Great Lakes Dredge & Dock Corp (GLDD) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Great Lakes Dredge & Dock Corp. Earnings Conference Call. (Operator instructions) As a reminder, this conference is being recorded. I would like to now introduce your host for today's call, Ms. Mary Morrissey. Ma'am, you may begin.

Thank you. Good morning, this is Mary Morrissey and I welcome you to our quarterly conference call. Jon Berger, our Chief Executive Officer, and Mark Marinko, our Chief Financial Officer, will discuss the operational and financial results for the quarter ended September 30, 2014. Following their comments, there will be an opportunity for questions.

During this call, we will 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 2013 Form 10-K and subsequent filings.

During this call, we will also refer to certain non-GAAP financial measures including adjusted EBITDA from continuing operations, 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 Mark Marinko, our CFO.

Thank you Mary, and good morning to everyone joining us. Total company revenues in the third quarter were $202 million, an 8% increase from the third quarter of 2013. Our dredging segment revenues grew 8% in the current year quarter to $167 million, with increases in capital, maintenance and foreign dredging, offset primarily by a 41% decrease in coastal protection revenue.

Our environmental and remediation segments revenue increased 3% to $37 million for the third quarter.

Total company gross profit margin for the quarter decreased to 12% compared to 14% for the third quarter of 2013, while dredging segments gross profit margin declined to 10.7%, from 14.5%.

Despite improved contract margins, gross profit margin during the third quarter was negatively impacted by first lower absorption of fixed costs due to having two hopper dredges in dry dock and therefore not utilized for the entire quarter, and an underutilized fleet in the Middle East; second, $5 million in cost overruns on a job one of our joint ventures is executing; and last, a $1 million mark-to-market hit related to our fuel hedging. Environmental remediations gross profit margin for the third quarter this year improved to 18% from 15% last year. This segment experienced improved contract margins, which were partially offset by higher unearned plant expense and higher labor costs.

Total company operating income was $8 million for the quarter, down from almost $14 million from the prior year quarter. General and administrative costs decreased in the quarter to just under 8% of revenue, but not enough to offset the decline in gross profit margin.

In addition, the period last year benefited from a $3 million gain from the sale of a dredge in the Middle East.

Operating income in our dredging segment decreased to just under $6 million for the quarter, down from $13 million in the same period in the prior year. The environmental and remediation segment reported operating income of $2 million, an increase of $1.5 million compared to the third quarter 2013, with higher gross profit margin and lower corporate overhead somewhat offset by increased general and administrative costs.

The domestic dredging bid market for the nine months ended September 30, 2014 was flat compared to the first nine months of 2013 at approximately $1 billion. As a reminder, the first phase of the Port Miami project was awarded in the first two quarters of 2013 at a value of $122 million.

In total, the Company won 30% of the overall domestic bid market during the first nine months of 2014, which is below our prior three-year average of 46%. Please remember that variability in contract wins from quarter to quarter is not unusual, and the win rate for one quarter is not indicative of the win rate the Company is likely to achieve for the full year.

In the first six months of 2014, Great Lakes won 32%, or $114 million of the capital projects awarded; 22% or $81 million of the coastal protection projects awarded; 18% or $47 million of the maintenance projects awarded, and 65% or $95 million of the rivers and lakes projects awarded.

Contracted dredging backlog at September 30, 2014 totaled $450 million, compared to backlog at December 31, 2013, of $515 million. We also have won $433 million of awarded or low bids pending formal award, that we won subsequent to quarter-end. Jon will discuss these awards in more detail later on during the call.

The environmental remediation segments backlog was $21 million at September 30, 2014, $8 million lower compared to the year-end backlog.

Regarding financing of the ATB, we have spent about $30 million year-to-date on the ATB bringing our total spend thus far to about $50 million. During our last earnings call, we mentioned that we are in the process of finalizing a structure that would allow us to fund a portion of the construction of the vessel. We finalized the structure yesterday and closed a $50 million term loan with Bank of America Leasing. We plan on utilizing our working capital to finance the remaining $40 million needed to complete the construction.

One effect of keeping the ATB on our balance sheet is that we will benefit from accelerated depreciation for tax purposes. This, along with a potential worthless stock deduction related to our discontinued demolition business, will enable us to avoid paying Federal taxes for approximately the next five years. This impact on our cash flow will be very favorable going forward.

Now, I'd like to talk about our credit facility. As we disclosed in our earnings release, we amended our credit facility during the third quarter in order to provide greater flexibility. The changes included -- increased the total facility to $210 million; secured and collateralized the facility with liens on certain vessels; we decreased the required ratio of aggregate orderly liquidation value of pledge collateral from 1.5 times to 1.27 times the aggregate revolving commitment; and we enabled the full use of the facility for the issuance of letters of credit. This last modification provides us more flexibility in pursuing international jobs.

Now, I will turn the call over to Jon Berger, who is going to discuss some of the highlights of the quarter as well as considerations that may affect our business for moving forward.

Thank you Mark, and good morning. Although our third quarter results were not where we wanted them to be, there are several positive developments that are setting the stage for elevated performance going forward. I will address some of the challenges that we face during the quarter, and will also highlight the good news that makes us optimistic about the future.

As Mark mentioned, our dredging segment revenue grew 8% compared to the third quarter last year, but operating income declined to $5.7 million. There are a few key factors that impacted our results.

As we stated during our last earnings call, we expected bidding activity for Superstorm Sandy-related coastal protection work to pick up earlier than it did. Very few projects were put forward that could be executed during the third quarter. In our bidding market, only two projects put out to bid were Sandy-related, one of which we won, an $11 million coastal restoration project in New Jersey.

We took advantage of the deferral of Superstorm Sandy work in the coastal protection market by accelerating the dry dock of the Liberty Island, bringing it forward to the third quarter. While in dry dock, the Liberty Island was outfitted with a bulbous [bow] that will improve the vessel's fuel efficiency and carrying capacity, giving us a competitive advantage when we bid on work going forward.

So, during the third quarter we had two dredges in our domestic fleet that not only were idle, but were also generating significant shipyard costs. Our dredging segment was also adversely impacted by a project being executed by one of our joint ventures. Higher-than-expected administrative costs and equipment mobilization delays have extended the duration of the project, which is forcing the work to be done in two seasons instead of one. As a result, we will have to demobilize for the winter and remobilize in the spring, which is leading to increased costs in executing the project. For the quarter, this was a $5 million impact.

Both sides of the joint venture have mutually agreed to dissolve the JV upon completion of the job. While Great Lakes originally entered into the joint venture as a method to achieve progress in the environmental remediation dredging segment of our business, we have made a decisive decision that successful growth of this segment can be better achieved outside of the JV.

In the Middle East, we also had underutilized equipment during the quarter that impacted our results. We completed the job in Saudi Arabia in the beginning of the quarter, and did not begin work on the $32 million land reclamation project in Bahrain until the middle of August. But through the rest of the year, this project will keep three of our vessels utilized.

And in October, we were awarded a $140 million Suez Canal project. Great Lakes is performing this work as part of a joint venture with Dredging International. We will be one of six dredging contractors working on the massive Suez project aimed at improving transit time for trade and fostering economic growth in the region. We are currently mobilizing two of our cutter dredges to Egypt to begin work in December.

With the land reclamation project in Bahrain and the Suez Canal project, plus another small project in Brazil that we were awarded in October, and the remaining work that we have on Wheatstone, we are lined up to have a significantly improved utilization of our foreign fleet both in the fourth quarter and into next year.

I'd like to turn back to our domestic bidding market. I am very pleased to report to you that the soft bidding market is behind us. In October, we have won approximately $289 million in new work, including three Sandy-related projects in New Jersey valued at over $254 million. We expect to see additional Sandy projects to be bid through the end of the year.

I'd also like to point you to one project that we've been working on domestically and highlight, is the Freeport Channel Deepening project. Freeport LNG, the project sponsor, plans to add liquification infrastructure at an existing LNG import terminal to provide export capacity. Great Lakes is widening the entrance and jetty sections of the port and the Freeport ship channel from the existing 400 feet width to 600 feet. Not only are we tracking projects involving existing LNG export facilities, but we are also tracking potential new facilities that may be built. We certainly still consider the LNG market a potential opportunity for Great Lakes.

A combination of our $471 million in backlog at quarter-end and the roughly $433 million of additional work that we have been low bidder on, positions us for a significant fourth quarter and we enter 2015 with significantly more of our fleet committed than in each of the last five years.

I'd like to give you at least one last update related to dredging, and that's the ATB. We cut steel on the new ATB dredge in September. We have three people onsite at the shipyard monitoring and working with Eastern Shipyard Group crew and construction appears to be going well with scheduled completion in the third or fourth quarter of 2016.

Now, let's turn to our environmental remediation segment. During the third quarter, Terra continued to execute on the Enbridge Oil Spill Remediation project, a large redevelopment project, brown field redevelopment project in New Jersey, along with working on many additional jobs. Segment gross profit margin operating profit showed improvement during the quarter, and we are on track to achieve over $100 million in revenue for the year. I want to applaud Terra on having a good quarter on project execution after a challenging first half of the year.

The biggest news for our environmental remediation segment is our recent acquisition of Magnus Pacific that we announced last night. Although this acquisition didn't occur in the third quarter, we have worked very hard over the last few months to bring them into the Great Lakes family. We believe we paid a fair price, and structured the transaction that provides for alignment of goals between both our businesses in this segment and encourages quick, [fulsome] integration.

As you know, part of the Company's growth strategy has been to grow the environmental remediation side of our business. We find this market attractive for many reasons, but I'll mention a few. It is specialty niche contracting similar to dredging. There are opportunities on water and land, such as the Hudson River, the Passaic River, the Enbridge contract. It is a fragmented market where we see competitive advantage for a large, well-capitalized safety and controls-focused entity, giving it clear advantages. And we see the size of the end users for these services to be getting bigger. Big oil, gas companies, the mining industries and the PRPs from major polluted sites, both on land and water.

Again, our size and the advantages this gives us are attractive to those purchasers of services. The Rivers & Lakes acquisition was the first step into acquiring assets to use in water-based remediation. The Terra Contracting acquisition in 2012 was the next step, and Magnus is the next milestone.

Magnus, which is headquartered outside Sacramento, California, is a very well-run company with a wonderful reputation of exemplary project execution and client satisfaction. It has an excellent team in place with management having an average of 20 years experience in environmental and geotechnical services. Magnus executes work for government agencies, site owners, general contractors and engineering firms. Examples of the geotechnical work Magnus provides are construction of slurry wall cutoffs, permeable reactive barriers, [created] permeable reactive barriers, and soil stabilization and ground improvements.

Some of the environmental services they offer include mine reclamation, deep soil mixing, in situ and ex situ stabilization. It also is active in specialty civil projects such as levy rehab and repair. These are capabilities and service offerings that are very complementary to the Terra platform. In addition, Magnus' footprint is primarily on the west coast, particularly California, Washington, Texas, Oregon and Colorado.

Magnus joined us with approximately $90 million of backlog, the majority of which will be executed in 2015. The combined platform of Terra and Magnus enables us to be a nationwide environmental and geotechnical service provider of considerable size, with the capabilities to execute on technically complex and large projects. Moreover, the combined entity now gives us the scale to invest in equipment and people to serve these big clients that require our services.

We are all very excited about the Magnus acquisition, and we are confident that we will successfully integrate Magnus into Great Lakes.

Over the course of due diligence, Magnus and Terra management have had several productive meetings and we have already begun to identify potential opportunities, so we are excited about the future this combined entity will have.

I'd like to talk a little bit about our sale of New York Sand and Stone. One of the initiatives we've discussed is getting rid of non-core assets to better focus on our core dredging and environmental remediation businesses. In October, Amboy Aggregates, the joint venture in which we are 50% interest, sold its New York Sand and Stone subsidiary. The financial impact of this step is not significant, and its impact on Great Lakes financials is not material, but these non-core assets use valuable time and resources that can be better spent on executing our strategy so we are pleased to have the entity sold.

Let's talk a minute about the future. We are very pleased with the future opportunities we see for the domestic dredging marketplace. We see maritime infrastructure getting more focus in daily discussions in Washington and in all coastal communities. A good example is Vice President Biden's visit to our dredge in Philadelphia, to bring attention to the deepening of the Delaware River, and how key maritime infrastructure is needed to create good-paying manufacturing jobs in America.

We are optimistically expecting that the WRRDA bill and allocations of the Harbor Maintenance Trust Fund spend will increase year-over-year and provide key maintenance dollars for our waterways.

We also expect to see funding in the gulf for major coastal restoration projects associated with the Restore Act, and the resulting fines from the Horizon Oil Spill. Finally, we see renewed opportunities in the private sector of water infrastructure associated with projects that drive energy exports.

Internationally, we have backlog to provide us solid utilization in 2015. Additionally we see more bidding opportunities than this time last year internationally.

Finally, we consider the environmental and geotechnical market as a growth market, and we are excited about our prospects and the ability to grow our position in this market.

In conclusion, the record amounts of dredging work in October that we won low bidder on, the progress on the ATB and the Magnus acquisition provide us with strong tailwinds. We enter the remaining part of 2014 and 2015 with renewed enthusiasm for where we are positioned as a Company.

With that, we'd be glad to take questions.

(Operator instructions) Our first question comes from the line of Scott Levine with Imperial Capital. Your line is now open.

Hey, good morning, guys.

Hey Scott, how are you?

Good, how are you?

Good.

So, first question really I guess, you know, on the dramatic change in the bid market, and maybe a little bit more call for US dredging, you know, a little bit more color on what the trigger point was there? And it seems like most of this is tied in with coastal. Maybe some broader thoughts about the market in general, about your outlook for the Army Corps, for spending on Corps projects, and update as well on the Port of Savannah and expectations there?

Sure. Obviously we've been talking about the coastal restoration projects, and I think we signaled for sure that we expect the projects to come out, and they were a little slow in coming out. But when they came out, they came out in great abundance. Great Egg Harbor, which we won, was about a $68 million project. We won Absecon Island, which was about $42 million, and we also won Barnegat to Little Egg Harbor, $143 million, all in October. And there are other big projects coming out to bid for coastal restoration. I think it was clearly slow, we talked about that. We kept a lot of dry powder waiting for these projects, because we believe we can get nice margin on that, and I think what we're seeing is the margin we're bidding at is a couple of ticks up from the work in our backlog. But it was slow.

But, looking at the schedule that's out there, there's a lot of work to come out to bid, and big, chunky projects. You know, like I said, Barnegat was $140 million, Great Egg was $68 million, $69 million, so real strong, larger projects, and these are very exciting because we won all three of them. And if you look at where they are on the Jersey Shore, they're one right after the other. So, we will have less mobilization, we'll have our equipment out there, our people can hit a real rhythm. So, it's all good.

The Savannah, I actually believe bids on Monday now, the 10th. It's going to be an interesting project. We see so much work out there, we're not going to chase it down on a low margin. There are some other good size projects that are coming out to bid that probably aren't any different than the Savannah-size project, so we're going to run at it, we're going to run at it hard, but we made a decision because of the elevated market that we see that has come out and the bidding activity we see, we're not going to chase margin down. As I said in my prepared remarks, with our backlog and low bids pending in dredging, less the work we worked off in October, we're somewhere up about $850 million. I mean, and as you know, that's probably $300 million more than our highest backlog ever. So, we see no reason to chase low margin projects if that's the case, because we believe we can hang tough on margin and this is our time to do it.

So, yes, and the Army Corps you know, has been a good partner for us. Your question, there's a lot of work out there, these are complex projects so it takes some time to get them through the system and design it, but we're very happy with obviously our backlog. How do you not be happy? But also, the opportunities that are out there for us. It's a long answer, but (multiple speakers).

Got it, that's helpful. Thank you. And then just turning to Magnus really quickly, I think you mentioned some financials in the press release. Can you comment on -- are the margins comparable to your existing E&R business? Additional help in thinking about how to model that business would be helpful.

Yes, they are. Yes, they are similar in margin to our other business. Should run in that 14% to 18% operating margin, something like that, and in the press release I think we said it'll be significantly accretive to us. I think in my remarks I suggested to you that we paid a fair price, we have downside protection, they have upside opportunity, and I think we structured it in a fashion that will facilitate the integration.

Got it. One last one and then I'll hop off. For Mark, could you reiterate the comments you'd made I think during your prepared comments on the tax? Was there -- I don't know if I got that down correctly. I think you'd mentioned that you guys would not be a cash taxpayer for five years. I was hoping you might be able to review that really quickly?

Right, so there's really two pieces that drive that. One is there is a, related to our demolition business that we sold earlier this year, we are working on taking a worthless stock deduction and that is one benefit to us for tax purposes moving forward. We will book that in Q4, so there'll be an impact in Q4. And also, when the ATB hits the water, since that -- that's on our balance sheet, we'll be able to take the advantage of accelerated tax depreciation.

Got it. So, is that just on the cash tax side, or will your book tax rate effectively be zero?

Yes, that's correct, both.

Both, okay, great. Thank you.

And Scott, that is -- it's unbelievably interesting for us and exciting, what that'll do to our cash flow obviously for the next five years, and ultimately we will end up owning this piece of equipment where historically we've done leases, and at the end of 10 year leases we still own 50% of this asset. I think we've been very prudent of using operating cash flow to fund this second portion of it, and then as Mark said, the note. But with the avoidance of tax, because of the depreciation, we will own this vessel free and clear probably in a five-year period or something like that, seven-year period. And you know, it's significant for us.

Got it, thank you.

Thank you. Our next question comes from the line of Trey Grooms with Stephens, your line is now open.

Hey, good morning.

Hey Trey, how are you?

Doing well, how are you doing?

Thanks, buddy.

Jon, you mentioned you're not going to chase margin with Savannah coming out, and then you said there's some other big projects out there. Can you just talk generally about how the bid pricing environment looks today?

Yeah, I mean, to be fair without going into too much detail, our margin and backlog is certainly up than where it's been, and the work that we're putting on the books right now is work that we're very happy with the margins, here. And so -- and incrementally, we see elevated bidding opportunity to continue into next year, so we're not going to chase it down. So, if someone wants to take it at a lower margin than we're comfortable with and we think we can earn, we'll let them do it. And you know, that's been our strategy for the last nine months.

We see the opportunities out there, you see the schedule out there, and we just think it's a time both for ourselves and quite honestly for the whole dredging industry to take advantage of our investment in our equipment and the fact that there's elevated demand for our product. So, it's certainly our margin has ticked back up there, and it's my expectation certainly for the rest of this year and next year that our utilization will also be at a higher level. And you know, we all know what that means when you're in a fixed-asset business.

Sure, sure. Okay, thanks for that, and then kind of looking at the acquisition you guys did, it seems to make a lot of sense. I realize that's going to give you guys some geographic exposure you don't currently have. Is there any other synergies that we can think about as you look to add acquisitions in this environmental remediation space?

Yes, and to be fair, we have a big job of integration. We did a wonderful job of integrating Terra. We took a business that was making $50 million and will do probably $100 million to $110 million or $115 million this year, in two years. But that was one business. Now, we have to integrate the two of them together. You know, as privately-owned businesses they tend to run relatively lean, so I'm not sure there are tremendous cost savings. I think where you'll see savings and where you'll see the real synergies is they overlap on services, but they utilize each other's services.

On the west coast, Magnus has used one of our competitors to do some dredging work in the past. Obviously that'll be done internally either by Terra or Rivers & Lakes, or [our big] dredging. On Terra's side, they have historically outsourced deep soil mixing, and that work that we can now do. But I think where you can see the real synergies is we now have a platform that I can go to the big mining companies, the big oil companies, and offer the full array of services from a national platform, have enough depth of management, have enough to be able to make those investments. We're going to obviously apply our safety culture, our pricing structure, and discipline. So, this is one where there are certainly some small cost savings, but this is one where I think you're going to see it on the revenue side, and I think you're going to see it relatively quickly in my view. I think there's some real opportunities that we're talking about already.

Great, one last one for me. You're talking about obviously higher utilization, and you guys have been more focused on maintaining the higher margin in the backlog, you said, over the last nine months or so. Would that higher utilization and higher margins embedded in backlog, is there any reason why we shouldn't think that the margins in 2015 couldn't look a lot like they have in other periods, where you've just had really nice utilization? I guess the point is, we should see pretty considerable margin improvement, I would think, going into 2015 and I just wonder if you could comment on that at all?

Yes. Trey, we have -- it's been an up-and-down year or two, but I think we -- 2015, the end of 2014 and 2015 is shaping up for [lack of return], what I would say is a pretty special year for this business. We've had ups and downs internationally, and now we look like we have solid backlog for the vast majority of our equipment, or at least big chunks of our equipment internationally, for the next year. We still will be running off in the first quarter, at least Wheatstone. Domestically, as we said, we moved forward a dry dock that we anticipated to be in 2015 and took the cost associated with that, and that's both capital costs we move forward, but there's also some costs that run through our P&L that we took in this quarter for the dry dock, for the maintenance.

So, we will not have a regulatory dry dock to expect in 2015, and those vessels are to a certain extent, the hoppers are scheduled up for a good part of the year already. And as I said, we're entering 2015 with way more work already scheduled and not to have to capture, than any of the five years I've been around here. And you know, I emphasize all the time that with higher utilization also comes absorption of overhead. We have a significant fixed cost here, and when we get higher utilization we absorb that over a much higher revenue base.

So yes, I think we're looking forward to 2015 as a company, as a management team, and your premise is right.

Great, thanks a lot for the color, Jon. Good luck.

Yes, thanks, pal.

Thank you. Our next question comes from the line of Andrew Kaplowitz with Barclays, your line is now open.

Hi guys, it's Vlad Bystricky on for Andy, how are you?

Sure, how are you, Vlad?

Great. So, I guess you guys talked about this a little, but maybe as I think about the acquisition of Magnus specific, it's a fairly sizeable acquisition for you guys. So, how should we think about the risks associated with the transaction, how you're working to mitigate those risks, and then also just looking out further, the potential for further consolidation in the space?

Okay great, let me go there. First, I believe we paid a very fair price. I think it's certainly something under 4 times. Really probably even a little less without giving out total margins. Secondly, the way we structured the transaction, it has both a note that is contingent upon performance in 2014 and 2015, and also the equity component, the equity link component also has some performance and ties us in. And structurally, the equity is -- value is triggered upon the combined performance of our environmental and geotechnical segment. So, you know, so that we want them to perform together and we incentivize them to perform together.

Where are the risks? I think the risks are always in integration. I think we were ahead of the game here, because we did this very well in Terra, we started the process before we did the transaction, we are putting in our safety culture as we speak for them. We are putting in controls in bidding, we will quickly get them on our ERP system, we've got a schedule to do that by the end of the first quarter. So, I think we'll have -- the next four or five months are going to be very focused internally in making sure we lay the platform straight, and then go to market. But we very much like the go-to-market story. We have some clients that already are interested in the story, and I think it's going to raise us and our client base to a different level.

So you know, with any acquisition it's a people business. We've locked in their most senior professionals for a five-year period, and we have excellent tailwinds with the vast majority of their revenue expectations, I think I said, $90 million of contracted backlog that will be executed in 2015. And I think most contractors would be very happy to have a kind of three-quarters or more of their backlog already booked for next year at margins that are requisite to meet the plan.

So, work to be done, obviously on the integration, but we think we have a program to get it done and the people focused on getting it done.

Okay, that's very helpful, thank you. And then maybe just one other quick question before I get back in the queue, on the demolition business that you'd previously sold and sorry if I missed this, but you had mentioned before that you were still working with the buyer to pursue some claims on receivables, certain claims. Do you have any update on that? Is that still an opportunity for some cash at some point?

We've had some monies trickling in, and we are on target to collect what we expect to collect. And we review that quarterly, obviously with our auditors and with the executive management who has empowered our other executives to work on it. So, we're on target, and our financial statements have it in there properly recorded.

Appreciate it, thank you.

Thank you. Your next question comes from the line of Jon Tanwanteng from CJS securities, your line is now open.

Thanks for taking my questions.

Sure, Jon.

Could you break out what the P&L impact of the dry dock costs were, and what period did you pull them from?

The Liberty Island was moved forward from 2015, and Mark is saying that through the P&L we probably took a $3 million hit.

On the Liberty $3 million, and then on the Terrapin it was another $3 million for the quarter, but that was its original schedule. So, $6 million for the quarter through the P&L.

Got it, thanks.

And just so you're sure, there are other costs that get capitalized, but certain maintenance costs we do not capitalize, and as Mark said, about $3 million for each of the dredges.

Okay great, and then are you expecting any further charges from the JV delays going forwards?

I hope not.

No.

No. I mean, obviously accounting tells you to have to take the full estimate at the time of when it occurs.

Essentially take the full loss of the project under the percentage of completion accounting, so that's what we've done and that's why there is the $5 million hit in this quarter.

Okay got it, and then do you have an expected one-time cost associated with Magnus for the quarter?

I mean, there are certainly some legal costs that will flow through. We did the vast majority of the due diligence ourselves, other than legal due diligence and our insurance brokers did the insurance diligence, but all the financial operating diligence, systems diligence, were all done internally. My guess, I haven't seen the final bills, but my guess is $300,000 to $400,000 of legal fees and things like that to get it closed.

Okay thanks, and then just one more, Jon. On the backlog and low bids that you have out there, can you talk about the timing of that? Do any of those projects extend beyond Q3 next year, into 2016 at all?

Yes, there will be some of that, that will be -- extend, but don't forget, part of this is windows. You only have certain windows to work on the beaches. And part of that is opportunistic. If they give you a long time to bid it, and we can pick up incremental work and push that work out, we will do that too. So, it gives us significant flexibility to be able to sit there and say all right, there's another opportunity that's out there that we can get good margins because of the way the market is, and the length of time some of these very large projects are, they may give you windows of two-and-a-half years or three years to do it. And if we could slip something else in there and pick up good margin, obviously we would do it.

Got it. Maybe a better way to ask the question is, what percentage or ball park do you expect to fall within the next 12 months?

Yes, a significant portion of it, yes. Obviously the Suez is something that's supposed to be done by the third quarter of next year, so that whole $140 million is going to hit. The other international work we all have will all be between the end of the year and next year, and a good bit of -- a good bit, obviously not all, but a good bit of the domestic business. I mean, because if you take out the international backlog, I guess $140 million plus $30 million, whatever. If you take out that --

Domestics. 289, 290.

No, plus other work. We took -- you know, my guess is, we're talking about [$750 million] of domestic backlog. You know, if we did -- we can't do [$750 million], that's a big number, so someone's going to trip, but it'll be elevated for sure.

Okay great, thank you very much.

Thank you. Our next question comes from the line of David Olkovetsky with Jefferies. Your line is now open.

First question relates to the credit docs or the updated credit agreement that you guys filed. There's a mention in there of an add-on to the 7-3/8 bonds. I just want to understand a little bit more why you're doing that. Would that just be cash going to the balance sheet? What's the reasoning behind that?

The reasoning behind that is the cash that's going on the balance sheet, the $50 million term loan, was used to pay for -- will be used to pay for -- the ATB. We are anticipating doing addition to the notes, so that we can match long-term financing with the acquisitions.

Match long-term financing with the acquisition of --?

So we're just trying to -- yes, yes.

Magnus, you mean?

Exactly, yes.

Right.

Got it. Okay, in other words, $25 million is going out the door right now in cash, and the remainder, the remaining $25 million essentially you're going to over-capitalize with a bond? Is that -- or (multiple speakers) a bond?

Well right, we funded Magnus off of cash on hand but we'd like to replenish that so we have enough cash for operating, and other uses. As we continue to grow our business, working capital obviously expands some. So, basically that -- we're going to use the notes to pay the purchase, the cash portion of the purchase.

Got it, okay. And then, just to focus a little bit on Magnus, I?m a little bit confused by some of the wording in this amendment number six to the credit agreement, where it defines the Magnus seller note. In your press release, you talk about a maximum $14 million seller note. Just walk me through how you get to that $14 million dollar number? Because what I'm seeing here is that it's Magnus' 2014 EBITDA less $12 million times two?

Yes, it's tied to certain financial metrics of them hitting their 2014 numbers, and also giving us some protection on their 2015 performance.

So the maximum amount if $14 million, is that correct?

Correct, that is correct.

It's not -- okay, got it. And is there a minimum amount, essentially, or no?

Is there a minimum amount? No, there isn't, but --

I don't really understand what the minimum is, what the minimum is based on. Is it based on their 2014, or their 2015, or a combination of the two? It's just a little bit confusingly worded here.

It's a combination, but you know, it really is there just to protect us, that they don't provide what they told us they were going to provide in basic terms. So --

Okay --

I wouldn't expect to see the note significantly change from what we told you, but there is downside protection for us.

Okay, and then with respect to 2013 for Magnus, can you just give us a sense -- because you guys mentioned I think the 2014 was around $118 million in revenues, or that's I guess kind of the projection. Is this a fairly steady business? Is it highly volatile? Talk about the --?

It's a business that's grown. I mean, the business has certainly grown. So, they have continually ramped up. It had been in existence for I think six years. Prior to that, they were a division, a west coast division of a major environmental company, and civil contractor. They wanted to grow faster than the parent company wanted them to, so they separated. As best we could tell they separated six years ago on friendly terms, because they did some joint venture projects with the parent company they were with, and they've grown nicely. And as with many of these companies, they grow to where they stand in control of their own individual capital. It's hard to continue, and that's the reason why they put themselves into play. But it's a growing business.

Got it, and how much of that business did management own?

100%. It was management-owned, there was not private equity, there was not --

So it was a management buyout, essentially?

Yes.

Okay got it, and I apologize for all these questions, but your acquisition of Magnus, was it a competitive bidding process? How did you find them?

Yes, they had an investment banker, we actually met with them a while ago. I think they were sold on our platform and our story, but we were very clear until we sold our demolition business I was not going to derail my management's focus away from getting that done. But we stayed in contact with them, we actually usurped the process to a certain extent, got them to put it on hold, and then we re-engaged in April, May, after we sold NASDI. But there was an investment banker, there were other bidders, and I'm not told for sure but I'm told that we necessarily weren't the highest-paying bidder.

Got it, okay. And then if I could ask just one more question with respect to the capital structure, I guess I just want to understand exactly, because there's a lot of moving parts here. What do you anticipate your final working capital structure looking like? Pro forma for Magnus, and pro forma for the add-on and the term loan and so forth, like what are the dollar amounts and what are the different pieces going forward, and cash position as well? Thank you.

The movement, we have $250 million of senior notes now, so you add $25 million to that, that'll go to $275 million, and we'll still have the $210 million revolver credit facility. And then the $50 million term loan.

Sorry, it's -- you're anticipating a $25 million add-on to the notes, not a $50 million?

Yes, we have the ability to do up to $50 million.

Got it, okay. Would there be a reason to upsize other than just working capital, additional working capital and that sort of thing?

We're just looking at other alternatives, but we wanted to get the flexibility to be able to do $25 million to $50 million. So, we're having those discussions with our Board right now.

And how much approximately CapEx does Magnus require, and just give us a sense for what you guys are thinking about CapEx in terms of 2015? I'm assuming you've gone through, or are going through, the budget process right now?

Well, we're starting the budgeting process. Magnus, like our Terra business, does not have the same unique, as many unique pieces of equipment or specialty equipment. So, we have the flexibility to lease or rent equipment if we could, but it's not going to be tens of millions of dollars of equipment, anywhere near that. You know, a big year may be $3 million to $5 million for specialized equipment because they have some very interesting jobs, and it makes more sense to buy it versus rent it or lease it.

Okay. I will turn it over.

Yes, and just one more thing David, one of the things that we're looking forward to is obviously, is being able to combine both the equipment from Terra and Magnus to be able to get higher utilization out of our equipment. So, that's one of the things we identified in diligence, and it's one of the first things from an integration standpoint, is to be able to get everybody visibility on the equipment. Because there's no reason that they can't jointly share equipment. It's mostly yellow equipment with special attachments and things like that, that can go on lowboys, and in a day be moved from the Midwest to the Pacific Northwest, things like that.

Got it. I do have more questions, but I will turn it over because I don't want to hog the queue any more. Thank you guys.

Thank you, our next question comes from the line of Rick D'Auteuil with Columbia Management, your line is open.

Good morning.

Hey, Rick.

So, a couple things. On the JV loss, is there any recourse? And maybe you can -- what happened to cause the problem of the push-out?

Yes, one, it's a pure 50/50 joint venture, so there's no recourse either way with our partners. It was a project that honestly just got ahead of us. We didn't get mobilized in time, and it's causing us to lay up over the winter, and taking equipment off the water, having to demobilize it, and then remobilize it, is what's cost us the big loss.

And the late start was due to the JV, not the customer?

We believe there's a little bit of both, but we've taken the full cost and hopefully we'll be able to find some common ground with the customer.

So that, you are seeking some recourse?

Yes, but you know, like for accounting purposes you take a --

Yes.

And the recourse is not going to be 80% of what we took the hit on, so it's just -- you know, sometimes you have a bad job, and unfortunately, this is one of them.

Okay, and the demo litigation that you guys retain the upside to if you have any wins, any luck on moving any of that forward?

Yes, I mean, we keep picking up small claims here and there. We obviously are trying to settle things as opposed to letting the legal community take the vast majority of the upside, but we're slowly but surely picking up unrecorded claims there.

Okay, Magnus margins you talked about. You talked about it having a growth profile. Is -- would, under your roof, do you expect it to have a growth profile? Have they been capital-constrained in any way?

They've been both capital constrained, I don't think they have -- though they've run a very safe operation, I don't think they have the disciplined safety documentation support you need to work on certain locations. And there are some projects and things that we believe the next step of this, we can really help them with. Walking into very high levels at the -- the executive suite of mining companies, at utilities, at energy companies, where they have consistent large spend year-over-year, and we want to get -- we want to be one of the two or three people that have share-of-wallet there. And we think between them and Terra now, and the size we have, the discipline we have, that's really where we think we'll see the upside.

Okay, and this may have come out, but I didn't see it. The rate on the note, that's the $14 million note?

5%.

Yes, I'm not sure if it's out, but it's 5%.

Okay. Triggers for the earnout are out, but is that over several years?

Yes, it's financial metrics over a period of years, so I'm not actually sure it is out, and from a legal perspective since it's -- I think it's 13 individuals, we've tried to just keep it. But, it does give us, I will say, protections on the downside.

Okay. Post-Savannah, what's the next large port contract to come up, and is it -- I mean, I don't know if the Army Corps, what -- are you trying to time these things, or the bidders trying to time these things so nobody gets a great margin, they'll stagger them?

No, it's really job-by-job. If I was to be a betting man, I'd say Charleston or one of the other Florida ports, but what we're seeing -- just to be clear -- we're seeing big beach jobs, big coastal restoration jobs that are being talked about that are the same size as my guess is, what Savannah ends up being.

Well, Savannah is $600 million, or so.

Yes, but --

So you're saying your piece of it would have been --?

To be sure, the dredging side is probably $100 million to $200 million. We don't know, and we're not going to share that, because we're bidding it on Monday.

No, I'm not trying to play your hand, here, obviously.

Right, but understand the $600 million includes a tremendous amount of work outside of dredging.

Okay. That's all I had, I appreciate it, thanks.

Yes, thanks, Rick.

And thank you. We have a question from the line of Richard Paget with Sepiida Capital. Your line is now open.

Morning, everyone.

Hey Richard, how are you?

Good. Jon, could you remind us of how lower fuel prices are going to potentially impact your margins in the near future?

Yes, and -- good question, and I think maybe Mark did mention it. When we are announced as the low bidder, we immediately go hedge our fuel. So, we price fuel at what we believe the -- what is the current market on a project, and then when we're awarded it, or we're announced low bid domestically, we immediately hedge. So, the hedges we've been using I think are fuel oil, they don't necessarily track perfectly, and so we've actually had to change our accounting method for hedging, and we took a $1 million hit this quarter. Obviously, that hit will be recouped as we purchase fuel on the projects that we hedged, but we just look to take that risk off our table when we bid jobs. So, the fact that fuel oil is going down really doesn't give us incremental margin. It's just, it's still kind of the margin is driven by the marketplace, and we just try to take that risk off the table for us.

Okay, so there might be, if fuel is a smaller proportion of a contract going forward given the drop in prices, it'll give you a little bit margin because there's not as much pass-through, but it's not going to be a big impact?

No, I would not look for that to be a driver of incremental margin tremendously, no.

Okay, thanks. All my other questions are answered.

Yes, good talking to you.

Thank you. Our next question comes from the line of John Rogers with D.A. Davidson and Company. Your line is now open.

Hi, good morning.

Hey, John.

Jon, I just wanted to follow up. I appreciate your comments about backlog, and it sounds like you're going to finish the year, if all this stuff gets to contract, with a record backlog. I guess what I'm trying to understand is, what's the utilization rate if you work on -- if you do this work into 2015? Because the last time you had backlogs of these levels, the next couple of years you had double-digit margins in dredging. Is that even realistic in this environment?

Yes, I mean, a lot of this is hopper work, which garners the highest margin. We need to of course get the rest of the fleet utilized, but we talked about this earlier. I think you're right. With higher utilization, our overall margins go up and we have the dual effect of not only incremental work at arguably a little uptick in margin percentage, but we also cover significantly more overhead, and that sticks. So, we get -- for lack of a better term, we get a double bump from an EBITDA standpoint.

So, I think the premise that we talked about earlier and your premise, is correct.

And as we think about the risks into 2015, besides just specific project execution, obviously have weather early in the year. But what about moving equipment around? Is that in the plan, especially out of Australia, or that we should be --?

Yes, actually even though the dredging, there's still some work going on, our portion of that project, our major equipment, is being loaded right now and coming back to the US. We have a submersible going to the Middle East, if it's not there already, in the next couple of weeks. We're prepping to load the two big cutters, and support equipment and pipe, to go to the Suez. But you know, we get paid for that. We've done that numerous times, and we will have a significant amount of our vessels sitting in the Northeast off of Jersey. You know, the beauty of those three projects we won are just up and down the Jersey coast, so it's not like we're going to be sailing from the Jersey coast to the Gulf, back to the Jersey coast, stuff like that.

So, those aren't risks that the mobilization risks of the submersibles -- we've done that before. We're used to it. It's a tried and true technology, these submersible companies are very sophisticated. So, I don't think we view that as a tremendous risk for us.

Okay, and then just lastly, in terms of the spend on the ATB in 2015, how much will flow through your books? And what are you planning there?

So, year-to-date or through the third quarter, we've spent $30 million this year, for a total of $50 million from the prior years. We'll have a couple more payments in before the end of the year, in the $10 million range, so you'll see about $40 million of capital this year related to the ATB.

So, an incremental [$10 million] from where we are year-to-date.

Yes, in fourth quarter.

Okay, but Mark, in terms of the spend in 2015, I mean, you know what the budget is for the ATB, and how are you looking at that, especially given the financing plan? I mean, does it still flow through your capital budgets in 2015?

Well it does, but obviously, taking the $50 million, the next $50 million of spend will be utilizing --

The financing.

- the financing.

Okay.

So, I don't have the spread in front of me, but there's usually a reasonable payment at the back end when you take delivery. So, my guess is, cash off our balance sheet other than that $50 million, probably the vast majority of that would be in 2016. Is that (multiple speakers)?

Yes, later, right.

Late 2015 or 2016, yes.

Right. So, we actually, as we put $50 million into it from cash for operations up to now, now we've got the $50 million financing, and then the last $40 million will come from operations again, and you'll see that late 2015 and into 2016.

Okay, thank you for that, appreciate it.

Thank you, and we have a follow-up from the line of Rick D'Auteuil from Columbia Management, your line is now open.

Yes, is it fair to say both Miami and Wheatstone are tracking your expectation from timing and cost and margins?

Yes. I think it's safe to say that. I think it's safe to say that the Wheatstone has been a marvelous contract for us, and I guess you know, we will be done in the first quarter, potentially some small cleanup in the second quarter, but Wheatstone will go down in the books as a very, very successful project for us. And Miami is going along kind of as expectations, yes.

Okay, and at one point you thought there might be some follow-on work in Australia, but now it sounds like you're bringing equipment back, so --?

Yes, I mean, with energy prices, there have been a lot of projects that have been shelved in Australia.

Okay.

And so, we're bringing the piece of equipment back to New York, just because we see opportunities potentially to utilize it here.

Okay, and about -- we haven't really focused on Gulf of Mexico, BP-related. Anything, what do the prospects look like there?

Yes, I think there's been cash, there's been some money released to the states. So, we actually expect to see some nice size projects let in 2015. So, I said it in the opening remarks, all the things we've talked about that are drivers of the domestic marketplace are happening. Savannah's going out to bid, Harbor Maintenance Trust Fund has been passed, we hear good things about where the executive branch is coming out on their budget next year for that. I think we take as a hopeful sign, Biden coming out and talking about infrastructure and the importance, and what it drives for employment. And the Gulf has some real opportunities, no question about it, and we're seeing private work too. Freeport is one of them, but we're certainly tracking other energy-related projects in North America.

So your win rate was lower presumably, you wanted to bid them on your margin and you were okay to lose them if the margin wasn't there, knowing that there was more work behind it. What's the competitive environment, and then even more importantly, you track their equipment and its utilization on the competitive front. Are they pretty much fully-utilized now, or close to it?

Yes, I mean, and to be sure, once you roll our October numbers in, that percentage changes dramatically. Right? Because you start saying, all right, we want close to $300 million, of a $300 million bid. You know, there's some other -- maybe it was $300 million of $375 million or $350 million, I can't remember what else bid in October.

But, I think that as a general comment, it's extremely, extremely tight in the hopper market. The cutters, there's some work there, but there's more opportunity and the mechanical is a smaller market that we've had good success with.

But, I think it's going to be elevated utilization for the whole industry.

And therefore pricing, I assume, right?

That has been our thesis, and I would suggest to you that in the bidding we've seen in the last month, we've stayed disciplined, and I think we're all happy with the margins we've gotten out of it.

Thank you.

And thank you. We have a question from the line of Shu Haur Tang with Morgan Stanley Investment Management. Your line is now open.

Good morning guys, thank you very much for the call. I was wondering if you guys could provide some color in terms of the add-on to the senior unsecured notes, the $25 million. Why wouldn't you -- because your senior unsecured notes will become callable in 2015, I was just wondering, could you shed some light on the decision of adding on as opposed to refinancing the whole senior unsecured notes, and actually just bring bigger notes to the market?

Yes, and if you've tracked the notes market, the marketplace goes up and down, up and down. Really isn't a tremendously expensive exercise just to do the add-on. As you well know, our notes do step down, I think February 1 of 2015, and depending on what the marketplace looks like, I can't tell you that we would not then just go and opportunistically look at redoing it and setting up another 8- or 10-year note. But, we just wanted to be disciplined, get our balance sheet in order right now by doing the add-on to the notes, and then as the marketplace tells us, we'll look at what's the proper capital structure going forward.

Oh, got it, so it's not completely off the table yet.

No, the market -- we look at everything. We're opportunistic, but we're certainly cognizant of what the notes market is like.

Okay. Thank you.

Thank you, good question.

Thank you. (Operator instructions) I'm showing no more questions in the queue at this time. I'd like to turn the call back over to management for closing remarks.

Okay, we appreciate the support of our shareholders, employees and business partners, and we thank you for joining us in discussion about the important developments and initiatives in our business. We look forward to speaking with you during our next earnings discussion in February. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes the presentation. You may now disconnect.