Orion Group Holdings Inc (ORN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Orion Marine Group second-quarter earnings conference call hosted by Christopher DeAlmeida. My name is Ian and I'm your event manager today. (Operator Instructions). I would like to advise all parties that this conference is being recorded for replay purposes.

Now I'd like to hand over to Christopher. Please go ahead.

Good morning, and welcome to the Orion Marine Group's second-quarter 2011 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've allocated about 15 minutes for prepared remarks, and then we'll open up the call for questions.

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 profit margins, EBITDA, EBITDA margins, backlog, projects and negotiation on pending awards, as well as our estimates and assumptions regarding our future growth, EBITDA, EBITDA margins, gross margin, administrative expenses, and capital expenditures.

These statements are predictions that are subject to risks and uncertainties, including those described in our 10-K for 2010, that may cause actual results to differ materially from those statements. 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 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 measure.

Also, please refer to our earnings release issued this morning, August 4, 2011, and our quarterly and annual filings with the SEC, which are available on our website, for additional discussions 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.

To start out, I just want to say a few things up front. As you, I'm sure, have read our press release, we find ourselves in a very frustrating and difficult operating environment.

This is my first unprofitable quarter since joining the Company 5.5 years ago, during which we delivered 21 quarters of positive results. So as you can imagine, I'm not happy about being in this position and I just want to assure you that we are working hard to improve our situation as quickly as possible.

We came into 2011 fully expecting continued pricing pressure in the marine construction projects as a result of what we've seen in the economic environment, which has been very uncertain. But what we didn't foresee is the gross inaction of Congress, which has just made it impossible for agencies like the Army Corps of Engineers to effectively carry out their mandate to maintain the nation's waterways. And as a result, while we have some dredges idle at this point, ships are running aground and waterways are becoming increasingly less usable. Shippers have to lighten loads and make it into port because the waterways are not being maintained to the proper depth and width.

We made a decision during the quarter that we would hold onto idle dredge crews in anticipation that the Corps would issue bids in June. Obviously, that did not occur. And this is normally the time of year where we are the most -- busiest with our dredge fleet.

However, we experienced a gap in bid lettings for maintenance dredging from the Corps, and that resulted in increased idle equipment costs and less-than-expected revenues. Additionally during the quarter, we experienced delays in the notice to proceed on a federal Navy job, causing our revenue to shift over to the right. And the good news is we just received that notice to proceed with this job on Tuesday.

Also, we experienced a delay on a Corps project that we were about to start in Louisiana as a result of the Mississippi River flooding.

There's no doubt we're frustrated with our current situation and our inability to more accurately predict such events as I've described. Regardless, we have to take steps to protect the intrinsic value of the Company and get better clarity into the future.

Now, the quickest way for us to return to the high profit margins that we enjoyed just a couple of years ago is for action to occur in Washington that puts dollars back into the Corps' available bank account so that they can begin a healthy flow of bid lettings, and resolution of a new highway bill, which we anticipate will help ease pricing pressures. Now we hope to see bid lettings from the Corps pick up during the third quarter, but we anticipate they will remain at a low level of activity.

Additionally, the lack of an approved budget for 2012 puts uncertainty in the next year and the pace of Corps lettings for 2012. Also, we don't expect to see a new highway bill any time soon with the congressional Joint Select Commission on Deficit Reduction about to be appointed and soon to be occupying Congress's attention in the months ahead.

Therefore, because of these uncertainties, we're in the process of right-sizing the Company to match the current market activity and pricing levels that we're currently seeing. In June, we reduced our workforce by nearly 300 people as projects came to an end and we trimmed permanent staff. But we have to be careful in this process as we need to retain highly-specialized personnel. So, workforce reductions are never easy, and since we have some of the best people in the industry who are all well qualified and efficient workers, it makes any process like this extremely difficult.

This is particularly disappointing to me as we've been in a hiring mode due to demand for our services over the past five years.

Still, we have more to do. Therefore, we are in the process of a detailed review of all our fixed costs and making tough decisions of where we can further trim overhead, reduce spending, and lower our overall fixed-cost level so we can further right-size the Company and get back to a profitable level, even with the current pricing pressure. So, we're going to be focused on making sure our overhead cost structure is in line with bid activity and the pricing levels.

Now at the same time, we're going to prepare for the future by strategically maintaining our equipment. Many of our assets have been continuously working for the past two years, particularly the dredges had been going nonstop. As these pieces of equipment come off jobs, we have to perform some maintenance so we're confident that they're ready to go back to work as soon as possible. When the work comes, you don't want to be in the repair shop.

However, we'll be prudent in the execution of our maintenance and repair. That's why we balance our costs.

As we've said before, we're in uncertain times in our economy and our markets. But we are seeing long-term signs that are positive for the future. Demand for our services has not and will not go away. In fact, we believe there is a building, pent-up demand for projects involving dredging services, and ongoing demand for marine construction projects. For example, the waterways are continuing to silt in as a result of delay in Corps lettings and also the flooding of the Mississippi River.

But of course, federal funding would need to be provided so that these needs could be addressed.

Additionally, according to the most recent data we've seen from the World Institute for Strategic Economic Research, the United States continues to export and import at high levels. The first quarter of 2011 saw exports of $351 billion, which compares to $296 billion during the first quarter of last year. Additionally, the first quarter of 2011 saw imports of $530 billion, which compares to $450 billion during the first quarter of 2010.

And since 95% of these exports and imports occur by ships, this means more ships are calling on our nation's ports. This, coupled with the expansion of the Panama Canal, should provide continued demand for our marine construction services long term.

We also expect to continue to see improved demand from the industrials' private side, such as chemical companies, refineries, and other private terminals. Over the past couple of years, these customers have delayed their infrastructure investments, but we're now beginning to see them make investments in maintenance and dock refurbishments and replacements, and I think this should bode well for us during the next 12 to 24 months.

Today, we are tracking almost $6 billion worth of bid opportunities over the next few years, and of that amount, 19% are federal projects, 32% are state, 29% are local, and 20% are in the private sector. This is the highest level of tracking database we've ever seen, which gives us optimism about the overall market demand. However, we have to pay close attention to pricing and funding to see how these opportunities ultimately play out.

So to sum up our markets, we expect lettings from the Corps to begin to increase during the third quarter, but at a slow pace. On the private side, we expect to see continued positive trends in the bid environment. State and local bid markets' activities should remain at a similar pace to the beginning of this year.

In closing, we expect 2011 will continue to be a challenging and frustrating year. We anticipate the gap in lettings for projects involving dredging services that we've encountered will be a short-term issue. However, we'll focus on protecting the intrinsic value of the Company by controlling costs, while managing through this downturn and preparing for future bid opportunities.

We realize this year has been frustrating and disappointing to many of our stakeholders. We wish we could've better predicted this uncertainty and been able to better quantify the challenges that we've been facing. We're working to improve our market-data analysis and improve our response to identified trends, and continue our efforts to return the Company to profitability.

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

Thanks, Mike, and thanks for joining us.

I'd like to begin by talking about guidance for just a second. As we've said many times before, we're in the construction business and things can shift around for a variety of reasons. We've been trying to fit our lumpy business into a strict quarterly guidance model, which is not always practical or easy to predict.

Looking at the longer-term picture has always -- has been and will always be the best way to look at our business. Therefore, we will continue to focus our communications with shareholders on the longer-term picture.

Additionally, the current uncertainty in the economic and political environment, including the inactions of our government, has made short-term forecasting extremely difficult. Our goal is to provide all of our stakeholders more clarity about the future outlook of the Company.

Beginning today, we are ending all forward-looking guidance and discontinuing any previously-provided guidance. We are providing more details regarding our backlog, tracking database, and other metrics which we believe will provide more clarity. We are implementing many of these metrics today and will be implementing more down the road.

Looking more closely at our second-quarter results, we reported a loss of $3.2 million, or $0.12 per diluted share, in the second quarter of 2011, which compares with a profit of $7 million, or $0.26 per diluted share, in the prior-year period.

This is the first quarterly loss the Company has experienced as a public company. As Mike said, we are not pleased with this at all. The combined pressures of pricing and a highly competitive environment and the slow pace of Corps lettings has had a greater impact on our financial results than we expected, and we must right-size our cost structure to match the current market activity levels and pricing structure.

Second-quarter contract revenues decreased 18.6% year over year to $70.9 million, of which 78% was generated from federal, state, and local government agencies and 22% from private industry, which compares to 61% from federal, state, and local government agencies and 39% from the private-industry sector in the prior-year period.

During the quarter, our book-to-bill ratio, which measures the replenishment of our backlog, was 0.7 times, which is up from our first-quarter 2011 book-to-bill ratio of 0.3 times. We are being successful on smaller jobs by finding the appropriate price point, region by region and job type by job type. We believe we are getting a good handle on where pricing should be in order to get our book-to-bill ratio back above 1 to 1.

Overall, we continue to be active on the bidding front, albeit primarily on marine construction projects. During the second quarter, we bid on $557 million worth of opportunities and were successful on $50 million worth. This represents an 8.9% win rate, which is significantly lower than our historical norm. While still under pricing pressure, we have been more successful at winning smaller jobs.

We've also continued to see pricing pressures and what appears to be irrational bidding on larger work. Over the shorter term, we expect to continue to seek good overall lettings on the marine construction side and slower lettings for projects involving dredging services.

As of June 30, 2011, we had backlog of work under contract of $119.8 million, of which 43% is for federal projects, 22% is for state projects, 25% for local projects, and 10% is in the private sector. Now keep in mind, we do a fair amount of private work that is short-term callout work and may not be reflected in backlog.

Subsequent to the end of the quarter, we have been successful in continuing to obtain additional awards for new work, even though it pressured bid margins. Additionally, we currently have over $100 million worth of bids outstanding, which includes approximately $18 million on which we are the apparent low bidder.

Turning to the balance sheet, we believe it is important to have a strong, stable balance sheet, low leverage, and a solid cash position. As of June 30, 2011, we had cash on hand of $25 million, which compares to $23 million as of March 31, 2011. Free cash flow for the second quarter of 2011 was $3.7 million.

So far this year, we have reduced our days sales outstanding by over seven days, bringing our trailing 12-month DSO down to 45 days as of June 30, 2011.

We currently have no debt, which is not to say that we will remain debt free in the future. As we've said before, while we want to keep our leverage low, we are comfortable with an appropriate amount of debt.

During the quarter, we began executing on our stock repurchase plan by repurchasing $3 million worth of our stock at an average price of $9.83. As we look ahead, we will continue to be opportunistic about repurchasing shares and returning value to shareholders under our approved plan of up to $40 million through May of 2012.

Turning to our cost-cutting initiatives, we have begun a detailed review of our cost cuts in an effort to right-size the Company to the current market activity and conditions. In June, we began eliminating overtime hours for support personnel and reducing the number of idled crews. As Mike mentioned, these are tough decisions, but necessary to match the market conditions.

I want to take a moment to help you understand how these savings impact our income statement. When crews and equipment are working, they're expensed to a job. Once they become idle, that expense is no longer absorbed by a job and causes our gross margin to decrease. Therefore, we have to take steps to mitigate these margin decreases and keep overall margins in line.

The impact of these steps we began taking in June will start to be realized in the third quarter and beyond. By making these changes, we limit the impact of idled crews and equipment. Keep in mind, job pressure -- job margins have been pressured, so we would still expect to see pressure on gross margins as compared to historical norms. Our goal is to offset that pressure through continued cost-cutting measures as much as possible.

During June, we also began making changes to control SG&A expenses. Along with job reductions and elimination of overtime hours, we have eliminated the 2011 bonus expense and are reviewing costs at a micro level to generate savings from such items as group medical, cell phones, computers, supplies, et cetera. In a nutshell, we are closely examining all areas of the business to make sure we keep costs in line.

Looking ahead, we are continuing our efforts to control costs and return to profitability. We expect to make further adjustments to our cost structure in the coming weeks to better align costs with revenue and gross margins. We are not prepared today to announce a specific savings target, but we expect to make significant changes that will not only help in today's market but will provide a better foundation for the future.

In closing, 2011 has many challenges and frustrations. We will manage through this downturn by maintaining the core value of the Company while controlling costs and preparing for the future.

Like Mike said, we are not pleased with where we are today and our lack of clarity in today's environment. However, we will make the necessary changes to protect the business, take advantage of positive trends, and be ready for the future.

As we look ahead, we expect the gap in projects involving dredging services to be a shorter-term issue. We expect the pricing pressure on marine construction projects will continue in the near term.

However, we remain excited about the long-term bid opportunities and our end markets. Our fleet support facilities and specialized workforce are hard to replicate, and we are well positioned to take advantage of the opportunities in our end markets once the current market pressures abate. We believe the Company has a strong future in the heavy civil marine infrastructure market, but we have to be patient, control costs, and manage through this time.

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

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

(Operator Instructions). Fred Buonocore.

I'd like to zero in on the gross margin a little bit. Can you quantify for us as much as possible, A, the degree of underutilized equipment or possibly the number of underutilized dredges you wound up with during the second quarter and, B, the cost of that as it related to your gross margin during the period?

And then, secondly, just to clarify on the repair and maintenance on the idled equipment, did that come in greater than you had anticipated? Because I don't recall you really talking about it on the first-quarter call, and trying to get an understanding of what those costs may have been as well. Thank you.

First, we don't specifically get into utilization, just for competitive reasons, but what we can say is utilization was significantly impacted, particularly with the dredges.

The gap that we talked about in the release and in the remarks we just made was significant, and it did have a significant impact on utilization from where we were in Q1 and where we've been historically over the last couple of years.

From where we sort of expected to be in terms of margin, about half of our deterioration, if you will, came from the idle equipment and about half came from increased maintenance and repair, and those two are related. So, you are correct. We didn't really talk about that in Q1.

But as you have and as we talked about in the remarks, we've had a lot of these pieces of equipment on the dredging side that have been going flat-out for the last couple of years. We've got to maintain that equipment. We've got to be ready for when they need to go back to work, and so -- but when you have an issue of the work -- of the dredges being idle, as I talked about in my remarks, those costs are now then not being absorbed in the job, and so that is going to have a downward pressure on our margins.

So, the rest of the impact on gross profit margins is going to be the normal ebb and flow of where we are in jobs and what jobs we're working on relative to this time versus the prior-year period, and also keeping in mind that we're in a pressured environment now.

So I think, again, that the impact of the idle equipment and the maintenance that we were doing on that idle equipment is the most significant aspect of the deterioration in margins.

Okay. And then as a follow-up to that, you talked about some pretty substantial cost-cutting actions. Can you, to the best of your ability, quantify what you have taken out to date, both in cost of goods sold and SG&A?

You know, as I said, we're not prepared to quantify that. I will say that the bulk of the cuts that we've made to date have been on the -- with respect to idle crews, and so that, of course, is going to affect cost of goods sold.

And again, what we're attempting to do is to limit the pressure that that idle equipment puts on the projects and on our cost of goods sold. As I said, normally when things are working and crews are working, those costs are job charged and therefore they're observed by the jobs. To the extent they're not, they're idle, they're not going to be absorbed.

And so, what we're attempting to do is just to reduce that as much as possible and to limit the impact that that's going to have on increasing our cost of goods sold or our lack of absorption, if you will.

On the overhead side, that's been, proportionately, the smaller piece. One of the big things that we did during the quarter, of course, and I talked about it in the remarks, is eliminate our 2011 bonus expense. Again, we're going through line by line at the micro level to just look at across-the-board cost savings, and again, we've made some changes in reductions in personnel and we'll continue to look at that.

Trey Grooms.

A couple of questions. One is, you mentioned slower lettings for dredging. You were kind of expecting that. It looks like with some of the things going on out there with the Mississippi River flooding and some of this BP funding for coastal restoration, port deepenings, that kind of thing, that there would be -- that that would help things along, looking out over the next several quarters. Is there just not the opportunity there that it appears or can you kind of go into some color there, please?

They're just kind of pushing back the lettings. There is certainly some opportunities that are building up from the devastation from the flooding.

But they have to wait until the river gets down to the right levels before they start putting those contracts out in any quantities. They have let a couple. There is more to come.

And we just see that the lettings that are going to be coming out in the third quarter, it takes time for those to get actually to the point where they can be kicked off and started. So even though we may see an increase in bid activity this quarter, the actual work may not start until subsequent quarters.

And also, just to follow up, Trey, again, longer term, you're right. The fact that BP is kicking in some money, that's a positive thing. The river flooding should provide opportunities for us. And as Mike said in his remarks, the demand for our services isn't going away. It may be getting deferred, but it's not going away.

One of the other issues that's on top of all of this is just the dysfunction of the government. We've all seen kind of what's going on and we've seen a marked decrease in the number of bid lettings in the first half of this calendar year from the Corps of Engineers, and we've seen delays in notice to proceed on federal jobs. As Mike said, we got one Tuesday, which coincidently was the same day they signed the budget deal, but this dysfunction in the government is just causing -- having an effect on how work gets let.

So, to your point, long term we feel very good about that. We think this work is going to get done, but short term, there's just a lot of dysfunction. As we all know, we're probably prepared for another few months of this wrangling where this joint committee is going to be talking about this stuff and probably sucking all the oxygen out of the air, too, for the next few months.

I think there'll be some more coastal restoration opportunities coming out as a result of that BP funding, so -- we're already seeing discussions about that. It's not clear exactly when the lettings will really start, but that could be an upside.

Okay, and then, on the margins, Mark, you mentioned that a lot of the decline was from the lower utilization and impact that has in maintenance and so forth, but you also point out that you expect margins to continue to be pressured, I guess, for the foreseeable future from where we stand today.

So can you -- I know you're not giving guidance or you pulled your guidance, whatever, however you want to look at it. But just directionally, I mean, this is -- these margins we're seeing here is unprecedented for you guys, and if you could just give us a little bit of direction on when you say continued margin pressure, are we talking about this level of margins or is this in your mind a one-time hit due to some of these things that you pointed out from utilization and so forth? Or is the business just so poor right now, I guess, that that's just the way it's going to be?

Trey, I just don't see -- this is Mike. I don't see any change in that this year. This is just a very tough year.

You know, we're seeing pricing pressure left and right, and it's not going to abate until there is some settling down of how federal funding is going to take place. You know, we just watched the FAA get -- a continuing resolution was not carried out and now 70,000 construction workers are on the street.

We have the Corps budget for FY 2011 expiring at the end of September. We also have the highway bill. Its continuing resolution is running out at the end of September. And with this congressional committee, the 12 appointed people that are supposed to come up with recommendations, they're not going to get those recommendations in until November. So there's going to have to be further continuing resolutions, both in the highway bill and the Corps of Engineers, to bridge this political uncertainty.

And I think until that abates and we get some clarity and get some long-term funding on the highway bill and the Corps, the price is going to remain tough. We went through last year and had 1,470 people employed in this Company. We were positioned for growth. And we have steadily maintained pricing discipline, and it became obvious after last quarter that we were going to have to drop prices to retain market share, and we've been doing that.

But we've not been unrealistic in bidding below our cost. We're trying to be prudent about it. But we still see some irrational pricing, both on small jobs and big jobs.

But having said that, our success rate has actually gone up now that I think we've honed in on what it takes to get some work.

And this pricing pressure, I mean I know it's very intense on the construction side of the business, but obviously it's becoming more of an issue on the dredging side as well. Can you kind of talk about the -- is it mostly just aggressive behavior from competition and you guys just having to kind of get down there in the trenches with them on the dredge side as well? Or is it -- a lot of this is this utilization issue on the dredge side, idled vessels and things. Is that playing a bigger role just specifically on the dredge side?

Yes. And just, I'll go into that in a little bit more detail. Yes, we've been experiencing the pricing pressure on the construction side, and that's spread as we talked about last call.

But to your point, absolutely, that's what's exacerbating the problem is this gap in schedule of lettings. You know, in the Gulf Coast market, last year, I think, by this time we had bid on something like 15 jobs. We've bid on, like, two this year. So, there -- I think what we're seeing is the impact of this idle equipment and the gap that this lack of lettings has created.

Now, again, what we're doing about this, getting back to margins, is we're trying to limit the impact of that. We're focusing on cost reduction. We began that in June once we -- as Mike said, we anticipated that in June we were being told they're either going to execute -- the budget was approved in April and they would begin letting their work. We suspect that all of this wrangling on the debt ceiling has had a factor in the pace at which stuff has been let.

So, we do think now that that's been settled, we will see some activity pick up as we go through the quarter. But I think the point is that we do expect in the near term that this uncertainty in the Corps lettings is going to have an impact. Again, we'll have to see how some of these things play out with respect to a 2012 budget, and then the impact that this -- what appears to be we're going to have some continued dysfunction in our government over the next few months here, and what impact that has on the bid lettings and the bid pace.

You know, nearer term, as we go a little bit further out there on the construction margins, we kind of expect to continue to see that pressure be with us for the near term. So, I guess what we're saying here is there's still a lot of uncertainty in the political and economic environments.

We do think that the ability for the pricing, if you will, on the dredging -- projects involved in dredging services, to return to normal is -- that could occur much quicker. I mean, if we get some certainty here, we get some -- a good pace of projects being let, that will reverse and get back to normal much quicker.

With the projects that are primarily marine construction related, that is probably a little bit longer of a haul there, and it's probably tied more to some certainty in a highway bill and some certainty in just general economic improvement.

Having said all of that, again we want to emphasize that long term we think, as we look out over the next decade, there's an awful lot of work to be done. We think we're tracking more work than we ever have. We think our end markets are going to have plenty of work to bid on for some time to come, and we think we will definitely get through this process here and come out the other side of it, but we're just going to have to be patient in the short term.

Okay. And then, I just -- one other question here is the -- you mentioned, and you've said this many times in the past, that you are debt free now but you don't necessarily -- you're not necessarily saying that you will continue to be that way.

What would it take -- what kind of circumstance would it take to push you guys to actually bring on leverage in this kind of environment here?

We're still carrying out M&A assessments. You know, we're very active on the acquisition front. Always are every year, looking for opportunities.

There's a number of companies that are -- don't have as good a balance sheet as we have right now that are under stress, and there may be some opportunities out there for us, and we're not going to shut the door on that. Thank goodness, we've got a strong enough balance sheet that we can move on opportunities.

So, we're going to continue to remain opportunistic and see what develops.

Yes, and I think, Trey, look, we intend to protect the balance sheet. But if -- obviously, we would be vigilant in terms of how we assess an M&A opportunity in this environment. But as Mike said, there could be the right opportunity with the right attributes that would complement what we're doing and be helpful in this situation. And so, we don't want to be shortsighted in that regard.

But I just want to emphasize that we will protect the balance sheet.

Yes, I mean, we've got excellent support from our banks and our bonding companies, and our covenants are in good shape.

What we're trying to do is instead of going forward with a 1,400-man workforce, look at how to get profitable with an 1,100-man workforce, and let's just ride this thing until it gets more clarity, particularly on the federal funding.

And I think that uncertainty is going to stay with us all throughout this year until we get this joint commission to convey their recommendations on budget cuts, and the question is, once those recommendations come forward, where are the cuts going to be? And if they want to create jobs and they cut in construction, that's an oxymoron there. It's not politically going to help get re-elected.

So, I think it's -- what we've seen in the last two months on the debt ceiling, we're going to see with this commission now for the next few months. So, that's what we're trying to position ourselves for.

Alex Rygiel.

Mike or Mark, what was the revenue mix between construction and dredging in the quarter?

We don't -- we do not split that out. We view all projects as -- we're project focused and we don't report it out that way.

We did report our breakdown between federal, state, and local, and our federal piece was around 40% for the quarter. And that includes both Corps jobs and Navy jobs in the quarter.

Which segment -- construction or dredging -- was profitable in the quarter?

Alex, we don't report segments. We're a single-segment business, and that's how we report out.

What is your utilization rate in the dredging -- in your dredging assets today?

Well, I think as I said before, we don't give that metric for competitive reasons. We may change that or may not change that in the future.

But I think, as I said earlier, it's fair to say that during the quarter, as we went through the quarter, our utilization was impacted and in a significant way, particularly with -- our dredging assets had a significant decrease in utilization during the quarter.

And it looks like in the first six months of 2011, your revenue from federal, state, and local is the highest it's ever been in the Company history. But yet your commentary about Washington policy suggests that there is a revenue problem here. It doesn't seem that way.

Can you help me to kind of reconcile those comments, and then also talk about the impact on your profitability that the falloff in the private sector has had?

That revenue we've had in backlog for some time. What we're saying is we've been working that off, and to replenish it with new federal revenue has been the difficulty. That's been the challenge. That's dried up there.

Right. And again, with respect to percentages, you're correct. With respect to volume, the volume of revenue is much below what -- where we want to see it on a run rate. So that's certainly significant.

And again, I think to your last point there on the private sector, no doubt, and again as Mike talked about, we've seen on a percentage basis, but also in terms of a dollar basis, a reduction of what we've done on the private side.

The good news there, though, is we've begun seeing some activity. We started seeing that late last year where a lot of deferred maintenance from the small jobs, which are just as important to us as the big ones, we started seeing an uptick of that. We've been steadily working at that. That's been a positive sign.

And there's been a number of projects that we think are upcoming, and of the money -- excuse me, the projects that we're tracking in our database, that $6 billion database, there's -- about 20% of that is in the private sector. And more importantly for us in the near term, there is a significant number of projects that we're taking a look at or bidding or have already quoted that are in the private sector.

On the dollar basis, it does look like the federal, state, and local is higher in the first six months of 2011 than last year and the year before. Were there any project-specific closeouts in Q2 that were closed out at a material loss?

No. I think, again, we sort of see the normal ebb and flow of projects that might come in higher or lower than initially anticipated, but in terms of a material impact, you know, I would -- the answer is no.

And again, that's not to say that we don't have projects that move around as we execute them and close them out, and they may come in differently than we initially anticipated, but nothing on a material basis.

Comparing Q2 of 2011 versus Q1 of 2010, I know it sounds a little odd, but in Q1 of 2010 you did $75 million in revenue and your gross profit was almost $16 million. This quarter, you did $71 million of revenue and your gross profit was $2 million.

You know, since your projects are somewhat fairly long term in burn, it doesn't seem like volume changed too much. So what didn't you see 12 months ago in the projects that you were starting or bidding then that all of a sudden resulted in the materially lower gross profit this quarter?

I guess I would correct that. The projects are -- the typical project length is three to nine months. So it's not long term -- that's not to say that we didn't have some longer-term projects (multiple speakers) between the two periods.

But on average, it's three to nine months. They're relatively short. Therefore, as we've moved from Q1 2010 through Q2 2011, the pricing pressures that we've seen become greater as we replenish the work that we've burned off. And again, coupled with the fact that I think there's no doubt that the underabsorption of equipment and crews during the quarter played a big impact, and you have to remember, too, Q1 2010 we were different company with a lot less of that equipment.

And we had a high utilization (multiple speakers)

And we had a high utilization, exactly.

So, again, we've added more equipment over that time period, and again that underabsorption of that is going to put downward pressure on the margins, coupled with the difference in the pricing for the projects that came on during that time period versus the ones that rolled off.

Matt Tucker.

A question on the Army Corps. Certainly understand your frustration with what's going on in Congress, but I guess my understanding was that the Army Corps lettings were still based on a fiscal-year 2011 budget that had been basically approved and allocated. So, could you just help us understand how or why what's going on in Congress today has impacted this year's lettings?

And then, I assume you have contacts with the Army Corps that you speak with, so maybe if you could provide a little color in terms of what they're telling you on when these lettings will start to come out or what they're waiting for.

Yes. In prior years, we've gotten, just from the Galveston district, somewhere around 15 bids to 17 bids a year. This first half, we've gotten three, and fortunately we were awarded those.

But normally this time of year, all our dredges are blowing and going out there. This is the best [month]. This is the calmest weather, unless a hurricane comes in, and we've got idle dredges at the docks, some of our fleet, and it's just highly unusual to see that. That is not normal.

I've met with these Corps commanders and their staff, and talked with them about this. Yes, they have an approved budget, but the money has got to flow down and they have to get authorization to spend it.

And there's been a lot of consternation about is it okay or not? Are we going to put out a bid or not? We've got all this flooding damage that's occurred, and where is the money going to come from to do that? Are we going to shift money or what's going to take place?

Congress could not get anything approved substantially. I think now they're talking about directing $1 billion in disaster relief for flooding all up along the Mississippi and Missouri and tornadoes and storms and everything. We don't know what the breakout of that is for dredging.

And you've had the Navy holding up on either projects or bid lettings because they want to make sure, is the money going to be there? If we award this job, is the money going to be there? And that's the kind of feedback I'm getting. They're not sure.

So until they get some clarity out of the budget office on how the money is going to be let, there has been confusion. And we just have never seen this slow an activity taking place from some of these districts, and now it looks like they're starting to get kicked back into gear, but the damage is done. By the time they get some bid packages out, and we get dredges back being utilized, that's a hell of a gap in our schedule. We've never had a year like that.

Got it. That's very helpful. So just to kind of paraphrase, even though the money -- the budget is kind of there, it's that authorization step that's really a hurdle and (multiple speakers) you're not really getting authorizations due to the uncertainty.

We think so. Absolutely. As you said, you're absolutely correct. The budget was approved in April. We've had indications that they would begin lettings in June. That didn't occur.

And again, obviously you know what's been going on all summer with the federal government and the debt ceiling noise and all that stuff, and again, I mean, we're still hearing today that they intend to let their fiscal-year 2011 programs so we are hopeful on that note. But again, we'll reserve judgment on that until we see hard bid dates and bid dates that don't -- that actually get carried out and don't get pushed off into the next fiscal year.

Got it. Thanks. And then, as you look at the gross margin in the quarter, and you kind of identified two reasons for it being down, obviously the dredging utilization, but then also two specific projects where you saw delays. Can you kind of give us a sense of the relative impact of the delays versus the dredging lettings being slow? Because I assume -- it sounds like the delay issue is kind of resolved, but just trying to get a sense for how much margins could come back, given you still have the utilization on the dredge side.

Okay, let me just explain the event first, and then I'll let Mark comment on the impact.

We had a project over in Louisiana, Belle Chase, which was scheduled to be carried out all throughout the quarter. The flooding got the levees so saturated that we were unable to do any pilot driving because they were concerned about the integrity of the surrounding levee.

And we had a Navy job, one of our major jobs we announced, that we fully expected to be well into it by now. But the Navy held up kicking that off throughout the whole quarter. And those were the two projects I recall. You may have some --

Yes, and Matt, again I think to the point there, no doubt that those things had an impact on revenue and, therefore, gross margin.

The good news there is, again, it shifted rightward. It didn't go away. The work hadn't gone away. It shifted rightward.

But with respect to the specific margin in Q2, as we had previously kind of talked about, we expected pressure during the quarter. We fully expected the pressure and we talked about that last call. I think from where we anticipated we would wind up, to what we actually reported out, that difference was more driven by the idle equipment created by the gaps in the Corps schedule, and then also the underabsorption of that equipment and the maintenance and repair activities that we needed to carry out on that equipment.

It's kind of a double-edged sword with -- sometimes, with some of this equipment, is we have to maintain it, we have to take advantage of opportunities when we have down time in order to maintain it, and we have to be prepared to take advantage of opportunities that are going to come out down the road. But at the same time, we're incurring that cost and we're not able to absorb that in the job.

So, those two things definitely tie together, and together they primarily account for the difference in where we expected to come in in margins, and certainly, again, as I said, we fully expected that Q2 margins would be pressured anyway. They've just more so than -- as a result of what I just talked about.

Got it. Thanks. Just one more and I'll jump back in the queue. You've talked about having to lower your margins on bids to win work. Is that reflected -- did you already started doing that in the second quarter and is that reflected in the second-quarter awards, or do you have to kind of -- and if so, do you have to kind of lower even further to lift that 9% win rate or is it really -- are you adopting this lower-margin bidding strategy post the second quarter?

I think the answer to the first question is yes. That is reflected in that success rate that we won, and we're going to continue down this path and, in parallel, right-size the Company so that those margins are such that we can live with them, and by that I mean return to profitability.

So, that's what we're trying to balance, and we're working with all our management team to do that and we expect this is going to be a short-term issue that we'll have to deal with this year. We want to just continue to be in a strong position until we see the upturn with the market.

We're just not interested in buying work, and let me tell you, I've seen prices all over the map. Not just on small jobs, even on some big jobs. We had an opportunity to participate in a big bridge project on the East Coast, and there were only three bidders. The low bidder -- it was an over $200 million project -- left $64 million on the table between them and the number two bidder. They left $90 million between them and the number three bidder, and this is a big company. And I am going, why on earth would you all do that?

So there's just a number of times that we've seen some real irrational pricing that doesn't make sense to us, and we don't want to go in and be locked in to three or four years of just terrible margins. We feel like we've just got to be patient, be realistic, and I'm glad to see our success rate coming back up. So (multiple speakers) watching very closely.

Steve Dyer.

I missed -- I wonder if you could go over the federal, state, local, and private breakout on revenue again this quarter. I know you talked about it, and I missed it.

Absolutely. Federal, state, and local for this quarter was 78%, and 22% private industry, and that compares to year over year of 61% federal, state, and local and 39% private.

And then, it looks like backlog is more like 90% federal, state, and local. Did I get those numbers right? 10% private?

I think you did get that right.

Okay. And I know that you guys have discussed margins, et cetera. Operating expenses, is this a decent level to think about going forward or is there still some cutting to do?

There is still some -- we're still looking at it, and again, it depends on what our schedules are going to be. You know, we may be looking at additional cuts, depending on what some of our schedules are on the operating side, and of course, obviously, we continue to look at our fixed-cost structure in terms of overhead and support staff.

But is this a decent level here in the next quarter or two, just -- unless things get dramatically worse?

Well, I think it's fair to say we're going to continue to be challenged, particularly in Q3, given the gap as we've talked about earlier.

We expect the Corps to start executing on their -- you know, they've said they're going to execute their fiscal-year 2011 plan, which, as you know now, is less than two months along. But obviously, any of that stuff that gets going or gets awarded is going to have limited impact on the current quarter.

So I think it's fair to say that we're going to continue to see this type of pressure, but again, we're taking a look at the cost structure side to try to match that and get through this.

Okay. Great. Would you expect anytime in the near term you'd have to write down any equipment or write down any of the goodwill from any of the acquisitions you've made recently, or is that -- how should we think about that?

We don't anticipate that -- either of those -- being an issue.

And then, last question, CapEx, you know, maybe a little bit higher, I guess, then I would've thought, given how tough things are. Is that just primarily the maintenance that Mike was talking about, just keeping everything in good shape?

Partially. We are reducing that.

It's under review.

It's under review. We've -- our full-year plan will be reduced accordingly. We do -- again, that goes hand in hand with some of the normal maintenance and repairs, but also the capital maintenance and repairs that we need to make sure that we're not short-sighted on in carrying out, but definitely it's under review. Definitely it will be much lower than we initially planned when we came into 2011. And if (multiple speakers)

I think we're hoping to get into the upper teens there, [as well].

Yes, the mid- to upper teens, but we're also -- that's also under review. So that could be -- that could change as we go through the balance of the year.

We have one further question. This one is from the line of Rich Wesolowski.

Mark and Mike, does your restructuring plan bring you to a cost base to handle a period where you may be living quarter to quarter in your backlog or have you sited the Company in an expectation that there will be some legislative victory for the industry, say, by the first half of 2012?

I don't think we've put any calendar date on it. I think what we're trying to do is get to a positive run rate, quarterly run rate.

And you know, how our success rate fares will determine whether we pick back up or not. I'm, I guess, maybe a little bit more skeptical of what I've seen here the last couple of months. This debate, I don't think is going to be over until the election occurs next year. And we just have no way of knowing.

But hopefully when Congress comes back in, they realize they can't make the same mistake they made with the FAA with the Corps and the highway bill. But both of those are on a short fuse and the candle is burning down, so we're basically just saying, look, until we get some clarity, let's just contain our costs and continue bidding, and if our backlog pops back up suddenly, we'll respond.

I don't think there will be any problem hiring the people back. We've been able to build this Company up without any difficulty on the manpower side, and with as many people unemployed right now, I'm just not concerned about being able to build back up.

So, it's hard to be specific, to answer your question, but I hope that gives you (multiple speakers)

That was perfect. That was perfect. Have you recognized any of the revenue from the Navy contract? Was that stopped after -- had it started or was it just never started?

On the one that we were talking -- the one that we specifically mentioned where we had a delay in the notice to proceed, we just got the notice to proceed Tuesday of this week.

So, there's been virtually no revenue (multiple speakers) recognized.

(Multiple speakers) other than the project team getting positioned.

No recognition in Q2.

Has there been any meaningful revenue generated in the Pacific Northwest?

There has been. We're -- again, I think we're pleased with where we are in that endeavor.

We're getting good margins (multiple speakers)

We are getting good margins on the work. We're pleased with -- I think we've got a real good handle on that market up there, and definitely I think that -- pricing in that market is -- appears to be better than what we're seeing on the Gulf Coast and southeast Atlantic.

We've teamed up with several joint ventures to get them positioned down the road that I think will be very helpful, and some other companies that don't have marine assets. So we're looking at both Navy work, ferry work, DOT work,. I think we'll be well positioned (multiple speakers)

And again, we view that as basically kind of a greenfield expansion. That was a longer-term effort. We do think we're on track there and we do think that that effort will pay off down the road.

You have $150 million or thereabouts in PP&E on your balance sheet. Have you ever made a guess as to the replacement value of that equipment?

It's much greater than that. You know, it would probably be in the $200 million, $250 million range, at least.

And are you selling any of that?

You know, we always take a look at -- just in the normal course of things, to look at it, and again, I think --

I think we'll look at selling some of the older equipment. One of the things we're recognizing is that there's a lot of equipment that has hit the market now with people not having work.

They are selling it, they're putting it out there, and these big equipment companies that -- auction companies, and we may take the opportunity to sell some of our older assets because we can get it back. Prices are good right now. We can get it back if the work picks back up. So we will look at that. I just (multiple speakers)

Couldn't quantify that today.

I couldn't quantify an amount.

Trey Grooms.

Just on your response to the last question, on the asset sales, are you referring -- when you say older equipment, are you referring more to assets on the construction side or --

Yes. Cranes, primarily. I should have said that. (Multiple speakers) not going to sell any dredges.

We're not -- we're not going to sell any core assets. We've got some older things, particularly on kind of the yellow iron side or the cranes that we feel like we'll be able to replace with a better piece of equipment down the road. We'll definitely look at that.

So we might see a little bit more than we would normally in a given year because, like we said, we're looking at all things. But we're not going to divest of any of the core assets, certainly.

Okay, and then, the one last question that I have is, it sounds like, and Mike, you said, trying to position the Company to perform well with 1,100 headcount as opposed to the 1,400. So, you're basically saying there that, I guess, most of the right-sizing, if you will, of at least personnel has been complete.

It's still under review. And I mean, you know, if we had a change in activity, if it went down, we'll react to that. We'll continue to make further layoffs. If it goes up, we'll hire.

I like to be in a hiring mode, but you've got to have the market to support it, and I think we may have stayed up a little high thinking that the market would turn quicker than it has, and the events that have taken place politically are just disconcerting to me, and I think the smart thing to do is let's retrench.

We're going to continue growing this Company. We've got a great Company. It's a leader. Our clients like what we do, and we're going to continue building the Company. It's just not going to happen this year. This is just going to be a stumbling block for us this year.

How difficult is it to kind of re-hire these folks? I know maybe some positions are more, I guess, difficult to fill than others. But do you see that as a risk when things return at all to having this lower headcount?

No, I don't think so because we've gone through and we've sliced this thing vertically and horizontally.

But in doing so, on our primary equipment, particularly our dredges, you have to retain the key personnel that operate the dredge. The crews, the deckhands and so forth, riggers and whatnot, it's a little bit easier to diminish those numbers. But you don't want to let go of long-term experienced operators and dredge superintendents that you'll need, and we just -- we're very careful about making those selections so that we can pop back up again when activity returns.

And Trey, that is a very good point there is that we are definitely committed to matching the -- our cost structure to the current environment.

Having said that, though, we don't want to cut off our nose to spite our face. As Mike said, there's certain personnel that are harder -- would be harder to re-hire, and so we've got to be smart about that, and that may mean that we have to retain some costs in our cost structure, and that could, again, impact our -- the absorption of that and have an impact on margin.

But that's going to be the smart move to do because we don't want to be in a position where we've got an increasing backlog and increasing work to do and we don't have personnel to carry it out. So it's a challenge, but that's how we've viewed it up to this point in the cuts that we've made and that's how -- if we have to make any additional, that's how we'll view it for any additional.

That's very helpful. Best of luck, guys.

Thank you. We have no further questions in the queue.

On behalf of Orion Marine Group, we would like to thank you for taking the time to speak with us this morning and we look forward to speaking with you next quarter. If you have any questions, please let me know. Thanks.

Thank you, ladies and gentlemen. That concludes your conference call. You may now disconnect. Thank you very much for joining us. Do enjoy the rest of your day.