Great Lakes Dredge & Dock Corporation
Q4 2012 Earnings Call Transcript

Published: 15 Mar 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Great Lakes Dredge & Dock Corporation Earnings Conference Call. My name is Ben, and I'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 conference, Ms. Katie Hayes, Treasurer and Director of Investor Relations. Please proceed.

[Katherine M. Hayes:]

Good morning. This is Katie Hayes, and I welcome you to our quarterly conference call. Jon Berger, our Chief Executive Officer; and Bill Steckel, our Chief Financial Officer, will discuss the operational and financial results for the quarter and year ended December 31, 2012, as well as other items that were announced in yesterday's earnings release. Following their comments, there will be an opportunity for questions. During this call, we'll make certain forward-looking statements to help you understand our business. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in our filings with the SEC, including our 2011 Form 10-K and subsequent filings, including the 8-K we filed yesterday. During this call, we will also refer to certain non-GAAP financial measures, including adjusted EBITDA, which are explained in the net income to adjusted EBITDA reconciliations attached to our earnings release and posted on our Investor Relations website, along with certain other operating data. I would first like to turn the call over to Jon Berger, our CEO.

[Jonathan W. Berger:]

Thank you, Katie. Prior to having Bill go over our financial results for the quarter and the year, I would like to say a few things to everyone. While the information reported on yesterday is quite disappointing to me, it does not change my fundamental optimism in our business. Our backlog is strong. We have excellent margin and backlog. And we see strong opportunities for us in all segments. I clearly note everyone's frustration over our inability to provide financial results until now and our radio silence in the last few weeks. This is not how we have worked with you in the past and not how we intend to going forward. I hope you understand our need for being silent until now. We obviously had meaningful revenue recognition issues at our demolition segment. We believe a significant portion will be recognized in the future. Our accounting policies and documentation procedures have been reviewed, and we do not intend to have these compliance issues going forward. We have missed our adjusted EBITDA guidance that we provided in November by approximately $24 million. The majority of this shortfall was from the demolition segment, where revenue recognized related to certain pending change orders was inconsistent with company policy. The total impact of this was approximately $13.5 million. In addition to these adjustments, demolition was impacted by $2 million of cost overruns on other projects. The dredging segment had also expected to sell an underutilized dredge located in the Middle East prior to year end. The buyer experienced funding delays. However, we currently expect to realize over $4 million on the gain of the sale of the dredge in 2013. In total, these items approximate $21 million. The remaining shortfall was due to timing shifts in certain dredging projects and margin deterioration on certain river and lakes projects. We will be focusing on improving our controls at our demolition subsidiary and throughout the company. The demolition remediation segment is a key part of our growth strategy, and we are committed to having the right personnel and tools in place to effectively grow the segment while maintaining adequate operational and financial controls. I will now turn our call over to Bill to discuss the fourth quarter and year-end results, and then I'll come back to address the market and answer your questions.

[William S. Steckel:]

Thank you, Jon. Revenues in the fourth quarter were $206.3 million, up from $158.6 million in the fourth quarter of 2011. Revenue increased in domestic maintenance and capital dredging as well as foreign dredging. These increases were offset by declines in both coastal protection and demolition. Coastal protection was previously referred to as beach nourishment. Coastal protection is a more accurate description of this important dredging work that protects valuable infrastructure along our coastlines. Our dredging segment had a record quarter for revenue. We worked safely and efficiently on 18 projects throughout the quarter. There was some shift in a couple of projects from the fourth quarter 2012 to the first quarter of 2013. For the year, the dredging segment had $587 million in revenue and $33 million in operating income. The demolition business was negatively impacted by pending change orders at projects where our accounting policy did not allow revenue to be recognized. We expect much of this revenue to be recognized in future periods. Total gross margin was compressed in the fourth quarter and full year of 2012 due to the pending change order issue in the demolition segment. For the full year, the dredging segment experienced weather impacts and lower dredge utilizations at reduced gross margin. However, fourth quarter margin, as a percent of revenue in the dredging segment, was nearly double the prior year quarter, reflecting the strong revenue and operating performance. The full year of 2012 domestic dredging bid market was $939 million. Our share of the market was as follows

[Jonathan W. Berger:]

Thank you, Bill. I'd like to again reiterate my disappointment in the events that have transpired around our year-end financials. However, the fundamentals of the company have not changed, and we are a strong company. As Bill said, our dredging division had the second-highest revenue ever, with $587 million, and operating income for the year of $33 million. Now let me speak to the markets. The dredging market has many opportunities on the horizon. Let's first talk about Sandy funding. We've been working closely with the Corps during and after the storm and are pleased that coastal projects that had been built and maintained as designed performed well during the storm. We actually performed 4 contracts, 2 in New York and 2 in New Jersey, in the immediate aftermath based on contracts that we had won before the storm, and performed 1 emergency contract immediately after the storm at Mauritius [ph]. The Sandy Supplemental Bill provides unprecedented amounts of funding for coastal protection projects, both for immediate restoration and also for long-term investment in coastal protection. We expect these to provide consistent marketplace for dredging in the affected areas for years to come. Although the Corps was quick to prepare the Sandy recover projects and GLDD was well positioned to respond to the surge in workload, the funding, although approved, was slow in coming. However, we are starting to see projects get funding and requests for bids are hitting the street now, so we expect to a robust coastal market for the rest of the year. Sandy Supplemental provides funding for coastal restoration projects in Florida and the Northeast and operations and maintenance dredging for federal channels from Florida to the Northeast impacted by Sandy. This should relieve pressure on the Corps' budget for these accounts and allow other projects elsewhere around the country to benefit as well. Overall, the Corp received $1 billion for immediate coastal restoration work and another $3.5 billion for the next phase that will include long-range planning. Let's turn to the federal budget. We expect the President's budget to be presented April 8. It's more than 2 months after it is due, as you well know, but we have not seen the details. But indications are the Corps' navigation budget will fare well, as it has in comparison to other federal programs. Impacts of the sequester will be felt by Corps as well as all federal agencies and is expected to be implemented through a significant amount of employee furloughs. As with all the Corps, we expect them to adapt to the changes and complete their mission. We don't expect many short-term impacts for our ongoing contracts. And while all future projects will be affected by the 5% cut in Corps funding, we expect the larger projects that we typically perform to still be fully funded through reprogramming and more efficient contracting. Sandy projects will be hit by the sequester as well. But since the supplemental drastically increased anything that coastal protection has seen historically, we don't expect the sequester to have a short-term impact on Sandy projects. Perhaps a bigger risk is the continuing resolution, since debt ceilings and fiscal discussions may impact the long-term investment in infrastructure projects. On the good side, we are seeing more states getting into the funding game, with New Jersey looking to increase its beach fund, Texas looking to start a port fund, and other states like North Carolina and Florida funding Corps projects out of their own budgets. In D.C., the Harbor Maintenance Trust Fund legislation was reissued in both the House and the Senate this year, and will already have 93 cosponsors in the House and 33 in the Senate. We understand from Senator Vitter this week that the Harbor Maintenance Trust Fund will be part of the draft WRDA Senate bill coming out and with language that we understand will be close to that what we proposed. There is much talk about WRDA this year, with Chairman Shuster in the House really pushing it hard as his first priority. Obviously, we're not in the predicting business for anything in Washington, so we can offer no guidance as to whether it gets passed this session. However, ports and waterways are very much in the infrastructure discussion this year. And Harbor Maintenance Trust Fund reform is front and center in those discussions. One place where we've been very satisfied is the progress in the administration's attention to these issues. From the President's attention to ports in his We Can't Wait initiative, and has mentioned the port in his State of the Union speech to the National Export Initiative's attention to domestic infrastructure including ports, we are excited that we are turning a corner in the importance of dredging to the national economy and the discussion. Gulf Coast funding. Obviously, there's funding coming for the settlements with certain participants in the Deepwater Horizon spill at both the civil and criminal level. The first of 2 BP trials entered their third week, so we'll have to wait and see the results of these trials. On the positive side, on the Gulf, our Scofield Island project was an incredible success from an engineering standpoint. We proved we could pump sand long distances. Our sense is now that we have an opening with a lot of engineering possibilities for handling sediment that will help push future project designs. Internationally, we are diversifying our base of business with our work in Australia and more work in Brazil. We are cautiously optimistic about the prospects in the Middle East, and we look to continue to look for opportunities for our equipment. With regard to our demolition remediation, we will work hard to renew your trust in this segment. As a critical part of our growth strategy, the acquisition of Terra Contracting broadens our remediation capabilities and also brings a strong market presence outside the Northeast, where we have traditionally focused. The successful partnership of our broadened demolition remediation capabilities with our dredging expertise is an important component of our company's growth. We have been executing our strategy to move higher value-added projects such as the large brownfield projects that Bill discussed that we will be executing over the next 1.5 year and a large decommissioning project in Ohio. We are moving along well in our integration with Terra Rivers and Lakes and demolition. And the combination has been extremely well received in the marketplace. Our combined team was recently added as a qualified supplier to 2 major utilities to provide demolition and remediation services. With that, I'd like to open it for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Jon Tanwanteng from CJS Securities.

[Arnold Ursaner:]

It's actually Arnie Ursaner backing up Jon. I want to try to focus on this whole issue of the change orders. Obviously, change orders occur in any construction-related, project-related business. They occur frequently. I can't imagine that it began this quarter. So I guess what we're trying to get a better feel for is what exactly did change on a company-specific basis? When did it start to change? And then I guess, the follow-up on that is to the extent you had an issue in Q2 on the change order and it's 8 months later and you haven't been paid, is there a different issue involved here?

[Jonathan W. Berger:]

Yes. I'll start, and then Bill, please back me up. Arnie, the biggest component of the 2 demolition projects are 2 large projects in the New York region. One of them started out as a $7 million project, and it's over $22 million now, so the scope changed dramatically. And in that project, we are a subcontract to a prime who was contracted with a state agency. And as is the case in dealing with a prime working for the state, the prime won't pay you until he gets paid. So we obviously performed all the work. We performed the work well. And it's a matter of having to work through. And as typically the case, they are going to fight you until they get their money. Otherwise, it comes out of their pockets, so you get sandwiched. The second project is also a New York project, where we're directly engaged with one of the agencies in New York City. And one of our subcontractors had a dispute with the agency, and we've been stuck in the middle. We believe it will be resolved by satisfaction. But until it is resolved, we just cannot recognize the revenue.

[Arnold Ursaner:]

Again, I think what we're all trying to get a better feel for, though, is you've been a subcontractor before and not been paid before. Why all of a sudden did you uncover that you had incorrect accounting at this point versus 2 years ago or 3 years ago?

[William S. Steckel:]

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

[Jonathan W. Berger:]

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

[Arnold Ursaner:]

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

[William S. Steckel:]

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

[Arnold Ursaner:]

Were forensic accountants brought in at this point?

[Jonathan W. Berger:]

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

[William S. Steckel:]

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

[Operator:]

Our next question comes from the line of Richard Paget from Imperial Capital.

[Richard S. Paget:]

So I'd just expand a previous question. If you are to recover that $13-plus million from demo in 2013, would that all fall to the bottom line?

[William S. Steckel:]

Yes.

[Jonathan W. Berger:]

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

[Richard S. Paget:]

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

[William S. Steckel:]

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

[Jonathan W. Berger:]

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

[Richard S. Paget:]

So those provisions for AR, are those related to the 2 New York contracts or that's something different?

[William S. Steckel:]

It's really across the business. We just took a hard look at our accounts receivable.

[Richard S. Paget:]

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

[William S. Steckel:]

It's about $1 million.

[Richard S. Paget:]

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

[William S. Steckel:]

Well, last year, we did have a reversal of an earnout provision, so the comparative is a little bit challenging there. We did accrue some extra state and local taxes that we wanted to catch up on and make sure we are properly accrued there. And we have clearly built out our sea sweep team here, so there is some incremental costs there.

[Richard S. Paget:]

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

[Jonathan W. Berger:]

Yes. Let's start with the scows. The 2 scows should be out sometime this summer, and as we planned. And the ATB, we are currently in detailed design phases, where we're getting the construction drawings ready to go to production. We have ordered a reasonable amount of the engines and some of that other stuff. So moving along as expected there, but that's kind of late '14, '15 kind of process anyway. But it's moving along.

[Operator:]

Our next question is from the line of Jack Kasprzak from BB&T.

[John F. Kasprzak:]

I guess on the SG&A question, following up on that, I mean, another way to look at it sort of going forward, what do you think the right annual level of SG&A is? It's been sort of in the low 50s. Is it note markedly higher now on a run rate due to some of these issues?

[Jonathan W. Berger:]

Obviously, because of the restatement, we'll have some issues that we'll probably keep our legal up a little bit over it sometime. And don't forget that we also did an acquisition that has some SG&A associated with it. So you're going to see that flow through. But other than those 2 items, I don't think we foresee any significant SG&A increase. The only thing I will say is that we will be embarking on an ERP system in this year. So we'll have some incremental consulting costs along with some capital that we've built into our capital budget for that.

[John F. Kasprzak:]

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

[Jonathan W. Berger:]

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

[John F. Kasprzak:]

Have you changed out any management in demolition in the last month or 2 or 3?

[Jonathan W. Berger:]

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

[John F. Kasprzak:]

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

[Jonathan W. Berger:]

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

[John F. Kasprzak:]

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

[Jonathan W. Berger:]

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

[John F. Kasprzak:]

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

[Jonathan W. Berger:]

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

[John F. Kasprzak:]

Okay. Another question is the -- sorry, I'm flipping through some pages here. On the covenant violations, I mean, you said you expect to get a waiver. But do you think that the issue there is going to affect your ability to bid on work? Has it affected or do you think it will affect?

[Jonathan W. Berger:]

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

[William S. Steckel:]

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

[Operator:]

Our next question comes from the line of Trey Grooms from Stephens.

[Trey Grooms:]

All right. So looking at demolition, once we kind of get some of these issues behind us, I mean, I'm guessing that just the focus on the more complex jobs and some changes that you're making there and bolstering the management team, all of these things combined, how should we think about dredging margins as we look into this quarter or next, kind of just going forward into the 1Q and even through '13 as all these changes take place? I know there was an initiative among you guys early on as a management team to take this piece of business and turn it around and get it into a -- on its way to margins that are similar to what the rest of the company is or maybe the company average. Where do we stand as we kind of look forward with given all the changes that have taken place here?

[Jonathan W. Berger:]

Yes. And, Trey, it is an important year for our whole strategy with that. And we brought Terra in, and we're seeing some encouraging early signs as we go to certain of the utilities and things like that. And I mentioned that we've gotten on the preferred bidding list now for 2 utilities. So I think that strategy is actually there. I think '13 is going to be a very, well, telling year from an executional strategy there. But I think it's going to be a very hard year to look at our numbers. Because as Bill said, if we collect a substantial portion of these deferred revenues or unrecognized revenues from 2012, it could skew the numbers a different way. So it's going to be hard to clearly see '13. But we believe that '13 is the year that those management teams have to perform and we have confidence in them.

[Trey Grooms:]

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

[Jonathan W. Berger:]

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

[Trey Grooms:]

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

[William S. Steckel:]

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

[Trey Grooms:]

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

[Jonathan W. Berger:]

Tell you what, we're cautiously optimistic. We think there is a significant amount of potential work out there. There's a long list of projects for Sandy. And as you know, when there is a significant amount of work, it raises all boats. And we're encouraged that there will be some good pricing. And don't forget, overall, we'll be buoyed by a significant portion of -- at least when we start dredging for at least 6, 7 month in Wheatstone, which is a very good contract for us. So we think the capital project is coming in and the significant amount of Sandy work that should be out there, we think that margins should track as we've historically said and probably rise a little bit.

[Operator:]

Our next question comes from the line of Andy Kaplowitz from Barclays.

[Andy Kaplowitz:]

Jon, so looking at demolition again, I mean, I thought you -- like you've done a better job of demolition, with the demolition business over the last maybe 2 years. And I kind of thought you got past the demolition issues. And here we are again. I guess, the question I have for you guys is it seems like demolition tends to raise the risk profile of the company, especially as you go into these larger demotion projects. So how will you mitigate that as we go forward here? Because the Corps dredging business is a good business, high market share, all that kind of stuff. But demolition, by its nature, a lot more competition and the projects are pretty complicated. So how would you address that?

[Jonathan W. Berger:]

Yes. I mean, it's a very fair question. And we're addressing it in a couple of ways. One, we're trying to take advantage of the fact that we are an equipment-heavy demolition business and we're trying to move away from the commodity side of the demolition business, which allows us -- and to be a direct contactor as opposed to a sub. But in the course of doing that, the more you move to complex businesses, you have to have a different set of project managers, accounting managers and you have to have better systems. And those are all things that we are addressing. And it's not something we don't have a history in addressing. I mean, our dredging people have been dealing with this for many years. And our senior dredging people and our senior operations side of the dredging people have volunteered to help us there. So that's how we'll mitigate that. And I believe that with the acquisition of Terra, it gets us into the type of projects that also differentiate yourselves, so you can do a demolition remediation project for a utility, as an example, or a big paper company that you can go direct for. And quality, safety, reliability become much more important than the commodity-tougher businesses that we heretofore have been in. So it's really part of a transition. And as Bill said, we're dedicated to getting that project management side of that business tied up better.

[Andy Kaplowitz:]

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

[Jonathan W. Berger:]

And that's a very good question, and we've talked about that. And strategically, we look for ways. And it is a construction business, fundamentally. So the best way I can see to do it is one that we are strategically looking to try to figure out how to do is to get into some other types of dredging that might involve long-term contracts. So we're just starting the process of looking in the mining industry, looking at the coal industry, where there is dredging. There is our technical capabilities. And it's my personal belief that you can go in and say, "We have such a wealth of knowledge in dredging, such a wealth of knowledge in production, maybe it's better off to outsource what has been a cost center for a mining company and let someone like us take it and get a longer income stream." So that's a hypothesis, it's something we are looking at. And that was one of the reason we acquired the Rivers and Lakes division is a lot of those types of dredges are smaller in nature. But we're doing a project right now in the Rivers and Lakes business for a mining company. We brought a real solution to them for a specific problem they have. We've been invited up to the oil sands to look at something. So -- but that's something that's going to be taking a couple of years to execute on. But I totally agree with you, it's one of the struggles we have for being a public company. And we are thinking and trying to get ways to do that where we might be able to provide at least some base level of consistent work that takes the peaks and valleys and modulates that some.

[William S. Steckel:]

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

[Andy Kaplowitz:]

Okay, that's helpful. One of my peers asked about the visibility over the next couple of quarters in terms of sort of margins and in pricing. But if I think about the overall business, it's just there's a lot of sort of puts and takes, I guess. You've won a couple of big jobs here recently, that should give you pretty good visibility into the first half of the year, I would guess, in revenue. But at the same time, you're saying that the core, it's faceless sequester and calls to work maybe has been a little slower to come out than you'd thought. So how do we think about sort of the revenue progression over the next couple of quarters? Do we have the visibility we need or is it still a little lacking?

[Jonathan W. Berger:]

It's always such a moving target. I mean the list of projects that are going to come out for bidding in Sandy is starting to firm up and that will be a very important part of the spring and the summer for us. Our big international project, Wheatstone, it's taken a little longer to get going, not because of us, but just typically the case of working in such a remote location, and then getting accommodations and things ready for us to go there. So that kind of has changed. We're working on a very nice island project in the Middle East right now. That will work our cutter, the Ohio that we built, for a year. And but we have a couple of -- we have a hole in the Middle East we have to fill, but there's some very, very nice projects that are bidding. So it's the problem we deal with, the ebbs and flows of what's going on. We had stability in Washington, which certainly help us, but the core budget has basically stayed pretty constant. For us, the best thing to do is to win a couple of these long-term projects. That's what really helps us. And so, I think visibility will get better for us if and when Miami gets awarded to us because that will let us know we have a great suite of equipment working for another year. We have Australia. That should go for 18 months. That's what really gives us the better visibility.

[Andy Kaplowitz:]

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

[Jonathan W. Berger:]

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

[Operator:]

Our next question comes from the line of Jon Rogers of D.A. Davidson.

[John B. Rogers:]

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

[Katherine M. Hayes:]

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

[William S. Steckel:]

It's a $17 million loss for the year at the operating level.

[John B. Rogers:]

For the year?

[William S. Steckel:]

Yes.

[Jonathan W. Berger:]

Okay, and dredging was a $33 million profit?

[William S. Steckel:]

Yes, right.

[John B. Rogers:]

If you have it for the quarter, just -- I mean, I guess I can figure it out but you're going to restate the last 2 quarters?

[William S. Steckel:]

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

[Katherine M. Hayes:]

Income.

[William S. Steckel:]

Operating income, yes. Sorry.

[John B. Rogers:]

And then, Jon, on Wheatstone, you're saying that starts up midyear now and...?

[Jonathan W. Berger:]

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

[John B. Rogers:]

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

[Jonathan W. Berger:]

Yes. I mean, we had initially thought that we would be able to spread that over the contract. But when we went back into the accounting literature in detail at the end of the year, we felt that the proper way to account for all that preventive maintenance we did because we are going to a remote location to take in '12. So it was a significant amount of preventive maintenance that we won't be running at that level going forward. And ultimately -- it either shook out now or it shakes out throughout the contract.

[John B. Rogers:]

And then, could you talk a little bit about what we're looking at in terms of capital spending this year and how the balance sheet -- I mean, especially the large equipment coming on over the next 2 years, were you still looking at operating leases there? And with your financing or your covenant violations, does that change any of that?

[William S. Steckel:]

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

[John B. Rogers:]

Okay, and the total spending on that?

[William S. Steckel:]

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

[John B. Rogers:]

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

[William S. Steckel:]

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

[Jonathan W. Berger:]

And I -- we may have talked about this even the last year when we did our notes. That's been talked about for years and I think we addressed that in our notes.

[Katherine M. Hayes:]

In the credit agreement.

[Jonathan W. Berger:]

In the credit agreement that, obviously, we foresaw that, that could happen.

[Katherine M. Hayes:]

That could happen that. It's carved out in any of our ratios or any of our covenants.

[Jonathan W. Berger:]

Yes.

[John B. Rogers:]

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

[Jonathan W. Berger:]

I think in general, the bid margins are solid, yes, and consistent. And don't forget we've had it now in margins, I guess, for 9 months or a year. The Wheatstone project, which is a capital project, so it holds the strong margins. Yes, no, I'm sorry. So I think the margins back along had been consistent and I think probably uptick from a year ago.

[John B. Rogers:]

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

[Jonathan W. Berger:]

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

[John B. Rogers:]

And just a last housekeeping item. Tax rate still in the mid-high 30s?

[William S. Steckel:]

Yes. We have hired a new Director of Tax, a very qualified guy. And we are working very hard on our taxes. But for now, consistent.

[Operator:]

Our next question is from the line of Philip Volpicelli from Deutsche Bank.

[Philip Volpicelli:]

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

[Jonathan W. Berger:]

We did.

[William S. Steckel:]

The grand total of about $26 million, that includes the purchase price and, of course, there's a working capital adjustment involved. And then there's present value of the earn-out.

[Philip Volpicelli:]

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

[William S. Steckel:]

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

[Philip Volpicelli:]

Okay. We'll just have to wait for the amendment to come through?

[William S. Steckel:]

Yes.

[Philip Volpicelli:]

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

[William S. Steckel:]

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

[Jonathan W. Berger:]

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

[Philip Volpicelli:]

Okay. So is it already in process or is it something that is coming up in terms of the bulk of the costs here?

[William S. Steckel:]

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

[Jonathan W. Berger:]

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

[Philip Volpicelli:]

I understand, yes, I appreciate that, Jon. The 2 contracts, the 2 construction contracts, that are, I guess, in dispute, have they reached lawsuit status or is it simply still in negotiations or -- where are you guys in that process and what's the next step?

[William S. Steckel:]

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

[Philip Volpicelli:]

So this should be resolved in '13 is your best guess at this point?

[William S. Steckel:]

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

[Jonathan W. Berger:]

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

[Operator:]

Our next question is from the line of Rick D'Auteuil from Columbia Management.

[Richard G. D'Auteuil:]

Just on the accounting stuff, it sounds like you're in the stage of remediation. Can you definitively say the backward view aspect is complete at this point?

[William S. Steckel:]

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

[Richard G. D'Auteuil:]

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

[William S. Steckel:]

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

[Richard G. D'Auteuil:]

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

[William S. Steckel:]

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

[Richard G. D'Auteuil:]

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

[William S. Steckel:]

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

[Richard G. D'Auteuil:]

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

[Jonathan W. Berger:]

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

[Richard G. D'Auteuil:]

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

[Jonathan W. Berger:]

To a large extent, I mean, and there's some complexities through the contracts and things like that, but that's essentially correct.

[Richard G. D'Auteuil:]

Okay. The 2 projects that had cost overruns -- I think you addressed them a little bit. What kind of detail can you give us there and is it normal expectations? Were there some things that should -- that really were poor management of the jobs in question?

[Jonathan W. Berger:]

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

[Richard G. D'Auteuil:]

Miami, you said it's in the government's hands. Is -- what are they communicating with the bidders at this point for [indiscernible]?

[Jonathan W. Berger:]

Really, yes, really nothing other than they're dealing through their process right now.

[Richard G. D'Auteuil:]

So it could start next year or it could start 6 months from now?

[Jonathan W. Berger:]

No, I mean, I believe it's pushed back a little bit, but I think that there will be dredging this year as best -- as best as we know right now.

[Richard G. D'Auteuil:]

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

[Jonathan W. Berger:]

We think we have a good shot at winning it. But until we win it, I am -- I will be sitting nervous.

[Richard G. D'Auteuil:]

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

[Jonathan W. Berger:]

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

[Richard G. D'Auteuil:]

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

[William S. Steckel:]

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

[Richard G. D'Auteuil:]

Is there still an expectation of recovery or not?

[William S. Steckel:]

Yes. I mean, we're still working as we get towards the -- what we talked about with you last quarter.

[Richard G. D'Auteuil:]

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

[Jonathan W. Berger:]

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

[Operator:]

Our next question comes from the line of Steven Swan from Morgan Stanley.

[Unknown Analyst:]

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

[Operator:]

Our next question will be from the line of [indiscernible]. I apologize if I've mispronounced, from Maersk Capital.

[Unknown Analyst:]

Yes, my questions have been answered, too. Your pronunciation was fine.

[Operator:]

So it looks like we have a follow-up from the line of Richard Paget.

[Richard S. Paget:]

Just real quick. Is it coincidence that the 2 issue projects in demolition are both in New York? And if it's not just coincidence, is there something inherent in the market that makes it a little bit more difficult or timely to get these recoveries? And if so, will you deemphasize that market going forward?

[William S. Steckel:]

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

[Richard S. Paget:]

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

[Jonathan W. Berger:]

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

[Richard S. Paget:]

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

[Jonathan W. Berger:]

It would be. But just because the Senate is talking about that and the House talking about a word of bill, let's be sure that they first have -- would have to harmonize and then get something out, so it would be, at best a '14 event or a '15 event, all right? The numbers itself would not be tremendously different than what we've talked about in our mind.

[Operator:]

Our next question is a follow-up from the line of Jon Tanwanteng from CJS Securities.

[Unknown Analyst:]

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

[William S. Steckel:]

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

[Unknown Analyst:]

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

[William S. Steckel:]

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

[Unknown Analyst:]

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

[William S. Steckel:]

It depends on the project.

[Unknown Analyst:]

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

[William S. Steckel:]

We have one of each.

[Unknown Analyst:]

Okay. In the demolition business, which is the problem business, the significant majority of your backlog, it's a very small number of 2 large projects. On those 2 projects, are you the sub or the prime?

[William S. Steckel:]

Prime.

[Unknown Analyst:]

On both?

[William S. Steckel:]

Yes.

[Unknown Analyst:]

So hopefully, we won't have this issue there. Jon, in the past you've talked about a goal of the demolition being a $300 million business. And I know you spent a tremendous amount of time and effort in 2011 fixing it. I think at that point, people -- you would have probably said, "I'm either going to fix it or we're going to get rid of it", and you did a great job fixing it in '11. Obviously, the problems cropped up again in '12. As we think out over the next year or 2, is it a fix it or get rid of it, or do you still have a goal of $300 million of revenue for that business?

[Jonathan W. Berger:]

I absolutely still have that goal. I think adding the Terra acquisition into that reporting segment, it was clearly a significant part of our strategy to get there. And fundamentally, I believe, the things in '12 with our dredging -- with our demolition business were totally different than the issues that we had in '10 and '11. Those were tremendously different. Here, it's just a revenue timing issue for the vast majority of this. But no, we fundamentally believe that we have a very good core strategy with where we're taking our demolition business, adding in the remediation skills. And we have to prove it to you, Arnie. I can't say anything more than that but I -- market indications are that from a third-party that by these services, bringing those 2 things together and the skill sets and the people we're putting together, I am encouraged about that.

[Unknown Analyst:]

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

[Jonathan W. Berger:]

Arnie, we have 4 divisional presidents that we have a lot of faith in. We bolstered the executive suite with a General Counsel, with Bill, with a Controller. The Board and I will take the next 60 days and let the dust settle on some things. And then we'll determine what incremental skill sets we need for the company.

[Unknown Analyst:]

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

[Jonathan W. Berger:]

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

[William S. Steckel:]

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

[Unknown Analyst:]

Two more questions. I think I've got this math right, but I'll follow or double-check it in the transcript. But I think you indicated there was a $13 million hit from the 2 contracts that affected them. And you also gave us a number that the change order took the value of one of the contacts from $7 million to $22 million. I'm just trying to kind of think of those 2 numbers in some context.

[William S. Steckel:]

Sure. But first of all, the $13 million is not just those 2 contracts. It's the complete scrub of all the issues that we had. And when Jon referred to the change of the contract size going from $7 million to $22 million, that's been over the course of the contract. We've billed some of the work that we've done. We've been paid for some of the work we've been done. And what we're talking about now is kind of the back end of those contracts. So...

[Unknown Analyst:]

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

[William S. Steckel:]

Yes.

[Unknown Analyst:]

Okay. Final question. Rick D'Auteuil asked you a little bit about Q1 and weather. I'd like to broaden the question a little bit since we're 2 weeks away from the end of the quarter. It's -- there are a lot of moving parts

[William S. Steckel:]

We do not give guidance. We certainly don't give guidance this early in the year. As I said, our Dredging business is off to a nice start this year, early indications. But that's really as far as we'll go in terms of talking about how things are going.

[Operator:]

Our next question is from the line of David Cohen [ph] from Minerva Advisors.

[Unknown Analyst:]

I have 2 questions. The first of them is I just want to clarify something that I think I heard you say, with regards to the incremental working capital investments, I think I heard you say that there was $60 million between Wheatstone and Scofield Island that you expect to largely recover during 2013. Is that correct?

[William S. Steckel:]

That's correct.

[Unknown Analyst:]

And then the balance would be in 2014?

[William S. Steckel:]

Yes.

[Unknown Analyst:]

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

[William S. Steckel:]

It's inventory. It's with accounts receivable.

[Unknown Analyst:]

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

[Jonathan W. Berger:]

Yes, and let me address that. I do believe that, again, the change -- the issues at our demolition division right now are fundamentally different than they were 2 years ago. But that being said, we've added 3 to 4 senior managers and we've added some operating people to demolition business during the year. And we did lose Bruce, but I think our executive and senior management suite, both at the corporate level and at the demolition segment, has been actually augmented. But that being said, we're going to take the next 6 months to make sure we have got our back office house in order and to lay the foundations for the growth of our demolition remediation segment. So I don't anticipate doing some transaction in the next 6 months, 9 months. I need to have the integration done. I need to have the sales and marketing that we're putting together out there. And I need to have the core team jelling and then we could talk about adding incremental, either services or geographic reach.

[Operator:]

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

[Katherine M. Hayes:]

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

[Operator:]

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