Great Lakes Dredge & Dock Corp (GLDD) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2005 Update, call moderated today by Ms. Deborah Wenzel. [Operator Instructions] Please be aware that today's call is being recorded, and to access a replay of today's conference call, you can do so by dialing 888 203 1112, and enter passcode 4455931. [Operator Instructions] I would now like to introduce you to your moderator, Ms. Wenzel. Ma'am, you may begin.

Thank you. Good morning. This is Deb Wenzel, CFO of Great Lakes, and welcome to our quarterly update call. The purpose of the conference call is provide you with a summary of Great Lakes' Third Quarter 2005 Financial Results, operating and bidding activities, market outlook, debt and liquidity levels, and some other relevant information. Following the presentation, as we said, you will be given an opportunity to ask any questions you 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 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 quarter overview, our revenue for the third quarter of 2005 increased to $119.7 million, compared to the third quarter, 2004 level of only $66.5 million, which was the lowest revenue quarter for the company in recent years. The 2004 revenue reflected the reduced level of utilization experienced by the company, due to the Army Corps of Engineers funding constraints, which led to a slowdown in the domestic dredging bid activity through the first half of 2004 and postponement of certain work in the company's backlog at that time. It appears that the funding issues at the Corps are being moderated, as the bidding activity has continued at a good pace for the third quarter of 2005. Therefore, the company's utilization improved significantly in the third quarter, as we performed on a couple of projects from backlog which had been previously postponed, as well as numerous projects that were subsequently added to backlog. Accordingly, the company's gross profit margin for the quarter ended September 30th, 2005, improved to 13.8% compared to 6.5% for the same quarter of 2004, as a result of the higher utilization relative to the level of fixed costs.

In the third quarter of 2005, we performed our annual test for impairment of intangible assets. As a result, we recorded a non-cash writedown in the value of goodwill and intangible assets related to the demolition reporting unit by $5.7 million, reflecting our best estimate of impairment at this time, due to revised future performance expectations for this segment. And I'll say a bit more about this a little later.

So for the third quarter of 2005, as a result of the improved utilization and margins, our EBITDA increased to $9.8 million, or $15.5 million, excluding this non-cash impairment right now, compared to $2.7 million for the third quarter of 2004, and $10.2 million for the second quarter of this year. This is in line with our expectations as we anticipate performing on more projects with solid margins.

Revenue and EBITDA for the nine months ended September 30 were $313 million and $25.3 million, or $31 million, excluding that third quarter non-cash impairment right now-- respectively. Which compared to $242.5 million and $23.1 million for the same 2004 period. The increase in 2005 year-to-date revenue and EBITDA was attributable primarily to the higher year-to-date utilization relative to 2004, since utilization had dropped down significantly in both the second and third quarters of 2004, as I'd mentioned.

I'd like to give a general overview of contracts contributing to the quarter within the context of the dredging markets we serve, and our demolition segment. Third quarter revenue for 2005 - we had $72 million of capital, including $16 million of foreign, we had $26 million of beach work, $18 million of maintenance, and $13 million of demolition for a total revenue of $119 million. This compares to our second quarter of 2005, where we had $41 million of capital, which included $10 million of foreign, $22 million of beach work, $18 million of maintenance, and $12 million of demolition, for a total of $93 million in revenue. And compared to the numbers for the third quarter of 2004, we're $40 million of capital, which had $9 million of foreign, $3 million of beach work, $14 million of maintenance, and $9 million of demolition, for a total $66 million in revenue.

Our capital dredging revenues for the quarter totaled $72 million, and was substantially generated by the following. We had continued work on the Miami Harbor deepening projecting, including some drilling and blasting with the drill boat ``Apache'' and dredging with the hydraulic dredge ``Texas.'' We continued work on our other deepening projects in New York, Wilmington, North Carolina, Oakland, California, and Columbia River, Oregon. Also, there was a completion of the Port Jersey Channel deepening project, which had been subcontracted to one of our competitors, and we had continuing work on the Durrat land development project in Bahrain, using our hydraulic dredge ``Carolina'' and another smaller hydraulic dredge.

The majority of our backlog continues to be represented by both domestic and foreign capital dredging work, and we expect to be working on a number of these projects over the remainder of the year, including a deepenings at Arthur Kill, New York, Wilmington, Oakland, and Miami domestically, as well as the large capital project in Durrat, Bahrain, internationally.

Our beach revenue in the third quarter totaled $26 million. Beach revenue continued to represent a greater proportion of our revenues in 2005, as compared to prior years, which is to be expected, given that beach work is comprised of 40% of the domestic bid market in recent quarters, which compares to only 15% of the market over the last three years. During the quarter, the company's beach revenues are substantially generated by three large projects in Florida - Broward, St. John's County, and the [Captina/Santa Bell] Island projects, which were added to backlog in this year. These projects will conclude in the fourth quarter. Beach nourishment work can be subject to wide variations in margin, given the inherent risks related to weather, and the need to work in offshore conditions in order to obtain sand from defined [bar] sites. Fortunately, we were able to obtain good margins on certain of the beach projects bid in the current year, and have incurred minimal project disruptions due to weather so far this year. We always anticipate a certain amount of weather downtime in our project estimates, since this is our risk. Therefore, there's always a potential upside or downside if the actual weather conditions are better or worse than historical norms.

Maintenance revenue in the third quarter totaled $8 million, which is down from recent quarters, but this typical when we have sufficient capital and beach work to occupy our equipment. The majority of the quarter's maintenance revenues relate to three rental projects along the Mississippi River, two of which are continuing into the fourth quarter, utilizing our smaller dredges.

On the demolition side, Nancy had another strong quarter, generating approximately $13 million in demolition revenue. The activity in the demolition sector has accelerated in recent months, and Nancy has continued to add a good volume of work, with improving margins, to its backlog. However, as mentioned previously, in connection with our annual intangible asset impairment analysis, in the third quarter, we did record a $5.7 million non-cash impairment writedown related to the demolition segment. At the time of our most recent sales transaction, in December, 2003, we had allocated a portion of the total goodwill to the demolition segment and had recognized an asset related to the intangible benefit inherent in certain customer relationships within the demolition business. Although Nancy is likely to achieve its 2005 forecast, and is projected to be cash flow positive going forward, we do not believe that we will achieve the future returns contemplated in our 2003 forecast when the goodwill was allocated. These downward revised projections for the demolition business are attributable to higher anticipated incentive pay for certain key members of the demolition business management, in order to maintain positive results. Additionally, when the original customer relationship intangible was established, it required estimation of future annual revenues attributable to certain key customers. Over the past two years, Nancy's revenues were generated by a greater variety of customers, rather than being as concerned as anticipated with these key customers. Therefore, we have revised our revenue expectations related to these particular customers, which resulted in a writedown of those intangible assets.

Now turning to our equipment and administrative spending, capital expenditures for the third quarter totaled $2.4 million, bringing our year-to-date total to $10.5 million. The quarter's spending included steel hull renewals for two of our Hopper dredges as well as spending on construction of a new barge for one of our boosters. These boosters provide additional pumping capacity, which is useful in many of the beach projects, which require sand to be pumped from bar sites far from shore. And we continue to target full-year 2005 capital spending of $13 million.

Our maintenance expenses in the third quarter totaled $8.5 million, bringing year-to-date spending $24.7 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. We now forecast our 2005 annual maintenance spending to be in the range of $28 million to $30 million, with the increased level being necessary to sustain the higher utilization levels in 2005.

The company's general and administrative expenses totaled $7.5 million for the quarter, ended September 30th, 2005, compared to $5.7 million for the same quarter of 2004, primarily as a result of increased incentive compensation driven by the improvement in our dredging segment performance, along with the additional incentive compensation required in our demolition segment, as I previously mentioned. As our dredging performance has improved in 2005, our incentive compensation had increased accordingly, from the reduced level in 2004 when our performance expectations had declined.

Our 2005 third quarter cash interest expense increased to $5.2 million, compared to $4.5 million of cash interest in the third quarter of 2004, as a result of higher underlying interest rates and increased spreads on the company's variable rate debt, as required by the credit agreement amendment, which was passed last year at this time. The 2005 third quarter total interest reflects a non-cash expense of $0.8 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 non-cash interest benefit of $1.5 million for the 2004 quarter on the same swap.

The company incurred a net loss of $3.7 million for the third quarter of 2005, which reflects the $5.7 million non-cash intangible asset writedown and increased incentive compensation, as discussed previously. This compares to a net loss of $4.6 million for the comparable 2004 fourth quarter. [inaudible] returning to debt and liquidity, this non-cash impairment writedown is excluded for our covenant calculation purposes per the terms of our various agreements, so we were in compliance with all financial covenants at September 30, 2005. At quarter end, our interest coverage was 2.2 and senior leverage was 1.77. Our total leverage ratio was waived through 2005 and replaced with a minimum EBITDA measure, with which we are also in compliance at September 30th, 2005.

As you may recall from our second quarter call, we obtained an amendment to our credit agreement to provide us with additional liquidity to address certain near-term working capital needs. The amendment increased the company's revolver borrowing availability by $5 million, with an offsetting decrease in the company's letter of credit capacity in the same amount. We have fortunately been able to keep our revolver borrowings below $8 million through the third quarter, and have therefore not need to make use of the additional revolver borrowing capacity, which will revert back to the pre-amendment level of $15 million on October 31st, 2005. We continue to experience some timing issues on our core collections, including our Tampa receivable, but we expect that our cash flows generated by operations, along with the $15 million level revolver capacity, to be sufficient to see us through the fourth quarter.

At September 30, 2005, we had outstanding performance letters of credit totaling $14.9 million, and no outstanding revolver borrowings.

I'll turn to some other matters -- there is still nothing new to communicate with respect to the federal subpoena matter at this time. As I continue to mention, we have provided the documents that have been requested by the Justice Department to this point, and seven of our company employees or former employees have now been interviewed or testified before the grand jury. As this matter remains unresolved, we are continuing to incur some legal costs, since our attorneys are still covering this matter.

In addition, I will mention here that a claim has been asserted against Great Lakes by a German construction company which is currently in liquidation, alleging that we, along with another Dutch company in 200, wrongfully withdrew from a consortium prior to the submission for a tender for a project to be performed in Germany. This company is seeking damages from their inability to bid on, or perform the work, in the amount of approximately EUR 21 million. Great Lakes has filed a petition with the German courts to seek dismissal of the claim for lack of factual and legal merit. A hearing is scheduled for mid-December. As indicated by our petition, we do not feel the claim has merit and that it will not have a material impact on our operations.

And, as I mentioned previously, we still anticipate that our competitor, Manson Dredging, will be commissioning a new hopper dredge in 2006. This dredge is over two times the size of our most recently constructed hopper dredge, the ``Liberty Island'' and is suited for the maintenance rental market, along the Mississippi Gulf outlet. We understand that this dredge is now likely to be commissioned around the second quarter of 2006. In addition, we recently learned that another competitor, [Weeks Marine], is constructing a large, clamshell bucket dredge, which we understand may be completed some time in mid-2006. This type of equipment is suited for harbor maintenance work.

We obviously continue to incur increased diesel fuel costs, consistent with the rest of the economy. As I mentioned on the last call, our projects are typically bid with fuel being estimated at current prices. Therefore, our current bids already take into account the increased pricing. Also, we do make use of fuel commodity forward contracts to reduce the impacts of changing fuel prices from the time of award to the time of performance on the company's domestic operations. Given that there's typically not a long time period between when the domestic work is bid and awarded, we believe this procedure has adequately enabled us to manage our fuel pricing risk.

Now we'll look at the third quarter bid market. In the third quarter, 2005, domestic bidding-- domestic dredging bid market, which represents work awarded during the period, totaled $202 million, bringing the year-to-date bid market to $571 million. So, with anticipated fourth quarter bidding, we expect that the full-year bid market is likely to achieve the average annual level over the last three years of approximately $690 million. The third quarter's activity included four capital dredging projects, including another phase of the New York Harbor deepening, [Ambrose Channel], which was won by Great Lakes for approximately $17 million, as well as the necks of the Port of Oakland deepenings, which was won by a competitor for approximately $11 million. The quarter also included a $20 million negotiated LNG project, which we were awarded, along with the Louisiana coastal restoration project, which was won by a competitor for approximately $16 million. This project in Louisiana is being administered by the National Oceanic and Atmospheric Administration, or NOAA, to reclaim portions of the Louisiana wetlands in an effort to control coastal erosion in the area. Now this project was bid prior to the recent hurricane, and therefore we anticipate that the project may be rebid, as plans for the post-hurricane restoration work are being rescoped.

The third quarter's bid market also included an award of four beach nourishment projects with a total value of $66 million. This brings year-to-date beach nourishment awards to $218 million, which is well in excess of typical annual averages of approximately $100 million. As I'd mentioned previously, much of the 2005 beach work has been funded by an emergency supplemental bill, passed in 2004, to pay for damage from the severe hurricane season experienced in 2004, particularly along the coast of Florida. Great Lakes won one of the beach projects awarded in the third quarter, a $14 million project to renourish [Captiva and Santa Bell] Islands in Florida. Additionally, Great Lakes will bid three additional beach projects in Florida, which had not been awarded at quarter end, so are not reflected in the September 30 backlog. These include a $20 million project in Collier County, a $9 million project for Jupiter Island, which is being funded by the Town of Jupiter, and a smaller project in Ocean Ridge Beach.

Our competitors continued to bid certain projects very aggressively during the third quarter, so the company's share of work awarded in this quarter totaled 31%, bring our year-to-date share to only 24%, which remains below our historical average annual market share of approximately 40%. We've continued to bid opportunities with more reasonable margins from the beginning of the year, so the work that we are taking on is at good margins. The competition has been bidding more aggressively, but we have seen some moderation in their aggressiveness in the third quarter, so we do believe that margins will recover in the industry, allowing us to capture our more typical market share. Although our domestic market share has declined to date in 2005, we have still been able to maintain a solid level of dredging backlog, which includes our foreign work.

Given the recent dynamics in the domestic market, we've been able to take advantage of the strong market in the Middle East and have temporarily deployed an additional hydraulic dredge to this region, which will be repatriated back to the U.S. once the domestic market warrants it.

As we- we had a number of questions in the last bond holder's call regarding our bidding process, so I thought I'd just take a moment here to comment a bit on the process we follow. As you know, substantially all our work is competitively bid. There's clearly an art to the bidding process, and we believe that we have the necessary information systems and management expertise to maximize the profitability in our bids. However, this process is much more challenging when there is reduced visibility and confidence in the behavior of the Corps in putting out work and the behavior of competitors in bidding for work in this environment. The bidding process is very dynamic. Each time a new project is bid, our estimating team evaluates a number of variables at that point in time. For instance, they consider what they know about the current location of competitors' assets and how long they are likely to be occupied, as well as our equipment capacity and the equipment mix that best fits with the project's scheduled and maximized profit potential, given the project specifications. They also consider how confident they are in subsequent bidding opportunities for our fleet and whether future opportunities may be more favorable than the project at hand. Given these factors, among others, they determine how aggressively to price the project, in light of the objectives of maximizing profitability and obtaining equipment utilization. So, as I've said during this year, we've seen work being won at extremely low pricing, and it was often our position to hold out, in order to achieve more rational pricing, rather than just putting wear and tear on our equipment for unprofitable work.

Now let's take a look at backlog. Despite the continued competitive bidding environment, we still have been able to obtain, as I said, a solid dredging backlog. Our dredging backlog at September 30, 2005, was $266.1 million, which compares to $294.9 million at June 30th, 2005, and $279 million at September 30, 2004. Our September 30, 2005, recorded backlog does not include $43 million of [low-bid] pending awards, including those three beach nourishment projects in Florida that I mentioned earlier, and other options pending on projects currently in backlog. These amounts will be reflected in backlog once awarded by the customer.

So to give you the numbers by dredging type, at September 30, 2005, we had domestic capital backlog of $132 million, foreign capital of $104 million, $22 million of beach, $8 million of maintenance, for a total dredging backlog of $266 million. Our demolition business had $19 million of backlog, for a total company of 285. Those numbers for June 30th, 2005, were $142 million of domestic capital, $116 million of foreign capital, $31 million of beach, $6 million of maintenance, for a total company backlog, dredging backlog, of 295. Adding Nancy, our demolition backlog of 17, for a total company backlog of 312. And the comparable numbers for September 30th, 2004 - we had $207 million of domestic capital, $15 million of foreign capital, $24 million of beach, $33 million of maintenance, for a total dredging backlog of $279 million. We had $11 million of demolition backlog, for a total company backlog of 290.

Our demolition services backlog has improved to $19 million, which compares to $16.6 million at June 30, and $11 million at September 30, 2004. Opportunities in the demolition sector continue to develop, and in the third quarter Nancy added an $8 million project for the demolition and abatement of a former state hospital, along with a number of its usual mix of small size projects.

Our market outlook - the Corps 2006 fiscal year budget has not been passed, and the Corps, along with other government agencies, is currently operating under a continuing resolution, which allows them to operate into fiscal year 2006 at fiscal year 2005 levels for authorized projects. We do believe this creating some confusion as to which projects the Corps can fund in the near-term, although the Corps has operated under continuing resolutions in the past, so we're hopeful that they shouldn't significantly impact funding or scheduled bidding activity.

We understand that the fiscal 2006 budget is expected to ultimately be passed at a level slightly increased over the prior year appropriation, so this bodes well for 2006. However, the real unknown at this point with respect to 2006 is where the funds will come from for the emergency work being performed along the Louisiana coast and whether there could be some shifting of monies from other Corps projects in the near term to address this work.

The federal government has passed two multi-billion dollar special appropriation bills to address the clean-up and reconstruction efforts along the Gulf Coast, due the destruction from Hurricanes Katrina and Rita. Approximately $450 million relates to Corps work, much of which will go towards restoring the levee system, so it will not directly impact the dredging market. However, we along with five other competitors has submitted what's called IDIQs, or indefinite quantity pre-qualifications, whereby we are pre-qualified to perform work under 19 identified potential projects. These projects may be up for bid on short notice, if necessary, to perform maintenance dredging along various channels in the affected Gulf Coast regions. This work will be funded by this special appropriation and would presumably additive to the Corps annual O&M budget. Aside from this work, we think the most likely outcome from the hurricane would be increased momentum to move forward with the Louisiana coastal restoration plan, which has been on the radar for a number of years now. This is the long-range plan to restore the coastal wetlands of Louisiana and could generate incremental work valued at up to $1 billion for the dredging industry over a five to ten-year period. The Water Resources Development Act, or WRDA legislation, which includes authorization of the Corps' civil works program, is still not a high priority of the administration at this point, and appears unlikely to pass in 2005. In our opinion, this is not likely to have any near-term impact to the industry, as projects that have been authorized by previous WRDA bills continued to be bid. We understand, though, that the current form of WRDA does include authorization for the Louisiana costal area study, which covers the project's anticipated [bottom line] restoration plan. We also understand that there is against good chance that this authorization request may be moved out of WRDA, to increase the likelihood that it will be passed here in the near future. And then if the authorization for the Louisiana coastal work is removed, we believe it could be advantageous for the dredging industry if WRDA is not passed currently, since there are some additional deepening projects, such as the 50-foot Miami work, and that work at Port Everglades, that could still be added if the passage is further delayed, rather than having to wait for a future bill or authorization bill.

We also continue to follow a number of the currently authorized deep port projects. There are a number of them valued in excess of $100 million that are expected to bid over the next few months. These include the next phases of the Columbia River, Oregon deepening project, and the Oakland, California, 50-foot deepening project. There is the initial phase of the Port Jersey 50-foot deepening, and two other phases of the New York harbor 50-foot deepening, along with a Jacksonville Harbor Florida deepening and potentially two port expansion projects in the Tampa area.

Clearly the 2005 beach nourishment market has benefited from the supplemental federal funding passed in 2004. However, there continues to be funding pressures for beach re-nourishment work going forward, as the current administration does not support federal funding for this work. Current schedules indicate beach nourishment projects valued at approximately $100 million for bidding through mid 2006. A number of these projects are sponsored by localities in Florida that have secured the funding for their projects through bond issues and taxes, as they recognize the cost-benefit to performing the work. As more and more municipalities devise means to fund their individual projects, this will help to sustain the beach market as historical levels, even if the federal government reduces its commitment to beach nourishment.

We also continue to monitor a number of opportunities for dredging services related to the development of LNG terminals, particularly along the Gulf Coast of Texas. We have outstanding proposals for over $50 million in dredging services solicited by private customers, typically large energy companies. Additionally, we added a $20 million LNG project in Freeport, Texas, to our backlog in the third quarter, and we expect to begin the dredging portion of this project in 2006. As we said in the past, with the higher prices of domestically produced natural gas and the increased cost competitiveness of importing LNG, we expect to see more of this work materialize in the near future.

And finally, looking at our foreign markets. As I mentioned, we now have two large hydraulic dredges working in Bahrain, on the Durrat development project, which will provide good work for these vessels over the next 18 to 24 months. Also, I mentioned previously, in last quarter, we are minority partner in a consortium that's performing a large land reclamation project to expand the airport in Dohat, Qatar, although we are providing only a small portion of the work overall. And we continue to follow a number of large land reclamation projects in the Middle East, particularly in Qatar, Saudi Arabia, and Bahrain, countries that generally welcome relationships with U.S. contractors. Given the volume of work being generated in the region, there appear to be opportunities for better margins than typically achieved in foreign work and currently better than the incremental margins at which we could employ these assets in the domestic market.

Given the [inaudible] of equipment we have committed to the region, we are hopeful to take on some additional work to occupy our equipment upon completion of the Durrat project, and we also continue to evaluate if there are opportunities to employ additional equipment overseas, if the contracts can cover the mobilization expense and return higher margins than we can obtain in the U.S.

Our outlook at this point - as we had forecasted, we did see utilization and earnings continue to improve through the third quarter, we were able to achieve our financial targets. While the bidding activity has been robust through the first nine months of the year, pricing has remained competitive. However, given our current backlog, we have been able to maintain a rational bidding strategy and have taken on new work with good margins compared to those on projects won in 2004, when we, along with others in the industry, had excess capacity. We continue to maintain a solid level of backlog with our recent foreign and domestic awards. We are in the midst of performing a deepening project in Arthur Kill, New York, Miami Harbor, Florida, Wilmington, North Carolina, and Columbia River, Oregon, all of which are progressing well. Despite this, the core fiscal year 2006 budget has not been adopted, so it is unclear how bids, along with the resource requirements necessitated by the reconstruction effort along the Louisiana coast, will impact funding for the Corps' dredging activities in the near term. We continue to see projects being scheduled and bid, so we are hopeful that the impact, if any, will be minimal. Assuming this is the case and we are not significantly impacted by inclement weather in the fourth quarter, we are well-positioned to achieve our 2005 budget EBITDA of $38 million to $40 million, and those numbers do not give effect to the impairment charge that we took here in the fourth quarter. At this level of EBITDA, we still expect to generate sufficient cash flow to meet our current annual debt service requirements of approximately $22 million and to fund our necessary capital expenditures.

So this concludes the formal portion of my update. I would like to note that we will provide a summary of the operating and backlog information provided herein, as well as the reconciliation of our EBITDA, which is a non-GAAP measure, to net income, which is a GAAP measure, in the financial section of our company website at gldd.com. At this point, I'd like to open up the call for questions you might have.

[Operator Instructions] [Sarah Thompson], Lehman Brothers.

Hi, good morning. Couple of questions for you. One is, when you guys gave the $38 million to $40 million EBITDA estimate for the year, that does not add back the litigation expenses, correct?

It does not add back the litigation expenses. As a matter of fact, [inaudible] just pointed out to me that I made an error. We've always been saying $38 million to $42 million and I meant to say $38 million to $42 million.

OK, that was my other question. OK, so then we're looking at kind of a like a $7 million to $11 million EBITDA number for the fourth quarter?

Exactly.

OK. And is that obviously down from the third quarter. Is that more based on a lower revenue number, or do you see margins contracting?

No, I think it's the same work, type of work that we had in the third quarter, going into the fourth quarter. What I see is we're completing some projects that we will not have quite the utilization level we had in the third quarter, and then right now, we are getting affecting by weather, so I think there will be a little impact from that.

OK, OK. And then on the call, you had earlier said that there was-- you're continuing to [extract] timing issues with the Corps around the A/R collection. Can you just elaborate on that?

Well, you know, we started to experience this over the summer this year, our biggest one being [TFS], which we're still working through with them. You know, again, they're in the midst of a continuing resolution. It seems that they get-- it's a little difficult to understand how much they can fund or not fund, so we're just-- I don't see that the funding is not coming, but we just see some postponement in it, there's some late payment, and that seems to be continuing here, so I anticipate we'll probably see that through the end of the year.

But just remind me, this is stuff you've seen in prior years, right? That sometimes things slip in the fourth quarter from-- or the fourth fiscal quarter?

Well--

--in years or is this specific to this year?

No, I think it's specific to the times that they'd had to operate under a continuing resolution. You know, usually there's not an issue going between the end of the year into the next year. I just think they don't know here exactly what they can fund. I think it's just, too, a heightened awareness of-- given their new way that they're structured now and the funding being more centralized, I just think it's a little bit more confusing for them as to how and when they get their funding. That's why I think we'll continue to see this going forward. You know, two years ago, I don't think it's a problem that we saw, but starting last year, and certainly into this year, we're seeing more of it.

[inaudible] Friedman, Billings Ramsey.

There was recently some news about General Electric and the Hudson River clean-up. I assume there will be a lot of dredging coming out of that. Have you been in touch with General Electric, or- following that situation at all?

Oh, yeah- no, we have contact with them and certainly it's a huge coverage issue. It's not like what we do in the harbors, where we deepen and it takes down a good amount. This is a huge area-- a small amount over a huge area, but certainly something we can do, and if and when they actually put out work, you know, we hope to be part of that.

That would be classified more as a maintenance type of dredging activity?

Well, maintenance and kind of environmental. It's a bit different than the [inaudible] we have.

What would the margins be on something like that, if--

Yeah, it'd be hard to comment on that, because it's not clear what they will actually do. I mean, there are still arguments that it shouldn't be done, so you know, we're certainly giving it credence because we want to be there and do the work, but how soon any of that will actually happen, it's been a long-- it's been out there for some time.

OK. And it's probably too early to come up with an approximate size of the project, in terms of a dollar value of the project?

Oh, they've put out big numbers, and again, from our point of view, it just depends on what they really do. I mean, you're talking hundreds of thousands of dollars.

On your-- did you say $2.4 million in capital expenditures?

For the quarter? Yeah.

For the quarter. OK. And you know, going forward, into 2006, would you like to see your capex increase, or are you comfortable with where you're running at right now?

Well, I think we need to do the levels we are right now. The work requires upgrades to this equipment and then of course in the [inaudible] environment that we're in, we always have to do sort of these [hull] renewals and that, so I wouldn't see anything reduced from that. I don't think we have any immediate needs, but you know, we're looking at what's out there in the market, you know, whether- we would get a couple of competitors bringing on new equipment, and you know, we're looking at that, what makes us [inaudible] in that arena as well. But I think on a general spend for next year, we're looking at something to this year.

OK. And LNG terminals, you know, where is this terminal -- what is it, Freeport?

Uh-huh.

Are there any others that you're looking at right now? I know there's talk about others, but my understanding is they're pretty difficult to get through all the environment regulations and permits and all that good stuff?

Yeah, I agree. I think it is difficult and nobody wants an LNG port right outside their neighborhood.

Right. Are you seeing any progress elsewhere?

I think so, yeah. We've put out a couple of more proposals, and I think you know, I think once we kind of get one started here and there's sort of a model for doing it, it makes a lot of sense, so I think you will see more.

OK. And is there any way that you could quantify how much capacity, you know, the new hopper dredge that Manson is introducing, you know, how much annual capacity or dollar value of contracts that this could take away from the market?

Well, yes, it's been sort of a difficult question to answer. We haven't seen the actual dredge and you know, what it will do. It's a bigger dredge, but it's a different configuration, so they all kind of have different efficiencies to them. I mean, again, we think they're looking at the Mississippi Gulf outlet maintenance work, of which can be very variable in any particular year. The more-- you know, we've talked about this sort of precipitation issue, and the more precipitation we have, the more stuff that empties down the Mississippi, the more dredging there is, and in years where it's lighter, then there's less work there, so it's hard to say how much they could take of a particular market, because it of course depends on, year to year, how big that market is.

OK, all right. And then last question is on your existing backlog right now, and the low bids, pending award, how are the margins in that relative to where we were one or two quarters ago?

Well, I think the margins have improved from one or two quarters ago. I think we're getting back to margins that we would have seen at the beginning of '04.

OK, thank you very much.

[inaudible]

My question is about business opportunities after the Katrina hurricane? From your comments, I mean, it doesn't look to me that you already got some business from the hurricanes. What is [inaudible]

Well, what we have done, or what has been put out by the Corps is the sort of pre-qualification process. They're identified, I believe, it's 19 projects that potentially will be need to be done and need to be done on a quick basis, so we've pre-qualified in order to be able to perform this work, and that could come, you know, very quickly here, it could come out over the next six to 12 months. It's not really clear, because I think at this point, I don't think the Corps knows exactly what they need. And it's not an unusual industry, just to have emergency projects, to handle things in this manner is not untypical of how these projects come out [down there]. But as far as, you know, additional work that's come out what-- you know, the hurricane situation, I think really what we feel, anyway, is that there's now a heightened awareness of the need for this coastal restoration, which is- was big dollars, and it's been talked about it being big dollars for a long time, and it's probably, you know, the solution to cure what's going on down there, over a long-term period. So as we said, you know, it's in WRDA right now. I think they're going to pull it out of WRDA and get it passed with another bill and get that on the fast track, and you know, that would be work, I think, that would be additive to the industry. How quickly and at what volume, we're not sure at this point, but we think that's really what's going to come out of it.

You mentioned [inaudible] about adding a barge-- any news from other competitors [inaudible] five other competitors that [inaudible] ? Anybody else picking up anything?

Not that we're aware of, no. We only know of these two dredges.

Right. And the [high inventory], are you- are these contracts only [inaudible] contracts or [inaudible]

I'm sorry?

I'm talking about--

I'm sorry, yeah, each project, I mean, that's-- when you bid your project, you're bidding at what you think the current, or the pricing of fuel will be over that time period, so yeah, you price in the change in fuel price, when you bid.

The last question -- last question is your capital expenditures are running quite below that of the [inaudible] and you are not giving any guidance on the capex-- [inaudible] anything less than $20 million-- there's a lot of business coming out and your competitors keep investing in the capital assets. Would you [inaudible] your capex?

I'm not sure I heard the last part of the question, but our depreciation obviously is from the purchase of the company went up significantly because we wrote our assets up to fair market value, so there is that sort of issue coming through here. But I think- I sort of answered the capital spending question, I think, as being adequate to what is necessary to maintain our fleet and in fact, improve our fleet to do the work that's coming out in the market. Did that answer your question or was there something more?

Yeah, no, that's kind of--

OK.

Thank you.

Our next question comes from Larry Taylor of Credit Suisse First Boston. Your line is open.

A number of questions have been answered. I just wanted to try and follow-up -- I know you probably can't give us a specific answer, but you know, when you looked at all of the activity in the Gulf region, I mean, there's a lot of noise in terms of potential work, potential diversion of funds, a lot of things going on. As you look at that region and your operating guys talk to the Corps, what do you think the timeframe is for the Corps coming up with a plan that will provide, you know, some basis to be able to sort out, you know, how much work may come out of that, or whether some of these projects like the Louisiana restoration will be-- will move forward fast?

Well, that's the talk that we're hearing. I mean, you know, obviously the Corps has been given some money through these special appropriations, and they're ready to do dredging on an emergency basis, or you know on a sort of maintenance basis, to keep things going, so they have that money. And then I think there is movement. You know, we've seen some discussion, and all that we hear is that, you know, we want to move forward on this coastal restoration work, so that is what we're hearing from the Corps in the district, that's what we're hearing from the Corps in Washington.

So when you think about the potential scope of that, obviously no one knows what the exact scope would be, but if you look at the plans that had been out there and how that might be expanded, are we talking about something that's just another major capital project, or something that may be sort of a real monster in terms of the amount of work to be done?

Well, I think it's big, and that's why it's taken-- some would argue maybe too long to get underway. You know, if it's something on the order of maybe what they were attempting to do in the Everglades in Florida and are still pushing to do. It's a big project, but it's been identified 10 years ago that this needed to be done, there were special taxes related to the oil industry in order to fund this, and, you know, Louisiana has put forth a referendum in order to fund their portion of it, so it's big, but I think it's real.

Very good, thank you.

Our next question comes from Oliver Cortlett [sp] from [inaudible] .

Good morning. A couple of questions. You mentioned at the last conference call that the Brunswick Phase II site might be restarted in the fourth quarter. Is that-- do you have any update on that?

Yes, the latest that we've heard is that we will start there-- we have a subcontractor, I think, that will be beginning our work and we will be in there early-- or late first quarter, early second quarter, to start that work.

OK, thanks. Now following up on the question about contract margins, you said that the margins and the backlog have been improving, but do you think in the fourth quarter, are you saying that they'll be improved over the third quarter level, or have we sort of reached a level at this point?

Well, I think when we look at what we've bid over this year, I mean, I think all during the year, we've been achieving levels that are satisfactory for us, but what has happened is we’ve not picked up our market share, so no, I think fourth quarter will continue to, you know, bid at the margins that we feel we need and what we're hopeful is that will translate into more of the market for us.

Right. But the actual gross margin in the fourth quarter, you're saying utilization is going to be-- is maybe going to be down a little bit in the fourth quarter? Does that imply that your gross margin might actually be down a little versus the third quarter level?

I think that very well could be, yes.

OK, thanks. Now, a couple of other questions. Following up on the capex question, is there a covenant on your capex for next year?

Yeah, there is a limit on our capital spending and I don't know what that is, but it's more than $13 million.

OK. Of the G&A, where you had some incentive compensation, is that sort of an accrual that will continue through this year, or was that a one-time quarter event?

No, it will be an accrual in the fourth quarter as well [inaudible] upon our annual [inaudible]

OK. And so assuming that things improve generally through fourth quarter and through next year, we can take that as a kind of a baseline level, going forward?

Yes.

OK, good. Finally, I think there's a math question here that I couldn't figure out -- you said operating income was $2.7 million for the quarter, but interest expense of 6.4, and taxes of 0.9. I think that's a net loss of 4.6. I just-- can you help me out, versus the 3.7 that you said.

Are you looking at the press release numbers?

Yeah.

I don't have it in front of me. We did provide all this on our website--

Right, yeah. I can get back to you on that, if you don't have it right now.

Yeah, I-- OK, you were saying the net loss is 3.7?

You said the net loss is 3.7, but when you take the 2.7 of operating income--

Uh-huh, right--

And subtract 6.4 of interest expense and another 0.9 of taxes--

The 0.9 is a benefit.

It is a benefit? But that still doesn't work, does it?

I'm sorry, just let me point out, it is a tax expense, 0.9 of tax expense, and then we do have earnings in the equity-- earnings of our joint venture [inaudible] operations of 0.9.

Oh, OK.

That's probably your difference.

OK, that's it, then.

OK.

That's all I have. Thank you very much.

Sure.

Our next question comes from Ed [inaudible]

Hi, good morning, Deb. A question regarding what's going on with Hurricane Katrina and stuff I've picked up from the Army Corps. They have, as you mentioned, $450 of appropriations, $200 million of that has been allocated to the operating and maintenance budget. And they indicate that they have, I think it's 190 of that 200 million that's been allocated to projects, and they've expensed $130 million up to this point. I'm wondering specifically if you know that was dredging work, and if that work has been released, you know, for poor performance at this point in time, or does that represent a future opportunity for you and the industry?

No, we don't-- I don't know, you know, if that is earmarked for dredging or not. I mean, obviously they have-- as I was indicating, a big responsibility for a lot of the levee work, and that's all under that same budget, so no, I don't know.

OK. The other question is, regarding your financial covenants with the banks, will you have to go bank for additional waivers once the amendments are-- you know, over with at this point in time? Are we going to have to go back in the first quarter?

No, we don't anticipate at this point that we will be going back to the banks, but that is something that we'll look at here.

All right, thanks.

Our next question comes from [inaudible]

My questions have been answered. Thank you.

Thank you. There are no further questions at this time.

OK, well, thank you for joining our third quarter update, and I will be conducting our next call for our 2005 year-end results the week of January 30th. Thank you. Bye-bye.

[Operator Instructions]