdi, it was believed that Nasdi had sufficient recourse in the matter and that any potential liability would be minimal.

However, in the meantime, certain of the insurance carriers, which would be responsible for this matter, have gone bankrupt. Negotiations between the parties have continued to progress and in the third quarter the case went before a judge in the Massachusetts court system, who advised Nasdi and the subcontractors to accept the settlement with the BHA. While Nasdi could continue to pursue the matter, it was determined that settlement may be more cost effective and we believed it was prudent at this point to record Nasdi’s share of this potential settlement liability.

Turning to Company general, our general and administrative expense in the third quarter was 6.5 million, which compares to 6.8 million in the same period of 2003. For the nine months ended September 30, general and administrative expense totaled 19.9 million in 2004, compared to 20.2 million in 2003. However, the expenses for the nine-months ended September 30, 2004, also included approximately 1.6 million of incremental legal and other costs related to the provisional document in response to the Department of Justice’s subpoena, as well as additional costs of approximately 0.5 million to wrap-up matters in connection with the Company’s sale in December of 2003. If not for these non-recurring incremental costs, our savings in year-to-date general and administrative expense relative to 2003 would have been approximately 2.4 million.

Capital expenditures for the third quarter of 2004 were 5.8 million, bringing our nine-month total to 15.9 million. However, this includes 5.1 million related to the building of two barges, which once constructed, we intend to sell and lease back under an operating lease with GE Capital. Additionally, the year-to-date spending includes 3.2 million related to capital improvements on our backhoe dredge, New York. We are in the process of restructuring the long-term operating lease for this dredge and expect the new lessor to fund these improvements in a sale leaseback arrangement, to be concluded in the next few weeks.

Our 2004 spending also includes 1.9 million related to the final construction of another barge, which was funded out of the proceeds held in an escrow account from the sale of two tugboats in 2003, as a part of a like-kind exchange transaction.

We are permitted to exclude the items noted in calculating our capital expenditures for purposes of covenant compliance, and therefore, given our 2004 revised forecast of 10 million, excluding these items, we anticipate spending approximately 4 million in the fourth quarter on improvements to equipment scheduled to work in the upcoming quarters.

Our cash interest expense related to our senior and subordinated debt for the quarter and nine-months ended September 30, 2004, has remained relatively consistent with the expense for the same periods of 2003. As a result of the lower interest rate debt put into place at the time of the Company’s purchase in December 2003. We still have in place an interest swap agreement, whereby we swapped a portion of our fixed rate debt to floating to manage the interest rate paid with respect to our 7.75 senior subordinated debt. To date this swap has been positive from a cash flow perspective, but each period earnings can be impacted by the non-cash adjustment of the swap to fair value, based on anticipated future rates. In the third quarter we incurred a non-cash benefit to interest expense of 1.5 million to adjust the swap to its current fair value.

As I mentioned in prior conference calls, the new agreements put in place in December in connection with the purchase transaction, did not contemplate the reduced EBITDA levels that we experienced in the second and third quarters. Midway through the third quarter we became concerned that we may not meet our total leverage ratio at the end of the quarter, so we expedited discussions with our lenders and bonding company to develop a revised covenant which would satisfy them, but allow us maximum flexibility to work through this challenging period of uncertainty.

The amended agreements, which were affected September 30th, 2004, allowed additional flexibility in our leverage and interest coverage ratio, in exchange for reduced borrowing availability and capital spending limits until we achieve certain defined financial measures.

Through the end of 2005, our total leverage ratio has been waved and replaced with a minimum EBITDA measure. Please note that the minimum EBITDA level set forth in the amendment are not intended to be guidance as to our earnings expectations for those periods. We will continue to give current guidance as to our annual earnings expectations in our quarterly calls, as I have done historically.

Since I mentioned the subpoena issue, I’ll just let you know now that there’s been no new information with respect to the Federal Subpoena per document production that the Company received in February of this year. As previously stated, it appears that the Grand Jury has been convened to investigate the drudging industry in connection with work performed for the Corp of Engineers. We continue to comply with the Justice Department’s requests and do believe that we have provided substantially everything they have asked for at this point. We are not sure how long the investigation will continue, however, we are advised that 12 to 18-months is typical in these types of investigations.

Another point of note related to our dredging operations is that our union contract with Local 12 in Southern California expired in August. The union workers did not ratify the initial proposal agreed to by the union management as we expected, so we continue to negotiate the remaining outstanding points. The next meeting is actually scheduled for tomorrow. So far the contract negotiations have had no effect on our work currently underway in the Los Angeles area.

The third quarter 2004 domestic drudging bid market representing work awarded during the period totaled 291 million, a marked improvement over the prior two quarters, which on a combined basis totaled just over 220 million. Great Lakes won 65 percent of the quarter’s awards, which included the 66 million Brunswick project, which was finally awarded, bringing our year-to-date bid market share to 51 percent.

Our year-to-date bid market now totals approximately 520 million. So if the fourth quarter continues at a similar pace, we may be on track to reach the average level of 650 million achieved in 1998 to 2002. We are encouraged by the improvement in the bid market over the past quarter and hope that this is an indication that the factors that had been impacting funding in the past quarters are being minimized. Although we remain hopeful that the bidding activity will continue to improve, it is likely that the pricing for work bid in the near-term we’ll remain competitive until such time that the industry occupancy reaches normal levels and participants regain confidence in the market.

I’ll discuss some of the dynamics that appear to be driving the market in a moment. But first I’ll discuss some specifics with respect to the third quarter’s bidding activity. In addition to the award of the $66 million Brunswick project, Great Lakes also bid and won two other deep port projects in the quarter. One, a $26 million project, Oakland, and the second, a $38 million project in Miami, which was bid by request for proposal, or RFP. We will start dredging on Brunswick and Oakland in the fourth quarter, and Miami early next year. Two other small deep port projects in San Diego and Norfolk were bid during the quarter and won by competitors.

As you may recall, the final phase of the 43-foot Arthur Kill (ph) deep port project was bid in the second quarter. Award of this project is still pending the outcome of a protest. However, we are confident that we will still perform a significant portion of this work. In the meantime, our dredge in New York will begin working, in the fourth quarter, for another contractor to complete a portion of the rock dredging on the Arthur Kill 1 project, as that contractor has fallen behind schedule in performing this project.

During the third quarter, five beach nourishment projects were bid and awarded, with a value of approximately 35 million, bringing the year-to-date beach bid market to 66 million. The majority of the beach work is typically bid in the second half of the year, since the work is generally performed in the months from September, October, through February or March due to environmental restrictions. Great Lakes won three of these projects, with total value of 26 million, including a $13 million project along Dewey and Rehoboth beaches in Delaware.

There were approximately 30 maintenance projects bid during the quarter, bringing the year-to-date maintenance bid market to 225 million, in excess of the five-year average annual market of approximately 200 million. Some of the maintenance work may have been expedited, given increased choling (ph) resulting from the hurricanes in the Southeast. The quarter’s maintenance and beach awards included a number of projects to be performed by hopper drudges and this is fortunate, as the industry’s hopper fleet has been practically idle up to this point.

On the foreign front, we signed a contract for the $30 million LNG terminal project in Ocean Cay, Bahamas in October. We now expect to start this project in the second half of 2005, using our dredge, Texas. We have also signed a contract for a land development project in Garat (ph), Bahrain. The notice to proceed with the full scope of the contract is pending permit approvals, however, the initial $5 million phase will begin in the fourth quarter. Upon approval of the full scope, the project will provide employment for the hydraulic dredge, Carolina, for a two-year period. The contract will be performed in a joint venture with the same Bahraini contractor that we partnered with for the Hidd contract and this company will perform the civil works.

Turning to backlog, dredging backlog has increased to 279 million at September 30, 2004, as a result of the improved domestic drudging bid market during the quarter. This represents a very solid level for the Company, in comparison to 129.1 million at June 30th, 2004 and 218.3 million at September 30, 2003. Additionally, our September 30, 2004 recorded backlog does not reflect 119 million of low bids pending award and other options pending on projects currently in backlog, including the Arthur Kill 2 and as I mentioned, the Ocean K projects.

Almost three-quarters of the September 30 drudging backlog is represented by domestic capital drudging work, which has traditionally been the most profitable work for the Company. Although the deep port projects most recently bid have been won at lower than historical margins, given the intense competition in the industry, these projects provide opportunities for us to utilize some of our key dredges and substantial amounts of ancillary plants (ph). And in the past we have sometimes been able to realize efficiencies beyond those anticipated in the original estimates for these types of projects.

Our backlog by dredge type and segment at September 30, 2004 and some recent comparative periods included 207 million of domestic capital, 15 million of foreign capital, 24 million of beach, 33 million of maintenance, for a total of drudging backlog of 279, adding demolition backlog at 11, for total Company backlog of 290 million.

This compares to our second quarter ’04 backlog, where we had 95 million of domestic capital, 19 million of foreign capital, 4 million of beach, 11 million of maintenance, for a total drudging backlog of 129, adding 13 million of demolition for a total Company backlog of 142.

And the numbers for the third quarter of ’03 were 139 of domestic capital, 33 million of foreign capital, 30 million of beach, 16 million of maintenance, for a total of Company backlog of 218 – I’m sorry, dredging backlog of 218 and adding 12 million of demolition, for a total Company backlog of 230.

The demolition services backlog at September 30, of 11 million included nine projects with over 500 million remaining in backlog – 500,000, I’m sorry, remaining in backlog, as well as typical compliment of midsized projects. Activity in the New England construction market seems to be picking up and we’ve identified numerous demolition projects in the $1 to $5 million range to be bid in the next six-months. We expect this to enable Nasdi to add some good backlog at improved margins.

The dredging market outlook, starting with deep port – first though I’ll mention that the 2004 Water Resources Development Act or WRDA legislation, which again, forms the basis for authorizing the Corp Civil Works project, including deep port projects, has not passed the Senate at this point. And as I mentioned in the previous call, the bill currently includes a provision that would create additional environmental regulations for beach nourishment projects, so passage in its current form is not desirable. However, Congress will be reconvening for a lame duck (ph) session after the November elections, to deal with appropriation bills. So there is still an opportunity for WRDA to be enacted, either as its own bill with an amendment to the unfavorable beach provisions, or as an attachment to the Omninbest (ph) appropriations bill or some other bill.

We continue to track the progress of the major deep port projects which have been authorized by previous WRDA bills and may provide bidding opportunities in the near-term. Starting with New York Harbor, the KVK, which is the largest of the authorized deepenings and has secured funding. With the completion of the KVK-5 contract, the 45-foot project is now complete at a total cost of approximately 350 million. The first phase of the 50-foot deepening is now scheduled to be bid in the first quarter of 2005. The total 50-foot deepening project is expected to have a cost substantially in excess of the 45-foot project, due to the additional amount of rock to be drilled and blasted before removal.

Also in New York, the Arthur Kill, the final phase to bring the channel down to 43-feet was bid in April and as I mentioned, the award of the project is pending, due to a competitor’s protest. The Corp and the New York-New Jersey Port Authority are anxious to have the work come in and we expect resolution before the end of the year. This channel is also authorized to go to 50-feet, which will provide substantial future work as well.

Port Jersey, New Jersey, the final segment of the 43-foot channel deepening bid in December of 2003, and we were the lower bidder at approximately 35 million. Port Jersey has also been authorized to go to 50-feet and the initial phase of the 50-foot project is currently expected to bid in the first quarter of 2005.

Norfolk Harbor, the initial phase of this $40 million port deepening project is underway and the second portion of the project bid in the third quarter of 2004 and was won by a competitor for approximately 10 million.

In Wilmington, North Carolina, a final large project is planned for the inner harbor of Wilmington and is expected to bid here in 2005. This is the same district that had asked us to defer our current deepening project in Wilmington, but they now indicate that they may have funds available and we could start this project in the Spring of 2005.

The Port of Miami, 45-foot deepening project finally bid here in the third quarter of 2004 by RFP and Great Lakes was awarded the $38 million contract.

Brunswick, Georgia, this is the $66 million project which originally was bid in 2002 to deepen the entrance and inner channel to 36 feet. We finally had it awarded to Great Lakes in the third quarter of this year. We started the work here now in the fourth quarter, however, given budget constraints, we can only perform a portion of the work into the first quarter of 2005 and then we’ll have to return in late 2005 and even possibly in 2006 to complete the work, depending on the amount of available funding in each of the next two years.

Columbia River, Oregon, this $180 million project to deepen the Columbia River shipping channel to 43-feet has encountered many permitting and environmental delays. Currently the first phase is scheduled to bid early in 2005.

Oakland, California, the next phase of this project to deepen the harbor to 50-feet, was won by Great Lakes in the third quarter of 2004 for approximately 26 million. Tampa, Florida, this smaller project was authorized for approximately 15 million, to deepen to 41-feet and widen the channel serving the Port of Tampa. It's currently scheduled to bid in the first quarter of next year. And finally, San Diego, California, there are indications that this $80 million deepening project has been funded and a small phase of the central channel was bid in the third quarter of 2004, and won by a competitor for approximately 2 million.

In summary, there are deep port projects (inaudible) in excess of 250 million that have currently been identified for bidding in 2005. Additionally, we recently submitted proposals for over 50 million in dredging services, solicited by private customers, primarily for L&D projects in the Texas area. And it is likely some of this will materialize over the next few months.

And finally, as I’ve mentioned previously, there are other projects that have been identified to dredge PCB (inaudible) material from the Hudson and Fox Rivers. We continue to pursue dredging opportunities as they relate to this projects, as they will add a substantial amount of work to our market over an extended period of time.

Turning to beach, although there are still a number of issues outstanding with respect to the future of federal funding of beach projects, we were pleased to see that a number of attractive beach opportunities did bid in the third quarter, as it demonstrates that the federal portion of funding is being made available. Additionally, the recent hurricanes experienced along the Southeast and East Coast have demonstrated the importance of maintaining sufficient beachfront in order to protect waterfront assets and minimize damage from such storms. While the direction of future beach re-nourishment funding is uncertain, this should only help to support the argument of its necessity. And in the near-term, the Senate has passed an emergency supplemental bill that contained 372 million for the Corp to pay for much of the damage from the recent hurricanes, of which 56 million has been identified for emergency beach restoration.

While it is likely that additional time will be needed to obtain approvals on permits for this work, we’ve identified over 100 million of emergency beach projects or projects that had previously been identified and are likely to be expedited in Florida and Alabama, which are anticipated for the fourth quarter 2004 or first quarter 2005 bidding. Additionally another 50 million of projects in Florida and South Carolina, not specifically attributed to the hurricanes, remains scheduled for 2005 bidding.

In addition to the typical beach projects, there is also a large project that is now expected to come out in the early 2005, related to the Louisiana Coastal restoration. This project has secured funding through the National Oceanic and Atmospheric Administration, or NOAA, so it should not be subject to the Corp’s funding issues. Given the close call that New Orleans had with Hurricane Ivan, it is possible this project may gain additional momentum as well.

In maintenance, as I mentioned earlier, the maintenance market has already reached its typical annual level with the bidding activity through the third quarter. While some of this work may have been expedited due to the hurricane, much was work that had been identified for some time, but had not been funded at this point. As the funds seem to be now flowing, we hope we are on track to continue to see a typical volume of maintenance work over the subsequent quarters.

The foreign market, as I mentioned previously, we expect to add substantial foreign backlog for the $30 million Ocean Cay Bahamas project, as well as well as potential additional work for the ID2 and Durat projects. Given this work and foreign work currently in backlog, we already expect to have good utilization of our foreign-based fleet throughout 2005, as well as work for our dredge, Texas. Also, we are proud of Consortia, that has bid a large land reformation project to expand the airport in Doha, Qatar. If we do with this or some other foreign work, it may present an opportunity for us to employ additional dredging assets abroad.

Our outlook, as we anticipated, the third quarter’s earnings were down significantly from what has been typical for the Company over the last two years. We had expected this, given the deferral of work on certain projects within our backlog, coupled with the slow bidding in recent quarters and the inability to obtain and perform on new work to contribute to the period. Despite the uncertainties which have existed with respect to funding of work within the Army Corp of Engineers program, the acceleration of bid activity in the third quarter gives us reason to believe that perhaps the Corp is working through these issues. The Corp’s 2005 fiscal year budget has not yet been passed and the Corp, along with other government agencies is currently operating under a continuing resolution, through November 20th, which allows them to operate into fiscal 2005, at 2004 levels for authorized projects. At this point it seems that the status of the 2005 budget won’t really be clear until after the November elections.

As I mentioned last quarter, the current version of the budget legislation also targeted changes to beach nourishment funding, proposing the Administration no longer honor any cost-sharing agreements for shoreline protection. Thus the local communities and State agencies would be required to fund and administer these projects in the future. The federal funding of shoreline protection has often been the target of our Administration seeking to control spending, but the resulting congressional lobbies generally have been successful in amending the budget and restoring federal funding. Fortunately, the language in the continuing resolution under which we are now operating, explicitly prohibits the Administration from enforcing its proposed policy to stop funding periodically to renourishment. And we remain hopeful that similar language will become part of the final appropriations bill whenever it may be passed.

In summary, while the Company experienced a significant decline in earnings during the quarter, we remain hopeful, given the current improvement in the bid market, that the factors that contributed to the recent downturn in the industry are becoming less of an issue. However, even if the bidding activity has normalized, it will take some time for pricing to return to historical levels, as the industry achieves historical occupancy and the participants regain confidence in a more predictable market.

We expect to be highly utilized in the fourth quarter as we perform on work currently in backlog. However, the margins on this work are not up to historical levels, given the competitive environment in which it was bid. Therefore, this, combined with the impact of the reduced earnings in the second and third quarters, leads us to revise our 2004 EBITDA expectations to be in the range of 31 to 32 million. And we are optimistic that additional deep port and beach work, if bid as scheduled, coupled with our current high level of backlog, can provide solid utilization into 2005.

At this reduced level of EBITDA, combined with increased capital spending, we still expect to generate sufficient cash flow to meet our current annual debt service requirements of approximately 20 million. In fact, even at this revised level of earnings, we currently have no outstanding borrowings under our revolver and we were able to make a prepayment of 2.5 million on our bank term loan in the first quarter. Even though we project increased activity for the fourth quarter, given our cash balance of 7.2 million at the end of September, and anticipated cash flow to be generated in the quarter, we don’t anticipate the need for any significant borrowing from the revolver during the fourth quarter.

At September 30, 2004, our senior leveraged EBITDA was 1.79 and our interest coverage was 2.28, as calculated according to the terms of our revised credit agreement. And we were in compliance with all financial covenants. At September 30th, 2004, we had outstanding performance letters of credit of 13.9 million and our revised borrowing availability under the amended credit agreement was 15 million, which remains sufficient for all foreseeable operating cash needs.

As we enter the fourth quarter, we have reason to be optimistic, albeit cautiously, as we always are in our industry. Given the new work won in the third quarter and the commencement of work that had been postponed, we expect to be highly utilized, with 18 drudges working during the quarter, compared to an average of only nine drudges over each of the last two quarters.

At this point we don't have any reason to believe that the market isn’t beginning to return to historical levels and we believe that our banks have given us sufficient flexibility so that we are well-positioned to take advantage of our upcoming business opportunities.

This concludes my formal presentation, the update. I would also like to note that we will provide a summary of the operating and backlog information provided herein, as well as a reconciliation of our EBITDA, which is a non-GAAP measure, to net income, a GAAP measure, in the financial section of our Company website at GLDD.com. I will now open up the call for questions.

(OPERATOR INSTRUCTIONS.)

Sarah Thompson (ph).

Hi, Deb. I guess this is kind of a bigger picture question. When we were on the call last quarter, you had felt pretty good about – my memory is that you felt pretty good about the 35 to 37 million EBITDA for 2004, because most of that was stuff you already had in backlog. Can you just talk about what changed?

Well, I think if we go back, there was still potential that we had to pick up at that point in time. And so, I don’t think we were able to pick up as much as we had hoped for. Second of all, everything is timing as to when these projects can get started. And so, probably the biggest portion is that we were not able to start on some of these projects as soon as we had hoped to.

Okay, but if you’re looking – I guess it’s kind of getting to the question of fourth quarter, I mean, what’s your level of confidence around getting 31 to 32 million in the fourth quarter?

Well again, we’re always somewhat cautious and conservative, but we do know that we have a number of projects that we have in backlog that are scheduled to start. And I guess the caveat I always say, barring weather – and these startup issues (ph), we should be able to perform to this level for the fourth quarter. As we sort of said here, we do have a very good backlog level here and we will have a lot of utilization going on here in the fourth quarter.

Okay. And then just on the backlog, you had mentioned that your margins were lower due to the increased bid activity. Can you just give us some magnitude of what the margins in your backlog look like, versus historical levels?

I really can’t. We don’t focus on that primarily. The difficulty is that you have a lot of different projects at a lot of different margins and any particular month or any particular quarter really is dependent upon the mix of those projects that happen to be working. Also too in the mix – because we concentrate on project margin or contract margin. What is not included in there is anything that is earned or unearned as far as our plant and overhead expenses. And different equipment will tend to earn more or less. So it’s really hard to give a very precise number here as to what margins will be different by, because it’s not just the contract margin itself, but how much of that will cover the fixed costs.

Okay. And then last question – and I’m sorry, I was trying to write all this down, but I don’t think I followed it all. On your CapEx, can you just talk about again, what the timing is on the sale leaseback?

Yes. Let me turn to that page so I can be specific. Okay, we talked about having a total spending to date of 15.9 million. In that 15.9 we had 1.9 million, which was funded out of the escrow account. We have another 1.5 million related to two barges, which we will do a sale leaseback on. Oh, I’m sorry -- 5.1 million. We will do a sale leaseback on one of the barges, in November, which will bring in approximately 4.5 million in November. The second one will happen in March of next year. Finally, there is the dredge New York, which has 3.2 million of capital spending in that number. That we will do the sale leaseback here within the next two to three – few weeks. And that 3.2 million will come back in.

Okay, so if we look at the cash out the door, then you’re still looking at roughly 10 million for the year?

Right, because if you net all that cash we’re at what, about 6.3, approximately, and if we do another 4 million of spending, then we’re right at about 10 million of actual cash net.

David Bryers (ph).

Hi, it’s David Bryers, from Stanfield. Two questions, I guess, related to bidding and the backlog. It looks like you had an impressive 55 percent win ratio. I know in the past you had a couple of tough quarters, you passed on a lot of business that was being bid at kind of cash cost, which didn’t make a lot of sense. Does that imply that pricing has gotten better – is the first question. Also, it sounds like your recap a lot of inefficiency from existing contracts. Are there contracts that you have where you’re not making cash costs? And then lastly, how much--?

You’re going to lose me here in a minute.

The last question was just on the backlog, how much of that is currently being contested? Was the Arthur Kill in that number?

Okay, I’m sorry, what was the first part of your question?

Has piping improved, but that the new contracts were above cash costs?

A good portion of what was bid in the third quarter was capital work and traditionally those margins are better than the other work. So just from that point of view, overall they would be some better work. There’s also a lot of risk in there, so people are not as willing to go down to – as they had in the past, go down to cash costs. The contracts are too complicated to be able to do that. So yes, I think that implies that there are better margins there, certainly than on the maintenance and beach work that had been bid over the last six-months.

The second, you said something about inefficiencies in our current contracts. We have no cash loss on any of our current contracts. We rarely do and we do not at this point in time. And then backlog, the Arthur Kill project is being protested. It is not in our backlog number.

So of the 279, are there any other contracts? If something’s being protested it’s not included in backlog?

No. Once the contract is – well, a contract is awarded, it’s put into backlog. To this point, that 279 is our backlog.

Okay, but it doesn’t include things that are being protested?

It does not include Arthur Kill, which is being protested. Arthur Kill has not been awarded either. The only thing that’s in backlog are contracts that have been awarded.

And can you give us a flavor for how much of that backlog actually has funding associated with it?

Well again, our understanding is that the Corp is not to bid projects for which they don’t have funding. So this is a different phenomena that’s happened this year, that we do have contracts on which the Corp has asked us to postpone commencement of work. The only ones that right now we have been asked to postpone, continue to be the Wilmington project. And then on Brunswick, we’ve been indicated that we have so much funding and then they will pay for us to come back when they have the funding in the next fiscal year. Those are the only two projects that we have in backlog that we have been indicated to being postponed.

Michael Long.

Hi. You mentioned a couple of projects that were won by competitors, San Diego and another one I didn’t get. Who would have won those? Is it sustained? And do you think those bid levels were just way too far out of your range? I guess that’s the first question.

Second question is about the foreign projects, you mentioned a lot of potential there. Who are some of the competitors there in the foreign market? Thank you.

Okay, I’m not sure who won the two contracts. They were small. I believe one was 10 million and one was 2 million. So I don’t remember exactly what your issue was on that.

Because they’re so small, you guys didn’t really want them. Is that kind of the case?

No, no, no – no. It's just sometimes you win them and sometimes you don’t. We put in various bids and they’re at levels that we would like to win them at. So we clearly would have bid on those projects.

On the foreign side, typically the competitors that we come up against are the large dredging companies out of Europe, typically out of Belgium and the Netherlands. They are names like Dredging International, Buscallis (ph), Yondanule (ph) and Van Ord (ph). Those are the big four that you typically see around the world.

Dell Deljourna (ph).

I’m sorry I’m (inaudible), but I have to just confirm something or clarify. You mentioned Arthur Kill 1 and 2 and so forth. I was going through the second quarter Q and in the commentary there was 66 (ph) million that was just won, as you were the low bidder, but it was pending disposal plans. And so I’m trying to figure out if that has been awarded or not?

No, it has not been awarded. That contract is still pending a protest.

Whose protest, yours or someone else?

Someone else.

And they’re protesting? What are they protesting?

You know, they’re protesting various items of the competitor’s bid. I don’t know technically what they’re protesting.

But again, (indiscernible), it hasn’t been awarded because of the protest and not because of any disposals?

That’s right. The Corp is working through the protest to resolve that first, before they award the contract.

And what’s the timing of that?

It should be very soon. And we understand that both the Corp, and more specifically, the New York-New Jersey Port Authority are very anxious to get this work going. As we said, they have this 50-foot project to get done and they have commitments to large container companies that they have to get this port deepened. So there’s a real push here to get this done as quickly as possible. But sometimes these things just take time.

(Indiscernible).

Hi Deb, it’s Tine Angeligo (ph), from Goldman Sachs. My understanding was that your cost structure was primarily valuable and I understand that volumes have come down significantly in the second quarter, so you probably did not have time to adjust in the second quarter. But margins have not improved sequentially in the third quarter and even your guidance, it doesn’t seem that you will be able to cover rate in the fourth quarter. So do you have any room to lower your cost structure at this point or do you really rely on an improvement in the market?

Well, we do have a good bit of variable expense on projects, obviously relating to payroll and fuel and all those ongoing. That we can cut off immediately when a project is completed. But we do have the cost of the equipment depreciation – the ownership – the maintenance insurance. So with the compliment equipment that we have there’s only so much we can do there in equipment (indiscernible) to do reductions. And I think I talked last call about some of the things that we did with our overhead in trying to cut cost there as well.

But going forward, with an increase in utilization, that clearly is a positive for us and should start to overcome the issue of the fixed cost versus our revenue levels, as utilization picks up. I mean, that was the big issue that we’ve pointed to here in the second and third quarters. So we do expect that the third quarter will be better.

Okay. And just going back to the hurricanes in Florida, when it seems that it was a small positive in some portions of your business, it’s more negative in some other portions. Net-net, what was the impact of the hurricanes on the third quarter performance?

I don’t have those numbers specifically. Obviously I mentioned that there are a number of projects that were impacted. And what happens is that you can’t go out and work during this period, obviously. So it extends the length of the project, which can impact the margins. But more specifically pushes that work out. We aren’t able to do it during the third quarter, so that reduces utilization as well.

In the long run, the storm probably will have a net plus certainly to the industry for a number of reasons. One, it points out the need to have beach restoration done. So I think that’s a positive that comes out of this, I guess. And then obviously there’s work now that needs to be done.

Okay. And just last thing, I just want you to confirm something. Your guidance for the full year, the $31 to 32 million of EBITDA, it’s not adjusted for the litigation charge?

No, it includes the litigation charge.

Melinda Newman (ph).

Hi. A couple of questions. Have you ever disclosed what capacity utilization is in the industry by equipment or hopper or mechanical, hydraulic? And then is there a way to get a sense of – given your forecast of having 18 of – is it still 24 dredges utilized, what it breaks out in, in terms of hopper mechanical hydraulics?

No. People have asked this question before about what’s the capacity and where are you in your capacity utilization. And what I explain is that it’s very difficult to come out with anything that’s meaningful. Every dredge has a different cost package. Every dredge works on different types of work. So it depends what dredge you have. It depends whether you’re on a beach job, a maintenance job or a capital job. And it depends upon the ancillary plant that you’re also utilizing.

So, we do have statistics that show how many dredge days each dredge works and we have those statistics, but it’s not necessarily meaningful or correlated to the revenue production. You can have a small dredge utilized for 365 days and it will not generate as much revenue as a large dredge that works for 30 days.

So maybe – let me try this a different way. Can you sort of say of the awards that are in the backlog now that happened over the course of the quarter, how many bidders bid for each of these projects? I’m trying to get a sense of how competitive the pricing is. And that’s why I’m asking about the different kinds of equipment, because it seems like there’s more – some jobs are more competitive than others and if there are a lot of bidders, then obviously the pricing is more competitive.

Well, typically on any project we have between three and five bidders. That’s our normal compliment. At times there are some smaller dredging companies that come in on particular projects. But you’re generally seeing the same three to five competitors. And yes, certain jobs are bid more competitively than others. As I said, maintenance work is a little more predictable, so you can cut your risk on that considerably and bid lower. On capital work there’s much more risk involved and it’s not prudent to come down too far in that pricing.

So right now, those three to five competitors all compete in all of those three types of work – maintenance, beach and capital and have various equipment that is better or worse in certain situations and will bid to that particular project to their particular capacity levels that they’re at – or utilization levels that they’re at. So there’s not really anything that can be, again, generally talked to as far as competition. It's just project by project.

Can I just ask one more question? You are now running, if we add back the legal, at about 4 million of EBITDA and I am wondering what you think the risk is of not meeting the minimum EBITDA covenant in the first quarter, because it steps up appreciably?

Again, I think Sarah had asked the question how we feel about the fourth quarter? We do have the startup of a number of projects and so we do expect utilization to be significantly better in the fourth quarter.

Roy Ofear (ph).

Roy Ofear, Trilogy Capital. I wanted to know if in addition to some of the weather elements you discussed, can you talk about some of the other issues that caused certain projects not to get initiated as quickly as you originally anticipated?

Basically, we have to wait for a notice to proceed from the customer. And then we mobilize and get to work. So most of it is in the timing between winning awards and getting that notice to proceed from the customer.

And what types of blockages usually arise from the customer? I mean, several obviously occurred in the last few quarters. What are typical events? Are they only weather-related? Are there other budgeting-related issues from the customers? Seasonality? Is there anything else you could help us with on that?

No. I would say, depending on the particular project, there is a certain expectation of the length of time it would take. If it’s say, a maintenance project, typically you would expect that period for the notice to proceed to be very short and you would go right away to work. On a capital project, that requires plans and permits and all sorts of additional information to be provided before you can start, you would expect that to be a much longer period. And there are various reasons why the period could be extended--.

And beach nourishment only God knows, right?

Particularly there at the Corp’s discretion. So there’s obviously a wide range of reasons why they may take a week longer or a month longer than what is typical.

Well we all know that on beach nourishment, it’s in the hands of the Army Corp and the federal government, so nobody could predict that. But can you help us on maintenance and capital projects? What do you factor into your lead time?

Well actually, the Army Corp of Engineers does perform all of the maintenance work and most of the capital work. There are some Port Authorities that do capital work. So I think those same variables that you allude to on the beach side are clearly there on the maintenance and the capital side. But in the capital side, it’s a more complicated job that’s being performed. And so typically for those things there are permits, or disposal plans, or equipment plans, pipe that needs to be supplied and various issues that all have to be clarified with the Corp before you go to work.

(OPERATOR INSTRUCTIONS.) Larry Taylor.

Hi, this is Michelle Dragonetti (ph), for Larry Taylor. A bunch of my questions have already been answered, but one quick thing, the 119 million in projects that were won at the end of the quarter but not yet added to backlog, has anything been since added, since the end of the quarter of that amount?

Yes, Ocean Cay, which is a big one, about 30 million. And to be honest, I don’t know – it’s possible that some other ones have been.

But at least one large chunk of it has been.

Absolutley, right.

And then of the balance, how much of that is contested or contested by a competitor?

The only project in there is the one that we’ve talked about, is Arthur Kill.

(Indiscernible.)

You mentioned that you arrived (ph) both your bank credit and your bid bonding agreement, are the levels of the financial covenant and the bid bonding agreement the exact same as the bank agreement?

No, they have different covenants and not nearly as constraining.

Okay. And are there any limitations on your bidding at this point?

No, not in our bidding.

You did not mention the price in terms of your sale leaseback with GE. I wonder if you can discuss that and discuss whether those are subject to change due to your financial performance?

No. GE is fully aware of our financial performance. In fact, they have a piece of our senior debt, the equipment debt and they own some other leases. So they’re fully – fully reflects what’s going on.

Final question. There is a little discussion about (inaudible) lawsuits in your financial statements. I was wondering if there’s been any change in the status of those lawsuits?

No, nothing.

Do you feel you’re adequately insured against that?

Whatever we have disclosed there is it.

Mike Hugal (ph).

Yes, good afternoon. A couple of minor points. In Florida and Alabama with the hurricane damage, is any of that funding coming from FEMA or is that all to be appropriated separately?

Well there was a separate appropriation, so we know at least there was 56 million of federal funding set specifically aside. There was talk about some of it being funded through FEMA. I have not heard if there was anything specifically paid through or identified through FEMA.

Okay. And my second question is regarding the litigation settlement, would that be paid out in one lump sum, assuming that number holds?

Yes.

Okay and is that your pro rata share or is that the total amount?

That’s our share.

That’s your share, okay. There’s no prior insurance from the prior owner in terms of indemnification?

Not under the acquisition, if that’s what you’re referring to.

Clark Arthur (ph).

Hi. I was trying to get a handle on whether you have any idea or feeling as to whether the Corp has resolved kind of their internal reorganization that sort of was attributed to some of the problems that you’ve been having with funding?

Our assumption is that yes, they have. Because we saw such a high level of activity here in the third quarter and we could presume that they have worked through that issue.

But you haven’t heard any sort of real affirmative discussion or what have you to sort of lay out exactly what’s going on?

No, nor did they ever really say that it was a problem with them. So, again, we know it was an issue. We heard the Corp districts talk about it. And now the funding is coming through. That’s all the evidence that we have.

Okay. So when you talk about there’s only basically one project, which is Wilmington, which has been delayed, does that mean there were other projects sort of up to this point that were delayed and now you’re sort of – your understanding is that funding is starting to come through for those projects that are in the backlog?

Yes, right. I mean, LA came through and we started that project. And we have had indications from Wilmington to say that they think they have funding. We’re hopeful even that Brunswick will find some additional money and we can continue there. But beside that, they are pretty clear that we will come back in the next fiscal year and they will have the money. Again, the evidence is that it seems to be flowing.

Okay. And in terms of the covenant compliance on the EBITDA, do they exclude the charge or include in the bank agreement?

Which charge?

The litigation.

It's included.

John Lu (ph).

Hi, Deb, John Lu. I’m still trying to figure out in a sense, why the contraction in EBITDA has been so severe the last couple of quarters. Because when you look back at 2001, there were several consecutive quarters where backlog was below 200 million and you still were realizing around 50 million, more or less, on an annual run rate in EBITDA. Now – clearly the second quarter EBITDA or backlog was very low, but prior to that you still had 200 plus sort of levels there. And it just doesn’t seem – it seems inconsistent with past experience with the levels of your backlog.

Well, it’s not backlog that makes the quarter. It's obviously the revenue that’s produced during the quarter. And the revenue levels are clearly down. And more so, the utilization of our equipment is down. So you could have one really good margin job and only employ one dredge, but we would have a very difficult quarter, because nothing else was being utilized. But of course all the cost related to that plant is still there. So really it’s the utilization level during the quarters that is the big impact.

Now do you publish utilization levels at all?

Well again, it’s not something that’s easily publishable. I mean, we can – as we said, I tried to give you a little flavor here, that we had nine dredges working the last – on average. That doesn’t mean nine at all times. But we’re going to have 18 here. So it gives you a relative feel for that. That’s a huge difference in utilization there. But there’s not a real good way to publish some sort of meaningful information that will give you a better sense of the earnings level. Because it depends upon which dredges are working at what point in time.

(Inaudible.)

Hi. I just wanted to know on the Brunswick contract whether you can tell us how much of that you think you would get done before it’s going to be delayed? And then I wanted to confirm that on Wilmington, which I guess is still subject to delays, is that 20 million or so in the background? Thank you.

I don’t know exactly. My understanding is approximately a third of it will be done this year and into the first quarter. And then on Wilmington, I guess you’re asking what the backlog number would be. It's just about 20 million, yes.

Okay. And then just to follow up on John’s question, you had nine dredges working in the second quarter and you’ll have 18 working in the third quarter, yet we’re not going to – we’re going to see some pick up, but not restored to the sorts of levels, because pricing has been negatively impacted. So, would it be fair to assume that it’s a combination of pricing and that the equipment that you will have working out of the 18 is not as – that maybe some of the higher overhead dredges are not going to be working?

No. Your first issue about margins, that is true and that is fair. We will have 18 drudges working, but they’re not all working right now. So it’s a timing – we’re phasing in. And during the quarter at points we will have that many drudges working. But we didn’t have them starting October 1st.

Do you have a first quarter outlook for how many dredges will be working, first quarter ’05?

No, I didn’t do that. We do look at our utilizations going forward and as I said, given our backlog, we think there’s going to be some good utilization here going forward.

Phil Meslin (ph).

Hi, it’s actually Phil Meslin (ph), with Greywolf. I just had a couple of quick questions. First one, I just wanted to know who the three to five competitors are that you typically run into. I’m new to the name – to your company, so I wanted to just get that. The second one – I joined the call a little bit late, so I may have missed this. I was wondering if you could break out the Q3 backlog by capital, maintenance and beach respectively?

Okay, the competitors that we typically see are Weeks Marine, Bean Stuyvesant (ph), Manson (ph), Norfolk Dredging, Cashman (ph), Donjon – those are the – I guess that’s six.

And then your second question, I’m sorry?

It was just if you could break out the Q3, pardon me, the Q3 backlog by capital, maintenance and beach respectively?

Okay, we do post that on our website.

Okay, I haven’t pulled that up yet. Okay, that’s great, that’s fine. Thank you very much.

(Inaudible.)

Hi. I wanted to quickly just get the working capital for the current quarter, AR inventory kind of stable?

I don’t have that in front of me. Actually, somebody asked this question last time. It's not something that I typically report, obviously, when our Q comes out. Generally speaking, with the lower level of utilization, you will see a decrease in our working capital investments.

(Inaudible.)

Hi Deb, it’s Austin (inaudible). I have a couple of quick questions. One is just to pick up on the issue of the nine dredges working on average last quarter versus 18 this quarter. Is the 18 net a maximum number, not an average, right?

Yes, we just sort of took a look at what would be going over the quarter. I didn’t look at it in terms – again, this is what’s so difficult is yes, I may have 18 dredges working, but if the most profitable one is only working a week, that sways what the utilization is. So again, it was just a general sense to give to everybody as the difference in our utilization level over the last two quarters, versus what we’ll see here in the fourth quarter.

Do you have either like a maximum number of dredges that were working last quarter or an average that you’d expect for the fourth quarter so we can make an apples to apples comparison?

I’m sorry, actually what are you trying to do?

I just want to understand, the nine dredges that you gave last quarter was an average throughout the quarter, right?

Average, yes.

And then the 18 for this quarter is a maximum number within the quarter?

No, I don’t think that’s – I think they’re both averages.

Oh, okay. That’s what I didn’t understand. And the last thing is, in your prepared comments you referred to either normal conditions in the market or something along those lines that would help pricing improve. I guess I’m just wondering if you could flush that out a little bit. What total bid market size makes for normal conditions or is there a--?

Well I guess when I speak to normal conditions I go back to the time period which I was presenting, which is 1998 through 2002. Obviously there’s ups and downs in a bid market, but it was a fairly high level period through which there was pretty good occupancy within all the competitors within the industry. So I’m kind of going to that time period as being what I call a normalization. So as we get up – as I said, if we can get up to that normal level of about 650 million bid market and everybody starts to fill out their schedule a little bit, then I think we could normalize back to the pricing and the utilization that we had during that five-year period.

Okay. And the market this year is tracking ahead of the 425 that was last year. Do you have a feeling for how close it’s going to get to that 650 number?

Well again, there’s numerous projects here that should come up to bid. So it could very well hit that number. And we’re hopeful that it will continue.

Clark Arthur.

I just had a follow-up. What’s a good number to use for sort of an SGA run rate now?

Well, I think if you take out those unusual items that I indicated, the subpoena expense and obviously there’s the (indiscernible) expenses. That’s a fair number. And we did some reduction in headcount, which as we said will come through in next year. That’s somewhat of an estimate. To be honest with you, I’m sorry, I don’t have a real good key on that.

At this time there are no further questions.

Okay, if there’s no further questions, I’d like to thank you for joining our third quarter update. And I will expect to conduct the next call for our 2004 year-end results the week of January 31st, 2005. Thank you.

This concludes today’s Great Lakes conference call. You may now disconnect.