Great Lakes Dredge & Dock Corp (GLDD) 2005 Q1 法說會逐字稿

Welcome to the Q1 2005 update call moderated today Ms. Deborah Wensel. At this time participants are in listen-only mode. After the presentation, a question and answer session will be conducted and instructions to participate will be given at that time. (OPERATOR INSTRUCTIONS). I'd like to introduce your moderator, Deborah Wensel. Ma'am, you may begin.

Thank you. This is Deb Wensel, Chief Financial Officer of Great Lakes and I welcome you to our quarterly update call. The purpose of this conference call is to provide you with a summary of Great Lakes' first-quarter 2005 financial results, operating and bidding activities, market outlook, debt and liquidity levels and some other relevant information. Following the presentation as noted, you will be given the 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 participants in this call are cautioned not to place undue 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 updates. Turning to the overview for the quarter, our revenue for the first quarter of 2005 was 99.9 million, which compares to the first-quarter of 2004 level of 103.9 million.

As we had anticipated, given our improved backlog level at year end, we experienced good utilization of our dredging fleet during the first-quarter of 2005. However dredging revenue declined approximately 8.5 million relative to the first quarter of 2004, in a similar amount from the fourth quarter of 2004, as a result of a mix of projects performed in the 2005 period and the equivalent mix applicable to these particular projects. This decrease in dredging revenue was offset by a $4.5 million increase in demolition revenue in this 2005 quarter, as compared to the same period of 2004 reflecting an increase in activity in this segment.

As you may recall from the previous call, our dredge fleet utilization and revenue picked up in the fourth quarter of 2004 and have remained strong throughout the first quarter of this year. But as we had anticipated, our dredging margins continued to be depressed since we have been performing on projects with inherently lower margins than in recent years due to the highly competitive environment in which they were bid. Therefore our gross profit margin declined to 7% for the quarter ended March 31, 2005, compared to 15.8% for the same quarter of 2004, but was still consistent with our gross profit margins of the last three quarters.

Because I have been asked some questions here recently with respect to our bid margins versus our gross profit margin, I just want to provide a couple of points, hopefully of clarification for you. When I refer to our bid margins I am referring to our contract margin basis which reflects an estimate of the contract's direct costs as well as an allocation of the indirect equipment costs, such as depreciation, insurance, maintenance, using standard rates based on budgeted utilization, equipment utilization level for the year. Our gross profit margin however reflects our contract margin reduced by any unallocated portion of our equipment costs, as well as operating overhead.

Therefore if we look at the earnings erosion we've experienced in the past two quarters it's more attributable to reduce contract margins, thereby reflecting the impact of the competitive pricing environment at the time much of the work was bid. In contrast we had more favorable contract margins in the second and third quarters of 2004 since we were performing more work from backlog; that was before the down trend in the bid market. However, because certain work was postponed and the bidding activity slowed, our utilization declined in these quarters which was evident in our reduced gross profit margins which reflect the unallocated equipment costs, and of course the overhead costs.

Hopefully that helps a little bit in looking at why our margins are declining. There is both the effect of equipment costs when there is lower utilization, versus bid margins based on the environment -- or contract margins based upon the bid environment. Now turning to the first quarter of 2005, as the result of the reduced contract margins our EBITDA declined to 5.2 million compared to 14.8 million for the first quarter of 2004. As I mentioned we had expected our EBITDA to be down for this quarter as a result of the lower margin work being performed during the period. The first-quarter 2005 EBITDA also reflects 0.9 million of legal expenses related to the federal subpoena. I will provide you with a little bit of an update on that matter in just a minute.

Now I would like to give a general overview of contracts contributing to the quarter's operations within the context of the dredging markets we serve in our demolition segment. First-quarter 2005 revenue included 36 million of Capital, 22 million of Beach, 30 million of Maintenance, and 12 million of Demolition, for a total revenue of 100 million. The comparable numbers for the fourth quarter of 2004 were 70 million of capital, 6 million of Beach, 21 million of maintenance, 11 million of demolition for a total of 108 million. And then those numbers for the first quarter of 2004 were 54 million of Capital, 30 million of Beach, 13 million of Maintenance, 7 million of Demolition, for a total revenue of 104.

Our capital dredging revenues for the quarter, as I said, totaled only 36 million which is reduced from our fourth quarter last year. We were delayed in starting the dredging on our Arthur Kill No. 2 project in New York, due to a lawsuit which was brought against the Army Corps of Engineers by the Natural Resources Defense Council, regarding dredging in the New York Harbor. As a result the Army Corps delayed all dredging in the area until a hearing was held in mid-March. At that time the restraining order was lifted and we were ultimately able to begin the Arthur Kill 2 project in late March with our backhoe dredge in New York. But we lost out on additional revenue had we been able to start in mid-February as originally planned.

We don't expect this suite to have any further impact to the dredging in the New York area. Capital dredging revenues for the quarter was substantially generated by the following work. Completion of the first phase of the Brunswick deepening with our hydraulic dredge tester; conclusion of our L.A. deepening project with the electric hydraulic dredge, Florida; continued work on the Oakland Manatee and Houston deepening projects; and the conclusion of the head terminal project in Bahrain with our hydraulic dredge, Carolina, which is now about to work on a land development project in Bahrain along with another smaller hydraulic dredge.

Over half of our backlog continues to be represented capital dredging work, but certain of these projects such as the Miami Harbor deepening, and Ocean Cay, Bahamas project, won't commence until the second half of this year. Additionally we don't expect to complete the remaining phases of the Brunswick deepening project until 2006 and 2007 when the Corps expects to have available funding for these portions of that project.

Our Beach revenue in the first-quarter totaled 22 million relating to work on a number of Beach projects in backlog at year end, including the West Hampton and Shinnecock Beaches in New York; Buckrow and Ocean View Beaches in Virginia; and Rehoboth and Dewey Beaches in Delaware. Additionally during the quarter, we started on Beach projects in Broward and Martin Counties in Florida, both of which were added to backlog in the first quarter. Maintenance revenue in the first-quarter totaled 30 million which is slightly higher than in typical quarters primarily due to the work on a few large maintenance projects. These included harbor maintenance projects in Baltimore, Maryland; Tampa, Florida; and Wilmington, North Carolina, which have all been completed, and a rental project in the Mississippi River Gulf Outlet which will conclude in the second quarter of this year.

NASDI had a strong first-quarter generating approximately 12 million in demolition revenue. In recent months NASDI has added a number of projects valued in excess of 1 million to backlog. The quarter benefited from revenue generated by these projects as well as a typical complement of numerous smaller projects. Looking at debt and liquidity, our capital expenditures for the first-quarter totaled 3.5 million which included approximately 600,000 related to the final construction of the second of two rock barges.

Like the first of these barges which was completed in 2004, this one will also be sold and leased back under an operating lease to be concluded in the next week or two. Our full year 2005 capital budget is 13 million, most of which relates to efficiency enhancements to our existing equipment. Over the last couple of years our capital spending has included significant amounts to replace and enhance our dredge skow capacity. We've recently commissioned four new large capacity skows including the two (indiscernible) just mentioned, which will replace some of the older smaller skows and provide more efficient tools to address upland disposal requirements and increase dump-site towing distances. We have also made significant enhancements to a number of other skows in our fleet to increase their material capacity.

Our maintenance expense in the first-quarter totaled 7.9 million. Again, these are equipment related costs that are expensed in the year incurred. Our 2004 annual maintenance spending of 22.7 million was down from prior years since we experienced lower utilization in 2004. As we expect our equipment to approach more typical utilization levels in 2005, we expect this year's annual maintenance spending to be in the range of 26 to 28 million which is more consistent with our historical maintenance spending. Our 2005 first-quarter cash interest expense totaled 4.9 million, which is about the same as cash (indiscernible) we incurred in the first quarter of 2004. The rates that we're currently paying on our variable interest debt have increased in 2005 since the underlying market rates have increased, and we are now paying a higher spread due to the amendment of our credit facility which was effective September 30, 2004. This resulted in approximately 200,000 of added interest expensed in the 2005 quarter.

Additionally for the 2005 first quarter we incurred noncash interest expense of 1 million due to the valuation of the Company's fixed to floating interest rate swap which was put in place in February of 2004. This compares to a noncash interest benefit of 0.7 million recorded for the first quarter of 2004. As a result of the Company's reduced earnings over recent quarters coupled with the impact of the noncash interest expense and additional noncash depreciation and amortization expense related to the revaluation of the Company's assets in connection with the 2003 sale, the Company's net worth at March 31st, 2005 dropped below the minimum level required in its Underwriting and Indemnity Agreement with our surety company. Therefore we discussed this matter with our surety company and they have provided a waiver of this requirement for the quarter ended March 31st, 2005.

We were otherwise in compliance with all debt covenants at March 31, 2005. Our interest coverage was 1.43 and our senior leverage was 3.29. As you may recall effective September 30, 2004, we amended our credit agreement to allow flexibility to work through this period of reduced earnings. As amended our total leverage ratio was waived through 2005 and replaced with a minimum EBITDA measure with which we are also in compliance at March 31, 2005. At the end of the quarter we had outstanding performance letters of credit totaling 13.9 million. Therefore under the revised terms of our credit agreement we have remaining LOC availability of 21.1 million, which should be sufficient to accommodate the letters of credit necessary for the additional foreign work we still anticipate taking on.

At March 31, 2005 we had 4 million drawn on the revolver facility, so our borrowing availability under the revised terms of our credit agreements was approximately 11 million which we believe is sufficient for all the Company's current operating cash needs. Turning to some other matters, I mentioned previously that we continue to incur legal expenses which totaled 0.9 million in the first quarter of 2005 related to the federal subpoena matter. As we discussed or disclosed previously, in February of 2004 the Company was served with a subpoena to produce documents in connection with a Federal Grand Jury convened in the United States District Court for the District of South Carolina. The Company believes the grand jury has been convened to investigate the United States dredging industry in connection with work performed for the U.S. Army Corps of Engineers.

We continue to comply with the Justice Department's request and believe that we have provided substantially all the documents that have been requested to this point. In addition to the documents requested, five Company employs have now testified before the grand jury. Also as you may remember from previous calls, we continue to follow the Bean Stuyvesant issue, whereby Bean Stuyvesant exploited a grandfather clause loophole allowing it expand its operations without complying with the same 75% U.S. citizenship ownership and control requirements applicable to the rest of the U.S. dredging industry and other sectors of the U.S. maritime industry.

A domestic competitor has been petitioning the U.S. Supreme Court for Writ of Certiorari to review a case brought against Bean Stuyvesant in challenge of its citizenship qualifications, with a broad coalition of domestic maritime interests filing a supporting amicus brief. We did just learn that the Supreme Court will not review this case. So the maritime industry will move back to pursuing a legislative solution in an effort to ensure a more equitable treatment among the industry participants.

In our year end filings we mentioned that we had received a request for information from the United States Environmental Protection Agency pursuant to the Clean Water Act. The EPA is investigating alleged dredging of unauthorized material and other unauthorized discharge of that material at various locations in federally regulated waters of the U.S., relating to the Port of Los Angeles deepening project which was being performing by the Company and a joint venture partner. The Company was performing this project under contract with the Los Angeles District of the Corps and believes it is in compliance with the contract specifications. No fines have been assessed and our understanding is that the Corps is working through this matter with the EPS.

To provide you with an update with respect to our union relationships, as you may know the majority of our hourly project based employs are unionized and most are covered by four collective bargaining agreements. Most of our major contracts continue into 2006 but our contract with our tugboat operators in New York did expire in February 2005 and negotiations will begins soon. We are currently working in New York and the expiration of this agreement has not affected our operations there.

We generally have good relationships with our unions and we recognize that the unions have an important responsibility to provide us with qualified and capable individuals. Over the last three years, Great Lakes along with the rest of the industry, has been experiencing major safety and health issues with union employees. Working in the dredging industry is inherently dangerous given the need to operate heavy, mobile equipment in a marine environment. In light of this our safety specialists have invested significant time and effort in helping the industry develop safety standards along with the Corps, and we have made substantial financial investments to train and implement these safety standards internally.

Beyond the obvious objective of promoting a safe working environment, we believe these investments are essential to help us manage our insurance costs and rates, which are directly impacted by our safety incidents. Despite the strides made in implementing our safety at this point, we believe further steps need to be taken to obtain buy-in for the safety initiatives in the field. Therefore we have engaged a consulting group to assist us in disseminating our program for a safe working environment to the field employees. We are hopeful this will translate into fewer safety incidents and ultimately reduce insurance.

Finally, another matter came to light during the quarter and was just reported in the local media, so I wanted to bring the matter to your attention as well. Pursuant to an internal investigation we discovered that an employee whose responsibilities were primarily related to contractual issues including subcontractors, agents and claims on certain foreign projects, has embezzled funds from the Company. The employee, who was not an officer of the Company, was terminated on April 4, 2005. Our preliminary findings indicate that the terminated employee embezzled approximately 1.1 million over a period from 2001 to 2004. We believe that any loss resulting from the employee's embezzlement is covered by insurance, subject to a $50,000 deductible, and will not have a material adverse effect on the Company's financial position or results of operations. We have performed a review of our internal procedures relating to this matter and believe this is an isolated incident.

Turning back to our bid market. For the first quarter of 2005 our domestic dredging bid market represented work awarded during the period totaled 215 million, which represents a solid quarter relative to the average annual bid market over the last three years of approximately 690 million. Almost half of this work related to eight Beach nourishment projects, as was expected given the severe hurricane season experienced in 2004, and the need to replenish numerous beaches along the Florida coastline in advance of the 2005 hurricane season.

The quarter's activity also included the first phase of the 50 foot KVK New York deepening project which was won by a competitor for 79 million. We bid approximately 94 million for this project which was still well below the Corps' allowable estimate, as well as the bid submitted by two other competitors which were each around 110 million. Therefore we believe this will be a challenging job and will occupy the competitors' large backhoe dredge for the next two years. The results of this bid are fairly consistent with what we have seen for much of the bidding to date this year. Competitors have been bidding on projects at very low prices, often well below our bids and the Corps' estimates. As a result we've won only 18.5% of the quarter's awards as we continue to bid opportunities with more reasonable margins. Our work did include the 24 million Broward County, Florida Beach project which was awarded to Great Lakes in the first quarter of this year.

It has been somewhat surprising that the pricing of recent bids have been so cheap since the bidding activity has accelerated from the slowdown experienced a year ago. We would expect that our competitors, like us, already have some scheduled equipment utilization and would therefore be more rational in their bidding. However given the additional volume of work taken on by certain of our competitors over this last year, we believe that we should now be well positioned to win a greater proportion of the upcoming bids since much of our competitors' key dredging assets should be occupied.

Looking at our backlog, dredging backlog at March 31, 2005 totaled 241.7 million, which declined from 280 million at December 31, 2004, but is significantly higher than the March 31, 2004 level of 189.2 million. Our March 31, 2005 recorded backlog does not reflect 110 million of low bids pending award and other options pending on projects currently in backlog, including approximately 80 million for the remaining work on the Durrat Bahrain project, which was just formally awarded to the Company in April.

Just to give you our number, our backlog numbers by segment, at March 31, 2005, we had 154 million of capital, domestic; 38 million of capital, foreign; 37 million of Beach; 13 million of maintenance, for a total dredging backlog of 242; adding in demolition backlog of 15 for a Company total of 257. The numbers that correspond for December 31, 2004, were 181 million of domestic capital; 43 million of foreign capital; 23 million of Beach; 33 million of maintenance; for a total dredging of 280, adding 11 million of demolition for a total Company backlog of 291.

Again those numbers for March 31, 2004, we had 113 million of domestic capital; 31 million of foreign capital; 13 million of Beach; 32 million of maintenance; for a total dredging backlog of 189, adding 15 million of demolition backlog for a total Company backlog of 214. Our demolition services backlog at March 31st, increased to 15.5 million from 11 million at December 31, 2004. Activity in the demolition sector has picked up, and NASDI added five new demolition projects valued in excess of 5 million to backlog during the quarter, along with a number of just usual small to midsize projects.

Looking at the dredging market outlook, starting with deep port. The Water Researches Development Act or WRDA legislation, which forms the basis for authorizing the Corps' civil works projects, including our deep port projects. No Act was passed in 2004 but a 2005 version of WRDA has already been introduced. This version does include authorization for additional federal cost sharing to 53 feet for port deepening projects. This could encourage some ports to pursue additional deepening projects as they would get more federal funding. Additionally the 2005 WRDA as currently drafted, authorizes the decommissioning of the Corps operated hopper dredge, McFarland, that works in the Delaware area, which is positive as this would make additional maintenance work available for performance by private industry.

The draft act also, however, authorizes the Corps to lift restrictions on the use of its two West Coast based hopper dredges. We think this would add only a small amount of additional work for these dredges, so we don't feel this portion should have as much impact to private industry. The WRDA legislation continues to face environment opposition, so again it's unclear as to when the next act will pass. Passage of a new WRDA Act is not critical at this point with respect to our project authorizations.

As I mentioned earlier, the first phase of the KVK New York 50 foot deepening project, bid in January of 2005, and it was won by a competitor. Also the first phase of the Columbia River deepening project in Oregon was just bid here in April, and Great Lakes was the low bidder. However we were in excess of the Corps' allowable estimate, and we were in the process of protesting the Corps' estimates on the project but the Corps cancelled the project for lack of funds which they can do since it had not yet been awarded. We understand the project is now scheduled to rebid at the end of this week, although at a reduced scope. We expect additional Deep Port Projects value in excess of 100 million to bid over the remainder of 2005. This includes the initial phase of the Port Jersey, New Jersey 50 foot deepening project, a project to deepen the entrance to the Ambrose Channel in New York, to 53 feet, and potentially two port expansion projects in the Tampa area.

A number of deep port projects bid in prior years are currently being performed by Great Lakes or competitors, including Miami, Brunswick, Wilmington, Arthur Kill, KVK and Oakland, and are likely to utilize the Corps' 2005 allotted funds for this work. So it's not too surprising that additional phases of these projects are not yet being bid given the Corps' recent pattern of not bidding work much beyond that for which it has visible funding. We continue to closely follow proposals we've recently submitted for over 50 million in dredging services solicited by private customers, primarily for development of LNG terminals along the Gulf Coast of Texas.

We have received a letter of intent for one of these projects and we expect it to be awarded to us in the next few weeks. Over ten domestic LNG terminals have been proposed with plans underway for another 20 to 25. Not all of these are likely to get off the ground. This private market appears to be gaining momentum as the global supply of liquefied natural gas has increased and importation of fuel becomes more cost competitive given the higher prices of domestically produced natural gas. Therefore it is likely that more of this work will materialize in the near future as the private contractors, generally multinational oil and energy companies, work to develop the infrastructure necessary for the LNG terminals.

Looking at Beach work, the Beach market, as evidenced by our recent bidding activity we've seen a large volume of new Beach work much of which is being funded by the emergency supplemental bill passed towards the end of 2004 to pay for damage from the 2004 hurricanes. Bidding schedules indicate an additional 100 million of Beach work to be bid through the remainder of 2005, some of which will receive federal funding from the Emergency Supplemental Bill, and others which are expected to be funded by the communities and localities. The Corps' (indiscernible) 2005 budget did not appropriate funds for Beach renourishment but we understand that the current draft of the Corps' fiscal year 2006 budget does reflect some funding, federal funding for certain Beach projects.

In maintenance, only 33 million of maintenance work was bid in the first quarter of 2005 but we still expect the 2005 maintenance market should again achieve levels consistent with historical averages of approximately 200 million, and the Corps' fiscal year 2005 budget contemplates this. We expect that one of our competitors, Manson Dredging, will be commissioning its new hopper dredge at the end of this year. This dredge is over two times the size of our most recently constructed hopper dredge, The Liberty Island, and is well suited for the maintenance rental market along the Mississippi Gulf Outlet. So it's likely to impact the bidding dynamics within this market once it comes online.

With respect to Beach and Maintenance markets we have received additional communications from various Corps districts cautioning that funds may not be available to complete certain projects which had been awarded and scheduled. We have not been asked to stop or postpone our work with respect to these projects and it appears that despite these warnings the funds are generally becoming available. However, on a positive note, the Senate recently passed an emergency supplemental bill for the Iraq reconstruction, which included a 200 million appropriate for the Corps' domestic dredging operations and maintenance budget which funds our Beach and Maintenance projects, which may help to alleviate some of the funding pressures for these types of projects.

And finally looking at our foreign market, we recently signed up the complete contract for the Durrat development project in Bahrain. We began the initial phase of this project in the fourth quarter of 2004 and the project will provide work for two years for two large hydraulic dredges and one small hydraulic dredge. The contract is being performed in a joint venture with the same Bahraini contractor that we partnered for, the HID (ph) contract, and this company is now performing the civil work. Given this project, along with the award of the Ocean Cay, Bahamas project in the fourth quarter, we have added substantial foreign dredging backlog which should provide good utilization of our foreign-based fleet throughout the remainder of 2005.

Also we are a minority partner in a consortium that has won a large land reclamation project to expand the airport in Dohoxtar (ph). Although due to scheduling conflicts, little of our equipment is planned for the execution of the project. Our outlook. We just concluded a very difficult year as we've had to deal with the various funding issues facing the Corps. While the bidding activity has picked up through the first quarter, there appears to be less clarity with respect to the Corps' appropriate funds and when these funds are made available to the various districts, as is noted with some of these cautionary letters we've received.

We continue to maintain a solid level of backlog and have seen our contract margins in backlog improve from the low levels experienced in mid 2004 as we have worked off some of lower margin backlog in the last two quarters. And as I mentioned, we have now started the next phase of the Arthur Kill New York deepening and will soon be starting the Miami Harbor deepening and continue our work on the Wilmington, North Carolina deepening, all of which have produced better margins and good utilization. And if the bidding activity continues at a similar pace to the last two quarters, we hope to take on new work at better margins since our competitors have recently obtained significant occupancy for their equipment.

Therefore we still believe our 2005 EBITDA budget, in the range of 38 to 42 million is achievable. At this level of EBITDA, we still expect to generate sufficient cash flows to meet our current annual debt service requirements of approximately 20 million, and to fund our necessary capital expenditures. And as I said as of March 31, 2005, we were in compliance with all debt covenants which were revised effective September 2004, to allow us additional flexibility to work through this period of reduced earnings. We continue to keep our banks well-informed and our bonding company up to date with respect to the state of the industry and our performance therein.

As such, we feel comfortable with these relationships and their respective willingness to work with us as we return to more typical levels of performance. This concludes my formal portion of the update, but 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's website at GLDD.com. I'd now like to open up the call for questions you might have.

(OPERATOR INSTRUCTIONS) Lionel Jovalt with Goldman Sachs.

Just a quick question first on the credit agreement. Basically the minimum EBITDA covenant at the end of March was $25 million, and you mentioned that you were in compliance with it. I just wanted to know roughly where you were in terms of LTM (ph) EBITDA at the end of March per your credit agreement.

I don't have it exactly. I think we ended up at about 25.8 million, somewhere in that neighborhood. There are some adjustments that are allowed in the credit agreement.

Okay. What I don't really understand is, basically you are maintaining the full year EBITDA guidance but it seems the bidding activity is improving a little bit but you have less visibility on the funding for the future. It seems that the pricing environment is actually getting a bit worse than what you expected. Are you just maintaining it because the low end of your guidance is basically the covenant that you have to reach? How comfortable are you that you reach 38 million of EBITDA at this point?

Well we do look at what we have in backlog. And given that we also will take a look at what potential work there may be coming up, and some of our equipment we would expect to be occupied with work that we will bid and win here going forward. We take that and we put together a reasonable look at what we think we can do for the rest of the year. That's what our guidance is based upon. It is not based upon any minimum requirements.

In terms of the surety bonds, you got a waiver only for the first quarter, if I'm right. It means that you still need to improve your net worth at a level of least 82.5 million by the end of June. Is it the right way to think about it first? And then are you currently in discussions with Travelers to permanently amend this agreement with them? And then are you conducting any discussions with other providers of surety bonds? And last thing (indiscernible), just need to confirm how much do you have outstanding in terms of surety or performance bonds?

You might have repeat just a little bit of that. We did receive a waiver for the first quarter; it was very close. And so you're correct that we do need to improve but we do think that our outlook is for improvement. And if we need something going forward we still can discuss that with Travelers. I don't -- then your next question had to do with?

At this point, you have not tried -- I mean you are just -- you have not tried to permanently amend the agreement for the surety bonds?

No, we felt that it was fine to get the waiver for the first quarter because we did think operations would pick up. (indiscernible) did that willingly and said willingly, discuss with us if we have any needs going forward. But that's -- since the direction was upward we didn't feel we needed to permanently amend it at this time.

How much do you have outstanding or how many surety bonds did you have at the end of the first quarter?

Do you mean total of surety bonds outstanding?

Yes.

We don't actually have that number. We will report that as we get into the Q. What their bonding is, is most of our backlog, although they don't bond, are foreign projects. So you can take that as sort of an estimate of what is outstanding that is bonded.

So roughly $200 million, or even higher than this?

Yes.

Last thing. Looking at your margins, if I look at sequentially your performance sequentially was from the fourth quarter, your sales went down only $8.4 million but basically your gross margin declined 160 basis points. So it seems that basically the projects that you are currently working on have even worse margins than the project you were working on in the fourth quarter. It seems like it's getting a little bit worse in terms of the pricing of these contracts. Should we -- does it mean that basically your margins could get even worse in the second quarter of this year?

Well actually we think that now given -- we look at our backlog and the margin that we have in backlog, we think that it will improve.

Last thing, were the margins on your dredging backlog better at the end of March than at the end of the fourth quarter of '04?

Yes, they were.

Thank you very much.

Sarah Thompson with Lehman Brothers.

I guess a couple of things. Is it possible to give us just what the major add-backs are to get to your bank EBITDA?

Yes rolling -- but the largest item would be our subpoena related expenses. There are a couple of other items but I can't, off the top of my head, tell you exactly what they are. But that is the largest one.

That would include the $900,000 then in the first quarter?

First quarter, exactly.

And then on your guidance, obviously your covenants kind of ratchet up EBITDA throughout the year, and I guess I was trying to read into a little bit of your comment around your comfort level for EBITDA for the full year. But is there any further discussion you can give us in terms of how that looks throughout the next three quarters? It sounded to me like it would be more back-end loaded. Did I misread that?

Well I think we expect to see an improvement here in the second quarter. As we said we started at our job in New York, that's a big deepening project. We hope to get to where we will be going at Wilmington. Miami will come in, and as all those jobs come online, and our overseas dredge is moving off to another project; we'll jump right onto that. We see the level of activity coming up here in the second quarter and into the third and fourth quarters, obviously as well. I mean that's what we are looking at. We are starting a number of jobs in backlog. We think we'll have some better margins and that's where we see the improvement.

Okay. Is there any -- I think you said your maintenance expense was roughly $8 million in the first quarter. Was there any reason -- I mean it's not a huge difference on an annualized basis, but certainly a little bit higher than if you annualized the $27 million number. Was that just because you had the availability to do maintenance in the beginning and so it's --?

Right, it has to do with whatever particular drydockings or particularly pieces of equipment that were in maintenance. We did have a couple big drydockings in the first quarter. Those are dictated by Coast Guard regulations. So we don't -- maintenance spending isn't even over the year and you're right, we do it when we have the available or when we are required to.

Perfect. Just last question. On your CapEx number, I think you gave $13 million. That's a net number, net of sale lease back, correct?

That is and the amount there I told you was about 600,000 at Rock Barge that was spent in the first quarter.

I'm sorry. I thought you had sale -- maybe I have the wrong number. I thought you had sale leaseback proceeds of more in coming quarters? It's only 600 for the year?

Yes, but they will only offset the spending that is that year. So most of the spending on that particular barge was last year; it got offset last year. It won't be 13 plus the 4 million that we will do on the sale leaseback.

Okay. Thank you.

Larry Taylor with CSFB.

A number of my questions have been answered, but I was wondering if you could give us some sense of the margins on capital, both domestic and foreign, that you are currently bedding? Or at least if not the actual numbers, how they compare to what was in backlog and the lower levels that you had last year?

Well again, obviously every project has a different margin in it. I mean when I say that, our margin in backlog now is better. I mean that's on a combined basis, so it is total of all the work in there whether it's Capital, Beach or Maintenance work. To be honest with you I wouldn't be able to even compare between the Capital work we did last year and the Capital work we did this year, other than overall these margins are higher. I don't know if you're looking for something on a specific basis, I guess I can't do that.

I would take as much information as you would give me, but you are saying it's higher. You're bidding -- the capital work now is at a higher level than it was in the middle part of last year when you were bidding?

Yes. I mean the projects that we are listing here that we're going to be doing this year which includes Arthur Kill, Miami, Manatee -- and Wilmington (technical difficulty) Wilmington. Yes, those particular projects do have higher margins than what we have experienced last year.

That is helpful. With respect to those large projects can give us a sense of the relative revenue contribution from each of those projects this year?

No, I don't really have anything in front of me to do that. I mean at the end of the first quarter we had capital backlog of 150 million. Those projects would include Brunswick, which we won't be doing this year. So I don't know. We're talking about 100 to 120 million for those projects.

In aggregate. Okay, that is very helpful. Thank you.

(indiscernible) with Delta (ph) Investments.

My first question is (indiscernible) restriction on the indenture of 7 3/4 bonds, on how much total debt you can have on top of the bond? Is there any restriction?

I'm sorry, is there a restriction? Yes, under our indenture the restriction is other than what we have in place right now which is our credit facility and our equipment debt, so what we have in place now. We have a mechanism to take on more debt but that depends upon our earnings level and being able to achieve a certain ratio, sort of a fixed charges ratio going forward.

There is no restriction asset debt, what is the total (indiscernible) can be on top of this bond?

No, it's based upon ratios, it's not a set amount.

The other question I have is, looking into the 10-K you mentioned about diesel costs. How much was the impact of diesel costs on the EBITDA of the first quarter?

That is hard to say. When we bid our projects we bid current or what we expect fuel pricing to be. And then we do have a hedging program that we take a look at what our backlog -- our needs for our backlog is going forward and we will hedge that. We try to assume that there is a minimal impact, although we may not be able to guard against a sharp increase. But I think overall our program is pretty good at keeping our fuel cost in line with what we bid as fuel cost. Now, how much has fuel impacted jobs? Obviously everybody has the same fuel pricing, so everybody is putting that into their bid. But right now market pricing is certainly not giving any additional dollars to cover that cost.

You continue to see increased diesel prices right now?

Sure, yes. That is what is out in the market there. Every bid we look at we look at the current pricing of fuel.

If you can give me an idea that approximately what percentage of your revenue is diesel cost, of fuel costs largely?

We made reports in the Q. I'll look here. I don't know if we did it as a percent of total cost or if we did it as a percent of --. It's a fairly sizable amount but certainly not -- our labor and our other equipment costs are probably going to be a much higher percentage.

The last question I have is, your total liquidity right now is about $11 million.

Our current availability for borrowing, that's correct.

Right. I'm looking into 31st December '04, it was almost like 45 million. So this reduced liquidity situation, and you're talking about getting more -- does that prevent you from bidding more actively or bidding for more projects? Do you have to put more additional money before you get a job?

I'm not sure I understand. Could you, I'm sorry, rephrase that?

The question is in many service oriented projects, you need to give additional financing, additional bonding, before you get into the -- accept that job.

All of our bonds are provided separately. That comes from our surety agreement. That is what dictates our ability there. And the surety company has not said that we have any limitation

okay. You're comfortable with this level of liquidity right now to aggressively bid for projects?

Yes, we don't see any real spikes up because we're really talking about working capital here, that it seems to be sufficient for what we need currently, yes.

Thank you, thank you so much.

David Marsh with Friedman, Billings, Ramsey.

Thanks for taking my question. Deb, the swap contract obviously is working against you here. I have two questions with regard to it. One, what is your availability of terminating the swap agreement and what would the cost of that be? And two, when would you actually have a cash flow event related to the settlement of the swap contract?

We have a cash flow event every six months, just around the date when we pay our interest. To date it has been cash positive for us. Last year we took in $500,000 of cash related to the swap. Where it is really a negative for us is because we have to -- it's not a hedge treatment. There is no hedge accounting treatment here. So we have to market to market every quarter and that's where this negative impact is because obviously you look out over the, I think it's a remaining four-year time period. Obviously the expectations are for higher interest rates and this is the present value of that, which I guess would be an estimate of what it would cost to get out of. But right now it's cash positive and it will be cash positive again here in June. So it's --

Not sure I necessarily follow what your swap rate is. Is there any more detail you can provide on that?

Our swap rate right now is lower than our coupon rate.

Are you able to provide any more detail on that though, like what it is? Is it LIBOR plus 200, 300?

It's on 50 million and we got 500,000 of cash last year, so that gives you an estimate of where it was sitting.

Okay. The other thing, I guess going back to what Suarez (ph) was asking about with regard to the diesel. I guess you disclosed in your K that a $0.10 move in diesel prices could have as much as a $900,000 impact. As I read it I thought on EBITDA -- and that included the hedging activities to date when you had filed the K. Are you continuing to hedge at these prices or are you letting it float more? Can you tell us a little bit about how the hedging will play itself out over the course of the remainder of this year?

Well, when we bid a project we put current pricing into that project. So fuel price, whatever is the current pricing for fuel, I mean that's what we're expecting to have to spend on this project. And then once the project is in backlog we take a look on a periodic basis to our needs for fuel in backlog and we will hedge that. Hedge rates, right now future rates are very close to spot rates right now. In fact, most often future rates are lower, sometimes a lot lower, but right now they are pretty close. And so we're pretty much locking in the cost that we have estimated for those jobs. So it's okay -- I mean if it's $2.00 a gallon or whatever, that is what we hedge. So that is what we end up expensing to our contracts.

Can you tell us what the quarterly obligations are with regard to the operating leases on the equipment? Does it play out that way or is it based on utilization in terms of what runs through the P&L on the equipment that you the lease?

The equipment that we lease, we have an annual of rental expense and that does flow through our P&L on an annual basis. That is, when I was talking and trying to give this little lesson about contract margins versus growth margins, obviously we have a certain utilization for the equipment and a certain amount of that would be allocated to contracts. But any portion that doesn't get allocated is part of that unallocated, but it does get expensed for the year. So in a low utilization year, as I was saying, we still have all the expense related to the operating leases. It still flows all the way through and just didn't get allocated up to contract cost.

Right. I guess from our perspective, is there a quarterly number that we could think about in terms of what you're quarterly operating lease payments would be? Is it a straight line number?

Our annual lease payments for 2005 are 15 million (ph) (technical difficulty). They actually go down each year thereafter. It is even. We expense it evenly over the four quarters.

Right, that is helpful. Thank you very much.

Jeremy Hedburg (ph) with Varde (ph) Partners.

You mentioned that you have very good relations right now with surety and the banks. Have you talked at all recently with your equity sponsors about putting more money in?

We talk with our equity sponsors on a very continuing basis. We have quarterly Board calls. But we have more recent conversations with them as well. They are very supportive and I have to say, we've had no discussions to ask them to put money in because I don't think it is necessary. So, no, we haven't had that conversation.

You may have covered this earlier, I apologize, but do you expect the legal expenses to continue for a little while here?

You know it is really difficult to say. I mean our lawyers are very careful about what information we give out and what I have given in the presentation is really all that they allow me to talk about.

Understood. I think everything else has been answered. Thank you.

Clark Orsky with KDP Asset Management.

Thanks. I don't know if you disclosed this, but I think you said that the Maintenance expense in 1Q was 7.9 million.

(multiple speakers) first part, that's correct.

What was it for the same period last year? Do you have it?

5.1 for the first quarter of 2004.

You also mentioned something about sale leasebacks, I didn't catch the number that you think would sort of be generated from revenues from that?

I'm sorry, what was the question?

Cash from sale leasebacks in '05 -- I didn't.

We are doing a sale leaseback on this Rock Barge here in the next week or two and that will be 4.5 million of cash in.

Okay. The first quarter had 600,000 of cost related to that.

That is correct.

So there will be no further costs for that?

Not of any consequence, that is right. That was pretty much the rest of the expenditure.

Is the CapEx spending for the balance of '05 fairly evenly spread?

That I can't say. I think actually we were a little bit higher in the first quarter, although we had the 600,000. Again, that all depends upon what we are doing and when those particular vessels are available to do whatever work we are doing. So, no, it's hard to say on that one whether it's even or not. Just like the Maintenance expense. May I make a point that if you look at the spending for the first quarter of '04 for 5 million, but we had a huge amount of utilization that quarter too. So I think you'll see a lot of our spending got done later in the year.

I guess just in general, you still seem pretty confident about your EBITDA. I mean were you surprised by the weakness and results in the first quarter? Did it pretty much match --?

We had expectations that the first quarter would still be low. That is why when we amended our credit agreement, we had asked for that lower level at the end of the first quarter. You know, we had a few things, as always, going both directions. Probably the biggest impact to us that was not expected was not being able to get going in New York. We lost four to six weeks of work in the first quarter there. That was probably the biggest negative.

Thank you.

Brett Young with RBC.

Good afternoon. Quick question. You're going to do the capital lease for 4.5 million this quarter.

Yes.

So net capital spending is 12.5, but total gross CapEx for the year is 17?

No, the number I gave you was gross spending. We expect to spend 13 million, irrespective of the 600,000 that we spent of the Rock Barge, and irrespective of the 4.5 million we will get on the sale leasebacks.

Great. Quick question on the pickup in New York, Wilmington and Miami, is that spread pretty evenly across the same quarter or did a lot of that activity pick up at the beginning of the second quarter or kind of in the middle?

Well the New York started at the end of the first quarter; Wilmington will be here, I don't know exactly when we'll get to work during the second quarter; Miami won't start until the end of the second quarter. And I think those are the three big ones.

Those are the main drivers, for I guess, an improvement in capital margin?

No, I mean there are the big jobs that will be going on. Obviously we have a number of other projects all going on as well. So, they are the easy ones to point to because they are the bigger projects.

And then in terms of the letters from the Corps in terms of funding issues, could you elaborate a little bit, what precipitated those?

Well, as I had indicated last year we had a couple of jobs which they actually postponed us starting work. This year we got to work or were about to start work on a couple of projects and they sent letters saying, just to let you know funding looks like it could be a problem. And then a week later, it turns out well they found more funding, and then after that they really have funding for the whole project. So it's a little bit difficult to understand, maybe something in their procedures now where they feel they have to cover themselves when there might be a funding issue. You know, we're not really sure. But so far what has happened is we have received a couple of letters cautioning about funding, yet they have not stopped or slowed down any of the work.

Okay, thank you very much.

Ted Bidwell (ph) with Loomis Sayles.

I was just trying to understand the industry outlook a little bit better for (technical difficulty).

Mr. Bidwell, your question please?

Hello, can you hear me?

Now we can hear you.

I was just trying to understand a little bit better the industry outlook for '05, I guess, and just wondering if you can give us some feel for the competitor increase in capacity by companies like Manson and Weeks because I know you have mentioned Manson has a big project coming on, or a big barge coming on. But can you quantify how much new capacity would come on in '05? I guess I'm trying to get to an understanding of why your competitors would be aggressively signing up all of this low margin business rate now? That is kind of what I'm trying to penetrate to a little bit.

I don't have an answer. First of all, as I said, we're surprised with the bidding that has happened here in the first quarter. It has been very aggressive, and very low to no margin as far as we can see. But as I said there was over 200 million of jobs bid. Not really understandable, I guess, from our point of view. But because we do have a good level of backlog we're not -- it doesn't seem reasonable to do that. And that is what we sort of indicated here, that we will continue to bid at more reasonable margins.

The pricing impact of the Manson new rig, is that industrywide or will that be just one segment of the margin?

It's a little more localized. It's more of a Maintenance dredge and more -- seems to be -- it's being built for the Mississippi River Gulf Outlet market, which is a very variable market, if I can say, because it really depends upon weather. It depends upon precipitation levels in the Midwest that feed into the Mississippi River, and then of course bring sediment down to the Outlet area which has to be dredged out. So the more rain and more precipitation, the more dredging there tends to be. The drier the year, the less. It's a variable market and it's not clear how cost competitive this particular vessel will be.

Could I just ask, also, on your relationship with the banks. If the improvement -- you need a fairly sizable amount of improvement to get from the current run rate to the kind of EBITDA that the covenants seem to demand even with add-backs. I'm just wondering, if you're having discussions with the banks and could characterize the comfort level of the banks with the current level of the revolver?

Well, we met with our banks in March, we get together. We had a site visit. Presented to them how we thought things looked. Again, we try to keep them very well informed as to what's going on here and what we think we can anticipate. So that has gone very well. We constantly sort of keep them in the loop as to whether or not we might think that we need some help from them or not. They were aware the first quarter was going to be very close, and so we had discussions just to keep them informed of that. And that seems to be where we are ere sitting right now. I don't think there is any, again -- you know, I think it's understood that it's an industry issue and we're doing the best we can to sort of navigate through this, if I can say.

On the liquidity front, are there any unencumbered assets that are unnecessary that you could see yourselves liquefying or selling?

No, and I don't think we need to do that. Again we look at the future of the market and the issue here is that there is a lot of demand, there is a lot of need for dredging. And we have seen it starting to come out here, so maybe -- some of the things it seems like with the funding is working through and they're starting to address this issue that there is this big need.

I don't think those needs are just going to go away, they're going to have to be done. So at this point, I don't even see why you would want to start -- if we were to sell a dredge here in the U.S., we are just going to have to compete against it. So, it doesn't seem to be a reasonable strategy at this point.

Okay, thanks.

Lionel Jovalt with Goldman Sachs.

Just a quick follow-up. Your cash position at the end of March was $0.4 million. I think you said you had $4 million borrowed against the revolver. Could you tell us where you are today in terms of cash and borrowings on the revolver?

Well we typically try and keep less than $1 million in cash since we are a net borrower. So that is very typical to be at that level. Our revolver today, to be honest I don't know. I didn't look at today's cash report.

Did it increase -- did you borrow?

We, over the period, I mean we do borrow and repay on a daily basis. So I wouldn't know whether we were up or down from there.

Okay, thank you very much.

Clark Orsky with KDP Asset Management.

You made a statement that you continue to bid on projects with better margins. I guess, if you could kind of put a little more detail on that. Is that foreign work or --?

Actually, I guess what I'm saying is that we bid all the same projects, we just put our bid in at, we think, a more rational margin level. You know, what we see our competitors bidding are costs -- are lower than our costs. When I say we're looking for -- we're bidding better margins, it means that all the bids that were going in has the margin on it. And that's why we're not winning those projects because there are bidding way below that number.

It's not that you think there is more opportunity for higher margin projects?

There should be when there is more work out there. Yes, this should go back to what is, I would call, a normal return here. These bids that are coming out now are way below what I would call normal.

Thanks.

Ms. Wensel, there are no further questions at this time. Please continue.

If there are no further questions, I thank you for joining our call. And I will expect to conduct our next call for our second-quarter results the week of July 25th. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference call. At this time you may all disconnect.