Great Lakes Dredge & Dock Corp (GLDD) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Great Lakes Dredge & Dock Corporation earnings conference call. My name is Ben and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Katie Hayes, Treasurer and Director of Investor Relations. Please proceed.

Good morning. This is Katie Hayes, and I welcome you to our quarterly conference call. Jon Berger, our Chief Executive Officer; and Bill Steckel, our Chief Financial Officer, will discuss the operational and financial results for the quarter and year ended December 31, 2012, as well as other items that were announced in yesterday's earnings release.

Following their comments, there will be an opportunity for questions. During this call, we'll make certain forward-looking statements to help you understand our business. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in our filings with the SEC, including our 2011 Form 10-K and subsequent filings, including the 8-K we filed yesterday.

During this call, we will also refer to certain non-GAAP financial measures, including adjusted EBITDA, which are explained in the net income to adjusted EBITDA reconciliation attached to our earnings release, and posted on our Investor Relations website, along with certain other operating data.

I would first like to turn the call over to Jon Berger, our CEO.

Thank you, Katie. Prior to having Bill go over our financial results for the quarter and the year, I would like to say a few things to everyone. While the information reported on yesterday is quite disappointing to me, it does not change my fundamental optimism in our business. Our backlog is strong. We have excellent margin in backlog. And we see strong opportunities for us in all segments.

I clearly note everyone's frustration over our inability to provide financial results until now, and our radio silence in the last few weeks. This is not how we have worked with you in the past, and not how we intend to, going forward. I hope you'll understand our need for being silent until now.

We obviously had meaningful revenue recognition issues at our demolition segment. We believe a significant portion will be recognized in the future. Our accounting policies and documentation procedures have been reviewed, and we do not intend to have these compliance issues going forward.

We have missed our adjusted EBITDA guidance that we provided in November by approximately $24 million. The majority of this shortfall is from the demolition segment, where revenue recognized related to certain pending change orders was inconsistent with Company policy.

The total impact of this was approximately $13.5 million. In addition to these adjustments, demolition was impacted by $2 million of cost overruns on other projects. The dredging segment had also expected to sell an underutilized dredge located in the Middle East prior to year-end. The buyer experienced funding delays; however, we currently expect to realize over $4 million on the gain of the sale of the dredge in 2013.

The total of these items approximate $21 million. The remaining shortfall was due to timing shifts in certain dredging projects, and margin deterioration on certain river and lakes projects.

We will be focusing on improving our controls at our demolition subsidiary and throughout the Company. The demolition remediation segment is a key part of our growth strategy. And we are committed to having the right personnel and tools in place to effectively grow the segment, while maintaining adequate operational and financial controls.

I will now turn our call over to Bill to discuss the fourth-quarter and year-end results. And then I'll come back to address the market and answer your questions.

Thank you, Jon. Revenues in the fourth quarter were $206.3 million, up from $158.6 million in the fourth quarter of 2011. Revenue increased in domestic maintenance and capital dredging, as well as foreign dredging. These increases were offset by declines in both coastal protection and demolition. Coastal protection was previously referred to as beach nourishment. Coastal protection is a more accurate description of this important dredging work that protects valuable infrastructure along our coastlines.

Our dredging segment had a record quarter for revenue. We worked safely and efficiently on 18 projects throughout the quarter. There was some shift in a couple of projects from the fourth quarter of 2012 to the first quarter of 2013. For the year, the dredging segment had $587 million in revenue, and $33 million in operating income.

The demolition business was negatively impacted by pending change orders at projects where our accounting policy did not allow revenue to be recognized. We expect much of this revenue to be recognized in future periods. Total gross margin was compressed in the fourth-quarter and full-year 2012 due to the pending change order issue in the demolition segment. For the full year, the dredging segment experienced weather impacts and lower dredge realizations that reduced gross margins.

However, fourth-quarter margin as a percent of revenue in the dredging segment was nearly double the prior-year quarter, reflecting the strong revenue and operating performance. The full-year 2012 domestic dredging bid market was $939 million. Our share of the market was as follows -- 52% or $108 million of the coastal protection projects awarded; 35% or $84 million of the capital projects awarded; 29% or $115 million of the maintenance projects awarded; and 45% or $42 million of the rivers and lakes projects awarded.

The coastal protection market was atypically high in 2011, with the highest volume of beach work ever awarded. 2012 was the third-highest market in the last 10 years. Also, Great Lakes was the low bidder in the fourth quarter on a $68 million deepening in the port of New York/New Jersey. The project has since been fully awarded.

Great Lakes backlog remains a high level. The dredging backlog and pending domestic awards at December 31 reached $471 million, which compares favorably to the $355 million at December 31, 2011. The Company's contracted dredging backlog, without pending domestic awards, was $389 million at December 31, 2012, compared to $319 million at December 31, 2011.

Demolition segment backlog was $60 million at December 31, 2012, including $7.7 million from our Terra Contracting acquisition; and $52 million at December 31, 2011. Demolition backlog includes a $23 million brownfield development project in New Jersey, and an $11 million demolition project in Columbus, Ohio.

We maintained our strategic investment in working capital for key projects, and balanced these investments with our overall objective of maximizing shareholder value, with the decrease in cash in the quarter resulting primarily from our $15 million special dividend.

As previously disclosed, we have committed substantial working capital to large projects this year, with the most significant investments being Wheatstone and the Scofield Island coastal restoration project in Louisiana. Across these two projects, we have invested nearly $60 million. We expect to recapture this working capital throughout 2013. We have a strong focus going forward on working capital management and generating positive cash flow.

As we noted in our press release, as a result of the matters described in the release and earlier noted, we did not meet one of our financial covenants in our senior revolving credit facility and our international letter of credit facility at December 31, 2012. Both the credit agreement and the international letter of credit facility require us to maintain a minimum fixed charge coverage ratio of 1.25 to 1. Our fixed charge coverage ratio as of December 31 was 1.12, resulting in an event of default under the credit agreement and international letter of credit facility, and a potential default due to a change of condition under our bonding agreement.

We have received full support from Wells Fargo -- our administrative agent and lead bank -- for a waiver. And while there can be no guarantees, we expect to receive all necessary waivers from our banks and our surety in the coming days. And we anticipate being in full compliance with all financial covenants in the first quarter of 2013.

Those are some summary comments relating to operations and finance. I'd now like to turn the call back over to Jon Berger, who is going to discuss some of our initiatives that we referred to, as well as strategic planning and growth considerations for moving forward.

Thank you, Bill. I'd like to again reiterate my disappointment in the events that have transpired around our year-end financials. However, the fundamentals of the Company have not changed, and we are a strong Company. As Bill said, our dredging division had its second-highest revenue ever, with $587 million; and operating income for the year of $33 million.

Now let me speak to the markets. The dredging market has many opportunities on the horizon. Let's first talk about Sandy funding. We've been working closely with the Corps during and after the storm, and are pleased that coastal projects that had been built, and maintained as designed, performed well during the storm. We actually performed four contracts; two in New York and two in New Jersey, in the immediate aftermath, based on contracts that we had won before the storm, and performed one emergency contract immediately after the storm at Mauritius.

The Sandy supplemental bill provides unprecedented amounts of funding for coastal protection projects, both for immediate restorations and also for long-term investment in coastal protection. We expect these to provide a consistent marketplace for dredging in the affected areas for years to come. Although the Corps was quick to prepare their Sandy recovery projects, and GLDD was well-positioned to respond to the surge in workload, the funding, although approved, the slow in coming.

However, we are starting to see projects get funding. And requests for bids are hitting the street now, so we expect a robust coastal market for the rest of the year. The Sandy supplemental provides funding for coastal restoration projects in Florida and the Northeast, and operations and maintenance dredging for federal channels from Florida to the Northeast, impacted by Sandy. This should relieve pressure on the Corps' budgets for these accounts and allow other projects elsewhere around the country to benefit as well. Overall, the Corps received $1 billion for immediate coastal restoration work, and another $3.5 billion for the next phase that will include long-range planning.

Let's turn to the federal budget. We expect the President's budget to be presented April 8. It is more than two months after it is due, as you well know. But we have not seen the details, but indications are the Corps' navigation budget will fare well, as it has in comparison to other federal programs. Impacts of the sequester will be felt by the Corps as well as all federal agencies, and it's expected to be implemented through a significant amount of employee furloughs.

As with all the Corps, we expect them to adapt to the changes and complete their mission. We don't expect many short-term impacts from our ongoing contracts. And while all future projects will be affected by the 5% cut in Corps funding, we expect the larger projects that we typically perform to still be fully funded through reprogramming and more efficient contracting.

Sandy projects will be hit by the sequester as well. But since the supplemental drastically increased anything that coastal protection has seen historically, we don't expect the sequester to have a short-term impact on Sandy projects. Perhaps a bigger risk is the continuing resolution, since debt ceilings and fiscal discussions may impact the long-term investment in infrastructure projects.

On the good side, we are seeing more states getting into the funding game, with New Jersey looking to increase its beachfront; Texas looking to start a port fund; and other states like North Carolina and Florida funding core projects out of their own budgets. In DC, the Harbor Maintenance Trust Fund legislation was reissued in both the House and Senate this year, and we already have 93 co-sponsors in the House and 33 in the Senate.

We understand from Senator Vitter, this week, that the Harbor Maintenance Trust Fund will be part of the draft WRDA Senate bill coming out; and with language that we understand will be close to that what we proposed. There is much talk about WRDA this year with Chairman Shuster in the House, really pushing it hard as his first priority. Obviously we're not in the predicting business for anything in Washington, so we can offer no guidance as to whether it gets passed this session.

However, ports and waterways are very much in the infrastructure discussion this year. And Harbor Maintenance Trust Fund reform is front and center in those discussions. One place where we have been very satisfied is the progress in the Administration's attention to these issues, from the President's attention to ports in his We Can't Wait initiative; and his mention of ports in his State of the Union speech; the National Export Initiative's attention to domestic infrastructure, including ports. We are excited that we are turning a corner in the importance of dredging to the national economy in the discussion.

Gulf Coast funding -- obviously there is funding coming from the settlements with certain participants in the Deepwater Horizon spill at both the civil and criminal level. The first of two BP trials entered their third week. We'll have to wait and see the results of these trials. On the positive side on the Gulf, our Scofield Island project was an incredible success from an engineering standpoint. We proved we could pump sand long distances. Our sense is, now, that we have an opening with a lot of engineering possibilities for handling sediment that will help push future project design.

Internationally, we are diversifying our base of business with our work in Australia and more work in Brazil. We are cautiously optimistic about the prospects in the Middle East and we continue to look for opportunities for our equipment.

With regard to our demolition remediation, we will work hard to renew your trust in this segment. It is a critical part of our growth strategy. The acquisition of Terra Contracting broadens our remediation capabilities, and also brings a strong market presence outside the Northeast, where we have traditionally focused.

The successful partnership of our broadened demolition remediation capabilities with our dredging expertise is an important component of our Company's growth. We have been executing our strategy to that move higher-value-added projects, such as the large brownfield project Bill discussed that we will be [excavating] over the next year and a half, and a large decommissioning project in Ohio.

We are moving along well in our integration with Terra -- rivers and lakes and demolition, and the combination has been extremely well received in the marketplace. Our combined team was recently added as a qualified supplier to two major utilities to provide demolition and remediation services.

With that, I'd like to open it for questions.

(Operator Instructions). Jon Tanwanteng, CJS Securities.

Hi, good morning. It's actually Arnie Ursaner, backing up Jon. Good morning, Jon Berger. I want to try to focus on this whole issue of the change orders. Obviously, change orders occur in any construction-related, project-related business. They occur frequently. I can't imagine that it began this quarter. So I guess what we're trying to get a better feel for is, what exactly did change on a Company-specific basis? When did it start to change? And then the follow-up on that is, to the extent you had an issue in Q2 on a change order. And it's eight months later and you haven't been paid. Is there a different issue involved here?

Yes, I'll start, and then, Bill, please back me up. Arnie, the biggest component of the two demolition projects are to large projects in the New York region. One of them started out as a $7 million project and is over $22 million now, so the scope changed dramatically. And in that project, we are a subcontract to a prime who is contracted with a state agency. And as is the case in dealing with a prime working for the state, the prime won't pay you until he gets paid.

We obviously preformed all the work; we performed that work well. And it's a matter of having to work through -- and is typically the case, they are going to fight you until they get their money. Otherwise it comes out of their pockets, so you get sandwiched.

The second project is also a New York project where we are directly engaged with one of the agencies in New York City. And one of our subcontractors had a dispute with the agency, and we've been stuck in the middle. We believe it will be resolved to everybody's satisfaction. But until it is resolved, we just cannot recognize the revenue.

Again, I think what we are all trying to get a better feel for, though, is you've been a subcontractor before, and not been paid before. Why, all of a sudden, did you uncover that you had incorrect accounting at this point, versus two years ago or three years ago?

Arnie, these projects were significantly more complex than projects that we've worked on in the past. And actually, from the owner's perspective, were much more complex in terms of the contract changes. And, really, that's the significant issue that was involved here. Our accounting policy is extremely conservative in terms of -- if you look at the range of policies that you can adopt under GAAP, in that -- if we don't have fully agreed and fully approved change orders, we don't recognize revenue, but we recognize all the cost. And, clearly, we had a breakdown in terms of our control of when those revenues were recognized. And we've acknowledged that, and we're going to fix that going forward.

And the last thing, Arnie, is part of the strategy in our demolition business is to move to more complex, highly engineered projects. And I would think if you looked in the past, we did a lot of smaller projects, more regional. If we did have issues, they were much more confined within a calendar year than going across years.

Just as a follow-up on the whole accounting and cost side, I guess I'll try to ask a couple pretty specific ones. Do you have any sense of the costs you expect to incur to do the additional training, perhaps hire additional people; software? And, specifically, anywhere in this process, were forensic accountants brought in? Or is that still a possibility that that will have to be done going forward?

At this point, we are still developing our remediation plan, and it will be a broad-based remediation plan. It will involve people; it will involve training; it will involve software. And the software is not multi-million-dollar software; it's relatively lower-priced. So, it's really a plan that's going to take us -- we're already working on it, but it will take us a little bit of time to get our arms fully around it. And we've just got to fix this going forward.

Were forensic accountants brought in at this point?

Arnie, hold on a second. I'm sorry.

Arnie, the work that we've done has been very detailed with our auditors, and internally. And that's really all we can say about it at this point.

Okay, thank you.

Richard Paget, Imperial Capital.

Good morning, everyone. Just to expand on previous question, if you are to recover that $13-plus million from demo in 2013, would that all fall to the bottom line?

Yes.

Yes. And we obviously will make no assurance that we will collect it all, it will all be collected this year. But we've incurred all the cost -- yes, and I can't tell you whether or not there will be some cost to collect. But the cost to execute all the work has been completed on those.

Okay. Moving on to SG&A, it was higher than it typically is. Are there any -- I don't want to call them one-time items, but nonrecurring items? Or there was acquisition-related expenses, or anything that we should make note of?

We did take some provision for some accounts receivable collections, just to be prudent in that area. And that's really the only thing that would be of an unusual nature there.

And I think we also, Bill, earlier in the year, had some incremental legal and consulting expenses associated with our New York claim, as we are working through that trial.

So, those provisions for AR, are those related to the two New York contracts? Or that's something different?

It's really across of business; we just took a hard look at our accounts receivable.

And what's the general magnitude of the aggregate of that?

It's about $1 million.

Okay. But still, even at $16 million for the quarter, that's still higher than historical.

Well, last year we did have a reversal of an earn-out provision, so the comparative is a little bit challenging there. We did accrue some extra state and local taxes that we wanted to catch up on, and make sure we were properly accrued there. And we have thoroughly built out our C suite team here, so there is some incremental cost there.

Okay, and could you give us an update on the progress with the new dredges, and when you might possibly expect them to be working, and out doing some dredging?

Yes, let's start with the scows. The two scows should be out sometime this summer, as we planned. And the ATV, we are currently in detailed design phases where we are getting the construction drawings ready to go to production. We have ordered a reasonable amount of the engines and some of that other stuff; so moving along as expected there. But that's a late 2014, 2015 process anyway, but it's moving along.

Okay. I'll get back in queue.

Jack Kasprzak, BB&T.

Thanks. Good morning. On the SG&A questions, following up on that -- another way to look at it going forward, what do you think the right annual level of SG&A is? It has been sort of in the low 50s. Is it markedly higher now at a run rate, due to some of these issues?

Obviously, because of the restatement, we'll have some issues that will probably keep our legal a little bit over some time. And don't forget that we also did an acquisition that had some SG&A associated with it, so you're going to see that flow through. But other than those two items, I don't think we foresee any significant SG&A increase.

The only thing I will say is that we will be embarking on an ERP system in this year. So we'll have some incremental consulting costs along with some capital that we built into our capital budget for that.

Okay. Regarding demolition, do the issues there make you guys rethink the types of projects are going to bid on in terms of that complexity? Might you look to regroup on your position with some of these -- on some of these projects as a sub or their complexity? Or is it just a matter of better oversight in your view?

I think it's a combination. We clearly -- our desire to move away from being a subcontractor to a prime, and we'd very much like to be prime. And we talked about getting into the utilities and some of those other areas where we can directly bid. And I think that takes care of a significant amount of those types of issues. But to be sure, we said it, we have to do better training. We're putting in new systems. And we'll get that under control.

Have you changed out any management in demolition in the last month or two or three?

No, we have not. We've continued to do some education. We are going to bolster the management team. But the revenue recognition issue, to a large extent, is an accounting issue that we have to manage through. But we have faith in our demolition team.

Okay. Jon, you mentioned in your comments, the margin in backlog was good. I'm not sure that adjective you used -- but strong. But can you talk about, specifically, the dredging business? Where do we stand in terms of margins? Should this be a business with a high-teens gross margin where it's been in the past? Or is there something that's changed? Pricing or other issues, competition, that's causing some of these problems on the dredging side? Because, typically, your dredging business, quarter in and quarter out, performs pretty well.

Yes, it's been -- as we've talked about the last couple of years, we have been piecemealing together a couple of years. We haven't had any of those big, long contracts. But our hope is, with the incremental funding in for Sandy; some of the capital projects that are out there that we won -- those type of projects, the more complex heavy engineering ones, is where we really can do well. So it's our hope and belief that what comes to fruition over the next couple of years, is that we will actually have -- back to some of our stronger margin years from our dredging.

And on the subject of bigger projects, can you tell us -- give us an update on what you're thinking in terms of Miami, and the award there?

Yes. Today, it's in the hands of the government. They're going through their processes. And it's our understanding that once their decisions are made, it's going to go through a peer review. We are really not any more clear than we were before.

Okay. A 2013 event, or -- it's just uncertain?

No, I believe it's just getting delayed. But I believe there will be dredging in 2013 in Miami.

Okay. Another question is on the covenant violations -- you said you expect to get a waiver. But do you think that the issue there is going to affect your ability to bid on work -- has it affected, or do you think it will affect?

No, no. We do not believe we will have a problem with anything. As Bill said, we believe our -- well, certainly our lead bank and, we believe, the rest of our banks -- we've had long relationships with them, and they've stood by us. We believe this is a momentary issue. And our sureties have given us no indication other than their standing behind us. And as Bill said, we think we will recover from this very quickly.

We're moving very quickly to get this work done, with our banks and our surety.

Okay, thanks for your help.

Trey Grooms, Stephens.

Good morning. So, looking at the demolition, once we get some of these issues behind us, I'm guessing that the focus on the more complex jobs and some changes that you are making there, and bolstering the management team, all of these things combined -- how should we think about dredging margins as we look into this quarter, next -- just going forward into 1Q and even through 2013, as all these changes take place? I know there was an initiative among you guys early on, as a management team, to take this piece of business and turn it around and get it into -- on its way to margins that are similar to what the rest of the Company is -- or maybe the Company average. Where do we stand, as we look forward, given all the changes that have taken place here?

Yes, and Trey, it is an important year for our whole strategy with that, and we brought Terra in. And we're seeing some encouraging early signs as we go to -- certain of the utilities and things like that. And I mentioned that we've gotten on the preferred bidding list now for two utilities. So I think that strategy is actually there. I think 2013 is going to be very, well, telling here from an execution on our strategy there. But I think it's going to be very hard year to look at our numbers. Because, as Bill said, if we collect a substantial portion of these deferred revenues, or unrecognized revenues from 2012, it can skew the numbers a different way. So it's going to be hard to clearly see 2013. But we believe that 2013 is the year that those management teams have to perform, and we have confidence in them.

Okay, so it's not to say that the changes that have been made and the things that have gone on changes your longer-term view of trying to get this business up, much better margins, but something closer to what the Company -- the average of the Company. Is that still something that's achievable, given the changes in the direction this thing has gone?

I personally believe that, Trey. But I've got to earn your confidence and prove that. But the acquisition of Terra giving us the mediation skills gives us a much broader skill set and set of service offerings, which what we were moving towards. And the leader of our demolition business comes from both the demolition and a remediation business, and is well-respected. So, it was all part of our plan to get those remediation skills in here. And that is our hope, but I've got to prove it to you.

Okay. And, sorry if I missed this, but on the dredging side, you mentioned weather had a little bit of an impact. There were some jobs that were pushed around. Is most of that stuff going to be realized in 1Q, that were pushed or delayed -- or how to think about that?

Yes, it will be. It's really just a shift.

And then, somebody touched on pricing earlier, but I don't know if it was addressed too much. How is the pricing looking, from just the dredging part of the business? How is pricing in the different markets there, given the kind of challenges we were seeing coming out of the Corps, and that sort of thing?

Trey, we're cautiously optimistic. We think there is a significant amount of potential work out there. There's a long list of projects for Sandy. And as you know, when there is a significant amount of work, it raises all boats. We are encouraged that there will be some good pricing.

And don't forget, overall, we'll be buoyed by a significant portion of -- at least when we start dredging, for at least six, seven months at Wheatstone, which is a very good contract for us. So we think that capital projects coming in, and the significant amount of Sandy work that should be out there, we think that margins should track as we have historically said, and probably rise a little bit.

Okay, thanks. I'll jump back in queue. Thank you.

Andy Kaplowitz, Barclays.

Good morning, guys. Jon, I'm looking at demolition again. I thought you had done a better job of demolition -- with the demolition business over the last, maybe, two years. And I kind of thought you got past the demolition issues. And here we are again. I guess the question I have for you guys is, it seems like demolition tended to raise the risk profile of the Company, especially as you go into these larger demolition projects. So how will you mitigate that as we go forward here? Because the core dredging business is a good business, high market share, all that kind of stuff. But demolition, by its nature -- a lot more competition, and the projects are pretty complicated. So how would you address that?

Yes, it's a very fair question. And we are addressing it in a couple of ways. One, we are trying to take advantage of the fact that we are an equipment-heavy demolition business. And we're trying to move away from the commodity side of the demolition business, which allows us -- and to be a direct contractor as opposed to a sub.

But in the course of doing that, the more you move to complex businesses, you have to have a different set of project managers, accounting managers; and you have to have better systems. And those are all things that we are addressing. It's not something we don't have a history in addressing. Our dredging people have been dealing with this for many years. And our senior dredging people and our senior operations side of the dredging people have volunteered to help us there.

So, that's how we'll mitigate that. And I believe that, with the acquisition of Terra, it gets us into the type of projects that also differentiate yourselves. So you can do a demolition remediation project for a utility, as an example; or a big paper company, that you can go direct for. And quality, safety, reliability, become much more important than the commodity type of businesses that we heretofore have been in.

So, it's really part of the transition. And, as Bill said, we're dedicated to getting the project management side of that business tied up better.

Okay, that's helpful, Jon. So, I like your dredging business, but, to be frank, I don't know how to model it, and never really have. It tends to be very volatile, as you know. Is there any way to mitigate that volatility as we go forward here? Because you do have a great potential in the business; but the problem is, every quarter there's just too much noise. So, is there any way to fix that over the next couple of years?

That's a very good question. And we've talked about that; and strategically, we look for ways. It is a construction business, fundamentally. So the best way I can see to do it is one that we are strategically looking at trying to figure out how to do, is to get into some other types of dredging that might involve long-term contracts. So we're just starting the process of looking in the mining industry, looking at the coal industry, where there is dredging, there is our technical capabilities.

And it's my personal belief that you can go in and say, we have such a wealth of knowledge in dredging, such a wealth of knowledge in production, maybe it's better off to outsource what has been a cost center for a mining company, and let someone like us take it, and get a longer income stream. So, that's a hypothesis. It's something we're looking at. And that was one of the reasons we acquired the rivers and lakes division is, a lot of those types of dredges are smaller in nature.

But we're doing a project right now on the rivers and lakes business for a mining company. We brought a real solution to them for a specific problem they have. We've been invited up to the oil sands to look at something. But that's something that's going to be taking a couple of years to execute on. But I totally agree with you. It's one of the struggles we have from being a public company. And we are thinking and trying to get ways to do that, where we might be able to provide at least some base level of consistent work that takes the peaks and valleys and modulates that some.

I do think, also, that the practical reality here is that the last couple of years have been years when we -- as Jon mentioned earlier -- we have not had the larger capital projects. And those larger capital projects that tend to run maybe a year or 18 months certainly help us with the issue that you described. And as we look at Wheatstone coming on, and look at the port deepenings that are out there on the horizon, that does help us with our core dredging business, I think, as far as the aspect of steadier performance goes.

Okay, that's helpful. One of my peers asked about the visibility over the next couple of quarters, in terms of margins and pricing. But if I think about the overall business, there's a lot of puts and takes, I guess. You've won a couple big jobs here recently. That should give you pretty good visibility into the first half of the year, I would guess, in revenue.

But at the same time, you're saying that the core, it's faceless sequester; and coastal work maybe has been a little slower to come out than you thought. So, how do we think about the revenue progression over the next couple of quarters? Do we have the visibility we need, or is it still a little lacking?

It's always such a moving target. The list of projects that are going to come out for bidding in Sandy is starting to firm up. And that will be a very important part of the spring and the summer for us. Our big international project, Wheatstone -- it's taking a little longer to going, not because of us, but just typically the case of working in such a remote location, and them getting accommodations and things ready for us to go there.

So, that kind of has changed. We're working on a very nice island project in the Middle East right now. That will work our cutter, the Ohio, that we built, for a year. But we have a couple of -- we have a hole in the Middle East we have to fill. But there's some very, very nice projects that are bidding. So, it's the problem we deal with -- the ebbs and flows of what's going on.

If we had stability in Washington, it would certainly help us. But the core budget has basically stayed pretty constant. For us, the best thing to do is to win a couple of these long-term projects. That's what really helps us. I think visibility will get better for us if and when Miami gets awarded to us, because that will let us know we have a great suite of equipment working for another year. We have Australia; that should go for 18 months. That's what really gives us the better visibility.

Okay, thanks. And then maybe one more. Investors have asked me, last night and this morning, about Bruce. So I should ask you guys about Bruce. Any more color you can give us on his departure?

Honestly, not really. It's like many companies, we don't comment on personnel matters. But I will tell you that in the 8-K it reflects that -- we separated with Bruce, not for cause.

Okay. Thank you, guys.

John Rogers, D.A. Davidson.

Hi, good morning. And I apologize if I missed this, but did you give us operating income by segment for the quarter and the year?

We gave you dredging. Operating income is $33 million. And then demolitions, I don't think we said, but --

It's a 17 million loss for the year.

For the year?

At the operating level. Yes.

Okay, and dredging was a $33 million profit?

Yes.

Right.

If you have it for the quarter, I guess I can figure it out -- that you are going to restate the last two quarters?

Right. It's about $9.5 million loss for demo for the quarter, and about $14.5 million for dredging for the quarter.

Okay.

Income.

Operating income, yes. Sorry.

And then, Jon, on Wheatstone, you are saying that starts up mid-year, now?

Yes, there will be some dredging. And we're going back and forth with the prime contractor right now, because obviously equipment is on the way there, or is in standby. Our dredge is in Singapore. DI, the prime contractor for who we're working for -- whose dredges I believe are in Dampier right now, which is just 100 meters down. So, I think the original plan was for us to start dredging by the 18th, or to -- so, it's a matter of -- we're going back and forth with them on some alternative scheduling to get started. Because, honestly, if our equipment is there, the contracts do provide for some standby. So, yes. But, ultimately, it's further back than we had hoped.

And the deferred, or the maintenance expenses that you're incurring on that equipment now, it looks like they have ramped up, or should have ramped up over the last couple of quarters. Does that continue to happen until you start work? And then does the project become that much more profitable as you start collecting revenue?

Yes, we had initially thought that we would be able to spread that over the contract. But when we back in to the accounting literature in detail at the end of the year, we felt that the proper way to account for all that preventative maintenance we did -- because we are going to a remote location -- to take in 2012. So it was a significant amount of preventive maintenance that we won't be running at that level going forward. And, ultimately, it either shook out now, or it shakes out throughout the contract.

Okay. And then could you talk a little bit about what we are looking at in terms of capital spending this year, and how the balance sheet -- especially the large equipment coming on over the next two years -- are you still looking at operating leases there? And with your financing -- or your covenant violations, does that change any of that?

Well, first of all, as we said, we're moving very quickly to get a waiver on our covenant violations. And all indications are that we've got very good support from our bank group on that. So that should be a short-term issue. CapEx-wise, we always talk about the $30 million to $35 million range for our normal CapEx. The large equipment that we're talking about is still contemplated to be operating leases going forward, both the scows and the ATV.

Okay, and the total spending on that?

The scows are about $17 million, I believe, and the ATV is contracted at $94 million.

And your expectation, Bill, is -- so that even with -- because I was reading something about some changes in accounting rules, those operating leases will stay off the balance sheet?

Yes, there is some accounting research and FASB work that's being done on accounting for leases. But that's still a ways away, as far as we know.

Then we may have talked about this even last year, when we did our notes. It's been talked about for years, and I think we addressed that in our notes.

In the credit agreement.

In the credit agreement, that obviously we foresaw that --

That could happen (multiple speakers) carved out in any of our ratios (multiple speakers).

Yes.

And then, lastly, a couple of people have asked about margins in the business. But with the storm disruptions that you saw in the quarter, and the deferral of some projects, the current backlog -- are the margins there higher than what we've seen over the last couple of quarters in the dredging business -- the bid margins?

I think, in general, the bid margins are solid; yes, and consistent. And don't forget, we've had now in margin, I guess, for nine months or a year -- the Wheatstone project, which is a capital project, so it holds a strong margin.

I'm sorry, go ahead.

The margins backlog have been consistent, and I think probably uptick from a year ago.

Okay. Then, presumably, we should see higher margins for the full year in 2013? I know not by quarter, but is that fair?

On the dredging side? As long as the coastal protection work comes out as we see, the Corps talking about it, I think that the margins should be good.

Okay. And last housekeeping items, tax rate -- still in the mid-high 30s?

Yes. We have hired a new director of tax, a very qualified guy. And we are working very hard on our taxes; but for now, consistent.

Okay. Thanks for the time.

Philip Volpicelli, Deutsche Bank.

Good morning. Most of my questions have been answered, but did you guys disclose what price you paid for Terra Contracting?

We did.

A grand total of about $26 million; that includes the purchase price. And, of course, there's a working capital adjustment involved. And then there's the present value of the earnout.

Okay. And then with regard to the covenant waiver, have you guys discussed what the cost might be with regard to getting that waiver?

Well, there certainly will be a cost, but that's not something that we would be disclosing publicly.

Okay, we'll just have to wait for the amendment to come through.

Yes.

And then, with regard to the ERP system, I believe you mentioned that that might be coming in 2013. Is that included in the $30 million to $35 million CapEx? Or is that in addition to it? And what amount would that be?

It's included in the CapEx, and it will be some in 2013 and some in 2014. I think we've got a relatively modest amount in 2013.

Yes, and I'm not sure it's as much the software as it is -- you'll find some in the G&A running through for training and things like that; and just the conversion.

Okay, okay. Is it already in process? Or is it something that is coming up, in terms of the bulk of the cost here?

We've gone through the evaluation process. We've zeroed in on a vendor that we believe is the right one for us, a construction specialist software company. And we have not incurred significant expenditures at this point in time.

Unfortunately, our accounting department has been a little preoccupied in the last few months.

I understand. Yes, I appreciate that, Jon. The two construction contracts that are in dispute, have they reached lawsuit status? Or is it simply still negotiations? Where are you guys in that process, and what's the next step?

Well, we don't want to discuss the projects in too much detail, as you can imagine. We're working with our customers and we want to keep this work moving forward. But, generally, I think it's fair to say that the worst case that you mentioned is not where we are. And that these projects are complex projects; we did the work we were asked to do; we did it well; and we are now in the process of resolving the documentation and the ultimate compensation for those.

So, this should be resolved in 2013 -- is your best guess at this point?

I don't think we are willing to predict for sure. You never know. These processes take time. The owners take time. And we are working on it as quickly as we possibly can.

Yes, and Phil, the lesson is, I'm not willing to take a discount for work we did, and work we did fairly. And so I will wait some time. Because, ultimately, I'd like my cash for the work we did, but I'm not giving somebody a discount for good quality work that we did.

Understood. Okay, good luck. Thank you.

Rick D'Auteuil, Columbia Management.

Good morning. On the accounting stuff, it sounds like you are in a stage of remediation. Can you definitively say the backward view aspect is complete at this point?

We have done a great deal of detailed work on it. We go very deeply into where we are, what we had going on. And we believe that our -- what we've disclosed to you is accurate information.

Is there -- beyond your normal auditor, is there any other involvement from outside consultants or professionals?

Rick, as you can imagine, this got a lot of attention from the management team. The Board, the management team responded very responsibly to this. And we have done our diligence on getting this situation resolved. And we have proper accounting on our statements that will be filed for the end of the year, and we are moving forward.

The answered to, I think, the last person's question, on one of the demo projects that has got issues, was that we are resolving documentation. That sounded a little different than what we heard about the prime -- I don't know if that's related to the prime contractor where you are a sub. Maybe you can help expand on that explanation. Did you have documentation? Or you are doing it -- the documentation -- in arrears there?

Rick, let me clarify. If I use the word documentation, I don't want you to focus too much on that. These are very complex projects. And, again, I say we did the work we were asked to do. We did it well. And the process of ultimately moving through to compensation is complex in its own right. And we're involved in that process with our customers. We are actively engaged with our customers and working through that process. I apologize if I led you down a path by using the word documentation. Certainly documentation is part of the issue, but it's a complex process of working through to the point of getting compensated properly.

Okay. Jon brought up that the prime -- that the project where you guys are a subcontractor, that the prime had not been paid. Is the prime delivering on the work that they contracted for? Or are there issues with the prime, in accordance with the contract that they have?

Well, I certainly wouldn't presume to speak on behalf of the general contractor. But from our perspective, the projects have been executed by the contractors as appropriate. And we believe that it's just a matter of moving through this process of moving through to be compensated properly.

But Jon brought up that you're not getting paid until the prime gets paid. If the prime is executing on their work, there would be a high likelihood that they would get paid. And if they're not, they are not going to get paid, right?

Rick, Rick, let me try to explain, the way I understand it. If we have change orders and work outside the scope -- we executed it; the prime has to take it and then document it to the state agency. The state agency has to go through all their processes. And the prime will not pay us until he gets paid for that work that he gets paid from the state. So, unfortunately, it becomes a very long documentation process that goes up to the prime, the prime to the state, the state doing a review, and then going back and forth. So that's where it's at right now.

Okay, so it's not contingent on whether they are executing on their part of the work. It's just waiting for the proper channels to get back, and check the boxes, as it relates to the work you've done.

To a large extent. And there is some complexities through the contracts and things like that. But that's essentially correct.

Okay. The two projects that had cost overruns, I think you addressed them a little bit. What kind of detail can you give us there? Is it normal expectations? Or were there some things that really were poor management of the jobs in question?

When you get to these things, you have winners and losers. This is the construction industry, and these are just some that had overruns. Certainly, over the life of our business, we have others that have pick-ups. It just so happens we had a couple that had overruns here.

Okay. Miami -- you said it's in the government's hands. What are they communicating with the bidders at this point for (multiple speakers)?

Really nothing, other than they are dealing through their process right now.

So, it could start next year? Or it could start six months from now?

No, I believe it's pushed back a little bit. But I think that there will be dredging this up here, as best as we know right now.

Okay. And you still feel like the equipment that you have is better suited for that opportunity, than maybe what your competitors would have?

Yes. We think we have a good shot of winning it. But until we win it, I will be sitting and nervous.

A comment you made up front, Jon, was in reference to your backlog -- we have excellent margins. What are you basing that on? Do you feel the pricing in your forward business was much better than the pricing and the stuff that you've executed over the last 12 months?

Yes, yes. It's just a mix of projects. We are seeing more capital work. And as is historically the case, capital work tends to play better to our business. And the projects that are in backlog right now support better margins, based on our forecast.

A quarter ago, you had some issues in the demolition business. And I think there were going to be some insurance potential coverage. Did you or did you not receive that? And what's the status of that?

Those have not been completely resolved at this point. We continue to work on those. And there is nothing in these results related to that.

Is there still an expectation of recovery, or not?

Yes. We're still working, as we get toward what we talked about with you last quarter.

Okay. We're a couple of months into the -- 2.5 months into the new quarter -- how has weather been in general in Q1, as it relates to your ability to execute on your existing business?

Our dredging business has gotten off to a good start this year, I'd say.

Okay. All right. I think that's the bulk of my questions. I appreciate it. Thank you.

Steven Swann, Morgan Stanley.

I have no questions. They've all been addressed.

[Gisotti Bugumwa], Maris Capital.

My questions have been answered, too. Your pronunciation was fine.

Richard Paget.

Just real quick, is it coincidence that the two issue projects and demolition are both in New York? And if it's not just coincidence, is there something inherent in the market that makes it a little bit more difficult or timely to get these recoveries? And if so, will you deemphasize that market going forward?

No, this really relates to the size of the project that's there. And it really is nothing that you should take as a predictor.

Okay. Then just real quick, you touched on getting some private work in mining. With all the potential Gulf Coast buildout of some more Petrochem and energy infrastructure, are you seeing any private work coming up on the horizon?

We do hear discussions, but those are long in coming, as you can imagine. And we have done private dredging ports on the LNG in the past. And we are clearly monitoring that. And we are searing rumbling of all those that we are going to be doing for import, now turning around and potentially being export, the plans being dusted up. But, yes, those clearly will be longer-term projects.

Okay, and then just one more, if I may. In the past you had said if Harbor Maintenance Trust Fund is fully allocated towards dredging, it could be an incremental $300 million to $500 million to the bid market. With the Senate's WRDA bill possibly addressing that, is that incremental range still applicable?

It would be -- just because the Senate is talking about that, and that House talking about a WRDA bill, let's be sure that -- they first would have to harmonize, and then get something out, so it would be, at best, a 2014 event for a 2015 event (multiple speakers). The numbers itself would not be tremendously different than what we've talked about, in our mind.

Okay, thanks. That's it.

Jon Tanwanteng, CJS securities.

Hi, it's actually Arnie again. A couple of mechanical questions. When you get a change order, does that come from the state or from the prime?

Well, if we're working for a prime it would come from the prime. If we're working directly for the owner, it would come from the owner.

So, in this particular problem award, the change order came from the prime, and they may or may not have cleared it with the state? Is that what seems to be the issue here?

No, it's different in each of those projects. One, we're working for the owner; and the other, we're not. And it really has nothing to do with that kind of an authorization problem. Again, I'll say it, we've done the work we were asked to do, and we've done it well.

So, again, to be specific, did the state ask you to do the work, or the prime?

It depends on the project.

Well, on the one that caused the problems, who gave you the change order?

We have one of each.

Okay. In the demolition business, which is the problem business, the significant majority of your backlog, it's a very small number of two large projects. On those two projects, are you the sub or the prime?

Prime.

On both?

Yes.

So, hopefully we won't have this issue there. Jon, in the past, you've talked about a goal of the demolition being a $300 million business. And I know you spent a tremendous amount of time and effort in 2011 fixing it. And I think at that point, people -- you would have probably said, I'm either going to fix it or we are going to get rid of it. And you did a great job fixing it in 2011. Obviously, the problem has cropped up again in 2012. As we think out over the next year or two, is it a fix it or get rid of it? Or do you still have a goal of $300 million of revenue for that business?

I absolutely still have that goal. I think adding the Terra acquisition into that reporting segment was clearly a significant part of our strategy to get there. And, fundamentally, I believe the things in 2012 with our demolition business were totally different than the issues that we had in 2010 and 2011.

Those were tremendously different. Here, it is just a revenue timing issue for the vast majority of this. But, no, we fundamentally believe that we have a very good core strategy with where we're taking our demolition business, adding in the remediation skills. And we have to prove it to you, Arnie. I can't say anything more than that. But market indications are that -- from third parties that buy these services -- bringing those two things together, and the skill set, and that people we're putting together; I am encouraged about that.

And, Jon, when Bruce was promoted to COO from CFO, you were pretty ecstatic, in the sense that he freed you up to do more things. He was very operationally hands-on. And it gave you more ability to do other things. Does the Board intend to hire a COO with operational experience to replace Bruce? Again, you have an excellent background in management consultant, but not necessarily in construction.

You know, Arnie, we have four divisional presidents that we have a lot of faith in. We bolster the executive suite with our general counsel, with Bill, with the Controller. The Board and I will take the next 60 days and let the dust settle on some things. And then we'll determine what incremental skill set we need for the Company.

Okay, but what that sounds like is, you intend to do a lot of the systems work and other things, without necessarily someone with a strong operational background in demolition.

Well, from the ERP system, Bill has a tremendous amount of experience in putting in systems like that. Our new Controller does, too. So I have no worries in being able to execute on that.

We also hired a Vice President of Sales, Cynthia Nielsen, who has a good construction background. She recently came from a large construction company. And she is well-versed in how construction change management works. And we will tap into Cynthia's expertise in a significant way, so we can bring the right resources to bear on what we're doing with our business, on the demolition side in particular.

Two more questions. I think I've got this math right, but I'll follow or double-check it in the transcript. But I think you indicated there was a $13 million hit from the two contracts that affected them. And you also gave us a number that the change order took the value of one of the contracts from $7 million to $22 million. I'm just trying to think of those two numbers in some context.

First of all, the $13 million is not just those two contracts. It's the complete scrub of all the issues that we had. And when Jon referred to the change of the contract size going from $7 million to $22 million, that's been over the course of the contract. We have billed some of the work that we've done. We've been paid for some of the work we've been done. And what we're talking about now is the back end of those contracts, so --

But the $22 million was your revenue contribution from those, correct?

Yes.

Okay. Final question -- Rick D'Auteuil ask you a little bit of about Q1 and weather. I'd like to broaden the question a little bit, since we're two weeks away from the end of the quarter. There are a lot of moving parts -- weather; timing of awards; Sandy, and its impact on various things; various one-time expenses. And I don't expect -- I know in the past you've given full-year guidance, but perhaps given all these moving parts, you could speak specifically about Q1 in your expectations?

No, we do not give guidance -- we certainly don't give guidance this early in the year. As I've said, our dredging business is off to a nice start this year, early indications. But that's really as far as we'll go in terms of talking about how things are going.

Okay, thank you.

David Cohen, Minerva Advisors.

Thank you. I have two questions. The first of them is, I just want to clarify something that I think I heard you say. With regards to the incremental working capital investments, I think I heard you say that there was $60 million between Wheatstone and Scofield Island that you expect to largely recover during 2013. Is that correct?

That's correct.

Okay, and then the balance would be in 2014?

Yes.

And in what working capital accounts would we find those dollars?

It's inventory; it's WIP; accounts receivable.

Okay. And then the second question is a little more strategic in nature. You've articulated in the past, pretty clearly, a strategy of building out from your core dredging expertise, both building up the demo business and building into other adjacencies. In my mind, these results indicate that you may be at the edge of your current capability set. And what I'm wondering -- and particularly now you're going to be down one senior manager -- what should we expect this year in terms of further strategic moves? Are you now going to pull back from acquisitions, and pull back from new business areas, and try to fix what's broken? Or are you going to continue to try to push ahead while you're fixing what's broken?

Yes, and let me address that. I do believe that, again, the issues at our demolition division right now are fundamentally different than they were two years ago. But that being said, we've added three to four senior managers, and we've added some operating people to demolitions business during the year. And we did lose Bruce, but I think our executive and senior management suite, both at the corporate level and at the demolition segment, has been actually augmented.

But that being said, we're going to take the next six months to make sure we have got our back office house in order, and to lay the foundations for the growth of our demolition remediation segment. So, I don't anticipate doing some transaction in the next six months, nine months. I need to have the integration done. I need to have the sales and marketing that we're putting together out there. And I need to have the core team gelling. And then we can talk about adding incremental, either services or geographic reach.

Okay. Well, best of luck with it.

Thank you.

Thank you. I would now like to turn the call over to Katie Hayes for closing remarks.

Thank you very much for joining us this morning. We look forward to talking to you on our next call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.