Great Lakes Dredge & Dock Corporation
Great Lakes Dredge & Dock CORP (Form: 10-Q, Received: 11/04/2011 16:21:57)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number: 001-33225

 

 

Great Lakes Dredge & Dock Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-5336063

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2122 York Road, Oak Brook, IL   60523
(Address of principal executive offices)   (Zip Code)

(630) 574-3000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   x      No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   x      No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   ¨      No   x

As of November 4, 2011, 58,960,444 shares of the Registrant’s Common Stock, par value $.0001 per share, were outstanding.

 

 

 


Great Lakes Dredge & Dock Corporation and Subsidiaries

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly Period ended September 30, 2011

INDEX

 

     Page  

Part I Financial Information (Unaudited)

  

Item 1

  Financial Statements   
  Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010      3   
  Condensed Consolidated Statements of Operations for the Three Months and Nine Months ended September 30, 2011 and 2010      4   
  Condensed Consolidated Statements of Equity for the Nine Months ended September 30, 2011 and 2010      5   
  Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2011 and 2010      6   
  Notes to Condensed Consolidated Financial Statements      7   

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   

Item 3

  Quantitative and Qualitative Disclosures About Market Risk      29   

Item 4

  Controls and Procedures      30   

Part II Other Information

  

Item 1

  Legal Proceedings      31   

Item 1A

  Risk Factors      31   

Item 2

  Unregistered Sales of Equity Securities and Use of Proceeds      31   

Item 3

  Defaults Upon Senior Securities      31   

Item 4

  Reserved      31   

Item 5

  Other Information      31   

Item 6

  Exhibits      31   

Signature

     32   

Exhibit Index

     33   

 

2


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

Condense d Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

 

     September 30,     December 31,  
       2011     2010  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 107,050      $ 48,478   

Accounts receivable — net

     110,044        95,548   

Contract revenues in excess of billings

     25,735        24,842   

Inventories

     32,398        31,734   

Prepaid expenses

     2,703        3,448   

Other current assets

     28,747        18,919   
  

 

 

   

 

 

 

Total current assets

     306,677        222,969   

PROPERTY AND EQUIPMENT — Net

     311,588        323,231   

GOODWILL

     98,049        98,049   

OTHER INTANGIBLE ASSETS — Net

     1,340        3,280   

INVENTORIES — Noncurrent

     30,988        27,128   

INVESTMENTS IN JOINT VENTURES

     7,221        7,329   

OTHER

     11,955        11,839   
  

 

 

   

 

 

 

TOTAL

   $ 767,818      $ 693,825   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 71,928      $ 82,721   

Accrued expenses

     27,688        32,809   

Billings in excess of contract revenues

     15,212        14,484   

Current portion of note payable

     2,500        2,500   

Current portion of equipment debt

     1,493        303   
  

 

 

   

 

 

 

Total current liabilities

     118,821        132,817   

LONG TERM NOTE PAYABLE

     5,000        5,000   

7 3/8% SENIOR NOTES

     250,000        —     

7 3/4% SENIOR SUBORDINATED NOTES

     —          175,000   

DEFERRED INCOME TAXES

     99,451        92,466   

OTHER

     9,200        11,717   
  

 

 

   

 

 

 

Total liabilities

     482,472        417,000   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 10)

    

EQUITY:

    

Common stock—$.0001 par value; 90,000,000 authorized, 58,960,444 and 58,770,369 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively.

     6        6   

Additional paid-in capital

     267,297        266,329   

Retained earnings

     18,468        12,261   

Accumulated other comprehensive income (loss)

     (795     357   
  

 

 

   

 

 

 

Total Great Lakes Dredge & Dock Corporation Equity

     284,976        278,953   

NONCONTROLLING INTERESTS

     370        (2,128
  

 

 

   

 

 

 

Total equity

     285,346        276,825   
  

 

 

   

 

 

 

TOTAL

   $ 767,818      $ 693,825   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Contract revenues

   $ 158,468      $ 173,333      $ 468,765      $ 514,868   

Costs of contract revenues

     131,077        140,638        394,166        417,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     27,391        32,695        74,599        97,768   

General and administrative expenses

     12,736        16,640        38,447        42,084   

Gain on sale of assets, net

     (131     —          (2,902     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     14,786        16,055        39,054        55,684   

Interest expense, net

     (5,571     (3,302     (16,432     (9,517

Equity in earnings (loss) of joint ventures

     606        81        (108     (772

Loss on foreign currency transactions, net

     (544     —          (544     —     

Loss on extinguishment of debt

     —          —          (5,145     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     9,277        12,834        16,825        45,395   

Income tax provision

     (3,618     (5,113     (6,600     (18,107
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     5,659        7,721        10,225        27,288   

Net (income) loss attributable to noncontrolling interests

     (57     (36     (525     531   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Great Lakes Dredge & Dock Corporation

   $ 5,602      $ 7,685      $ 9,700      $ 27,819   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share attributable to Great Lakes Dredge & Dock Corporation

   $ 0.10      $ 0.13      $ 0.16      $ 0.47   

Basic weighted average shares

     58,930        58,698        58,863        58,616   

Diluted earnings per share attributable to Great Lakes Dredge & Dock Corporation

   $ 0.09      $ 0.13      $ 0.16      $ 0.47   

Diluted weighted average shares

     59,161        58,901        59,533        58,818   

Dividends declared per share

   $ 0.02      $ 0.02      $ 0.06      $ 0.05   

See notes to unaudited condensed consolidated financial statements.

 

4


Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(Unaudited)

(in thousands, except share amounts)

 

                               Accumulated              
     Shares of             Additional           Other              
     Common      Common      Paid-In     Retained     Comprehensive     Noncontrolling        
     Stock      Stock      Capital     Earnings     Income (Loss)     Interests     Total  

BALANCE — January 1, 2011

     58,770,369       $ 6       $ 266,329      $ 12,261      $ 357      $ (2,128   $ 276,825   

Share-based compensation

     77,369         —           1,224        —          —          —          1,224   

Vesting of restricted stock units, including impact of shares withheld for taxes

     106,428         —           (291     —          —          —          (291

Exercise of stock options

     6,278         —           27        —          —          —          27   

Excess income tax benefit from share based compensation

     —           —           48        —          —          —          48   

Acquisition of noncontrolling interest in NASDI, LLC

     —           —           (40     —          —          1,973        1,933   

Dividends declared and paid

     —           —           —          (3,473     —          —          (3,473

Dividend equivalents paid on restricted stock units

     —           —           —          (20     —          —          (20

Comprehensive income (loss):

                

Net income

     —           —           —          9,700        —          525        10,225   

Currency translation adjustment, net

     —           —           —          —          (374     —          (374

Reclassification of derivative gains to earnings (net of tax of $830)

     —           —           —          —          (1,250     —          (1,250

Change in fair value of derivatives (net of tax of $313)

     —           —           —          —          472        —          472   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

                 525        9,073   
              

 

 

   

 

 

 

BALANCE — September 30, 2011

     58,960,444       $                 6       $ 267,297      $ 18,468      $ (795   $ 370      $ 285,346   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                          Retained     Accumulated              
     Shares of             Additional      Earnings     Other              
     Common      Common      Paid-In      (Accumulated     Comprehensive     Noncontrolling        
     Stock      Stock      Capital      Deficit)     Income (Loss)     Interests     Total  

BALANCE — January 1, 2010

     58,542,038       $ 6       $ 263,579       $ (18,336   $ 539      $ (1,239     244,549   

Share-based compensation

     68,467         —           1,734         —          —          —          1,734   

Vesting of restricted stock units, including impact of shares withheld for taxes

     13,202         —           —           —          —          —          —     

Exercise of stock options

     97,917         —           470         —          —          —          470   

Dividends declared and paid

     —           —           —           (2,990     —          —          (2,990

Dividend equivalents paid on restricted stock units

     —           —           —           (17     —          —          (17

Comprehensive income (loss):

                 

Net income (loss)

     —           —           —           27,819        —          (531     27,288   

Reclassification of derivative gains to earnings (net of tax of $64)

     —           —           —           —          (96     —          (96

Change in fair value of derivatives (net of tax of $153)

     —           —           —           —          (231     —          (231
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

                  (531     26,961   
               

 

 

   

 

 

 

BALANCE — September 30, 2010

     58,721,624       $                 6       $ 265,783       $ 6,476      $ 212      $ (1,770   $ 270,707   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

5


Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

     Nine Months Ended  
     September 30,  
     2011     2010  

OPERATING ACTIVITIES:

    

Net income

   $ 10,225      $ 27,288   

Adjustments to reconcile net income to net cash flows provided by operating activities:

    

Depreciation and amortization

     29,999        26,020   

Equity in loss of joint ventures

     108        772   

Loss on extinguishment of 7 3/4% senior subordinated notes

     5,145        —     

Deferred income taxes

     8,793        (683

Gain on dispositions of property and equipment

     (2,902     (415

Amortization of deferred financing fees

     1,181        1,205   

Unrealized foreign currency loss

     525        —     

Share-based compensation expense

     1,224        1,734   

Excess income tax benefit from share based compensation

     (48     —     

Changes in assets and liabilities:

    

Accounts receivable

     (13,279     47,649   

Contract revenues in excess of billings

     (893     10,342   

Inventories

     (4,524     846   

Prepaid expenses and other current assets

     (11,641     2,263   

Accounts payable and accrued expenses

     (9,707     (3,447

Billings in excess of contract revenues

     728        (5,679

Other noncurrent assets and liabilities

     (1,308     419   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     13,626        108,314   

INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (24,901     (18,283

Proceeds from dispositions of property and equipment

     7,452        361   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (17,449     (17,922

FINANCING ACTIVITIES:

    

Proceeds from issuance of 7 3/8% senior notes

     250,000        —     

Redemption of 7 3/4% senior subordinated notes

     (175,000     —     

Senior subordinated notes redemption premium

     (2,264     —     

Deferred financing fees

     (5,962     —     

Dividends paid

     (3,473     (2,990

Dividend equivalents paid on restricted stock units

     (20     (17

Taxes paid on settlement of vested share awards

     (291     —     

Repayments of equipment debt

     (274     (1,074

Exercise of stock options

     27        470   

Excess income tax benefit from share-based compensation

     48        —     

Borrowings under revolving loans

     —          14,968   

Repayments of revolving loans

     —          (25,968
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     62,791        (14,611
  

 

 

   

 

 

 

Change in cash and equivalents due to changes in foreign currency exchange rates

     (396     —     
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     58,572        75,781   

Cash and cash equivalents at beginning of period

     48,478        3,250   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 107,050      $ 79,031   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

    

Cash paid for interest

   $ 12,714      $ 6,848   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 5,282      $ 15,521   
  

 

 

   

 

 

 

Non-cash Investing Activity

    

Property and equipment purchased but not yet paid

   $ 3,366      $ 2,565   
  

 

 

   

 

 

 

Property and equipment purchased on capital leases and equipment notes

   $ 2,085      $ 33   
  

 

 

   

 

 

 

Acquisition of noncontrolling interest in NASDI, LLC

   $ 40      $ —     
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

6


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollar amounts in thousands, except per share amounts or as otherwise noted)

1. Basis of presentation

The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Great Lakes Dredge & Dock Corporation and Subsidiaries (the “Company” or “Great Lakes”) and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management, all adjustments, which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly the Company’s financial position as of September 30, 2011, its results of operations for the three and nine months ended September 30, 2011 and 2010 and its cash flows for the nine months ended September 30, 2011 and 2010 have been included.

The components of costs of contract revenues include labor, equipment (including depreciation, maintenance, insurance and long-term rentals), subcontracts, fuel and project overhead. Hourly labor is generally hired on a project-by-project basis. Costs of contract revenues vary significantly depending on the type and location of work performed and assets utilized. Generally, capital projects have the highest margins due to the complexity of the projects, while beach nourishment projects have the most volatile margins because they are most often exposed to variability in weather conditions. In the current year condensed consolidated statements of operations, the Company has presented gains, net of losses, on the sale of assets as a separate line item in operating income. In the prior year gains, net of losses, on the sale of assets included in costs of contract revenues were $151 and $387 for the three and nine months ended September 30, 2010.

The Company’s cost structure includes significant annual equipment-related costs, including depreciation, maintenance, insurance and long-term rentals. These costs have averaged approximately 21% to 22% of total costs of contract revenues over the last three years. During the year, both equipment utilization and the timing of fixed cost expenditures fluctuate significantly. Accordingly, the Company allocates these fixed equipment costs to interim periods in proportion to revenues recognized over the year to better match revenues and expenses. Specifically, at each interim reporting date the Company compares actual revenues earned to date on its dredging contracts to expected annual revenues and recognizes equipment costs on the same proportionate basis. In the fourth quarter, any over and under allocated equipment costs are recognized such that the expense for the year equals actual equipment costs incurred during the year.

The Company operates in two reportable segments: dredging and demolition. These reportable segments are the Company’s operating segments and the reporting units at which the Company tests goodwill for impairment. In the current quarter, the Company early adopted new accounting guidance that allows for the option to perform a qualitative assessment prior to calculating the fair value of a reporting unit in the first step of the annual goodwill impairment testing. The Company performed its most recent annual test of impairment as of July 1, 2011 for the goodwill in both the dredging and demolition segments with no indication of goodwill impairment as of the test date. As of the test date, the fair value of both the dredging segment and the demolition segment were in excess of their carrying values by approximately 35% and 8%, respectively. Given the small margin the demolition segment’s fair value is in excess of its carrying value, a more than insignificant decline in the demolition segment’s future operating results or cash flow forecasts versus the segment’s current forecasts could potentially cause a goodwill impairment charge to be recognized in a future period.

The condensed consolidated results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

Future adoption of accounting standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to their accounting guidance to clarify existing standards and to improve comparability of fair value measurements disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards (“IFRS”). The amendment clarifies the FASB’s intent as it relates to existing measurement guidance and revises some requirements for measuring or disclosing information about fair value measurements. The amendment will be effective for Great Lakes on January 1, 2012 and is not expected to have a significant impact on our consolidated financial statements.

 

7


In June 2011, the FASB issued an amendment to their accounting guidance that requires presentation of net income and total comprehensive income, together with their components, either in a single continuous statement or in two separate but consecutive statements. The amendment does not alter any current recognition or measurement requirements in respect of items of other comprehensive income. When adopted, Great Lakes will cease to present the components of other comprehensive income within the statements of equity. The amendment will be effective for Great Lakes on January 1, 2012, with early adoption permitted.

2. Earnings per share

Basic earnings per share is computed by dividing net income attributable to Great Lakes Dredge & Dock Corporation by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share is computed similar to basic earnings per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. The computations for basic and diluted earnings per share from continuing operations are as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Numerator:

           

Net income attributable to Great Lakes Dredge & Dock Corporation—numerator for basic and diluted earnings per share

   $ 5,602       $ 7,685       $ 9,700       $ 27,819   

Denominator:

           

Denominator for basic earnings per share—weighted average shares outstanding

     58,930         58,698         58,863         58,616   

Dilutive impact of outstanding restricted stock units issued

     178         173         250         165   

Dilutive impact of outstanding stock options issued*

     53         30         420         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share adjusted weighted average shares

     59,161         58,901         59,533         58,818   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share attributable to Great Lakes Dredge & Dock Corporation

   $ 0.10       $ 0.13       $ 0.16       $ 0.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share attributable to Great Lakes Dredge & Dock Corporation

   $ 0.09       $ 0.13       $ 0.16       $ 0.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* For the three and nine months ended September 30, 2011, 990,794 and zero options to purchase shares of common stock, respectively, were excluded from the calculation of diluted earnings per share. For the three and nine months ended September 30, 2010, 588,384 and 304,695 options to purchase shares of common stock, respectively, were excluded. The options were excluded based on the application of the treasury stock method, as such options were determined to be anti-dilutive.

3. Fair value measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy has been established by GAAP that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The accounting guidance describes three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. At September 30, 2011, the Company held certain derivative contracts that it uses to manage commodity price risk and interest rate risk. The Company does not hold or issue derivatives for speculative or trading purposes. At September 30, 2011 the Company held a position in a money market fund where quoted prices are not available in an active market. The fair values of these financial instruments are summarized as follows:

 

8


           Fair Value Measurements at Reporting Date Using  

Description

   At September
30, 2011
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

Cash equivalents

   $ 20,022      $ —         $ 20,022      $ —     

Fuel hedge contracts

     (701     —           (701     —     

Interest rate swap contracts

     1,198        —           —          1,198   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total assets measured at fair value

   $ 20,519      $ —         $ 19,321      $ 1,198   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

            Fair Value Measurements at Reporting Date Using  

Description

   At December
31, 2010
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Fuel hedge contracts

   $ 595       $ —         $ 595       $ —     

Interest rate swap contracts

     1,264         —           —           1,264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 1,859       $ —         $ 595       $ 1,264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate swaps

In May 2009, the Company entered into two interest rate swap arrangements, which are effective through December 15, 2012, to swap a notional amount of $50 million from a fixed rate of 7.75% to a floating LIBOR-based rate in order to manage the interest rate paid with respect to the Company’s 7.75% senior subordinated notes. Although the senior subordinated notes were redeemed in January 2011, the swaps remain in place. The swap is not accounted for as a hedge; therefore, the changes in fair value are recorded as adjustments to interest expense in each reporting period.

The Company verifies the fair value of the interest rate swaps using a quantitative model that contains both observable and unobservable inputs. The unobservable inputs relate primarily to the LIBOR rate and long-term nature of the contracts. The Company believes that these unobservable inputs are significant and accordingly the Company determines the fair value of these interest rate swap contracts using Level 3 inputs.

 

     Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3) Interest Rate Swaps
    Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3) Interest Rate Swaps
 
     2011     2010  

Balance at January 1,

   $ 1,264      $ (20

Total unrealized gains (losses): included in earnings

     (511     1,365   

Settlements

     445        440   
  

 

 

   

 

 

 

Balance at September 30,

   $ 1,198      $ 1,785   
  

 

 

   

 

 

 

 

     Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3) Interest Rate Swaps
     Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3) Interest Rate Swaps
 
     2011      2010  

Balance at July 1,

   $ 1,141       $ 1,193   

Total unrealized losses: included in earnings

     57         592   

Settlements

     —           —     
  

 

 

    

 

 

 

Balance at September 30,

   $ 1,198       $ 1,785   
  

 

 

    

 

 

 

 

9


Fuel hedge contracts

The Company is exposed to certain market risks, primarily commodity price risk as it relates to the diesel fuel purchase requirements, which occur in the normal course of business. The Company enters into heating oil commodity swap contracts to hedge the risk that fluctuations in diesel fuel prices will have an adverse impact on cash flows associated with its domestic dredging contracts. The Company’s goal is to hedge approximately 80% of the fuel requirements for work in backlog.

As of September 30, 2011, the Company was party to various swap arrangements to hedge the price of a portion of its diesel fuel purchase requirements for work in its backlog to be performed through May 2012. As of September 30, 2011, there were 3.2 million gallons remaining on these contracts which represent approximately 45% of the Company’s forecasted fuel purchases through May 2012. Under these swap agreements, the Company will pay fixed prices ranging from $2.35 to $3.33 per gallon.

At each balance sheet date, unrealized gains and losses on fuel hedge contracts are recorded as a component of accumulated other comprehensive income (loss) in the condensed consolidated balance sheets. Gains and losses realized upon settlement of fuel hedge contracts are reclassified from accumulated other comprehensive income (loss) as the fuel is utilized, as a reduction of fuel expense, which is a component of costs of contract revenues in the condensed consolidated statements of operations.

At September 30, 2011 and December 31, 2010, the fair value asset of the fuel hedge contracts was estimated to be $19 and $595, respectively, and is recorded in other current assets. At September 30, 2011 the fair value liability of the fuel hedge contracts was estimated to be $720, and is recorded in accrued expenses. The gain reclassified to earnings from changes in fair value of derivatives, net of cash settlements and taxes, for the period ended September 30, 2011 was $1,250. The remaining gains included in accumulated other comprehensive income at September 30, 2011 will be reclassified into earnings over the next eight months, corresponding to the period during which the hedged fuel is expected to be utilized. The fair values of fuel hedges are corroborated using inputs that are readily observable in public markets; therefore, the Company determines fair value of these fuel hedges using Level 2 inputs.

The fair value of the money market fund, interest rate and fuel hedge contracts outstanding as of September 30, 2011 and December 31, 2010 is as follows:

 

    

Fair Value

At September 30, 2011

 
     Balance Sheet Location    Fair Value
Asset
     Balance Sheet Location    Fair
Value
Liability
 
  

 

 

Cash equivalents

   Cash and cash equivalents    $ 20,022         

Fuel hedge contracts

   Other current assets      19       Accrued expenses    $ (720

Interest rate swaps

   Other current assets      819       Accrued expenses      —     

Interest rate swaps

   Other assets      379       Other liabilities      —     
     

 

 

       

 

 

 

Total

      $ 21,239          $ (720
     

 

 

       

 

 

 

 

    

Fair Value

At September 31, 2011

 
     Balance Sheet Location    Fair Value
Asset
     Balance Sheet Location    Fair
Value
Liability
 
  

 

 

Interest rate swaps

   Other current assets    $ 816       Other liabilities    $ —     

Interest rate swaps

   Other assets      448       Other liabilities      —     

Fuel hedge contracts

   Other current assets      595       Accrued expenses      —     
     

 

 

       

 

 

 

Total

      $ 1,859          $ —     
     

 

 

       

 

 

 

Other financial instruments

The carrying value of financial instruments included in current assets and current liabilities approximates fair value due to the short-term maturities of these instruments. In January 2011, the Company issued $250,000 of 7.375% senior notes due February 1, 2019, which were outstanding at September 30, 2011. The senior notes are senior unsecured obligations of the Company and its subsidiaries that guarantee the senior notes. The fair value of the senior notes was $231,250 at September 30, 2011, based on recent transactions.

 

10


4. Share based compensation

The Company’s 2007 Long-Term Incentive Plan permits the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to its employees and directors for up to 5.8 million shares of common stock. The Company believes that such awards better align the interests of its employees with those of its shareholders and help to attract and retain the best possible talent.

In June 2011, the Company granted 444,178 options to purchase shares of common stock and 263,428 restricted stock units to certain employees pursuant to the plan. In addition all non-employee directors on the Company’s board of directors are paid a portion of their compensation in stock grants. Compensation cost charged to income related to all share-based compensation arrangements was $381 and $1,224, respectively, for the three months and nine months ended September 30, 2011 and $440 and $1,734, respectively, for the three and nine months ended September 30, 2010.

5. Accounts receivable

Accounts receivable at September 30, 2011 and December 31, 2010 are as follows:

 

     September 30,
2011
    December 31,
2010
 

Completed contracts

   $ 38,581      $ 20,093   

Contracts in progress

     57,009        64,399   

Retainage

     16,293        12,711   
  

 

 

   

 

 

 
     111,883        97,203   

Allowance for doubtful accounts

     (1,839     (1,655
  

 

 

   

 

 

 

Total accounts receivable

   $ 110,044      $ 95,548   
  

 

 

   

 

 

 

At September 30, 2011 and December 31, 2010, $4,181 and $5,923, respectively, of retainage from long-term projects was not expected to be collected within the next twelve months and is classified as other non-current assets.

6. Contracts in progress

The components of contracts in progress at September 30, 2011 and December 31, 2010 are as follows:

 

     September 30,
2011
    December 31,
2010
 

Costs and earnings in excess of billings:

    

Costs and earnings for contracts in progress

   $ 179,826      $ 287,291   

Amounts billed

     (158,153     (263,665
  

 

 

   

 

 

 

Costs and earnings in excess of billings for contracts in progress

     21,673        23,626   

Costs and earnings in excess of billings for completed contracts

     4,062        1,216   
  

 

 

   

 

 

 

Total contract revenues in excess of billings

   $ 25,735      $ 24,842   
  

 

 

   

 

 

 

Billings in excess of costs and earnings:

    

Amounts billed

   $ (425,977   $ (429,688

Costs and earnings for contracts in progress

     410,765        415,204   
  

 

 

   

 

 

 

Total billings in excess of contract revenues

   $ (15,212   $ (14,484
  

 

 

   

 

 

 

 

11


7.     Accrued expenses

Accrued expenses at September 30, 2011 and December 31, 2010 are as follows:

 

     September 30,      December 31,  
     2011      2010  

Payroll and employee benefits

   $ 9,231       $ 13,573   

Insurance

     8,674         11,039   

Interest

     3,073         604   

Percentage of completion adjustment

     2,849         3,232   

Income and other taxes

     1,433         2,977   

Other

     2,428         1,384   
  

 

 

    

 

 

 

Total accrued expenses

   $ 27,688       $ 32,809   
  

 

 

    

 

 

 

8.     Foreign currency translation

The financial statements of the Company’s foreign subsidiaries where the operations are primarily denominated in the foreign currency are translated into U.S. dollars for reporting. Balance sheet accounts are translated at the current foreign exchange rate at the end of each period and income statement accounts are translated at the average foreign exchange rate for each period. Gains and losses on foreign currency translations are reflected as a currency translation adjustment in accumulated other comprehensive income. Foreign currency transaction gains and losses are included in loss on foreign currency transactions, net.

9.     Segment information

The Company and its subsidiaries currently operate in two reportable segments: dredging and demolition. The Company’s financial reporting systems present various data for management to run the business, including profit and loss statements prepared according to the segments presented. Management uses operating income to evaluate performance between the two segments. Segment information for the periods presented is provided as follows:

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2011      2010      2011     2010  

Dredging

          

Contract revenues

   $ 134,591       $ 149,107       $ 396,273      $ 463,747   

Operating income

     13,593         15,796         45,008        56,827   

Demolition

          

Contract revenues

   $ 23,877       $ 24,226       $ 72,492      $ 51,121   

Operating income (loss)

     1,193         259         (5,954     (1,143

Total

          

Contract revenues

   $ 158,468       $ 173,333       $ 468,765      $ 514,868   

Operating income

     14,786         16,055         39,054        55,684   

In addition, foreign dredging revenue of $21,843 and $59,779 for the three months and nine months ended September 30, 2011 and $20,916 and $60,129 for the three months and nine months ended September 30, 2010, respectively, was primarily attributable to work done in the Middle East and Brazil.

The majority of the Company’s long-lived assets are marine vessels and related equipment. At any point in time, the Company may employ certain assets outside of the U.S., as needed, to perform work on the Company’s foreign projects.

10.     Commitments and contingencies

Commercial commitments

In June 2007, the Company entered into a credit agreement (the “Credit Agreement”) with Bank of America N.A. as administrative agent and issuing lender, various other financial institutions as lenders and certain subsidiaries of the Company as loan parties. The Credit Agreement provides for a revolving credit facility of up to $145,000 in borrowings and includes sublimits for the issuance of letters of credit and swingline loans. The revolving credit facility matures on June 12, 2012. The revolving credit facility bears interest at rates selected at the option of Great Lakes, currently equal to either LIBOR plus an applicable margin or the Base Rate (as defined

 

12


in the Credit Agreement), plus an applicable margin. The applicable margins for LIBOR loans and Base Rate loans, as well as any non-use fee, are subject to adjustment based upon the Company’s ratio of Total Funded Debt to Adjusted Consolidated EBITDA (each as defined in the Credit Agreement). As of September 30, 2011, the Company had no borrowings and $22,641 of letters of credit outstanding, resulting in $122,359 of availability under the Credit Agreement.

The Company obtains its performance, bid and payment bonds through bonding agreements (the “Bonding Agreements”). The bonds issued under the Bonding Agreements are customarily required for dredging and marine construction projects, as well as demolition projects. As of September 30, 2011, Great Lakes had outstanding bonds valued at $265,481; however, the revenue value remaining in backlog related to these projects totaled $176,757.

The Company has a $24,000 international letter of credit facility that it uses for the performance and advance payment guarantees on the Company’s foreign contracts. As of September 30, 2011, Great Lakes had $11,725 of letters of credit outstanding under this facility.

The Company also has $250,000 of 7.375% senior notes outstanding, which mature in February 2019.

The Company’s obligations under the Credit Agreement and Bonding Agreements are secured by liens on a substantial portion of Great Lakes’ assets. As of December 31, 2010, the net book value of the Company’s operating equipment securing the Company’s obligations under the Credit Agreement and Bonding Agreements was $95,658 and $70,662, respectively. Great Lakes’ obligations under its international letter of credit facility are secured by the Company’s foreign accounts receivable.

The Credit Agreement, the Bonding Agreements and the indenture relating to the senior notes contain various restrictive covenants, including a limitation on dividends, limitations on redemption and repurchases of capital stock, limitations on the incurrence of additional indebtedness and requirements to maintain certain financial covenants.

Certain foreign projects performed by the Company have warranty periods, typically spanning no more than one to three years beyond project completion, whereby the Company retains responsibility to maintain the project site to certain specifications during the warranty period. Generally, any potential liability of the Company is mitigated by insurance, shared responsibilities with consortium partners, and/or recourse to owner-provided specifications.

Legal proceedings and other contingencies

Various legal actions, claims, assessments and other contingencies arising in the ordinary course of business are pending against the Company and certain of its subsidiaries. These matters are subject to many uncertainties, and it is possible that some of these matters could ultimately be decided, resolved or settled adversely to the Company. Although the Company is subject to various claims and legal actions that arise in the ordinary course of business, except as described below, the Company is not currently a party to any material legal proceedings or environmental claims.

The Company or its former subsidiary, NATCO Limited Partnership, is named as a defendant in approximately 251 asbestos-related personal injury lawsuits, the majority of which were filed between 1989 and 2000. All of the cases filed against the Company prior to 1996 were administratively dismissed in May 1996 and any cases filed since that time have similarly been administratively transferred to the inactive docket. Over the last year, hundreds of lawsuits have been reactivated in an effort to clean out the administrative docket. Prior to the commencement of discovery in any of the reactivated cases, counsel for plaintiffs agreed to name a group of cases that they intended to pursue and to dismiss the remaining cases without prejudice. Plaintiffs have currently named 40 cases against the Company that they intend to pursue, each of which involves one plaintiff. The remaining cases against the Company have been dismissed. Plaintiffs in the dismissed cases could file a new lawsuit if they develop a new disease allegedly caused by exposure to asbestos on board our vessels. The Company is presently unable to quantify the amounts of damages being sought in these lawsuits because none of the complaints specify a damage amount. The Company does not believe that it is probable that losses from these claims could be material, and an estimate of a range of losses relating to these claims cannot reasonably be made. Based on the foregoing, management does not believe that the 40 lawsuits, individually and in the aggregate, will have a material impact on our business, financial position, results of operations or cash flows.

On August 26, 2009, the Company’s subsidiary NASDI, LLC (“NASDI”) received a letter stating that the Attorney General for the Commonwealth of Massachusetts is investigating alleged violations of the Massachusetts Solid Waste Act. The Company believes that the Massachusetts Attorney General is investigating illegal dumping activities at a dump site NASDI contracted with to have waste materials disposed of between September 2007 and July 2008. Per the Massachusetts Attorney General’s request, NASDI executed a tolling agreement regarding the matter in 2009 and engaged in further discussions with the Massachusetts Attorney General’s office in the second quarter of 2011, but has had no further contact with the Massachusetts Attorney General’s office since then. The matter remains open, and, to the Company’s knowledge, no proceedings have currently been initiated against NASDI. Should a claim be brought, NASDI intends to defend itself vigorously. Based on consideration of all of the facts and circumstances now known, the Company does not believe this claim will have a material impact on its business, financial position, results of operations or cash flows.

 

13


On March 27, 2011, NASDI received a subpoena from a federal grand jury in the District of Massachusetts directing NASDI to furnish certain documents relating to certain projects performed by NASDI since January 2005. The Company continues to fully cooperate with the federal grand jury subpoena and internally investigate as appropriate. Based on the early stage of the U.S. Department of Justice’s investigation and the limited information known to the Company, the Company cannot predict the outcome of the investigation, the U.S. Attorney’s views of the issues being investigated, any action the U.S. Attorney may take, or the impact, if any, that this matter may have on the Company’s business, financial position, results of operations or cash flows.

On April 6, 2011, NASDI received a subpoena from the District Attorney for Richmond County, New York in connection with a grand jury investigation. The subpoena directs NASDI to furnish certain documents relating to one project performed by NASDI and one of its subcontractors. The subpoena appears to be related to the activities of NASDI’s subcontractor for this project. The Company fully complied with the production of requested documents and will continue to cooperate if additional requests are made. Based on the Company’s internal investigation to date, the Company does not believe that it will have any liability with respect to this matter. In addition, the Company intends to continue to fully cooperate with the New York grand jury subpoena.

The Company has not accrued any amounts with respect to these NASDI matters as the Company does not believe, based on information currently known to it, that a loss relating to these matters is probable, and an estimate of a range of potential losses relating to these matters cannot reasonably be made.

11.     Acquisition of noncontrolling interest

Effective January 1, 2011 the Company reacquired Mr. Christopher Berardi’s membership interest in NASDI for no cost per terms of NASDI’s limited liability company agreement. This resulted in the elimination of noncontrolling interest of $1,973 during the first quarter ended March 31, 2011. The Company now owns 100% of NASDI.

In March 2011, Mr. Berardi resigned his employment with the Company’s demolition segment effective April 29, 2011. Mr. Berardi’s resignation and the repurchase of his NASDI membership interest also resulted in the reversal of a $1,933 accrual established in conjunction with a prior restructuring of ownership interest in NASDI. This reversal was recorded directly to equity as part of the reacquisition of the noncontrolling interest.

12.     Subsequent events

In October 2011, the Company entered into a transaction to sell a parcel of land in Channelview, Texas. The Company received proceeds of $6,490 for land with a recorded value of $106, resulting in a gain of $6,384. There were no other items occurring subsequent to September 30, 2011 that would have a material impact on the financial statements.

13.     Subsidiary guarantors

The Company’s long-term debt at September 30, 2011 includes $250,000 of 7.375% senior notes due February 1, 2019. The Company’s obligations under these senior unsecured notes are guaranteed by the Company’s wholly-owned domestic subsidiaries. Such guarantees are full, unconditional and joint and several.

The following supplemental financial information sets forth for the Company’s subsidiary guarantors (on a combined basis), the Company’s non-guarantor subsidiaries (on a combined basis) and Great Lakes Dredge & Dock Corporation, exclusive of its subsidiaries (“GLDD Corporation”):

 

  (i) balance sheets as of September 30, 2011 and December 31, 2010;

 

  (ii) statements of operations for the three and nine months ended September 30, 2011 and 2010; and

 

  (iii) statements of cash flows for the nine months ended September 30, 2011 and 2010.

 

14


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES  
CONDENSED CONSOLIDATING BALANCE SHEET  
AS OF SEPTEMBER 30, 2011  
(In thousands)  
     Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     GLDD
Corporation
     Eliminations     Consolidated
Totals
 
ASSETS              

CURRENT ASSETS:

             

Cash and cash equivalents

   $ 102,269       $ 4,781       $ —         $ —        $ 107,050   

Accounts receivable — net

     107,875         2,169         —           —          110,044   

Receivables from affiliates

     38,563         6,481         49,639         (94,683     —     

Contract revenues in excess of billings

     25,734         275         —           (274     25,735   

Inventories

     32,398         —           —           —          32,398   

Prepaid expenses

     2,487         —           216         —          2,703   

Other current assets

     14,061         130         14,556         —          28,747   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     323,387         13,836         64,411         (94,957     306,677   

PROPERTY AND EQUIPMENT—Net

     311,472         116         —           —          311,588   

GOODWILL

     97,799         250         —           —          98,049   

OTHER INTANGIBLE ASSETS—Net

     1,170         170         —           —          1,340   

INVENTORIES — Noncurrent

     30,988         —           —           —          30,988   

INVESTMENTS IN JOINT VENTURES

     7,221         —           —           —          7,221   

INVESTMENTS IN SUBSIDIARIES

     3,732         —           572,946         (576,678     —     

OTHER ASSETS

     6,817         3         6,254         (1,119     11,955   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 782,586       $ 14,375       $ 643,611       $ (672,754   $ 767,818   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

CURRENT LIABILITIES:

             

Accounts payable

   $ 70,688       $ 1,240       $ —         $ —          71,928   

Payables to affiliates

     84,495         6,673         3,625         (94,793     —     

Accrued expenses

     23,764         608         3,316         —          27,688   

Billings in excess of contract revenues

     15,076         300         —           (164     15,212   

Current portion of note payable

     2,500         —           —           —          2,500   

Current portion of equipment debt

     1,493         —           —           —          1,493   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     198,016         8,821         6,941         (94,957     118,821   

LONG TERM NOTE PAYABLE

     5,000         —           —           —          5,000   

7 3/8% SENIOR NOTES

     —           —           250,000         —          250,000   

DEFERRED INCOME TAXES

     —           —           100,570         (1,119     99,451   

OTHER

     8,446         —           754         —          9,200   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     211,462         8,821         358,265         (96,076     482,472   

Total Great Lakes Dredge & Dock Corporation Equity

     571,124         5,554         284,976         (576,678     284,976   

NONCONTROLLING INTERESTS

     —           —           370         —          370   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL EQUITY

     571,124         5,554         285,346         (576,678     285,346   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 782,586       $ 14,375       $ 643,611       $ (672,754   $ 767,818   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

15


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES  
CONDENSED CONSOLIDATING BALANCE SHEET  
AS OF DECEMBER 31, 2010  
(In thousands)  
     Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     GLDD
Corporation
    Eliminations     Consolidated
Totals
 
ASSETS             

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 48,416       $ 62       $ —        $ —        $ 48,478   

Accounts receivable — net

     93,983         1,565         —          —          95,548   

Receivables from affiliates

     5,338         5,798         6,745        (17,881     —     

Contract revenues in excess of billings

     24,777         94         —          (29     24,842   

Inventories

     31,734         —           —          —          31,734   

Prepaid expenses

     3,246         —           202        —          3,448   

Other current assets

     9,853         8         9,058        —          18,919   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     217,347         7,527         16,005        (17,910     222,969   

PROPERTY AND EQUIPMENT—Net

     322,958         273         —          —          323,231   

GOODWILL

     97,799         250         —          —          98,049   

OTHER INTANGIBLE ASSETS—Net

     3,017         263         —          —          3,280   

INVENTORIES — Noncurrent

     27,128         —           —          —          27,128   

INVESTMENTS IN JOINT VENTURES

     7,329         —           —          —          7,329   

INVESTMENTS IN SUBSIDIARIES

     2,311         —           528,425        (530,736     —     

OTHER ASSETS

     7,704         —           4,350        (215     11,839   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL

   $ 685,593       $ 8,313       $ 548,780      $ (548,861   $ 693,825   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable

   $ 81,534       $ 1,187       $ —        $ —        $ 82,721   

Payables to affiliates

     14,151         3,655         —          (17,806     —     

Accrued expenses

     30,511         693         1,605        —          32,809   

Billings in excess of contract revenues

     14,121         467         —          (104     14,484   

Current portion of note payable

     2,500         —           —          —          2,500   

Current portion of equipment debt

     303         —           —          —          303   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     143,120         6,002         1,605        (17,910     132,817   

LONG TERM NOTE PAYABLE

     5,000         —           —          —          5,000   

7 3/4% SENIOR SUBORDINATED NOTES

     —           —           175,000        —          175,000   

DEFERRED INCOME TAXES

     —           —           92,681        (215     92,466   

OTHER

     9,048         —           2,669        —          11,717   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     157,168         6,002         271,955        (18,125     417,000   

Total Great Lakes Dredge & Dock Corporation Equity

     528,425         2,311         278,953        (530,736     278,953   

NONCONTROLLING INTERESTS

     —           —           (2,128     —          (2,128
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL EQUITY

     528,425         2,311         276,825        (530,736     276,825   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL

   $ 685,593       $ 8,313       $ 548,780      $ (548,861   $ 693,825   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

16


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

   $ 155,426      $ 6,796      $ —        $ (3,754   $ 158,468   

Costs of contract revenues

     (127,306     (7,525     —          3,754        (131,077
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     28,120        (729     —          —          27,391   

OPERATING EXPENSES:

          

General and administrative expenses

     11,630        214        892        —          12,736   

Gain on sale of assets, net

     (131     —          —          —          (131
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     16,621        (943     (892     —          14,786   

Interest expense, net

     (450     (61     (5,060     —          (5,571

Equity in earnings of subsidiaries

     208        —          14,864        (15,072     —     

Equity in earnings of joint ventures

     606        —          —          —          606   

Loss on foreign currency transactions, net

     (526     (18     —          —          (544
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     16,459        (1,022     8,912        (15,072     9,277   

Income tax provision

     (365     —          (3,253     —          (3,618
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     16,094        (1,022     5,659        (15,072     5,659   

Net income attributable to noncontrolling interests

     —          —          (57     —          (57
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Great Lakes Dredge & Dock Corporation

   $ 16,094      $ (1,022   $ 5,602      $ (15,072   $ 5,602   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010

(In thousands)

 

       Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

   $ 172,655      $ 2,229      $ —        $ (1,551   $ 173,333   

Costs of contract revenues

     (139,825     (2,364     —          1,551        (140,638
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     32,830        (135     —          —          32,695   

General and administrative expenses

     15,396        179        1,065        —          16,640   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     17,434        (314     (1,065     —          16,055   

Interest expense, net

     7        (22     (3,287     —          (3,302

Equity in earnings of subsidiaries

     (336     —          17,278        (16,942     —     

Equity in earnings of joint ventures

     81        —          —          —          81   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     17,186        (336     12,926        (16,942     12,834   

Income tax provision

     92        —          (5,205     —          (5,113
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     17,278        (336     7,721        (16,942     7,721   

Net income attributable to noncontrolling interests

     —          —          (36     —          (36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Great Lakes Dredge & Dock Corporation

   $ 17,278      $ (336   $ 7,685      $ (16,942   $ 7,685   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

   $ 460,688      $ 16,382      $ —        $ (8,305   $ 468,765   

Costs of contract revenues

     (387,094     (15,377     —          8,305        (394,166
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     73,594        1,005        —          —          74,599   

OPERATING EXPENSES:

          

General and administrative expenses

     35,356        635        2,456        —          38,447   

Gain on sale of assets, net

     (2,902     —          —          —          (2,902
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     41,140        370        (2,456     —          39,054   

Interest expense, net

     (579     (160     (15,693     —          (16,432

Equity in earnings of subsidiaries

     1,422        —          42,982        (44,404     —     

Equity in loss of joint ventures

     (108     —          —          —          (108

Loss on foreign currency transactions, net

     (526     (18     —          —          (544

Loss on extinguishment of debt

     —          —          (5,145     —          (5,145
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intcome before income taxes

     41,349        192        19,688        (44,404     16,825   

Income tax provision

     2,863        —          (9,463     —          (6,600
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     44,212        192        10,225        (44,404     10,225   

Net income attributable to noncontrolling interests

     —          —          (525     —          (525
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Great Lakes Dredge & Dock Corporation

   $ 44,212      $ 192      $ 9,700      $ (44,404   $ 9,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

   $ 512,702      $ 5,758      $ —        $ (3,592   $ 514,868   

Costs of contract revenues

     (414,793     (5,899     —          3,592        (417,100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     97,909        (141     —          —          97,768   

General and administrative expenses

     38,876        526        2,682        —          42,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     59,033        (667     (2,682     —          55,684   

Interest income (expense), net

     3        (59     (9,461     —          (9,517

Equity in earnings (loss) of subsidiaries

     (726     —          57,980        (57,254     —     

Equity in loss of joint ventures

     (772     —          —          —          (772
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     57,538        (726     45,837        (57,254     45,395   

Income tax benefit (provision)

     442        —          (18,549     —          (18,107
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     57,980        (726     27,288        (57,254     27,288   

Net loss attributable to noncontrolling interests

     —          —          531        —          531   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Great Lakes Dredge & Dock Corporation

   $ 57,980      $ (726   $ 27,819      $ (57,254   $ 27,819   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations      Consolidated
Totals
 

OPERATING ACTIVITIES:

           

Net cash flows provided by (used in) operating activities

   $ 41,250      $ (640   $ (26,984   $ —         $ 13,626   

INVESTING ACTIVITIES:

           

Purchases of property and equipment

     (24,894     (7     —          —           (24,901

Proceeds from dispositions of property and equipment

     7,452        —          —          —           7,452   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in investing activities

     (17,442     (7     —          —           (17,449

FINANCING ACTIVITIES:

           

Proceeds from issuance of 7 3/8% senior notes

     —          —          250,000        —           250,000   

Redemption of 7 3/4% senior subordinated notes

     —          —          (175,000     —           (175,000

Senior subordinated notes redemption premium

     —          —          (2,264     —           (2,264

Deferred financing fees

     —          —          (5,962     —           (5,962

Dividends paid

     —          —          (3,473     —           (3,473

Dividend equivalents paid on restricted stock units

     —          —          (20     —           (20

Taxes paid on settlement of vested share awards

     —          —          (291     —           (291

Net change in accounts with affiliates

     33,524        2,557        (36,081     —           —     

Capital contributions

     (3,205     3,205        —          —           —     

Repayments of equipment debt

     (274     —          —          —           (274

Exercise of stock options

     —          —          27        —           27   

Excess income tax benefit from share-based compensation

     —          —          48        —           48   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows provided by (used in) financing activities

     30,045        5,762        26,984        —           62,791   

Effect of exchange rate changes on cash and cash equivalents

     —          (396     —          —           (396
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in cash and equivalents

     53,853        4,719        —          —           58,572   

Cash and cash equivalents at beginning of period

     48,416        62        —          —           48,478   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 102,269      $ 4,781      $ —        $ —         $ 107,050   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

19


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations      Consolidated
Totals
 

OPERATING ACTIVITIES:

           

Net cash flows provided by (used in) operating activities

   $ 140,462      $ 345      $ (32,493   $ —         $ 108,314   

INVESTING ACTIVITIES:

           

Purchases of property and equipment

     (18,283     —          —          —           (18,283

Proceeds from dispositions of property and equipment

     361        —          —          —           361   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in investing activities

     (17,922     —          —          —           (17,922

FINANCING ACTIVITIES:

           

Dividends paid

     —          —          (2,990     —           (2,990

Dividend equivalents paid on restricted stock units

     —          —          (17     —           (17

Net change in accounts with affiliates

     (45,963     (67     46,030        —           —     

Repayments of equipment debt

     (1,074     —          —          —           (1,074

Exercise of stock options

     —          —          470        —           470   

Borrowings under revolving loans

     —          —          14,968        —           14,968   

Repayments of revolving loans

     —          —          (25,968     —           (25,968
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows provided by (used in) financing activities

     (47,037     (67     32,493        —           (14,611

Net change in cash and equivalents

     75,503        278        —          —           75,781   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at beginning of period

     3,028        222        —          —           3,250   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 78,531      $ 500      $ —        $ —         $ 79,031   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

20


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (the “SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Great Lakes Dredge & Dock Corporation and its subsidiaries (“Great Lakes” or the “Company”), or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. Great Lakes cautions investors that any forward-looking statements made by Great Lakes are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to Great Lakes, include, but are not limited to, risks associated with Great Lakes’ leverage, fixed price contracts, dependence on government contracts and funding, bonding requirements and obligations, international operations, government regulation, restrictive debt covenants and fluctuations in quarterly operations, as well as those risks and uncertainties that are described in Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and in other securities filings by Great Lakes with the SEC.

Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any forward-looking statements. The Company’s future financial condition, results of operations and cash flows, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

General

The Company is the largest provider of dredging services in the United States. In addition, the Company is the only U.S. dredging service provider with significant international operations, which represented 15% of its dredging revenues for the first nine months of 2011, compared with the Company’s three year average of 23%. The mobility of the Company’s fleet enables the Company to move equipment in response to changes in demand for dredging services.

Dredging generally involves the enhancement or preservation of the navigability of waterways or the protection of shorelines through the removal or replenishment of soil, sand or rock. The U.S. dredging market consists of three primary types of work: capital, beach nourishment and maintenance. The Company experienced an average combined bid market share in the U.S. of 39% over the last three years, including 44%, 32% and 52% of the capital, beach nourishment and maintenance sectors, respectively. The Company’s bid market is defined as the aggregate dollar value of domestic projects on which the Company bid or could have bid if not for capacity constraints (“bid market”). With the acquisition of L.W. Matteson, Inc. (“Matteson”), on January 1, 2011 the Company began to provide the following additional dredging and other services: inland lake and river dredging, inland levee and construction dredging, environmental restoration and habitat improvement and other marine construction. The foregoing bid market shares do not reflect Matteson’s activities prior to December 31, 2010.

The Company’s largest domestic dredging customer is the Army Corps of Engineers (the “Corps”), which has responsibility for federally funded projects related to navigation and flood control of U.S. waterways. In the first nine months of 2011, the Company’s dredging revenues earned from contracts with federal government agencies, including the Corps as well as other federal entities such as the U.S. Coast Guard and the U.S. Navy, were approximately 53% of dredging revenues, down slightly from the Company’s three year average of 60%.

The Company’s demolition subsidiaries are headquartered in the Boston, Massachusetts area. In the first nine months of 2011, demolition revenues accounted for 15% of total revenues, above the prior three year average of 12%. The demolition segment’s principal services consist of interior and exterior demolition of commercial and industrial buildings, salvage and recycling of related materials and removal of hazardous substances and materials. The majority of the work has historically been performed in New England; however, the primary demolition subsidiary, NASDI, LLC (“NASDI”) continues to expand its footprint into the New York area and the marine demolition market, and specifically into bridge demolition projects. Effective as of January 1, 2011, NASDI became a wholly owned subsidiary of the Company. See Note 11 to Condensed Consolidated Financial Statements.

 

21


The Company also owns 50% of Amboy Aggregates (“Amboy”) and 50% of TerraSea Environmental Solutions (“TerraSea”) as joint ventures. Amboy’s primary business is mining sand from the entrance channel to the New York harbor in order to provide sand and aggregate for use in road and building construction and for clean land fill. Amboy also imports stone from Nova Scotia and distributes it throughout the New York area. TerraSea is focused on environmental services through its ability to remediate contaminated soil and dredged sediment treatment. The Company’s investments in Amboy and TerraSea are accounted for using the equity method.

The Company operates in two reportable segments: dredging and demolition.

Results of Operations

The following tables set forth the components of net income (loss) attributable to Great Lakes Dredge & Dock Corporation and Adjusted EBITDA, as defined below, as a percentage of contract revenues for the three months and nine months ended September 30, 2011 and 2010:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2011     2010     2011     2010  

Contract revenues

     100.0     100.0     100.0     100.0

Costs of contract revenues

     (82.7     (81.1     (84.1     (81.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     17.3        18.9        15.9        19.0   

General and administrative expenses

     8.0        9.6        8.2        8.2   

Gain on sale of assets, net

     (0.1     —          (0.6     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     9.4        9.3        8.3        10.8   

Interest expense, net

     (3.5     (1.9     (3.5     (1.8

Equity in earnings (loss) of joint ventures

     0.4        —          —          (0.1

Loss on foreign currency transactions, net

     (0.3     —          (0.1     —     

Loss on extinguishment of debt

     —          —          (1.1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     6.0        7.4        3.6        8.9   

Income tax provision

     (2.3     (2.9     (1.4     (3.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3.7        4.5        2.2        5.4   

Net (income) loss attributable to noncontrolling interests

     —          —          (0.1     0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Great Lakes Dredge & Dock Corporation

     3.7     4.5     2.1     5.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     16.4     13.9     14.5     15.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA, as provided herein, represents net income (loss) attributable to Great Lakes Dredge & Dock Corporation, adjusted for net interest expense, income taxes, depreciation and amortization expense and debt extinguishment. The Company presents Adjusted EBITDA as an additional measure by which to evaluate the Company’s operating trends. The Company believes that Adjusted EBITDA is a measure frequently used to evaluate performance of companies with substantial leverage and that the Company’s primary stakeholders (i.e., its stockholders, bondholders and banks) use Adjusted EBITDA to evaluate the Company’s period to period performance. Additionally, management believes that Adjusted EBITDA provides a transparent measure of the Company’s recurring operating performance and allows management to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. For this reason, the Company uses a measure based upon Adjusted EBITDA to assess performance for purposes of determining compensation under the Company’s incentive plan. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, amounts determined in accordance with accounting principles generally accepted in the United States (“GAAP”) including: (a) operating income as an indicator of operating performance; or (b) cash flows from operations as a measure of liquidity. As such, the Company’s use of Adjusted EBITDA, instead of a GAAP measure, has limitations as an analytical tool, including the inability to determine profitability or liquidity due to the exclusion of interest and income tax expense and the associated significant cash requirements and the exclusion of depreciation and amortization, which represent significant and unavoidable operating costs given the level of indebtedness and capital expenditures needed to maintain the Company’s business. For these reasons, the Company uses operating income to measure the Company’s operating performance and uses Adjusted EBITDA only as a supplement. The following is a reconciliation of Adjusted EBITDA to net income (loss) attributable to Great Lakes Dredge and Dock Corporation:

 

22


     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2011      2010      2011      2010  

Net income attributable to Great Lakes Dredge & Dock Corporation

   $ 5,602       $ 7,685       $ 9,700       $ 27,819   

Adjusted for:

           

Loss on extinguishment of debt

     —           —           5,145         —     

Interest expense, net

     5,571         3,302         16,432         9,517   

Income tax expense

     3,618         5,113         6,600         18,107   

Depreciation and amortization

     11,195         8,027         29,999         26,020   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 25,986       $ 24,127       $ 67,876       $ 81,463   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth, by segment and dredging type of work, the Company’s contract revenues for each of the periods indicated:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
Revenues (in thousands)    2011      2010      Change     2011      2010      Change  

Dredging:

                

Capital—U.S.

   $ 39,778       $ 104,092         (62 )%    $ 130,287       $ 220,343         (41 )% 

Capital—foreign

     21,843         20,917         4     59,779         60,129         (1 )% 

Beach

     41,714         4,180         898     87,947         85,884         2

Maintenance

     16,583         19,918         (17 )%      92,525         97,391         (5 )% 

Rivers & Lakes*

     14,673         —           —       25,735         —           —  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Dredging Revenue

     134,591         149,107         (10 )%      396,273         463,747         (15 )% 

Demolition

     23,877         24,226         (1 )%      72,492         51,121         42
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Revenue

   $ 158,468       $ 173,333         (9 )%    $ 468,765       $ 514,868         (9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

* Rivers & lakes was established by the Company on December 31, 2010 in connection with the Matteson acquisition, and did not operate as part of the Company prior to January 1, 2011.

Total revenue for the 2011 third quarter was $158.5 million, down 9% from $173.3 million during the 2010 third quarter. Most of this decline was attributable to a decrease in domestic capital revenue, offset, in part, by increases in beach nourishment and the addition of rivers & lakes revenue. Demolition revenue for the quarter was $23.9 million, down slightly from $24.2 million a year ago. Total revenue for the nine months ended September 30, 2011 was down $46.1 million or 9% compared to the prior year due to decreases in domestic capital dredging revenue, offset, in part, by contributions from rivers & lakes and a significant increase in demolition revenues.

Capital projects include large port deepenings and other infrastructure projects such as land reclamations. Domestic capital revenues in the third quarter and nine months ended September 30, 2011 were primarily generated by work in the Ports of New York and Norfolk, as well as projects in Florida. Domestic capital dredging revenue decreased $64.3 million, or 62%, in the 2011 third quarter compared to the 2010 third quarter. Domestic capital dredging revenue in the third quarter of 2010 included $58.7 million from sand berm construction off the coast of Louisiana, which did not repeat in 2011. Domestic capital dredging revenue decreased $90.1 million, or 41%, in the nine months ended September 30, 2011 compared to the same period in 2010. In the nine months ended September 30, 2010, the Company earned $65.0 million from the sand berm construction mentioned above and approximately $20 million of additional deepening work that was not repeated by the Company in the current year.

Foreign revenue increased $0.9 million, or 4%, for the third quarter of 2011 to $21.8 million as compared to $20.9 million in the 2010 third quarter. In the nine months ended September 30, 2011, foreign revenue decreased $0.4 million, or 1%, to $59.8 million from $60.1 million the same period of 2010. The Company has diversified its foreign revenue with projects in Bahrain, Brazil and Kuwait. Foreign revenues year to date also benefited from the resolution of outstanding project claims of approximately $3.8 million in the 2011 first quarter, offset by fewer projects in the Middle East.

Beach nourishment projects include rebuilding of shoreline areas that have been damaged by storm activity or ongoing erosion. Beach nourishment revenue in the 2011 third quarter increased $37.5 million, or nearly nine times that of the same 2010 quarter. Year to date 2011 beach revenue increased $2.1 million, or 2%, compared to the first nine months of 2010. Beach projects during the quarter were positively impacted as the Company was able to work on certain projects which were not subjected to environmental window restrictions typically incurred in the third quarter. In the 2011 third quarter, the Company worked on several beach projects, including projects in Delaware, Florida, New Jersey and North Carolina.

 

23


Maintenance projects include routine dredging of ports, non-inland rivers and channels to remove the regular build up of sediment. Maintenance revenue in the 2011 third quarter decreased by $3.3 million, or 17%, compared to the 2010 third quarter. Maintenance revenue in the first nine months of 2011 decreased by $4.9 million, or 5%, compared to the same period in 2010. Maintenance revenue decreased compared to the prior year as $3.2 million of work typically included in maintenance revenue was shifted to the rivers & lakes division in 2011.

Rivers and lakes projects include inland lake and river dredging, environmental restoration and habitat improvement and other marine construction. Rivers and lakes revenue was $14.7 million and $25.7 million for the three and nine months ended September 30, 2011, respectively. The Company purchased its rivers and lakes operations on December 31, 2010. Rivers and lakes revenue increased in the 2011 third quarter in comparison to the first half of the year due to the work performed on the backlog established in previous quarters as first quarter revenue is generally limited by freezing conditions in the northern United States that are typical during that time of year.

Consolidated gross profit for the 2011 third quarter decreased by 16% to $27.4 million, from $32.7 million in the same 2010 quarter. Gross profit margin (gross profit divided by revenue) for the 2011 third quarter decreased to 17.3% from 18.9% in the 2010 third quarter. The decrease in gross profit and gross profit margin was primarily due to greater than anticipated weather delays caused by Hurricane Irene off the East Coast and other subsequent storms. Consolidated gross profit for the nine months ended September 30, 2011 decreased by $23.2 million to $74.6 million from $97.8 million in the same 2010 period, resulting in a decline in gross profit margin to 15.9% from 19.0%. The 2011 third quarter and year to date gross profit margin was impacted by a lower coverage of fixed costs resulting from a comparison to the atypical vessel utilization in the prior third quarter and year to date periods. In addition, gross profit margin benefited in the prior year from a favorable project mix and increased vessel utilization on a number of domestic capital dredging and beach nourishment projects. The negative gross profit margin from the demolition segment the first half of 2011 also contributed to the lower profit margin for the nine months ended September 30, 2011. The demolition segment continued to work on several projects, primarily in the New York market, that experienced cost overruns primarily recognized in previous quarters of 2011. These projects were commenced in 2010 as part of the demolition segment’s expansion into new markets.

The Company’s general and administrative expenses totaled $12.7 million and $38.4 million for the three and nine months ended September 30, 2011. General and administrative expenses totaled $16.6 million and $42.1 million for the three and nine months ended September 30, 2010. The decrease in 2011 is due largely to costs of $4.4 million and $7.2 million for the three and nine months ended September 30, 2010, respectively, for severance, legal and consulting charges that were recorded in conjunction with the senior management reorganization. The decrease is also attributable to a $1.1 million reduction in the third quarter of 2011 of the future liability related to the earnout due to previous owners of the Company’s rivers and lakes dredging operations. These factors were partially offset by additional amortization expense related to the rivers and lakes acquisition of $0.6 million and $1.7 million for the three and nine months ended September 30, 2011, respectively. Additionally, during the nine months ended September 30, 2011, the demolition segment recorded $1.6 million of investigation-related expenses resulting from two subpoenas received in April 2011 (see Note 10 to Condensed Consolidated Financial Statements).

Operating income for the three and nine months ended September 30, 2011 decreased 7.9% and 29.9% to $14.8 million and $39.1 million, respectively, compared to the same periods of 2010 as a result of decreased dredging revenue and the resulting decline in gross profit.

Interest expense totaled $5.6 million and $16.4 million for the three and nine months ended September 30, 2011, respectively, an increase from $3.3 million and $9.5 million from the same periods of 2010, primarily due to the Company’s issuance of $250 million of 7.375% senior notes and the related redemption of the Company’s $175 million of 7.75% senior subordinated notes in the 2011 first quarter. Due to timing requirements, both of these note issuances were outstanding and accruing interest for approximately 30 days in the 2011 first quarter, resulting in duplicative interest expense of approximately $1.1 million. In addition, although the senior notes accrue interest at a lower interest rate, the increase in principal outstanding results in an increased amount of interest expense. Additionally, the Company recorded gains on interest rate swaps of $0.1 million and $0.4 million for the three and nine months ended September 30, 2011, compared to gains of $0.6 million and $2.2 million for the three and nine months ended September 30, 2010, respectively, as interest rates generally declined steeply in 2010. While rates have continued to decline during 2011, the magnitude of the decline has lessened, resulting in smaller gains in the current year.

Income tax expense for the three and nine months ended September 30, 2011 was $3.6 million and $6.6 million, respectively, compared to $5.1 million and $18.1 million for the same 2010 periods. This decrease was primarily attributable to lower earnings generated in 2011. The effective tax rate for the nine months ended September 30, 2011 was 39.2%, which is substantially consistent with the effective tax rate of 39.9% for the same period of 2010. The Company expects the tax rate for the full year to remain at 39.2%.

Net income attributable to Great Lakes Dredge & Dock Corporation was $5.6 million and earnings per diluted share were $0.09 for the 2011 third quarter as compared to $7.7 million and $0.13 for the same 2010 period. Net income attributable to Great Lakes

 

24


Dredge & Dock Corporation and earnings per diluted share for the nine months ended September 30, 2011 were $9.7 million and $0.16, respectively, compared to $27.8 million and $0.47 for the same 2010 period. The decrease is due to the lower operating income and increased interest expense for the period, as well as approximately $6.2 million of expense associated with the redemption of the $175 million senior subordinated notes (consisting of a $2.9 million non-cash write off of deferred financing fees, a $2.2 million redemption premium, and $1.1 million interest expense on the $175 million notes that were outstanding for 30 days after the debt was called).

Adjusted EBITDA (as defined on page 22) was $26.0 million and $67.9 million for the three and nine months ended September 30, 2011, respectively, compared with $24.1 million and $81.5 million in the same 2010 periods, primarily for the reasons discussed above. Although operating income for the 2011 third quarter was lower than the same period in the prior year, the Company recorded $11.2 million of non-cash depreciation and amortization expense for the three months ended September 30, 2011 that is included as a component of operating income, but excluded for the purposes of calculating Adjusted EBITDA. The depreciation and amortization expense recorded in the three months ended September 30, 2010 was only $8.0 million.

Results by segment

Dredging

Dredging revenues for the three and nine months ended September 30, 2011 were $134.6 million and $396.3 million, respectively, compared to $149.1 million and $463.7 million for the same periods of 2010. Dredging revenues for the nine months ended September 30, 2011 were driven by continued domestic capital work with significant contributions from strong third quarter beach revenue offset by a small decline year over year in maintenance revenue. The decline in dredging revenue for the nine months ended September 30, 2011 from the same period in the previous year was due to a decline in domestic capital, which was partially offset by the revenue contribution of the rivers and lakes projects. Domestic capital revenue in the prior year was atypically high due to $65.0 million from sand berm construction off the coast of Louisiana. Gross profit margin in the dredging segment was 17.5% and 18.4% for the three and nine months ended September 30, 2011 compared to gross profit margin in the dredging segment of 20.5% and 20.2% for the three and nine months ended September 30, 2010, respectively, as lower dredging revenues from increased vessel downtime resulted in lower coverage of fixed costs. In addition, gross profit margin benefited in the prior year from a favorable project mix and increased vessel utilization on a number of domestic capital dredging and beach nourishment projects. Dredging segment operating income was $13.6 million and $45.0 million for the three and nine months ended September 30, 2011, compared to operating income of $15.8 million and $56.8 million for the three and nine months ended September 30, 2010, respectively. The decrease reflects the decreased revenues and gross profit margin in the nine months ended September 30, 2011 compared to the same period in 2010.

Demolition

Demolition revenues for the three and nine months ended September 30, 2011 totaled $23.9 million and $72.5 million, respectively, compared to $24.2 million and $51.1 million for the same 2010 periods. The demolition segment experienced higher revenue levels in the nine months ended September 30, 2011 than from the same period in the prior year as the segment continued several large jobs that were included in backlog at year end 2010. The demolition segment generated operating income of $1.2 million and an operating loss of $5.9 million for the three and nine months ended September 30, 2011, respectively, compared to operating income of $0.3 million and an operating loss of $1.1 million for the same periods of 2010. Gross profit margin in the demolition segment was 15.8% and 2.2% for the three and nine months ended September 30, 2011 compared to gross profit margin of 8.0% and 7.4% for the three and nine months ended September 30, 2010, respectively. For the nine months ended September 30, 2011, the demolition segment’s greater operating loss and lower gross profit margin is primarily the result of losses recognized to date on projects in backlog at December 31, 2010. In the third quarter of 2011, the demolition segment stabilized the cost overruns on projects in the New York market and believes that the future losses already have been recognized in the results of the segment. The demolition segment also recognized $1.6 million of additional legal and consulting expenses in the nine months ended September 30, 2011 relating to the subpoenas received in April 2011 which impacted the segment’s operating income.

Bidding Activity and Backlog

The following table sets forth, by reporting segment and type of dredging work, the Company’s backlog as of the dates indicated:

 

25


     September 30,      December 31,      September 30,  
Backlog (in thousands)    2011      2010      2010  

Dredging:

        

Capital—U.S.

   $ 109,568       $ 117,866       $ 143,207   

Capital—foreign

     40,675         65,334         29,285   

Beach

     117,543         18,080         17,702   

Maintenance

     16,187         56,140         31,190   

Rivers & Lakes*

     13,391         25,116         —     
  

 

 

    

 

 

    

 

 

 

Dredging Backlog

     297,364         282,536         221,384   

Demolition

     68,029         80,984         54,878   
  

 

 

    

 

 

    

 

 

 

Total Backlog

   $ 365,393       $ 363,520       $ 276,262   
  

 

 

    

 

 

    

 

 

 

 

* Rivers & lakes was established by the Company on December 31, 2010 in connection with the Matteson acquisition, and was not part of the Company for the period ended September 30, 2010.

The Company’s contract backlog represents its estimate of the revenues that will be realized under the portion of the contracts remaining to be performed. For dredging contracts these estimates are based primarily upon the time and costs required to mobilize the necessary assets to and from the project site, the amount and type of material to be dredged, and the expected production capabilities of the equipment performing the work. For demolition contracts, these estimates are based on the time and remaining costs required to complete the project, relative to total estimated project costs and project revenues agreed to with the customer. However, these estimates are necessarily subject to variances based upon actual circumstances. Because of these factors, as well as factors affecting the time required to complete each job, backlog is not always indicative of future revenues or profitability. In addition, a significant amount of the Company’s dredging backlog relates to federal government contracts, which can be canceled at any time without penalty to the government, subject to the Company’s contractual right to recover the Company’s actual committed costs and profit on work performed up to the date of cancellation. In addition, the Company’s backlog may fluctuate significantly from quarter to quarter based upon the type and size of the projects the Company is awarded from the bid market. A quarterly increase or decrease of the Company’s backlog does not necessarily result in an improvement or a deterioration of the Company’s business. The Company’s backlog includes only those projects for which the Company has obtained a signed contract with the customer.

The domestic dredging bid market for the 2011 third quarter totaled $513.9 million, an increase of $158.2 million from the same period in the prior year, resulting in a total amount of contracts awarded for the nine months ended September 30, 2011 of $847.3 million, compared to $658.3 million in the same period of 2010. The Company won 64%, or $188.1 million, of the beach nourishment projects awarded through September 30, 2011, as well as 31%, or $69.2 million, of the maintenance projects and 31%, or $92.8 million, of capital projects awarded through September 30, 2011. The Company won 42% of the overall domestic bid market through September 30, 2011, slightly above its three year average of 39%. The third quarter bid market benefited from many projects let to bid before the fiscal year end of many governmental entities. Given that the size of the year to date bid market is similar to the full year bid market in 2010, the Company expects the full year 2011 bid market to be larger than the full year 2010 bid market. Variability in contract wins from quarter to quarter is not unusual and one quarter’s win rate is generally not indicative of the win rate the Company is likely to achieve for a full year.

The Company’s contracted dredging backlog was $297.4 million at September 30, 2011 compared to $282.5 million as of December 31, 2010. These amounts do not reflect approximately $78.2 million of domestic low bids pending formal award and additional phases (“options”) pending on projects currently in backlog. At December 31, 2010 the amount of domestic low bids pending award was $39.9 million.

Domestic capital dredging backlog at September 30, 2011 was $8.2 million less than at December 31, 2010 as the Company worked off its prior backlog related to deepening projects in the ports of New York and New Jersey and won new capital projects including $41 million for channel deepening in New York’s Ambrose Channel and $43 million for Louisiana costal restoration. The Company believes that the new focus in Washington D.C. on marine infrastructure is evidenced by the bipartisan interest in addressing deferred and long overdue navigational improvement needs. Federal capital projects are being prioritized by the Corps as it begins its appropriation of annual funding for projects. The Company believes the Corps will continue to let work to bid during the remainder of this year and into 2012. However, as in prior years, the Company has limited visibility as to future Corps projects. In addition, the Company continues to be optimistic about the passage of a Harbor Maintenance Trust Fund (“HMTF”) bill that allocates existing funding to maintenance dredging as intended. The industry has seen strong support from both Democrats and Republicans for this bill which politicians argue both creates domestic jobs and does not require new taxation.

Beach dredging backlog at September 30, 2011 was $99.5 million higher than at December 31, 2010 primarily due to six coastal protection/beach re-nourishment projects along the East Coast that were awarded near the end of the third quarter totaling $95.1 million and remain in backlog. The beach nourishment market has continued to be robust and the Company expects to commence the recently awarded projects in the fourth quarter of 2011, as well as work through the resulting backlog through mid-2012.

 

26


Maintenance dredging backlog is $40.0 million lower at September 31, 2011 than at December 31, 2010. The Company continued to work through backlog in the third quarter from the projects won in the fourth quarter of 2010. The Company was awarded $11.5 million for maintenance work in Baltimore that will be worked on in the fourth quarter of 2011.

The $43 million Louisiana coastal restoration project won by Great Lakes in July, along with another coastal project that was let to bid, demonstrates that resources are being devoted to help restore the barrier islands and wetlands that provide natural protection from storms in the Gulf Coast area. The Company believes that numerous projects are being planned in the Gulf States resulting from a fund established following the Deepwater Horizon oil spill, which has not yet released projects. These projects have been long overdue to restore the eroding coastline. In addition, the Company expects a deepening project for the Port of Miami, Florida to be released for proposal in the first half of 2012 as domestic ports contemplate the need to facilitate larger draft vessels from international trade that will be coming through the deeper Panama Canal.

Although several Middle Eastern countries have experienced civil unrest and resulting governmental instability in the current year, recent international response and focus has contributed to increased stability within many of these nations, including Bahrain. The Company has maintained normal operations for its international projects and has a positive outlook for many of its foreign markets.

The Company continues to observe an increase in international dredging and has pursued new opportunities in strategic foreign markets. The Company’s development of opportunities in Brazil translated into new projects, some of which were completed in the third quarter of 2011. In the Middle East there are several new capital projects being let to bid that are well suited for the fleet of vessels that we currently maintain in the region. These foreign opportunities and those in other markets include several projects which fit well with Great Lakes’ expertise and equipment.

Demolition services backlog was $68.0 million and $81.0 million at September 30, 2011 and December 31, 2010, respectively, a decrease of $13.0 million. The Company continued to work through backlog related to the larger projects that existed at year end 2010. The integration of our demolition and dredging businesses has been a pivotal step to strengthen and grow the demolition segment. Bridge demolition continues to be a focus of future growth as the Company’s expertise on maritime projects provides additional support to these opportunities.

Liquidity and Capital Resources

The Company’s principal sources of liquidity are cash flow generated from operations and borrowings under its senior credit facility. The Company’s principal uses of cash are to meet debt service requirements, finance its capital expenditures, provide working capital and meet other general corporate purposes.

The Company’s net cash provided by operating activities for the nine months ended September 30, 2011 and 2010 totaled $13.6 million, and $108.3 million, respectively. Normal increases or decreases in the level of working capital relative to the level of operational activity impact cash flow from operating activities. In the first nine months of 2011, net cash provided by operating activities was primarily the result of lower net income and changes in accounts receivable and other operating assets between periods. In the first nine months of 2010, lower activity in foreign dredging operations (which usually experience longer collection periods) coupled with payments being made on a foreign accounts receivable that had been outstanding throughout 2009, drove the increase in cash generated.

The Company’s net cash flows used in investing activities for the first nine months of 2011 and 2010 totaled $17.4 million and $17.9 million, respectively. Investing activities in both periods primarily relate to normal course upgrades and capital maintenance of the Company’s dredging fleet. During the nine months ended September 30, 2011, the Company sold the dredge Victoria Island for $6.6 million.

The Company’s net cash flows provided by (used in) financing activities for the nine months ended September 30, 2011 and 2010 totaled $62.8 million and $(14.6) mill