Orion Group Holdings Inc (ORN) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Orion Marine Group Third Quarter 2008 Earnings Conference Call. Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the call over to Mr. Chris DeAlmeida. Please go ahead, sir.

Good morning, and welcome to the Orion Marine Group Third Quarter 2008 Earnings Conference Call. Joining me today are Mike Pearson, Orion Marine Group's President and Chief Executive Officer; Mark Stauffer, our Executive Vice President and Chief Financial Officer; and Cabell Acree, our Vice President and General Counsel.

Regarding the format of the call, we've allocated about 15 minutes for prepared remarks in which Mike and Mark will highlight our results for the third quarter and outlook for the remainder of 2008, as well as 2009, and then we will open up the call to questions for the remainder of the time.

During the course of this conference call, we may make projections and other forward-looking statements regarding, amongst other things, our end markets, revenues, gross profit, gross margin, EBITDA, backlog, projects in negotiation and pending award, as well as our estimates and assumptions regarding our future growth, EBITDA, gross margin, administrative expenses, and capital expenditures. These statements are predictions that are subject to risk and uncertainties that may cause actual results to differ materially. Moreover, past performance is not necessarily an indicator of future results. By providing this information, we undertake no obligation to update or revise any projections or forward-looking statements, whether as a result of new developments or otherwise.

Also, please note that EBITDA and EBITDA margin may be deemed a -- non-GAAP financial measures under the rules of the Securities Exchange Commission, including Regulation G. Please refer to the reconciliation accompanying this earnings release call -- earnings call available on our website at www.orionmarinegroup.com for comments on the use of non-GAAP financial measures, as well as applicable reconciliations to the most comparable GAAP measures.

Also, please refer to our earnings release issued this morning, November 6, 2008, which is available on our website for additional discussion of risk factors that could cause actual results to differ materially from our current expectations.

Before I turn the call over to Mike, I would like to point out that this morning's earnings release highlighted our current market outlook, as well as details of our revenue growth goal and EBITDA goals for the fourth quarter full-year 2008 and an initial -- initial goals for the full-year 2009, as well as some other helpful information.

Based on our experiences and feedback from the investment community over the past year, we felt it was prudent to provide additional clarity and visibility to our full-year goals and help investors better understand quarterly fluctuation. However, this additional visibility does not deter from our previously stated long-term goals and our recommendation to view the Company over the long term.

As a matter of housekeeping, we plan on issuing new information for the next quarter during our year-end earnings release and follow the same pattern on a go-forward basis. Should you have any questions on this, please feel free to give me a call.

With that, I'll turn the call over to Mike Pearson, President and CEO. Mike?

Thank you, Chris. Good morning, and thanks for joining us.

Overall, we're pleased with our results for the third quarter, particularly in light of the active storm season. As you know, during the quarter, we felt the effects of a rather active hurricane season. I'd like to thank all of our employees for doing an excellent job at executing our hurricane preparedness program, securing their job sites, and returning to work as soon as possible. As a result, we were ready to quickly respond to our customers' needs.

We encountered a total of seven named storms which impacted our operations and resulted in our having to shut down all of our projects at least once, with some projects being shut down three times, which is historically abnormal.

While projects are shut down, we're unable to recognize revenue under percentage-of-completion accounting. Therefore, our revenues that we would've otherwise recognized during the quarter were shifted into future periods; specifically, approximately 6 million of revenue during the third quarter was shifted into future periods. However, I would want to remind you that this is not lost revenue; it's just revenue that's delayed and should be recognized in future periods.

Now, while these storms reduced and recognized revenue during the quarter, we expect to see new bid opportunities as a result of this active hurricane season. And, in fact, we're already working with several customers on small emergency repair projects.

Additionally, the president recently signed into law supplemental emergency funding legislation, with $740 million being set aside for the Corps of Engineers for emergency dredging and construction projects in the storm-affected areas. On the cost side, we built in contingencies to cover estimated [demobe] and [remobilization] costs associated with shutting projects for pending storms. For the third quarter, we adequately covered these costs.

Aside from the storms, we were pleased with our results for the quarter, which were in line with our overall expectations.

Now, turning to the market and the future outlook, there's no doubt we're experiencing an extraordinary time in the history of our economy. The uncertain economic outlook is affecting numerous industries and companies; however, to date, we are encouraged that we have not seen a significant drop in our end-market activity. We anticipate that the impacts of the economic downturn may be mitigated by the need to rehabilitate America's crumbling infrastructure and to provide needed improvements. Based upon public reports, we expect these improvements to be forthcoming in the future as it remains a continued focus on infrastructure in Congress, and as such, projects could serve as a potential stimulus for reviving the economy.

In particular, the recent election results further highlight this focus as President-Elect Obama's proposals include spending $150 billion on infrastructure improvements over a 10-year period and spending an additional $60 billion over the same period for bridge repairs and reconstruction and also remaining focused on continuing to build hurricane defenses and restoring Southeast Louisiana's wetlands.

Further, despite some decrease in global shipping traffic, we believe Gulf Coast and Southeast Atlantic ports will continue with expansion plans.

First, decreases in shipping fees may put pressure on shippers to become more efficient with larger ships.

Secondly, financing for the widening of the Panama Canal is now in place, and Gulf of Mexico and Southeast Atlantic ports should continue plans for increases in both tonnage and shipping traffic. For example, the Port of Houston has continued to see an increase in both tonnage and ship traffic year over year and currently has plans to continue substantial expansion of the port over the next 15 years.

Also, today we announced the award of a large dredging project associated with continued port expansion in the Houston and Galveston areas. Similarly, the other ports in the Gulf of Mexico continue to add breakbulk capacity to accommodate increased heavy lift and project cargo [shifts] as these ports have sufficient land available for future expansion.

Additionally, we continue to see opportunities in the cruise industry. Despite a recently reported drop in cruise bookings, there remain several large ships under construction or being delivered that are expected to come online over the next couple of years, and we believe we will see either mooring upgrades to existing facilities or new cruise ship pier construction opportunities as a result.

To date, we're still seeing bid opportunities and projects related to bridge construction and repair in our markets, and we continue to work on several bridges in Florida that are over water.

Also, we remain encouraged that the Water Resources and Development Act, or WRDA, that was passed last year, will start to provide opportunities in the second half of 2009. For example, we expect to bid on recently issued tender packages for New Orleans' hurricane protection and coastal restoration programs.

And, finally, the Department of Defense continues to see funding increases for BRAC, the Base Realignment and Closures Program, and their funding is projected to be increased 19% next year and 29% after -- a 29% increase in 2008, and we believe a portion of that may be marine related.

Overall, we continue to see a reasonable strength in our end markets and good prospects, both near term and long term. However, we will remain vigilant of the uncertainty in the economic environment. As we previously have stated, depending on the breadth and depth of any downturn, we could see negative impacts on our business. It's not unreasonable to think that some of our end markets could see some deterioration or bidding delays as a result of the credit crisis. However, other end markets could reasonably see increased bidding opportunities and outperform due to increased spending on infrastructure projects, as well as hurricane protection and restoration projects. Currently, we're seeing good overall bid opportunities for 2009, and we're cautiously optimistic about the year ahead.

As we look at 2009, we had an estimated $96.6 million of backlog at the end of the third quarter booked and ready to be liquidated during 2009. As we announced today, we were awarded a large port channel deepening project near Galveston, Texas, which added approximately $13 million more to 2009 backlog. Including this project, we have about $110 million' worth of backlog that is expected to be liquidated in 2009.

On top of that, we're tracking almost $1.4 billion of potential bid opportunities for 2009, which excludes the recent Federal Supplemental Emergency Storm Funding.

As a result of our backlog and current bid opportunities, our initial goal is to grow full-year 2009 revenue between 12% and 16% as compared to full-year 2008. Additionally, we've set our initial full-year 2009 EBITDA margin goal to be 14% to 18%.

I'd like to point out that achievement of these goals could be impacted by the uncertain economic outlook, and as a reminder, we cannot guarantee that the revenue projected in our backlog will be realized or if realized will result in earnings.

In closing, there is no doubt 2008 has been a challenging year. However, as we look at 2009, we're cautiously optimistic about the prospects that lie ahead. Our main goal is to continue to grow the business profitably, so we will be prudent in our bidding and execution and vigilant in monitoring economic developments which are currently difficult to predict with regard to any positive or negative impacts on our business.

With that, I'll turn the call over to Mark Stauffer to discuss our financial results in more detail. Mark?

Thanks, Mike, and thanks again for joining us.

Net income for third quarter 2008 was $3.8 million, or $0.17 per diluted share. This net income includes approximately $600,000 due to reconciling federal and state deferred taxes and the benefit of the domestic production deduction. Excluding the tax reconciliation, net income would have been $3.2 million, or $0.15 per diluted share, which compares with $5.8 million, or $0.26 per diluted share, in the prior-year period.

Third-quarter contract revenues increased 4.8% year over year to $62.9 million, of which 49% was generated from federal, state, and local government agencies and 51% from private industry. This compares to 52% from federal, state, and local government agencies and 48% from private industry for the third quarter of 2007.

EBITDA margin for the quarter was 16.5%, or in line with our expectations. I would like to remind investors that there can be fluctuations in quarter-to-quarter results due to the timing and mix of projects. For this reason, we suggest investors focus on the long term and annual results rather than quarter-to-quarter fluctuations. However, it is also partially for this reason that we have decided not only to give full-year revenue growth goals and EBITDA margin goals but also to provide these goals for the upcoming quarter. We hope this will help the investment community better understand quarterly fluctuations in our business.

We expect fourth quarter 2008 revenue to grow 19 to 26% year over year, and we have a fourth quarter 2008 EBITDA margin goal of 15% to 18%.

Due to current project schedules, the Company will not fully realize the revenue that shifted out of the third quarter during the balance of 2008.

Additionally, the bidding and award of some contracts were delayed as a result of the storms, specifically Hurricane Ike, which reduces the amount of revenue opportunity in 2008. Therefore, our full-year 2008 revenue growth goal will be below our previously stated goal of 28 to 32% year over year and will now be in the range of 21 to 23% year over year. However, we remain comfortable with our previously announced full-year 2008 EBITDA margin goal range of 14 to 16%.

As Mike mentioned earlier, for 2009, we expect revenue to grow 12 to 16% as compared to 2008. Our full-year 2009 EBITDA margin goal is 14 to 18%.

Given the uncertainty in the economic environment, we believe that it is important to have a strong, stable balance sheet. We had maintained a strong balance sheet with good free cash flow generation, low leverage, and a solid cash position for many years. Despite the uncertain economic environment, our approach and solid balance sheet remain intact.

During the quarter, net cash flow from operation -- excuse me, operating activities was $16.4 million, which is an increase of $10 million year over year. We believe a good positive cash flow from operations is one of the foundations of our Company that is viewed favorably by our bonding company and is a safeguard during volatile times like these. As a result of continued free cash flow from operations, at this time, we do not anticipate the need to utilize our revolving line of credit.

Additionally, we once again ended the quarter with a solid cash position. As of September 30, 2008, we had cash on hand and availability under our revolving line of credit of approximately $26.7 million. In addition, we had another $15 million of liquidity available to the Company at the discretion of our lenders.

Finally, our debt position remains low. As of the end of the quarter, our leverage was less than one time to EBITDA, which we believe is very conservative and well below our comfort level of 2.5 to 3 times EBITDA.

To sum it up, we maintained our solid financial position during the quarter. Our strong balance sheet should help us in the current economic crisis. As Mike mentioned, with our current backlog and our visibility for good market opportunities, we are comfortable with our financial position as we head into the upcoming year.

With that, I'll turn the call back over to Chris to begin the Q&A portion of the call.

Thank you, Mark and Mike. We would now like to open up the call for questions. Connie, would you please review the procedure for placing a question?

Thank you. (OPERATOR INSTRUCTIONS)

Fred Buonocore, CJS Securities.

Nice quarter, all things considered with the hurricanes and whatnot. One thing I want to ask about, just to see if I'm looking at this correctly, if you -- you know, ex the hurricanes, it looks like your revenue would've been around 69 million for the quarter, which would've been up around 15% year over year. And then kind of given your Q4 guidance that you're giving now, it looks like without the hurricanes, you might've been a little bit short of your initial 28 to 32% top-line growth. Is that -- just to be clear, is this reflective of the impact of the hurricanes also on Q4 and pushing projects out, or was there some other headwind or pressure that arose during the quarter that also impacted revenue growth?

No, I think, Fred, you've got it spot-on there. As we talked about during the prepared remarks, as a result of the storms, projects that -- the bidding projects, the bidding environment got shifted out as well. As an example, the project we announced this morning for the Galveston dredging project, we were apparent low bidder on that project two months ago, and we're just seeing the award today. So there was a lot of disruption, particularly in the Upper Texas Gulf region and Louisiana region, with people just getting back not only up to speed but assessing their own individual needs and things of that nature, and it had an impact in shifting opportunities [rightward].

Got it. So we could really look at it as the active hurricane season not just had an impact on Q3; it was really a whole second-half impact?

Well, the other thing, Fred, to keep in mind is that when our customers shut down, they shut down the bidding activity. So there's a bit of a delay in that not only on the jobs that we were awaiting award on that already (had) been bid, but it slows down either issuing tender packages or evaluating bids in progress.

Got it. That makes sense. And then, secondly, in the press release and in the prepared marks, Mike, you talked about there were certain kinds of projects that might be impacted by the deteriorating economic environment while there would be others that could potentially offset that or represent upside. Any -- you analyzed that pretty well in your remarks, but could you just give a little bit more specificity of an example of a type of end-market project that we might see a slowdown in versus the type of project that we might see a pick-up in?

Right. Well, I recently attended a McGraw-Hill construction conference in Washington, DC a few weeks ago that was very helpful to try to understand what's happening to the [EMC] sector, and from that, I was able to learn that the markets that are deteriorating, that are dragging EMC down as a sector is the housing construction, companies that build commercial stores of warehouses, hotels, office buildings, things like that, markets that we don't participate in, but nevertheless, it has downward pressure on us, as well. And the markets that are projected to hold or grow are highway and bridges, infrastructure.

You know, there's a large infrastructure bill that's currently being kicked around with the House Transportation and Infrastructure Committee for a stimulus package, and we think right after Congress returns mid-November, this will get on the floor and start getting tabled for passage certainly if not with the incumbent president, with the new president-elect. And we've seen figures bantered around of a $500 billion stimulus bill, so we're excited about that, and the feeling is it's safe [inaudible] for the next five years, 2010 to 2015, is going to get a big boost with this new administration.

Got it. And then, finally, do you have much exposure, or do you do much business in the oil and gas industry? I know you do some; just wondering to what magnitude.

Well, we're more downstream maintenance, existing facilities. We're not affected by, for example, the drill rig activity goes down in the Gulf of Mexico. That doesn't really mean anything to us because we're building and servicing and maintaining existing infrastructure that's on the shallow waterways. And we're still doing terminal work. As long as this country imports 60 to 70% of its oil, there's going to be terminal facilities to be upgraded and maintained, so that's our bread and butter, and I think a lot of the downturn with drilling activity on the Gulf of Mexico is just going to shift EMC companies internationally that participate in those markets.

Excellent. Okay, thank you very much. That's all I have for now.

Okay.

David Yuschak, SMH Capital.

As far as your guidance for the fourth quarter, it is relatively wide considering we're almost halfway through November. What kind of conditions, both at the top end and the bottom end of that, would you need to give you such a wide range, kind of midpoint of the final quarter?

Well, it's really the same answer that we gave I think in 2008 is even though we're at this point in the quarter, there's still the impacts of when projects might get started, when they get bid, and the delay between bid and award. That's kind of a moving area, and it's a function of the full year. So as we're going through the quarter, I mean this is going to solidify, obviously, as we see projects like the one we awarded today get awarded and we can get active in mobilizing to that project. But as we talked about, it's still moving around a little bit in terms of what's actually going to get bid and what we can burn off in the quarter.

Okay. Now, and just kind of curious, too. Shaw's in the middle of that major -- starting to ramp up that project for the New Orleans area, that $700 million contract. Are you guys starting to see anything coming from them as far as any bid requests at all?

Yes, they just started coming out with tender packages that we'll participate in, and you know, it's in the early stages at this point and -- but they do have work planned to be executed starting next year.

Okay. Is that going to be the first half of next year, do you think?

Probably so. We'll see how it pans out, but I would certainly feel like mid-year, it's going to be pretty active over there.

Okay. And then as far as your outlook for the backlog and all the bidding activity, is it -- are you more inclined to think -- you know, because you've been making some good progress on commercial versus government work as far as the mix. Do you see that maybe heading back towards the other way for the time being, at least for 2009?

Well, it could. If the Corps gets organized with allocating the funding that's been diverted their way, we could have a shift that way. There's been a lot of damage as a result of these hurricanes. Hurricane Ike, in particular, was devastating, and I think the Corps is trying to prioritize the needs, and we were very actively bidding Corps work, dredging projects, in particular, in the third quarter. It's kind of slowed down now, and we expect that there will be another flurry of bids coming out.

I do know that the Harper Dredge market has been very active with bidding, and that's a good sign that the Corps has additional funds that they're going to move forward next year. So that could be one of the shift areas. We'll just have to wait and see.

And as far as the liquidity on the balance sheet because you've got $18 million in cash, [you didn't mention] earlier that you've got another, what was it, $10 million or so potential added? Given the kind of cash generation you could produce next year, is this being more just kind of cautious on maintaining the liquidity on the balance sheet right now relative to your debt servicing, that you just want to maybe maintain your relationships with banking right now rather than maybe lower than exposure?

Well, I think it's a little bit of both. I mean I think, just historically, if you look at us, we've kind of maintained a fairly conservative balance sheet. I think as we move forward, as we talked about, certainly I think the times warrant us being a little prudent as we move forward into '09.

And then just real quick on some housekeeping. D&A for 2009, getting kind of maybe rough estimates of what that might be? And in the quarter, too, you had a pretty good step-up in the SG&A expenses. I'm just wondering if some of that might be just related to extra costs of Hurricane Ike relative to the D&A and the public -- cost of being public?

I think that the ramp-up in the D&A is really related to the amortization as a result of the SSI acquisition, and I think you've solved that impact on Q3. That's why it's up substantially year over year. A lot of that's related to the amortization of the -- of SSI acquisition. Some of it's also a full complement of the public company expenses.

Sequentially, it's up quite a bit. I was just kind of wondering because you had that cost of the amortization in the second quarter, as well.

We had -- in Q2, we had some improvements in our medical expense. Basically, it broke in our favor.

Okay.

You know, we don't anticipate -- that's a tough one to predict how that's going to go, but that was a big factor in why Q2 was down a little bit. We think Q3 is more in line with what our expectations are over the next several quarters [inaudible] until that amortization from the SSI rolls off next year.

Now, when does that -- when did that roll off, mid-year?

Just after mid-year.

Okay, so your D&A for the year ought to be down next year relative to this year some?

Some. That rolls off in about August of next year.

Okay. That's all I've got for now. Thanks.

Jack Kasprzak, BB&T Capital Markets.

I was wondering if you could frame out with regard to the $1.4 billion bidding opportunities you're tracking for '09; is there any point of reference you can give us for what that was six or 12 months ago?

Our database of information at this time a year ago was just under $1 billion, and it's now 1.4.

And as you said, Mike, the -- that number excludes recent federal emergency storm funding, so what's driving the increases, if you could give us some color there?

Well, it's kind of spread across the board in our end markets. We've got about 11 different end markets, but a lot of dock construction and ports, you know, due to port expansion, and that's been a big driver, and that continues. And the reason we didn't try to break down the $740 million is that we really haven't got the details on it just yet. I think the Office of Management and Budget is in the process of distributing that, and once we get the details, we'll convey it, but we just wanted to exclude it right now. But, essentially, bridgework, cruise pier work, and dock construction are the -- probably the big three.

Okay. And so does that -- and you mentioned, too, in your commentary that you think the WRDA-related funding could start to provide opportunities in second half of '09, so that would be incremental to what you just discussed, as well?

Yes, we still haven't seen WRDA come out on a big way. One of the questions asked a while ago was about the Shaw Group's project that they're going to be executing. That is just now coming on the table with tender documents, so, hopefully, between now and the end of the year, we'll get some better visibility on how that work's going to be executed. They got the $700 million Corps project in New Orleans for the hurricane protection barriers, and that's the kind of work we like to do. So does that fairly answer your question?

Yes. And then the stimulus package, the $150 billion stimulus package that Congress is kicking around, you mentioned that, as well. Apparently, there's $1 billion within that for dredging projects. Have you seen -- have you guys seen that?

I haven't seen it, but I have been informed of that. I belong to the Dredging Contractors of America, and they're informing the members that that is the case, that there's about $1 billion that's set aside for dredging, and I believe for marine construction, as well, but primarily dredging. And that's very important for us to see that come forward because we think the Corps is going to have a pretty good funding base for about a three-year period, but I don't really have the details to tell you precisely, but I concur that I've heard that same figure.

Okay, so we start with $1.4 billion of bidding opportunities that you're looking at, that you're tracking for '09. That's up from just under $1 billion or so this time last year. And so incremental to that -- and we don't know any specific numbers in terms of what it could mean for you guys or opportunity, but incremental to that would be emergency storm funding, WRDA-related projects, and anything that could come out of a stimulus project -- package?

Well, what I want you to keep in mind is like WRDA's going to be spread over 10 years, as --

Okay.

-- and some of these other funding stimuluses are not going to be a one-year deal; they'll be spread over five to 10 years. [Safety] could be five years. So it'll take us a little time to sort that out in the months ahead, but ignoring all that, our own database of traditional work out there has got a significant step-up from '08 to '09, and we see another $2 billion beyond '09 with what we're tracking now.

So we feel pretty good that the work is stacking up, but you can't ignore the fact that there could be some delays due to the credit crunch (if) someone decides to delay a project. We haven't seen that yet, but it could happen.

Sure. Just trying to get -- first of all, make sure I understood. I don't want to double-count, first of all, and secondly, we want to understand the visibility in longer terms, so that helps.

It's as simple as this. It doesn't get into our database until we know it's real.

Okay.

And, Jack, I think you've got it. I think what will happen is as we get clarity on the emergency dredging, we get clarity on the stimulus bill, then portions of those dollars will be added on to that $1.4 billion.

Right. And, Mark, the EBITDA margin in the third quarter was 16.5%, I think?

Yes.

That was your best EBITDA margin so far this year. Is that just -- I mean even with the storm disruptions, it was better than Q1 and Q2. I mean is that simply just because those problem projects have rolled off?

Yes. We think that we've got those problems behind us, as we talked about on the last call, at the end of Q2, and we're in line with our expectations for Q3.

Okay, great. Thanks a lot, guys.

Okay.

Trey Grooms, Stephens, Inc.

Just one question on the guidance for '09, if I could. You guys reiterated your -- I guess in your prepared comments the kind of long-term goals of 15% top-line and 18% of EBITDA margin, and this kind of falls at the top end of the '09 guidance range. Can you kind of give us some color on what you're seeing that would -- what you're expecting that could cause that -- you know, the '09 to come in lower than that range, and your thoughts behind putting the range that you gave kind of with the longer-term goals at the higher end of it?

Well, I think that, as we've been talking about in the prepared remarks and some of the questions, I think given the economic environment, you know, we're cautiously optimistic for next year, but we certainly are -- it's not out of the realm of possibility that we could see some impacts because of the economic downturn. So I think that we're cautiously optimistic about next year, we think our goals for next year are realistic, and we think it's prudent to put forth the goals we did given the environment that we're in.

Okay, and with the top line that you -- the range that you gave there, any additional green fields in that number at that plant?

Yes, we continue -- we will continue to execute our growth strategy during '09.

We certainly intend to increase our presence in the eastern part of Louisiana, and we're taking steps there to be a player in the Southeast Louisiana region.

Okay, and then with the pullback in diesel and steel costs that we've seen recently, could you give us some color on what kind of impact that that could have on the cost side of your business?

Well, material prices are beginning to abate now on certain commodities. I think iron and steel products have gone down significantly here in the last few months. Cement is pretty flat. Scrap material's gone down, as well as the steel price, and so -- diesel fuel is down. I don't know if the price of gasoline and diesel fuel is going to stay down long-term with us being in an importing situation, but right now, it's very low.

I think the commodities going down can be helpful because some projects that may not have gone forward otherwise could be helped out by a lowering of these costs because that can be significant on a construction job.

Okay. And looking at the guidance that you did give for '09, are you guys kind of thinking that these costs kind of stay about where they are now or bump up next year? Kind of what was your kind of thinking that you baked into that?

Well, we tried to assess any uptick that could occur with our vendors and suppliers. You know, we stay in close contact with them, and because of the short nature of our -- short duration of most of our contracts, we're able to not get in a bind on commodities and have been successful in passing that on. But we'll keep our eye on it. Like I say, I can't help but think that fuel prices is -- will rise again. It's just a question of when and -- but we're not having any issues with commodity overruns.

Okay, and Mark, this -- if you did address this, I apologize, but your CapEx expectations for '09?

Oh, we haven't announced that yet. We will announce that on the next call. For this year, we've said sort of the 14 to $16 million with the additional of Subaqueous. We haven't announced '09, but we'll do so next call.

Okay. And then you guys have talked quite a bit about infrastructure opportunities that could come in '09, especially with the changes we're going to have in the presidency. Other than kind of base realignment and closure there on the Navy side, is there any other opportunities that you could see coming for you guys with any type of wind-down in the Iraq war if it were to occur this year?

There could be an increase in Navy work. We had a bit this year. We haven't seen any major projects come out in the last couple of months, but there still are some Navy dock work that will be carried out, and I suspect if there's a major shift, down-manning quickly in Iraq, that there could be some short-term opportunities, but we don't have any specifics at this time. I think we're all waiting to see what the new president-elect's going to do.

Yes, and I think just a couple other general comments. I mean just generally speaking, to the extent there was a free-up of budgetary funds as a result of your scenario, I think, certainly, that that would be helpful in, say, the Corps funding or other areas, DOT funding. I mean you -- again, it's kind of a hypothetical question, but I think, hypothetically, that if you saw a reduction of funding over there, that that would be spent domestically.

Great. Thanks a lot, guys.

[Jay Brosnahan], West Park Capital.

Most of my questions have been asked and answered but had a quick question on the gross margins. Was there anything positive or additive to the gross margins due to the hurricanes this last quarter?

Not -- you need to keep it in mind about the duration of or the timing of the storms. We generally don't see a whole lot of -- there's not a material impact in the -- right around the storm. We would expect that we would see impacts or opportunities from the storm in future period.

Right, but with the gross margins, there weren't any -- I mean wouldn't that have impacted your margins negatively? I guess what I'm trying to get at is as we go forward, should that start to be the baseline for your gross margin?

Well, I think, as we kind of talked about with respect to EBITDA margins, I think we were more pleased, obviously, in Q3 versus the first half of the year with -- when we had problems with the two dredging projects that had a depressing effect on gross margins and EBITDA margins. So I think we were pleased with the results. I think they were in line with our expectations, both at the gross margin level and at the EBITDA level. I think, as Mike said in his prepared remarks, with respect to storms, on the cost side, we plan in contingencies for the actual event, in other words, the actual [demobe] and [remobe] associated with the event. What happens further, though, is that we're obviously -- if we're not being productive because we've [demobed] off to the side, we're not recognizing revenue and profit under the percentage-of-completed -- completion method of accounting. So with respect to the actual impact of the storms, I mean we generally think we've covered our cost associated with this [mobe/demobe] relation to the storms in Q3.

Thank you very much.

You bet.

Min Cho, FBR Capital Markets.

Quick housekeeping question first. Can you break out your percentage of revenue by federal, state, and local?

Yes, our -- just give me one second -- our federal was 11% for the quarter; 16% was state; 22, local.

Okay, and can you remind us what that was in the third quarter of '07? Do you have that?

Yes, federal was 12, so that's essentially the same; state was 7%, so that was an increase in Q3 '08; and local was 33% a year ago.

Okay. And then in terms of just acquisitions, I know you're always kind of looking out there opportunistically. Can you talk about the pipeline right now and also if the valuations have become more realistic given the recent economic downturn?

Well, we continue to look for opportunities and are active in that M&A environment. I think right now, we're kind of in a mode of -- we'd like to get some clarity on the economy next year and see if this is going to settle down. It's really not a good time to be going to increase your debt in this kind of environment, so we're just kind of being cautious, wait-and-see how the year's going to shape up. We can continue to grow the Company organically next year without any acquisitions, so there's no pressure there, and we just want to be prudent that if we do -- do an M&A activity, that we're not paying a high price to do it.

Okay, but -- that makes sense. Also, in terms of your dredging business, can you talk a little bit about the competitive landscape right now? It sounds like there's obviously a lot more opportunity. Are you seeing any pricing pressure (that actually) help in pricing going forward?

Well, we've seen pricing all over the map. We've seen some irrational pricing, and we've seen some reasonable pricing. I think some of the larger dredging companies are beginning to get booked up. Their utilization is stretching out. I know some of the Hopper Dredge companies are getting booked up very nicely, it looks like, next year, and I think that will eventually trickle down to the smaller companies that have smaller dredging fleet, like ourselves. So that's kind of the trend, and we're very encouraged that the Corps appears to be stacking up a pretty nice workload next year.

All right, great. Thank you, and good luck.

Okay.

Ross Berner, Weintraub Capital.

The margins on SSI, were those lower than the Company average EBITDA margins prior to the acquisition?

Not at all. We've had some of our best margins with them, but we don't break that out by division, but we're very pleased with what we're seeing from that division.

And SSI in pre-acquisitions, their results were in line with our -- their historical performance was in line with ours, as well.

So one of the things that we talked about over the last year in change is that you had EBITDA margins of 18, 19, 20-plus percent given the short-term nature of the work, given that materials wasn't a significant issue in the procurement process and the way that your jobs played out. How -- can you sort of walk me through why we've seen the gradual decline in margins? Is it pricing pressure? Where -- given that you're talking about a robust backlog in opportunity, why are we seeing pricing -- margin pressure?

Well, a couple things. I mean the current year. It's no doubt been a tough year. We had a couple of projects that we talked about earlier in the year that definitely had a negative impact on margins. We've also -- again, we had an active storm season, particularly impactful on the Q3 just in terms of a disruption. We're pleased that during the quarter, margins rebounded from where they were earlier in the year. I think going into next year, we're cautiously optimistic. I think we don't want to be irrationally exuberant based on what we're seeing, but we are cautiously optimistic, and I think that, again, as we've said, we're sort of in uncertain times, and we don't want to get ahead of ourselves in --

I understand that, and I appreciate that. I mean is there any reason that your EBITDA margin can't get back north of 18, 19, 20%, or do you feel like you're just being judicious at this time?

Well, I think long-term, that's certainly what we aspire to. But I think that the other reason why that we've decided on a go-forward basis to focus or add the quarterly goal updates -- and we intend to do that, as Chris laid out in his prepared remarks -- so we hope that that provides additional clarity, but long-term, we certainly aspire to that. If the markets -- end markets continue like they are and the economic downturn doesn't have an impact on it, we're certainly going to aspire to that, and we always and historically and remain and will remain focused on driving margin.

Okay. Thank you for that. And given the valuation, you're now trading around three times EBITDA, just give or take what number you want to use for next year, and so if you do 40-some-odd million of EBITDA and your CapEx is 13, 14, 15 million, why look for acquisitions? Why not find a way to return capital to shareholders given that it's going to be a hard environment for you to get multiple expansion?

Well, we'll certainly keep all options open. We're not sure -- like next year, as we go in, we want to make sure that we maintain a strong balance sheet in the environment. We're not sure that buying back shares is the best use of capital, but we're -- we'll look at it as we go through the year and see what we think the best use of the capital is, and --

Where are the main -- let me just ask you this. Where does your stock actually need to go to for it to be a reasonable use of your capital?

Do not know. I mean I don't think we can answer that.

Do you think maybe you could run that exercise and sort of -- you know, because obviously, it's a tough market, it's a tough financial market, it's a tough credit market, it's a tough stock market, but your stock has been destroyed.

We've seen other companies that have done share repurchases, and they were not rewarded for it, and in this volatile market right now, we just think it's a better use of proceeds to continue to build our Company and grow our asset base, and we've got a limited float in the market and reduced stock liquidity, and we're moving more shares which just sort of magnify the effects of an illiquid stock. So we just don't believe a share buyback's the best use of our cash right now given our growth goals and potential acquisition opportunities.

Yes, I appreciate that, Mike. I just -- one thing I'd say is we, as shareholders, think it also is our company, as well, so you say you build our company, it's everybody. So --

Well, we're not unique. There's a whole host of our peer companies in a similar situation, so--.

Ross, why don't we get back to you on that point.

Okay, thanks, guys.

David Yuschak, SMH Capital.

Just was wondering as far as your bonding capacity and surety issues, are you seeing anything out there, given what's happened with the whole financial sector between needs for capital and the potholes that showed up there, some -- I mean black holes. I'm just wondering as you review your bonding capacity needs, and you've always had a pretty good luck at getting that expanded, where do you stand right now as far as bonding?

Well, we're in good shape. As we'd mentioned earlier, in prior years, our bonded capacity was about $250 million. It's now about, we believe, $400 million, and we have plenty of excess capacity there to grow, and one of the aspects of having that additional bonding capability is maintaining a strong balance sheet. So that's why our cash is up higher year on year, and we want to not have any constraints in bidding some bigger projects that we see coming down the road. So I think we're in great shape with our bonding company.

Right now, your bonding providers are not expressing any concerns about having to rein some of that in or limit your capacity?

They were not caught up in the mortgage meltdown. They weren't affected by that. In fact, they just carried out an acquisition of another bonding company here recently, and I think they're the number-two --

[Inaudible] yes, post-closing, they'll be number two. But, no, we feel real comfortable with them. We've had meetings with them during the course of the year. We think we're in great shape, and as Mike said, we think we've got plenty of capacity to execute our plan.

Then Jacksonville, I guess, is going to -- moving ahead on a major project out there. I think it was potentially maybe putting out for bids in the fourth quarter. Could you maybe give us an update? Is that, in fact, going to happen, or what's your read of that?

I'm not sure. They've been talking about expansion there for some time. I think it will eventually happen. I know the port's very occupied right now with getting their cranes back in operation. They've had some damage and so forth. But, yes, that port area should see some future developments. We've identified about $10 billion of port expansion plan with the ports in the eight different states that we participate in, so -- but I can't really comment on the timing of that in Jacksonville. I'm not real sure.

Okay. And then one -- another question. Industry capacity, you know, this kind of ability to bring on business, whether it's coming from new program to an administration, whatever. How would you gauge industry capacity right now to do the kind of work that's out there relative to what you can do in ways -- as you judge your own internal capacity?

And looking at the valuation of the shares, doesn't that kind of maybe even limit your ability to want to make an acquisition because if you've got a public market that's three times enterprise of that EBITDA, it seems like -- this is kind of perverse, but private markets are probably being -- are viewing themselves more valuable than the public markets. Could you address both of those issues for me, please?

Well, what I'd say is that we do have bonding issues with private equity, and that's one aspect that we avoid, but -- can you think of anything to add to that?

Yes, I think, as Mike said earlier, we want to be cautious in an M&A environment. I think there may be some opportunities that come out during the course of the downturn, and since we've talked about bonding, I mean that may or may not have an impact, may or may not be a constraint. Probably if you go by historical times, the -- in tough economic times, it's reasonable to assume that we're going to see smaller competitors that might have pressure from their bonding program. So there may be opportunities as we go through this economic downturn, but as Mike said earlier, and as you point out, we're going to be very cautious about pursuing that. As you know, I mean with the stock price, the stock market, the banking environment, it may be prudent to kind of take a wait-and-see attitude on some things, but we'll continue to monitor our opportunities. We'll always look to be opportunistic, but we're also going to be mindful of the environment that we're in right now.

Now, would you envision some time in 2009 that industry capacity could tighten up considerably, particularly maybe as it relates to your own ability to generate business, as well as what kind of capacity may be out there in the way of competitors to bidding on it, too, because it does look like it could be a very positive environment for RFPs?

All right. Okay, well, certainly, we're not fully utilized. There is some surplus capacity we have that could increase our revenue growth if the work is out there, and I do believe that there is a possibility that there may be some capacity constraints potential in dredging. As I mentioned, the Hopper Dredges, with some of the bigger companies, are getting bigger backlogs and getting booked up, so I know the Corps is concerned about making sure they have enough equipment to liquidate the work.

We just really don't have the full details on that to comment specifically at this time. That's what we're waiting on. It's sort of like when we were talking earlier about $1 billion of dredging work, well, we have to wait to get the details to see exactly what is our carve-out of that of [marketing] because maybe of that $1 billion, there's only 300 million that we can bid on because we don't have the equipment to bid on the others. So it'll just take a little time to find that out.

Okay. That's all I've got then. Thanks a lot.

Okay.

Jay Brosnahan, West Park Capital.

Guys, what do you think you'll be leaving the end of the year in terms of utilization?

Well, we don't publicly announce our utilization, but we do -- we're pleased with our utilization year to date, and as Mike just got through saying, we do think we have certainly capacity, and we think with our capacity and our CapEx program that we'll certainly have the equipment to execute our plan.

Okay, and then given the valuation of your stock, any on-the-IR-front plans for road trips, road shows, and all of the above conferences?

Jay, this is Chris. Yes, we'll continue in our efforts probably a little bit more scaled back than we did at the beginning of the year, but we'll be attending two conferences in the back half of this year. We have one road show scheduled, as well. And then we'll be looking again to target to probably attend four to six conferences next year, and we'll probably do a few road shows in that mix, as well.

Thanks, guys.

You bet.

Fred Buonocore, CJS Securities.

Just two quick follow-ups. First, did you quantify or can you quantify the revenue contribution in the quarter from SSL, please?

We do not split that out publicly.

Okay.

But we can say, generally, we're pleased with their contribution.

Got it. And then can you just give us a quick update on the cruise ship terminal project in Haiti that I guess should be, if it hasn't already, commencing soon?

We've mobilized our equipment and people to the site and have begun work. That job's kicked off, and we're pursuing other opportunities in the Caribbean.

Very good. And then actually, finally, is there a certain percentage of your backlog that you view as potentially at risk given the current environment?

Generally not. Generally, if a project is awarded, certainly, there's a risk. We don't view that as a high risk, that it could be terminated, but the risk would come more on the bid opportunity slipping, and that would be where you'd see it more so than on work that's already under contract.

Got it. Thank you very much.

You bet.

And at this time, we have no further questions in the queue.

All right. I think that's it, and we will -- we'll go ahead and wrap it up for the quarter, and we look forward to talking to you all in three more months. Thanks.

And this concludes today's conference. We thank you for your participation. You may now disconnect.