Orion Group Holdings Inc (ORN) 2009 Q2 法說會逐字稿

Good days, ladies and gentlemen, and welcome to the Q2 2009 Orion Marine Group, Inc., Earnings Conference Call. My name is Deanna and I'll be your coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Christopher DeAlmeida, Director, Investor Relations. Please proceed.

Thank you, Deanna. Good morning, and welcome to the Orion Marine Group's Second Quarter 2009 Earnings Conference Call. Joining me today are Mike Pearson, Orion Marine Group's President and Chief Executive Officer and Mark Stauffer, our Executive Vice President and Chief Financial Officer.

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

During the course of this conference call, we will make projections and other forward-looking statements regarding, among other things, our end markets, revenues, gross profit, gross margin, EBITDA, EBITDA margin, backlog, projects in negotiation and pending award, as well as our estimates and assumptions regarding our future growth, EBITDA, EBITDA margins, gross margins, administrative expenses, and capital expenditures. These statements are projections that are subject to risk and uncertainties, including those described in our 10-K, for 2008 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 a result of new development or otherwise.

Also, please note that EBITDA and EBITDA margin are non-GAAP financial measures under the rules of the Securities and Exchange Commission, including Regulation G. Please refer to the reconciliation accompanying this 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, August 6, 2009, and our quarterly and annual filings with the SEC, which are available on our website, for additional disclosures of risk factors that could cause actual results to differ materially from our current expectations.

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. I'm pleased to tell you that once again, we delivered solid results for the quarter. Revenues for the second quarter 2009 increased $3.7 million, or 5.5%, as compared to the second quarter of 2008.

Revenue growth for the quarter was lower than our second quarter revenue growth goal of 8 to 12% as a result of some delays in project start dates. In the normal course of business, project start dates can shift for a variety of reasons that could be due to fluctuations in timeframes for permitting, contract award, and obtaining notices to proceed from the customer. These shifts cause revenue to move into different periods than originally estimated, creating some loppiness in our business.

As a result of improved project execution and performance, our second quarter EBITDA was $15.2 million, which resulted in an EBITDA margin of 21.4%, exceeding our second quarter goal range of 15 to 17%.

Briefly looking at how our end markets performed during the quarter, we continue to see good opportunities related to port expansion; continued focus on US infrastructure improvements, including bridge work over water; coastal and wetland restoration projects; and expansion in the cruise industry. These demand should continue to provide good long-term growth opportunities in the future.

During the quarter, we were pleased with the pace of project letting and awards, as evidenced by the almost $40 million of large project announcements that we made during the quarter.

Now turning to our end markets and outlook for the remainder of the year -- despite the economic environment, we continue to have good, diverse end markets, with solid drivers for future growth. Just to highlight some of the major growth drivers, we believe the Gulf Coast and Southeast Atlantic ports will continue with expansion plans despite some decrease in global shipping traffic.

We also believe funding for these projects has and will remain intact for most of the planned port expansions, aided in part by some additional funds from the stimulus package.

Additionally, we continue to see bridge opportunities and believe these projects will be a priority for states, with funding coming from both the annual spending of the current safety loop program and through the stimulus package.

For example, this morning we announced that we've been awarded a portion of a bridge project in Beaufort County, South Carolina. Also, we believe we'll continue to see increased opportunities from the US Army Corps of Engineers, as the Corps is well positioned now with significant funding levels as a result of their normal civil works budget funds and additional supplemental emergency hurricane-related funding, and also additional funding from the stimulus package.

With regard to the cruise industry, there remain several large ships under construction or being delivered that are expected to come on line over the next couple of years, and the current marine facilities that will dock some of these ships are inadequate and require substantial upgrades. We believe we'll continue to see either mooring upgrades to existing facilities or new cruise ship pier construction opportunities as a result.

And finally, I want to touch on the status of the stimulus package, or ARRA, and its effects on the Orion Marine Group. As you know, during the first quarter we began to get some clarity on how the stimulus dollars would be allocated and spent. And over the past couple of weeks, we've begun to see bid opportunities related to the stimulus plan, primarily from the Army Corps of Engineers.

In fact, as we announced this morning, we were recently awarded a channel-deepening dredging project in Galveston from the Army Corps that is funded with ARRA funds. However, we're just at the beginning of the bid letting cycle and we expect stimulus-related bid opportunities to grow in the coming months.

Now, while ARRA activity could have a positive impact on our backlog for 2009, as we've said before, we don't expect to see significant revenue opportunities from the stimulus package until 2010 and beyond. Therefore, the pace of bid opportunities tied to the stimulus is generally in line with our expectations.

Regardless of stimulus dollars, we're comfortable with our end markets. And we believe we've got good solid long-term growth drivers. Still, the stimulus package will have a positive effect on certain of our end markets and we look forward to the opportunities that it presents us.

To sum it up, we continued to produce good results during the second quarter and are pleased with our performance for the year to date, as both revenue growth and EBITDA margins for the first half of the year are in line with our expectations.

As we look ahead, we believe we're well positioned to take advantage of the bid opportunities that we see before us.

Additionally, I want to remind you that our business involves construction work, and certain things are beyond our control which can cause backlog, revenue, and profitability to vary from our initial expectations. And it's for that reason we ask investors to focus on the long-term results and not quarterly fluctuation.

But at the end of the day, I'm pleased with our overall results, where we are today, and our future prospects. Additionally, I want to thank our management team and our employees for the job that they've done in the first half of this year.

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 the second quarter 2009 was $6.3 million, or $0.28 per diluted share, which compares with $2.4 million, or $0.11 per diluted share, in the prior-year period.

Second quarter 2009 contract revenues increased 5.5% year over year to $70.8 million, of which 60% was generated from federal, state, and local government agencies and 40% from private industry. This compares to 46% from federal, state, and local government agencies and 54% from private industry in the second quarter of 2008.

Just to reiterate what Mike said, there can be fluctuations in quarter-to-quarter results due to the timing and mix of projects. For this reason, we encourage investors to focus on the long-term and annual results rather than quarter-to-quarter fluctuations.

SG&A expense for the second quarter 2009 were $8.7 million, which represents an increase of $3 million year over year. In the prior-year period, we recovered in full a previously reserved receivable and benefited from lower group medical and workers' compensation expenses.

In the current-year period, we increased our allowance for doubtful accounts to fully reserve a customer receivable based on that customer's bankruptcy filing during the second quarter.

Now turning to backlog. As of June 30, 2009, we had backlog of work under contract of $141.8 million. In addition, the recently announced large project awards, including the announcements we made this morning, add approximately $41 million to backlog. Including these projects, we have approximately $183 million worth of backlog, of which we expect approximately $110 million will be liquidated in 2009.

Additionally, we have several projects that we are apparent low bidder on or are in negotiations that are not reflected in the backlog as of the end of the quarter.

As a reminder, our backlog consists of projects under contract that have not been started or are in progress and not yet complete. And we cannot guarantee that revenue projected in our backlog will be realized; or if realized, will result in earnings.

In addition to our current backlog, we are tracking potential bid opportunities of $4 billion to $4.5 billion, of which approximately $800 million could liquidate in 2009. This does not include the full allotment of potential Corps of Engineer bid opportunities related to the stimulus package.

Given the current backlog, contracts we have recently signed, and the revenue opportunities we see for 2009, we expect third quarter 2009 revenue will grow 16 to 21% year over year. Additionally, we have set our third quarter EBITDA margin goal at between 15 and 17%.

For full-year 2009, we remain comfortable with our previously stated full-year 2009 year-over-year revenue growth goal of 12 to 16% and our full-year 2009 EBITDA margin goal of 14 to 18%.

However, given the timing shifts we saw in the second quarter, and expected low material pricing, which could bring down overall contract values, we believe our revenue growth for the year could reasonably be at the lower end of our goal range. We believe the favorable EBITDA margins we saw in the first and second quarters will boost our full-year EBITDA margins toward the middle and upper end of our full-year EBITDA margin goal range.

Turing to the balance sheet, we believe it's important to have a strong, stable balance sheet with good free cash flow generation, low leverage, and a solid cash position. As of June 30, 2009, we had cash on hand and availability under our revolving line of credit of approximately $51.6 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 1 times EBITDA, which we believe is very conservative and well below our comfort level of 2.5 to 3 times EBITDA.

In closing, we once again delivered good results while maintaining our solid financial position during the quarter. And we believe our strong balance sheet should help us in the current economic environment.

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

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

(OPERATOR INSTRUCTIONS) Fred Buonocore, CJS Securities.

Good morning, gentlemen. Very nice quarter.

Good morning.

Thank you.

Could you please elaborate a little bit on the very strong gross margins in the quarter? Clearly you don't see this as sustainable, but if you could talk about what happened this quarter and why we shouldn't see this level of margin going forward? Thank you.

Sure. During the quarter we had good product execution and as we've talked about before, we monitor our projects on a month-by-month basis and update our forecasts on those. We had some favorable project execution during the quarter and that resulted in the EBITDA margins and the gross margins we saw during the quarter.

As we've said before, we're always going to strive to outperform like that, but we think it's reasonable as we go forward, as we kind of model out, that we're sort of dealing with the unknown as we go forward in terms of whether or not we'll meet contingencies or not.

As we went through the second quarter, there were certain contingencies based on our execution that we did not need. So again, there's going to be times when we can outperform, and we're going to strive to do that. But as we look forward, we're not modeling that in.

We self-performed about 90% of our work, Fred, during the quarter.

Right. Is that a little bit better than average, or--?

It's at the upper end of the range. Typically we self-perform between about 85 and 90%, so that's kind of at the upper end.

Was there any impact, maybe, of some more dredging working coming back into your mix that might be helping that as well?

Yes. We talk about dredging-- the pace of projects and the dredging environment today versus a year ago, as an example. Definitely, it's a more favorable environment this year than it was last year.

Great. And can you also elaborate a little bit more on some of the projects where you're apparent low bidder? I mean, are any of these really large? Are these similar to the types of things that you've been announcing with some frequency over the last couple of months?

We don't really disclose that until we sign contracts because as you know, there's no guarantee on that category. So we only announce in backlog what we sign contracts for. But there are a number of opportunities out there that we believe we're in good position on.

Fair enough. Well, thank you very much.

You bet.

Will Gabrielski, Broadpoint.

Thank you very much. Good morning, everybody.

Good morning.

Can you guys follow up on some of the comments I've heard from other companies about the activity around smaller contracts? And maybe some of the competitive issues there and how that's shaping up now and you feel the mom and pop-type competitors are doing on a utilization basis?

Okay. Well, certainly on the smaller contracts, $3 million and less, we're certainly seeing a lot more pressure, both on margins and the number of competitors that are showing up for those bids. Hopefully that will begin to mitigate itself as we get near the end of the year.

We're kind of encouraged to see that other E&C sectors are starting to begin to recover. I see housing starts and housing construction's beginning-- it looks like it might be bottoming out. But I think we're going to continue to see that kind of pressure throughout the rest of the year with small jobs. We're not seeing it on the major projects.

Okay. Can you comment a little bit about the impact of materials pricing and what impact it may have had on margins in the quarter and going forward?

Yes. You've certainly seen material pricing come down. Iron and steel has moved downwards; lumber has dropped dramatically, primarily because of the housing industry. Cement has been flattened out, aggregates continue to rise, asphalt continues to be expensive, and ready-mix concrete's kind of flattened out a little bit here in the last couple of months. And there's been a huge drop in diesel fuel.

So kind of all in all, we've seen a downward trend on commodities and that is one of the reasons for us kind of skewing towards the lower end on our revenue goals because of that kind of pressure in commodities dropping.

Can you quantify-- I'm not sure if it's possible, but what impact did that have on revenue in the quarter? Would you have been able to hit your guidance assuming flat commodities year on year? Is that a fair way to think about it or--?

Will, I think more for Q2, the revenue was more as a result of projects kind of slipping rightward. And again, there are projects that-- under contract but start dates kind of slipped around as a result of permitting delays or the delays that Mike talked about in his comments. It was more driven by that in Q2 and not so much on commodity pricing.

Because as you know, for us commodity pricing is more of like a pass-through-type--

Right. As you moved into Q3 on those particular projects where there may have been slippage, or pushing to the right, have those issues been resolved? What percentage of those issues have been resolved? How can you look at that?

I would say most of them have been resolved and we've gotten underway. Some of them started moving toward the end of the quarter, but definitely moved out. But I think all the ones that sort of impacted the Q2 revenue have gotten underway.

The other thing I would point out is that's normal. That's not abnormal at all. I mean, that's part of the contracting business in terms of having stuff sort of slosh around in terms of permitting issues or notice to proceed and things of that nature.

Fair enough. I was just curious-- If you think about the stimulus package now and the margins you might see on that now that you've booked the project as of this morning that you announced, is that shaping up the way you thought it would?

Yes, I think we're pleased with the amount of bid work that's in-house now compared to where it was a year ago. If you remember, the Corps in Q2 of '08 just dried up; we just didn't have much to bid on. And that situation has changed and we're pretty encouraged about the pace. And the size of projects is getting larger, which is what we like to see. I think we're pretty pleased at this point in time.

All right. One last one -- just a quick modeling question. Back half of the year SG&A -- can you just give some color? Should it be up versus the first half or down versus the first half? And I know there's some amortization rolling off, I believe, and it sounds like there was a one-time item in Q2 '09 that may have impacted that number.

It did; and you are correct. The amortization from the acquisition in 2009 rolls off during Q3, so you could expect to see that come down, SG&A to come down, as a result of that.

Again, I think that-- probably come down a little bit. The variables are, like we-- you look at our year-over-year, especially, we have periods like last year where we had some favorable events occur with respect to group health and workers' comp and things like that. So a little bit of that is sort of unknown. But I think probably down from where we were in Q2 would be a good way to look at it going forward.

All right, great. Thanks and congratulations again.

Thank you.

Alex Rygiel, FBR Capital Markets.

Yes. Great quarter, guys.

Thanks, Alex.

A couple of questions. First, shouldn't project delays in the second quarter, or slippage, however you want to term it, shouldn't that have negatively impacted your gross margins in 2Q?

Not necessarily. Again, I think-- we did have some revenue shift rightward, but the projects that we were working on-- again, through good execution and release of certain contingencies because of that execution, it had favorable impact on margins. So it's really two separate issues.

Okay. And as it relates to the allowance for doubtful accounts, how large was that in the 2Q?

It was about $400,000. You'll see that when the Q gets filed, Alex. And just to clarify, that's related to the reserve that we partially took in Q4 of '08. It's the same customer. It's not a new customer, it's the same customer and it's related to the retainage on a project that we had completed, and that is now fully reserved.

Okay. And about what percentage of your revenue does not pass through backlog?

That's a tough one. That's going to vary from period to period based on what activity-- the timing and mix, because of what activity-- if it's under contract and not burned off at a measurement date-- I think we could get back to you in terms of something a little more specific, at least historical.

And one last question. Can you comment on the Navy as one of your customers?

And also your activities in the Southeast, particularly as it relates to some for the new offices that you've developed over the last 18 months and how they are proceeding and how the opportunities are shaping up for those new offices.

Well, yes. We're certainly pleased that we got this Beaufort County bridge. That's a major project for us out of one of our greenfield sites there. We're operating out of Norfolk and Charleston and we'll draw from those resources to complete that work.

And we've just finished our major outfall project with the Corps of Engineers on Virginia Beach and we have secured follow-on opportunities there that we've been bidding. So we feel like our flag's well planted where we positioned ourselves and we're certainly a player.

And also with respect to the Navy, as you're aware, we announced a project during Q2 for the Navy. So I think we're pleased that we're seeing some bid opportunities come out from the Navy. We've started seeing that uptick over the last year or so and it's good to be working for the Navy again.

And we'll probably see some activity from the Coast Guard here before the year's out with some of the work that they've got planned in the Gulf.

That's great. Keep up the good work.

Thanks.

David Wuschak, SMH Capital.

Yuschak here. Good morning, guys. A question I've got for-- on the low end of your guidance. When you take a look at you and your potential range here in the third quarter, it almost kind of suggests there's something out there that may concern you that could get you to the low end of that guidance. Could you explain to me what issues were bothering you that you've maintained the low guidance rather than maybe boost it, given what you performed here in the first half of the year?

Well, I think some of the issues of slippage on projects is something that is outside our control. I mean, some of the announcements we just made here recently, we were low bidder on those projects anywhere from three to six months waiting for them to start. Sometimes it is a permitting issue or they have to get the EPA sign-off. Or it may be just a matter of getting a board meeting of personnel to approve the project to get the notice to proceed. We simply have to wait on a board meeting.

So there are things that can cause a project to slip. And the large dredging project, the deepening in Galveston, for example, we were awarded the base contract of that work some time around-- I think it was mid-2008. And we've waited all this time to get those options awarded. So it's very difficult to pin these things down so we try to be conservative in what we say.

And the other thing, Dave, as we kind of mentioned in the remarks, and Mike just mentioned in answer to one of the questions, with the commodity prices that we're seeing and sort of the reduction in those-- as I said a minute ago, those are sort of a pass-through for us. So to the extent we've seen some significant decreases in commodity prices as we're bidding new work and bringing new projects on, it's very possible that the overall contact values will be a little bit lower. And for those reasons, that's why we're sort of thinking it's reasonable that we might be at the lower end of the revenue growth goal.

As far as that backlog duration is concerned-- thinking about that Army Corps project, for instance, being a year ago. Can you give us a sense as to how that backlog duration has either been contracting or expanding? Because as you said, for the most part most of your business gets done in a 12-month period of time. So any given period, you could have a six-month duration versus a nine-month.

Could you give us a sense -- is that an issue at all in trying to manage that, or has it changed much at all that makes it more difficult to manage that duration process and get equipment deployed where you do have, maybe, a slowdown in one project; or stretch-out.

Yes, our backlog fluctuates, and we like to use the word "lumpy" because it goes up and down. And we normally turn our backlog about twice a year. That's kind of the rule of thumb.

But I would say we might have seen a little bit of increase in some delays and stuff like that, but I think, all in all, it's sort of business as usual. In other words, it's just going to vary from project to project, like Mike said. I mean, there may be some things that push it out.

But we try to-- certainly in the large projects that we announce, we try to detail in the release when we think the project might start. An as an example, I think in one of the projects we announced this morning, we said we thought it would start some time during the fourth quarter and last for 12 months, I believe it was. So we try to peg that in the announcements.

But in answer to your question, I don't think it's anything unusual. I think it's sort of just the nature of contracting.

And then just one question. In your press release, you do indicate having $183 million in backlog, of which you expect to burn $110 million in 2009. Does that mean $110 million for the second half of 2009?

Yes.

Okay. So you're basically needing to maybe pick up another $40 million, $50 million or so of quick-turn stuff then, right?

That's correct.

All righty. Thank you very much.

You bet.

Troy Grooms, Stephens, Inc.

Good morning; it's Trey Grooms. Most of my questions have been already answered, but I guess just a couple more. You touched on this and said that the project delays, permitting fluctuations, and so forth that you've been seeing, that this is normal. But are you seeing at all any of these customers pushing back on jobs kind of indefinitely or being more cautious in any way?

Well, I think early in the year we saw a pull-back from the chemical industry. They cut their work forces nearly in half and kind of shut down there. Their CapEx-- we encountered one bad receivable there in that process. But that's probably the most severe.

I think the oil and gas companies have been going slow with some of their work. They carry out what has to be done. And I think as the price of oil begins to pick back up, that could change next year.

But that's nothing new. I mean, that's something you guys have been dealing with for--

Yes, it hasn't been anything material. I mean, the big drivers, the big projects that we're seeing out there -- and I'm talking about $10 million on up -- continue to be in the queue and we're very actively bidding throughout all of our markets.

Yes, and just to be clear, Trey, too -- this is sort of projects that shifted around that were already awarded or in the process of being awarded. And again, I think that the comment there is that's sort of normal construction business. The comment is not related to-- just to be clear, is distinguished from actually bidding the project where a bid might be delayed.

We've kind of said in the past, if we're going to see something be impacted by the economic conditions, it would be where the actual bid would get delayed. And I think what we've said on that is we haven't seen anything across the board that leads us to believe that we've seen anything there.

I mean, we've seen, as Mike said, on the chemical side; as we've said before, in the real estate development side -- those certainly have been delayed or were pushed out in terms of the bid opportunities.

But in terms of when projects are in the queue to bid and they're being bid and getting awarded, what we saw in the second quarter is just sort of like the normal process.

Yes, our biggest challenge is continuity between projects -- where we may have a number of projects ending at the same time and then the ones that are about to start up -- creates a gap for us. And that's something we're continually trying to manage throughout the year. And that's probably one of our biggest challenges.

I think on the dredging side, our utilization is picking up here in the Gulf, particularly the western Gulf. Those are the things that we have to deal with.

On the topic of utilization, you guys-- I mean, outstanding margins this quarter, and you talked about some contingencies that flowed through. Did higher utilization rates, just from a more robust bid environment out there and more opportunity -- did that play a role in the quarter at all? And kind of how do we think about that looking into the next couple of quarters and into '10?

As we said earlier, I think it did-- a couple of things played into it. One, we self-performed 90% of the work. I think with respect to particularly projects involving dredging services, certainly a much better environment this year than last year so we're very pleased about that. And I think there's been-- that's one of the things we talked about where favorable impact of the stimulus and the Corp funding. Even though we expect the actual of impact of revenue on that to be further out, I think we've already seen favorable impacts in the marketplace because of the fact that the Corp's well funded.

But I think going forward, again, I think we've got to be prudent in how we think about executing our projects going forward. And of course, you're never going to know whether you need a contingency until you get through the thing it is that you put the contingency in there for.

So I think going forward -- again, just as a general statement, and again depending on the timing and mix of projects -- when we talk about gross margins, sort of high teens to low 20s is sort of the normal range. And I think that's a good way to think about it going forward. But as always, we are going to constantly look for ways to beat that out and I think we did that in Q2 and we're very pleased that we did.

Okay. And just one other question, I guess for Mark. SG&A, you touched on that it would be down in the second half with the roll-off of some amortization related to subaqueous. Would that roll-off be coming from-- I guess off of the $8.7 million kind of range or would it be coming off a base closer to what you did in the first quarter? How do we think about that?

I would say probably closer to the first quarter as opposed to the second.

As a base?

Yes.

Great; okay, perfect. Thanks, guys, and again, good quarter.

Thank you.

Jack Kasprzak, BB&T Capital Markets.

Hi. Actually, it's Paul Betz for Jack. I noticed the projects that you announced this morning were in the 12- to 18-month duration, which is out of your typical range of three to nine months. How would that affect gross margin and EBITDA margin? Do these longer projects have the same EBITDA expectations or could you expect that to maybe lower your expectations going forward?

There's no real change in the philosophy we have about how we bid our jobs. I mean, I think within those historical ranges is still intact.

And I think it's more a function of what the type of project is versus the duration.

And I hate to harp on the slippage of projects, but I just want to make sure I'm clear. Q2 is a little lower because you had project slipping into the third quarter, and it sounds like most of those project were now underway, which I guess is kind of evidence in your guidance for the third quarter. Your year-over-year increases seem to be a little bit higher.

I guess there could be slippage in the third quarter as well, and possibly in the fourth quarter, which is why you kind of say that you're going to be at the lower end of your full-year guidance, which is understandable.

And then materials could come into play, which is why you could be at the low end of your full-year guidance.

Is that kind of correct? Is the third quarter year-over-year increase higher because of these projects that slipped from the second quarter, or is it seasonality or just the project biddings?

No. Partially the reason-- or primarily, I should say, for the large increase year over year is Q2 '08 was down significantly as a result of all the storm activity. We had-- I'm sorry, I meant to say Q3 '08. The Q3 '08, year over year, the reason why it's so outsized in terms of year-over-year growth is more a reflection of what happened in Q3 '08 with the active storm season -- the upper Texas coast getting hammered, literally, here.

And so I think that's more why it's such a huge percentage. Historically, also, Q3, barring active storm seasons, is typically going to be higher revenue than Q2 or Q1.

Okay, great. Thank you very much.

You bet.

Steve Dyer, Craig-Hallum.

Thank you. Nice quarter, guys.

Thanks, Steve.

Just a couple of things. Most of mine have been asked so far. Wondering what you're hearing in terms of sort of the urging or the cadence of some of the stimulus dollars. I mean, there's obviously a real thrust out of Washington for shovel-ready projects and so on and so forth. Would you expect that once those are awarded it's going to be pretty quick to work, or hopefully that will mitigate some of the delays you're seeing?

Well, in the case of the Corps, I think they've gotten very organized and the pace of projects that they're putting out to bid is being ramped up significantly here in the next two or three months. They've certainly packaged bigger projects together on what they call MATOCs, multiple task contracts, which require several companies to team up to be able to capture some of these jobs. And it's going to take a few months for that to sort itself out.

The pace is just very hectic and we think that there's a good opportunity for the Corp's base civil works program next year to be even higher than this year. I think it's around $5 billion this year and I know the House voted mid-July overwhelmingly-- I think it was energy and water development agencies appropriations act -- that designated $5.5 billion for the year 2010 on their civil works program. So that's a big uptick on the base load. And of course you've got the stimulus coming on top of that. So we're pretty pleased to see that.

But we've always said that the true execution of the projects on the stimulus with us is going to kick in at the end of this year and primarily in 2010. I mean, they'll make the awards and obligate the money -- that's the buzz word, "obligate." But the actual execution, revenue recognized, will probably be in 2010.

Yes. And as Mike said in his comments, that's really in line with our expectations, really. That's been our thought process all along, going back to Q4 when the stimulus was first being talked about.

Okay. Another question I wanted to ask you. The NOAA is forecasting a relatively tame hurricane system. Do you guys use that as a forecasting tool? What are your thoughts on that as it relates to your work in the Gulf?

Well, I hope it is a quiet year for hurricanes. I think the coast has been beat up pretty badly since 2005. And I might just remind you that a lot of the work that's being carried out now, in 2009, is a result of hurricanes in 2005. Some of the dredging work we'll be doing under the stimulus will be part of the supplemental funding for Hurricane Ike and part of the ARRA. So there's quite a bit of work that it took nearly three years to materialize from those bad series of hurricanes that happened four years ago.

So let's hope it's quiet. But if it isn't, we're certainly going to be here to repair and remediate whatever damage might occur. But we don't forecast based on hurricanes.

Okay. And then, Mike, you talked a lot about a bunch of different commodities and the directions that they're going. Are you able to kind of quantify -- and sorry if I missed this -- but are you able to kind of quantify on a particular bid what sort of the lower year-over-year commodities prices may mean to a particular bid in terms of percentage of that bid?

It's really hard to give you a number.

Yes, it's really going to depend on the project. It depends on the project and the scope of it as to what type of materials are going to be in it. Is it more labor and equipment intensive? Does it have more of one commodity versus another commodity? So it's really hard to say until you get into something and start seeing it.

Okay. Those are pretty much pass-through costs, right, so it should actually help margins, kind of on the average?

Well, as we've kind of said before, short-term, we might see slight impacts one way or another depending on how commodity prices are moving. But generally speaking, we're not going to see impacts one way or another unless there's huge spikes or something like that. Because, again, if you think about the quick turn of our projects, the quick-turn nature of it, and the fact that they're pass-throughs, over the longer period it should be sort of neutral. But there certainly could be some minor impacts one way or another in the short term.

Okay. Win rate -- can you comment on that a little bit? And the reason that I ask is historically you guys have had about a 25% hit rate. And you talk about sort of $800 million in projects liquidating in the second half of the year. But obviously your guidance, and sort of the Street's revenue expectations, are quite a bit below -- $200 million, for example. How has that trended? Anything new there?

It's kind of been in line with what we said. Keep in mind, we won't go after all $800 million of that. But generally speaking, what we go after, our win rate is in line with historical.

Okay. Can you comment at all about sort of the acquisition landscape? What are your strategic thoughts on that, if you can say much?

Well, we continue to look for opportunities. There's nothing to report in this call. We certainly made it clear that we thought we could accomplish our goals this year with our base greenfield on an organic growth strategy and I think we're still on track for that. And that's really all I can comment on at this point.

Okay. And then, just one last housekeeping question. Mark, can you give me the cash balance and the debt balance again?

Cash balance at the end of the quarter was $44 million and the debt balance was just under $30 million.

Okay, thank you.

You bet.

Rick Johnson, Tygh Capital.

Yes, thanks. Were any of the slippages on projects related to customers just wanting to wait and see how low commodity prices are going to go before starting jobs?

No, not really. Because most of these are public bids. The number's published, it's out there in the public domain. It is just a matter of the process it takes to get a job kicked off. In some cases we've seen with DOT work, that took several months. Getting the board approvals and the go-ahead, it just-- it's strung out.

And there's a lot of work being processed at the same time. I know the Corps has had to staff up to help administer processing the amount of contracts they're putting out and sometimes you just get in the queue and you've got to wait.

And it's not a matter of-- I mean, the bids are the bids. Especially on the public sector side, it's not like they can renegotiate. They can pull the bid, but we didn't see any of that. I mean, they certainly have the right not to award something, but we did not see that; that was not the case here. And it's more, as Mike said, it's just kind of the normal gyrations of getting stuff awarded.

And permitted, too. Some of the other things that they can't impact because a project gets awarded, but it may take a while for the permitting issue-- Even in the government projects, they require the same permits that anybody on the commercial side would have to have. And then you're subject to the bureaucracy of getting a permit issued. Again, that can move around.

It causes a real challenge for us. If we were planning on starting a crew when one job finished and we can't, we get a gap in there, that creates some indirect costs for us that we hadn't anticipated. So we have to figure that in our thinking.

Fine. And when you speak of contingencies on contracts that are obviously benefiting margins, are those close-outs usually fees or things that occur during a project?

It'll be during a-- I mean, we literally look at the projects on a monthly basis. And the way it would work is that whenever you pass the need for that contingency-- so it can be any number of things. It can also be that-- if you're going through a project and your production is greater than you anticipated, we're going to make adjustments in our forecast for that project to complete it as we go along. So it's not the case where, oh, it's the end of the project and everything dumps out. It is literally an ongoing process throughout the life of each project.

Okay, thanks.

Will Gabrielski, Broadpoint.

Sure, thank you. Just a quick question. Obviously we calculate our own bookings numbers here -- was this a record quarter in dollars for new awards, as I calculated it?

We'll have to get back to you on that one.

Okay, I was just curious if I was doing the math right. And then, on Q2 -- can you comment about the linearity in bookings from month to month? Did it increase or decrease during the quarter?

I think it fluctuates and it depends on timing and-- we'd have to get back to you in more detail on that, but I think again, we sort of look at the long-term trend versus any quarter-to-quarter fluctuations.

But you see the Corps trending up, I would imagine, throughout the quarter and then beginning of July?

We've certainly seen an improved environment with respect to the pace of Corps projects coming up to bid, certainly.

Okay, fair enough. And then just to follow-up on what Mr. Johnson was saying before me -- when you look at contingencies going forward, that's usually you should have some visibility on, right, at this point for Q3 and Q4. How do you feel about the setup? And can you provide me with some dollars or any contingencies as it stands today?

On our major jobs, we run a Pertmaster risk analysis and assess contingency that needs to go into the project, and its based upon all the line items of work to be done. And as we go through the project duration, some of those contingencies may be liquidated, some may not be used, and we may or may not recognize them in any given quarter based upon the remaining risk to complete the work.

But we manage our contingencies and hopefully they don't have to be used, but they're put in there for a good reason. Because this is construction work and you get in a jam sometimes and use it up, plus some. (Chuckles) It's something that we look at every month when we do our project reviews, and assess it.

Right. So in terms of the dollar value of existing contingencies that are remaining on projects that are currently in the construction phase, was that depleted a great deal in Q2 because of execution on existing work, or is there still a fair amount of opportunity in Q3?

We can't really comment on that. I mean, it depends on the project, it depends on where we were in the project, it depends on whether it's production or-- We talked about hurricane season a minute ago. If you're living on the Gulf Coast, you know that it's just about the time of year where that might get cranked up or not. So there's always the potential for it.

I would go back to the comment we made that we sort of expect, again, given the timing and mix of projects, we would expect gross margins to be in the high teens to low 20s. And again, if we have a period where we outperform like we did in Q2, you could see us outside that range on the plus side. But I think in terms of how we look at it, we think we'll be within that range, barring outperformance.

Okay, fair enough; I appreciate it. Thanks, guys.

You bet.

David Yuschak, SMH Capital.

Yes. As far as your capital spending expectations for this year, are you kind of still at the levels you anticipated earlier this year? And given that potential $800 million that could be let here, when would you be looking at potentially a timeline to boost if you needed resources to execute on some of that 800 -- whatever percent you might win?

We're constantly looking at that. We don't have any change into what we've said our expectations are for the full year. I'd remind you that we don't spend CapEx on a pro rata basis throughout the year. So it's something that we're continuing to look at for the back half of the year.

And certainly as we get into the back half of the year, obviously we're looking at 2010 as well in terms of CapEx expenditures for the back half of 2009.

Would there be any conditions, though, in the rest of this year that might boost those numbers?

There could be. It's going to depend on any of the projects. But I think at this point, today, I think we feel we have adequate amount in our CapEx plan. But certainly that could change based on project awards and/or other things that we might see in the bidding opportunity.

I think in this quarter, too, you said there was a 60-40 mix between kind of government/quasi-government and the private sector?

Right.

How do you think that might shape up in the second half of the year?

That's tough to-- I think it's reasonable that you could see that remain that way, although I would remind you that we go after projects irrespective of who the owner is. But given the things going on with the Corps and some of the other government agencies, and some of the project awards we just announced and have announced in Q2, I think it would be reasonable to assume that that sort of mix holds for the balance of the year.

We'll probably see less private work this year and more federal and state, would be my guess, because there seem to be more bid opportunities out there in those areas than in the private.

And then, one last question. Mike had mentioned earlier about managing logistics of when you finish a job and are waiting for something else to happen. And certainly, some of these delays kind of complicate that. At what point in time do you kind of say, "Okay ,I don't know when this delayed project will start up but I need to at least get some short-term work in there." How do you make that kind of decision as to, "I need to get some of this equipment to work and I've got to pull the trigger on getting this short-term job done just to keep my facilities active?"

That's probably the Operations VP's biggest challenge. I mean, we were talking about contingencies a while ago. We could finish a job during a quarter, have wonderful productivity, did not need our contingencies whatsoever, but the next clock that we're expecting to go to doesn't give us the notice to proceed in time, creates a gap, and it erodes our indirect costs because we've got some idle equipment in there.

And our equipment never has been fully utilized and still isn't fully utilized, and that's one of our biggest challenges. Because we can forecast some expectations and if the client holds us up, we have to eat that cost of that equipment.

Now, I will tell you this -- we're not going out and buying work. We don't subscribe to that philosophy, we're not changing our philosophy about pursuing profitable projects. And unlike some of our competitors we've seen go out and bid below our costs, we will not do that. We'd rather lose the job than do that.

So you just take your down time for whatever period it might be.

We just take our licks because we're all about making money, we're not about just buying work to see how good our estimate was.

That's obviously-- that's the daily challenge, the weekly challenge, of our regional and divisional guys that have to juggle the schedule, the equipment, the logistics. I mean, that's just part of their daily life.

And then just one last question, on your Shelf registration -- 150 relative to the size of the company looks pretty large. What's the thought process of putting something that large relative to the size of the company?

Well, we filed the Shelf registration statement so it would give our company a lot of flexibility to access capital markets. And the term -- any future [offers] in the securities will be included in a filing with the SEC. And since we're in a registration, as you know we can't really comment any further on it. But flexibility is the key.

Okay. Thanks, guys.

You bet.

This concludes the question-and-answer portion of the conference. I'd like to turn the call back to Christopher DeAlmeida for closing statements.

All right. On behalf of Mike and Mark, we would like to thank you for taking the time to talk with us this morning and we look forward to speaking with you in the future. Also, if you have follow-up questions please feel free to give me a call. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.