Great Lakes Dredge & Dock Corporation
Great Lakes Dredge & Dock CORP (Form: 10-Q, Received: 08/09/2013 16:07:50)
Table of Contents

 

 

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 June 30, 2013

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 July 31, 2013, 59,472,566 shares of the Registrant’s Common Stock, par value $.0001 per share, were outstanding.

 

 

 


Table of Contents

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 June 30, 2013

INDEX

 

         Page  

Part I Financial Information (Unaudited)

     3   

Item 1

  Financial Statements      3   
  Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012      3   
  Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2013 and 2012      4   
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2013 and 2012      5   
  Condensed Consolidated Statements of Equity for the Six Months ended June 30, 2013 and 2012      6   
  Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2013 and 2012      7   
  Notes to Condensed Consolidated Financial Statements      8   

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   

Item 3

  Quantitative and Qualitative Disclosures About Market Risk      34   

Item 4

  Controls and Procedures      35   

Part II Other Information

     36   

Item 1

  Legal Proceedings      36   

Item 1A

  Risk Factors      36   

Item 2

  Unregistered Sales of Equity Securities and Use of Proceeds      36   

Item 3

  Defaults Upon Senior Securities      36   

Item 4

  Mine Safety Disclosures      36   

Item 5

  Other Information      36   

Item 6

  Exhibits      37   

Signature

       38   

Exhibit Index

       39   

 

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Table of Contents

PART I — Financial Information

 

Item 1. Financial Statements.

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)

 

     June 30,
2013
    December 31,
2012
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 21,623     $ 24,440  

Accounts receivable—net

     149,940       149,142  

Contract revenues in excess of billings

     71,842       69,574  

Inventories

     30,578       28,726  

Prepaid expenses and other current assets

     50,203       41,808  
  

 

 

   

 

 

 

Total current assets

     324,186       313,690  

PROPERTY AND EQUIPMENT—Net

     355,854       346,540  

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

     81,975       104,031  

INVENTORIES—Noncurrent

     35,762       37,392  

INVESTMENTS IN JOINT VENTURES

     6,072       7,047  

OTHER

     13,505       17,695  
  

 

 

   

 

 

 

TOTAL

   $ 817,354     $ 826,395  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 92,070     $ 123,082  

Accrued expenses

     44,973       38,490  

Billings in excess of contract revenues

     7,913       11,280  

Current portion of long term debt

     2,515       13,098  
  

 

 

   

 

 

 

Total current liabilities

     147,471       185,950  

7 3/8% SENIOR NOTES

     250,000       250,000  

REVOLVING CREDIT FACILITY

     41,000       —     

DEFERRED INCOME TAXES

     105,057       106,767  

OTHER

     24,026       10,253  
  

 

 

   

 

 

 

Total liabilities

     567,554       552,970  
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 10)

    

EQUITY:

    

Common stock—$.0001 par value; 90,000 authorized, 59,471 and 59,359 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     6       6  

Additional paid-in capital

     272,688       271,418  

Retained earnings (accumulated deficit)

     (22,217     2,591  

Accumulated other comprehensive loss

     (495     (380
  

 

 

   

 

 

 

Total Great Lakes Dredge & Dock Corporation equity

     249,982       273,635  

NONCONTROLLING INTERESTS

     (182     (210
  

 

 

   

 

 

 

Total equity

     249,800       273,425  
  

 

 

   

 

 

 

TOTAL

   $ 817,354     $ 826,395  
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Contract revenues

   $ 152,863     $ 163,107     $ 341,710     $ 318,014  

Costs of contract revenues

     147,682       144,401       310,746       279,286  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5,181       18,706       30,964       38,728  

General and administrative expenses

     18,311       11,456       37,498       24,723  

Proceeds from loss of use claim

     (13,272     —          (13,272     —     

Impairment of goodwill

     21,474       —          21,474       —     

(Gain) loss on sale of assets—net

     58       (93     60       (124
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (21,390     7,343       (14,796     14,129  

Interest expense—net

     (5,396     (5,383     (11,129     (10,642

Equity in loss of joint ventures

     (385     (8     (975     (24

Loss on foreign currency transactions—net

     (261     (21     (225     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (27,432     1,931       (27,125     3,448  

Income tax (provision) benefit

     2,244       (751     2,348       (1,315
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (25,188     1,180       (24,777     2,133  

Net (income) loss attributable to noncontrolling interests

     (53     91       (31     206  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (25,241   $ 1,271     $ (24,808   $ 2,339  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.42   $ 0.02     $ (0.42   $ 0.04  

Basic weighted average shares

     59,436       59,171       59,403       59,105  

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

   $ (0.42   $ 0.02     $ (0.42   $ 0.04  

Diluted weighted average shares

     59,436       59,534       59,403       59,493  

Dividends declared per share

   $ —        $ 0.02     $ —        $ 0.04  

See notes to unaudited condensed consolidated financial statements.

 

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Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(in thousands)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Net income (loss)

   $ (25,188   $ 1,180     $ (24,777   $ 2,133  

Currency translation adjustment—net of tax (1)

     (75     (8     (81     (4

Net unrealized gain on derivatives—net of tax (2)

     (51     (1,762     (34     (1,288
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss—net of tax

     (126     (1,770     (115     (1,292
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (25,314     (590     (24,892     841  

Comprehensive (income) loss attributable to noncontrolling interests

     (53     91       (31     206  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (25,367   $ (499   $ (24,923   $ 1,047  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net of income tax expense of $48 and $5 for the three months ended June 30, 2013 and 2012, respectively, and $52 and $3 for six months ended June 30, 2013 and 2012, respectively.
(2) Net of income tax expense of $34 and $1,171 for the three months ended June 30, 2013 and 2012, respectively, and $23 and $856 for the six months ended June 30, 2013 and 2012, respectively.

See notes to unaudited condensed consolidated financial statements.

 

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Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(Unaudited)

(in thousands)

 

     Great Lakes Dredge & Dock Corporation shareholders              
     Shares of
Common
Stock
     Common
Stock
     Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interests
    Total  

BALANCE—January 1, 2013

     59,359      $ 6      $ 271,418     $ 2,591     $ (380   $ (210   $ 273,425  

Share-based compensation

     49        —           1,452       —          —          —          1,452  

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

     62        —           (277     —          —          —          (277

Exercise of stock options

     1        —           2       —          —          —          2  

Excess income tax benefit from share-based compensation

     —           —           93       —          —          —          93  

Distributions paid to noncontrolling interests

     —           —           —          —          —          (3     (3

Net income (loss)

     —           —           —          (24,808     —          31       (24,777

Other comprehensive loss—net of tax

     —           —           —          —          (115     —          (115
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE—June 30, 2013

     59,471      $ 6      $ 272,688     $ (22,217   $ (495   $ (182   $ 249,800  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Great Lakes Dredge & Dock Corporation shareholders              
     Shares of
Common
Stock
     Common
Stock
     Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests
    Total  

BALANCE—January 1, 2012

     58,999      $ 6      $ 267,918     $ 24,042     $ 3     $ 568     $ 292,537  

Share-based compensation

     122        —           1,714       —          —          —          1,714  

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

     82        —           (212     —          —          —          (212

Exercise of stock options

     17        —           75       —          —          —          75  

Excess income tax benefit from share-based compensation

     —           —           118       —          —          —          118  

Dividends declared and paid

     —           —           —          (2,482     —          —          (2,482

Dividend equivalents paid on restricted stock units

     —           —           —          (22     —          —          (22

Distributions paid to noncontrolling interests

     —           —           —          —          —          (134     (134

Net income (loss)

     —           —           —          2,339       —          (206     2,133  

Other comprehensive loss—net of tax

     —           —           —          —          (1,292     —          (1,292
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE—June 30, 2012

     59,220      $ 6      $ 269,613     $ 23,877     $ (1,289   $ 228     $ 292,435  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

     Six Months Ended
June 30,
 
     2013     2012  

OPERATING ACTIVITIES:

    

Net income (loss)

   $ (24,777   $ 2,133   

Adjustments to reconcile net income (loss) to net cash flows used in operating activities:

    

Depreciation and amortization

     23,735        16,123   

Equity in loss of joint ventures

     975        24   

Deferred income taxes

     (2,286     (478

(Gain) loss on dispositions of property and equipment

     60        (124

Impairment of goodwill

     21,474        —     

Gain on adjustment of contingent earnout

     —          (240

Amortization of deferred financing fees

     576        669   

Unrealized foreign currency loss

     68        378   

Share-based compensation expense

     1,452        1,714   

Excess income tax benefit from share-based compensation

     (93     (118

Changes in assets and liabilities:

    

Accounts receivable

     3,555        5,967   

Contract revenues in excess of billings

     (2,319     (20,048

Inventories

     (222     (8,653

Prepaid expenses and other current assets

     (5,903     (5,658

Accounts payable and accrued expenses

     (31,069     (12,371

Billings in excess of contract revenues

     (3,367     6,371   

Other noncurrent assets and liabilities

     (747     (519
  

 

 

   

 

 

 

Net cash flows used in operating activities

     (18,888     (14,830

INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (27,954     (22,783

Proceeds from dispositions of property and equipment

     223        226   

Proceeds from vendor performance obligations

     13,600        —     
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (14,131     (22,557

FINANCING ACTIVITIES:

    

Deferred financing fees

     —          (2,039

Distributions paid to minority interests

     (3     (133

Repayments of long term note payable

     (10,547     —     

Dividends paid

     —          (2,482

Dividend equivalents paid on restricted stock units

     —          (22

Taxes paid on settlement of vested share awards

     (277     (212

Repayments of equipment debt

     (36     (426

Exercise of stock options

     2        75   

Excess income tax benefit from share-based compensation

     93        118   

Borrowings under revolving loans

     144,000        —     

Repayments of revolving loans

     (103,000     —     
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     30,232        (5,121
  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     (30     11   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (2,817     (42,497

Cash and cash equivalents at beginning of period

     24,440        113,288   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 21,623      $ 70,791   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

    

Cash paid for interest

   $ 9,768      $ 9,602   
  

 

 

   

 

 

 

Cash paid (refunded) for income taxes

   $ 431      $ (6,371
  

 

 

   

 

 

 

Non-cash Investing and Financing Activities

    

Property and equipment purchased but not yet paid

   $ 7,720      $ 6,231   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

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, 2012. 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 June 30, 2013, and its results of operations for the three and six months ended June 30, 2013 and 2012 and cash flows for the six months ended June 30, 2013 and 2012 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 coastal protection projects have the most volatile margins because they are most often exposed to variability in weather conditions.

The Company’s cost structure includes significant annual equipment-related costs, including depreciation, maintenance, insurance and long-term rentals. These costs have averaged approximately 20% to 23% of total costs of contract revenues over the prior 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 or 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 four operating segments that, through aggregation, comprise two reportable segments: dredging and demolition. Four operating segments were aggregated into two reportable segments as the segments have similarity in economic margins, services, production processes, customer types, distribution methods and regulatory environment. The Company has determined that the operating segments are the Company’s four reporting units. Due to a decline in the overall financial performance and declining cash flows in the demolition reporting unit, the Company concluded there was a triggering event that required an interim impairment test for the reporting unit in the second quarter of 2013. The Company recorded an estimated preliminary goodwill impairment charge of $21,474 at the demolition reporting unit in the quarter ended June 30, 2013.This impairment of goodwill is discussed in Note 4.

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

 

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Table of Contents
  2. Earnings per share

Basic earnings per share is computed by dividing net income attributable to common stockholders 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. For the three and six months ended June 30, 2013, 522 and 554 thousand shares of potentially dilutive stock options and restricted stock units were excluded from the diluted weighted-average common shares outstanding as the Company incurred a loss during these periods. The impact of these shares would have been antidilutive. For the three and six months ended June 30, 2012, zero options to purchase shares of common stock were excluded from the calculation of diluted earnings per share based on the application of the treasury stock method. The computations for basic and diluted earnings per share from continuing operations are as follows:

 

(shares in thousands)    Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013     2012      2013     2012  

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

   $ (25,241   $ 1,271      $ (24,808   $ 2,339  

Weighted-average common shares outstanding — basic

     59,436       59,171        59,403       59,105  

Effect of stock options and restricted stock units

     —          363        —          388  
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average common shares outstanding — diluted

     59,436       59,534        59,403       59,493  
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share — basic

   $ (0.42   $ 0.02      $ (0.42   $ 0.04  

Earnings (loss) per share — diluted

   $ (0.42   $ 0.02      $ (0.42   $ 0.04  

 

  3. Accounts receivable and contracts in progress

Accounts receivable at June 30, 2013 and December 31, 2012 are as follows:

 

     June 30,
2013
    December 31,
2012
 

Completed contracts

   $ 48,756     $ 43,898  

Contracts in progress

     85,346       91,459  

Retainage

     23,458       24,419  
  

 

 

   

 

 

 
     157,560       159,776  

Allowance for doubtful accounts

     (3,469     (2,050
  

 

 

   

 

 

 

Total accounts receivable—net

   $ 154,091     $ 157,726  
  

 

 

   

 

 

 

Current portion of accounts receivable—net

   $ 149,940     $ 149,142  

Long-term accounts receivable and retainage

     4,151       8,584  
  

 

 

   

 

 

 

Total accounts receivable—net

   $ 154,091     $ 157,726  
  

 

 

   

 

 

 

 

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The components of contracts in progress at June 30, 2013 and December 31, 2012 are as follows:

 

     June 30,
2013
    December 31,
2012
 

Costs and earnings in excess of billings:

    

Costs and earnings for contracts in progress

   $ 324,934     $ 458,750  

Amounts billed

     (264,340     (392,860
  

 

 

   

 

 

 

Costs and earnings in excess of billings for contracts in progress

     60,594       65,890  

Costs and earnings in excess of billings for completed contracts

     11,248        3,684  
  

 

 

   

 

 

 

Total contract revenues in excess of billings

   $ 71,842      $ 69,574  
  

 

 

   

 

 

 

Billings in excess of costs and earnings:

    

Amounts billed

   $ (371,799   $ (338,741

Costs and earnings for contracts in progress

     363,886       327,461  
  

 

 

   

 

 

 

Total billings in excess of contract revenues

   $ (7,913   $ (11,280
  

 

 

   

 

 

 

 

  4. Impairment of goodwill

The Company’s annual goodwill impairment test is conducted in the third quarter of each year and interim evaluations are performed when the Company determines that a triggering event has occurred that would more likely than not reduce the fair value of goodwill below its carrying value. Due to a decline in the overall financial performance and declining cash flows in the demolition reporting unit, the Company concluded there was a triggering event that required an interim impairment test for the reporting unit in the second quarter of 2013.

In connection with the Company’s preparation of this Quarterly Report on Form 10-Q, the Company performed step one of the goodwill impairment test as of June 30, 2013, which compared the fair value of the demolition reporting unit against its carrying amount, including goodwill. In deriving the fair value of the demolition reporting unit, the Company used both a market-based approach and an income-based approach. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. Under the market approach, the Company uses the guideline public company method by applying estimated market-based enterprise value multiples to the reporting unit’s estimated revenue and Adjusted EBITDA. Based on the first step analysis, management concluded that the fair value of the demolition reporting unit was less than its carrying value; therefore, the Company performed step two of the goodwill impairment analysis.

Step two of the goodwill impairment analysis measures the impairment charge by allocating the reporting unit’s fair value to all of the assets and liabilities of the reporting unit in a hypothetical analysis that calculates implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as a loss on impairment of goodwill.

Management determined that the demolition reporting unit’s implied fair value of goodwill was below the carrying value as of June 30, 2013. As a result, the Company has estimated the range of impairment of goodwill between $19.0 million and $21.5 million and has recorded a preliminary estimated impairment charge of $21,474 in the second quarter of 2013. Due to the timing and complexity of the second step of the impairment test, which is required to determine the actual impairment of goodwill, the Company was unable to finalize the amount of impairment prior to filing this form 10-Q for the three and six months ended June 30, 2013. Any subsequent adjustment to the estimated impairment charge will be recorded in the 2013 third quarter.

 

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The change in the carrying value of goodwill for the period ended June 30, 2013 is as follows:

 

     Dredging Segment      Demolition Segment     Total  

Balance — December 31, 2012

   $ 76,575      $ 24,224     $ 100,799  

Impairment of goodwill

     —           (21,474     (21,474
  

 

 

    

 

 

   

 

 

 

Balance — June 30, 2013

   $ 76,575      $ 2,750     $ 79,325  
  

 

 

    

 

 

   

 

 

 

 

  5. 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 June 30, 2013 and December 31, 2012, the Company held certain derivative contracts that it uses to manage commodity price risk. The Company does not hold or issue derivatives for speculative or trading purposes. In addition, other nonfinancial assets and liabilities are measured at fair value in the financial statements on a nonrecurring basis. The fair values of these financial instruments and nonfinancial assets and liabilities measured at the reporting date are summarized as follows:

 

            Fair Value Measurements at Reporting Date Using  

Description

   At June 30, 2013      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Fuel hedge contracts

   $ 235      $ —         $ 235      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
            Fair Value Measurements at Reporting Date Using  

Description

   At December 31,
2012
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Fuel hedge contracts

   $ 178      $ —         $ 178      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 June 30, 2013, 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 2014. As of June 30, 2013, there were 2.8 million gallons remaining on these contracts which represent approximately 80% of the Company’s forecasted fuel purchases through May 2014. Under these swap agreements, the Company will pay fixed prices ranging from $2.88 to $3.26 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 and included in fuel expense, which is a component of costs of contract revenues in the condensed consolidated statements of operations.

At June 30, 2013, the fair value liability of the fuel hedge contracts was estimated to be $235 and is recorded in accrued expenses. At December 31, 2012 the fair value liability of the fuel hedge contracts was estimated to be $178 and is recorded in accrued expenses. The loss reclassified to earnings from changes in fair value of derivatives, net of cash settlements and taxes, for the six months ended June 30, 2013 was $291. The remaining gains and losses included in accumulated other comprehensive loss at June 30, 2013 will be reclassified into earnings over the next eleven 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 fuel hedge contracts outstanding as of June 30, 2013 and December 31, 2012 is as follows:

 

          Fair Value at  
     Balance Sheet Location    June 30,
2013
     December 31,
2012
 

Liability derivatives:

        

Derivatives designated as hedges

        

Fuel hedge contracts

   Accrued expenses    $ 235      $ 178  
     

 

 

    

 

 

 

Assets and liabilities measured at fair value on a nonrecurring basis

All other nonfinancial assets and liabilities measured at fair value in the financial statements on a nonrecurring basis are subject to fair value measurements and disclosures. Nonfinancial assets and liabilities included in our condensed consolidated balance sheets and measured on a nonrecurring basis consist of goodwill and long-lived assets, including other acquired intangibles. Goodwill and long-lived assets are measured at fair value to test for and measure impairment, if any, at least annually for goodwill or when necessary for both goodwill and long-lived assets.

The Company estimated the fair value of our demolition reporting unit for our goodwill impairment test by using both a market-based approach and an income-based approach. The income approach is dependent on a number of factors, including estimates of future market growth trends, forecasted revenues and expenses based upon historical operating data, appropriate discount rates and other variables. The market approach measures the value of a reporting unit through comparison to comparable companies. Under the market approach, the Company uses the guideline public company method by applying estimated market-based enterprise value multiples to the reporting unit’s estimated revenue and Adjusted EBITDA. The Company analyzed companies that performed similar services or are considered peers.

 

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An impairment of goodwill was recorded in the amount of $21,474 in the second quarter of 2013. The fair value of goodwill was determined using quantitative models that contained significant unobservable inputs. See Note 4.

 

     Fair Value Measurements Using
Significant Unobservable Inputs

(Level 3)
 
     2013  

Goodwill

  

Balance at January 1,

   $ 100,799  

Impairment of goodwill

     (21,474
  

 

 

 

Balance at June 30,

   $ 79,325  
  

 

 

 

Accumulated other comprehensive loss

Changes in the components of the accumulated balances of other comprehensive income are as follows:

 

     Three months ended
June  30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Cumulative translation adjustments—net of tax

   $ (75   $ (8   $ (81   $ (4

Derivatives:

        

Reclassification of derivative losses (gains) to earnings—net of tax

     154       143       291       (263

Change in fair value of derivatives—net of tax

     (205     (1,905     (325     (1,025
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gain on derivatives—net of tax

     (51     (1,762     (34     (1,288
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

   $ (126   $ (1,770   $ (115   $ (1,292
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments reclassified from accumulated balances of other comprehensive income to earnings are as follows:

 

         Three months ended
June  30,
    Six months ended
June  30,
 
     Statement of Operations Location   2013     2012     2013     2012  

Derivatives:

          

Fuel hedge contracts

   Costs of contract revenues   $ 256     $ 237     $ 484     $ (438
   Income tax (provision) benefit     (102     (94     (193     175  
    

 

 

   

 

 

   

 

 

   

 

 

 
     $ 154     $ 143     $ 291     $ (263
    

 

 

   

 

 

   

 

 

   

 

 

 

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. Based on timing of the cash flows and comparison to current market interest rates, the carrying value of our senior revolving credit agreement approximates fair value. In January 2011, the Company issued $250,000 of 7.375% senior notes due February 1, 2019, which were outstanding at June 30, 2013. 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 $259,063 at June 30, 2013, which is a Level 1 fair value measurement as the senior notes value was obtained using quoted prices in active markets.

 

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Table of Contents
  6. Accrued expenses

Accrued expenses at June 30, 2013 and December 31, 2012 are as follows:

 

     June 30,
2013
     December 31,
2012
 

Construction liabilities

   $ 13,218      $ 6,426  

Insurance

     8,482        9,070  

Interest

     8,151        7,837  

Payroll and employee benefits

     7,405        9,906  

Percentage of completion adjustment

     3,199        1,552  

Income and other taxes

     1,911         1,699  

Other

     2,607         2,000  
  

 

 

    

 

 

 

Total accrued expenses

   $ 44,973       $ 38,490  
  

 

 

    

 

 

 

 

  7. Long-term debt

On June 4, 2012, the Company entered into a senior revolving credit agreement (the “Credit Agreement”) with certain financial institutions from time to time party thereto as lenders, Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and an Issuing Lender, Bank of America, N.A., as Syndication Agent and PNC Bank, National Association, BMO Harris Bank N.A. and Fifth Third Bank, as Co-Documentation Agents. The Credit Agreement, which replaced the Company’s former revolving credit agreement, provides for a senior revolving credit facility in an aggregate principal amount of up to $175,000, subfacilities for the issuance of standby letters of credit up to a $125,000 sublimit, multicurrency borrowings up to a $50,000 sublimit and swingline loans up to a $10,000 sublimit. The Credit Agreement also includes an incremental loans feature that will allow the Company to increase the senior revolving credit facility by an aggregate principal amount of up to $50,000. This is subject to lenders providing incremental commitments for such increase, provided that no default or event of default exists, and the Company will be in pro forma compliance with the existing financial covenants both before and after giving effect to the increase, and subject to other standard conditions. The prior credit agreement with Bank of America N.A. was terminated.

Depending on the Company’s consolidated leverage ratio (as defined in the Credit Agreement), borrowings under the new revolving credit facility will bear interest at the option of the Company of either a LIBOR rate plus a margin of between 1.50% to 2.50% per annum or a base rate plus a margin of between 0.50% to 1.50% per annum.

The credit facility contains affirmative, negative and financial covenants customary for financings of this type. The Credit Agreement also contains customary events of default (including non-payment of principal or interest on any material debt and breaches of covenants) as well as events of default relating to certain actions by the Company’s surety bonding provider. The Credit Agreement requires the Company to maintain a net leverage ratio less than or equal to 4.50 to 1.00 as of the end of each fiscal quarter and a minimum fixed charge coverage ratio of 1.25 to 1.00. At December 31, 2012, the Company’s fixed charge coverage ratio was 1.12x, resulting in an event of default under the Credit Agreement.

On March 15, 2013, the Company executed a Waiver and Amendment No. 2 to the Credit Agreement (the “Credit Agreement Waiver and Amendment”) pursuant to which the counterparties thereto agreed, among other things, to waive any default, event of default, or possible event of default, as applicable, related to the Company’s failure to meet the above-described financial covenant in the Credit Agreement.

Separately, the Company determined that a perfection trigger event had occurred under the Credit Agreement as of December 31, 2012. As a result, the outstanding obligations under the Credit Agreement, which were previously unsecured, are now secured by liens on certain of the Company’s vessels and all of its domestic accounts receivable, subject to the liens and interests of certain other parties holding first priority perfected liens. Under the original terms of the Credit Agreement, the obligations thereunder that became secured under these circumstances could again become unsecured provided that (i) no event of default has occurred and is continuing and (ii) the Company has maintained for two consecutive quarters, and is projected to maintain for the next two consecutive quarters, a total leverage ratio less than or equal to 3.75 to 1.0. Pursuant to the Credit Agreement Waiver and Amendment, this provision has been amended to add the additional condition that no release of the liens securing the obligations under the Credit Agreement can occur until the Company has delivered to the lenders its audited financial statements with respect to its fiscal year ending December 31, 2013.

 

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Table of Contents

The obligations of Great Lakes under the Credit Agreement are unconditionally guaranteed, on a joint and several basis, by each existing and subsequently acquired or formed material direct and indirect domestic subsidiary of the Company. During a year, the Company frequently borrows and repays amounts under its revolving credit facility. As of June 30, 2013, the Company had $41,000 of borrowings on the revolver and $74,228 of letters of credit outstanding, resulting in $59,772 of availability under the Credit Agreement. At June 30, 2013, the Company was in compliance with its various covenants under its Credit Agreement.

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 June 30, 2013, Great Lakes had no letters of credit outstanding under this facility. At June 30, 2013, the Company also had $250,000 of 7.375% senior notes outstanding, which mature in February 2019.

 

  8. Share-based compensation

The Company’s 2007 Long-Term Incentive Plan permits the granting 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.

In May 2013, the Company granted 369 thousand options to purchase shares of common stock and 217 thousand 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 board-related compensation in stock grants. Compensation cost charged to expense related to share-based compensation arrangements was $730 and $1,452, respectively, for the three and six months ended June 30, 2013 and $699 and $1,714, respectively, for the three and six months ended June 30, 2012.

 

  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
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Dredging

        

Contract revenues

   $ 136,487      $ 135,315     $ 310,446      $ 258,988   

Operating income

     14,569        11,697       33,569        16,596  

Demolition

        

Contract revenues

   $ 16,645      $ 27,929     $ 31,533      $ 60,475  

Operating loss

     (35,959     (4,354     (48,365     (2,467

Intersegment revenues

   $ (269   $ (137     (269     (1,449

Total

        

Contract revenues

   $ 152,863      $ 163,107     $ 341,710      $ 318,014  

Operating income (loss)

     (21,390     7,343       (14,796     14,129  

Foreign dredging revenue of $33,348 and $71,733 for the three and six months ended June 30, 2013 and $20,848 and $38,873 for the three and six months ended June 30, 2012, respectively, was primarily attributable to work done in the Middle East and Brazil as well as for the Wheatstone LNG project in Western Australia.

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.

Additionally, the Company has identified certain pending change orders for one demolition project for which previously recognized revenue no longer meets the Company’s policy for revenue recognition. The Company has reversed the recognition of revenue for these pending change orders because of new developments in the second quarter. These developments include the Company filing a lawsuit and lien against the general contractor and recent communications with the general contractor and the site owner. As a result of these reversals, contract revenues were reduced by $5,568 for the three and six months ended June 30, 2013.

 

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Table of Contents
  10. Commitments and contingencies

Commercial commitments

Performance and bid bonds are customarily required for dredging and marine construction projects, as well as some demolition projects. In September 2011, the Company entered into a bonding agreement with Zurich American Insurance Company (“Zurich”) under which the Company can obtain performance, bid and payment bonds. Bid bonds are generally obtained for a percentage of bid value and amounts outstanding typically range from $1,000 to $10,000. At June 30, 2013, the Company had outstanding performance bonds valued at approximately $647,263; however, the revenue value remaining in backlog related to these projects totaled approximately $289,761.

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

As is customary with negotiated contracts and modifications or claims to competitively bid contracts with the federal government, the government has the right to audit the books and records of the Company to ensure compliance with such contracts, modifications, or claims, and the applicable federal laws. The government has the ability to seek a price adjustment based on the results of such audit. Any such audits have not had, and are not expected to have, a material impact on the financial position, operations, or cash flows of the Company.

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 records an accrual when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe any of these proceedings, individually or in the aggregate, would be expected to have a material effect on the Company’s results of operations, cash flows or financial condition.

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. 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.

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 conducted an internal investigation into this matter and continues to fully cooperate with the federal grand jury subpoena. Based on 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 March 19, 2013, the Company and three of its current and former executives were sued in a securities class action in the Northern District of Illinois captioned United Union of Roofers, Waterproofers & Allied Workers Local Union No. 8 v. Great Lakes Dredge & Dock Corporation et al., Case No. 1:13-cv-02115. The lawsuit, which was brought on behalf of all purchasers of the Company’s securities between August 7, 2012 and March 14, 2013, primarily alleges that the defendants made false and misleading statements regarding the recognition of revenue in the demolition segment and with regard to the Company’s internal control over financial reporting. This suit was filed following the Company’s announcement on March 14, 2013 that it would restate its second and third quarter 2012 financial statements. Two additional, similar lawsuits captioned Boozer v. Great Lakes Dredge & Dock Corporation et al., Case No. 1:13-cv-02339, and Connors v. Great Lakes Dredge & Dock Corporation et al., Case No. 1:13-cv-02450, were filed in the Northern District of Illinois on March 28, 2013, and April 2, 2013, respectively. These three actions were consolidated and recaptioned In re Great Lakes Dredge & Dock Corporation, Case No. 1:13-cv-02115, on June 10, 2013. The Company denies liability and intends to vigorously defend this action.

 

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Table of Contents

On March 28, 2013, the Company was named as a nominal defendant, and its directors were named as defendants, in a shareholder derivative action in DuPage County Circuit Court in Illinois captioned Hammoud v. Berger et al., Case No. 2013CH001110. The lawsuit primarily alleges breaches of fiduciary duties related to allegedly false and misleading statements regarding the recognition of revenue in the demolition segment and with regard to the Company’s internal control over financial reporting, which exposed the Company to securities litigation. A second, similar lawsuit captioned The City of Haverhill Retirement System v. Leight et al., Case No. 1:13-cv-02470, was filed in the Northern District of Illinois on April 2, 2013 and was voluntarily dismissed on June 10, 2013. A third, similar lawsuit captioned St. Lucie County Fire District Firefighters Pension Trust Fund v. Leight et al., Case No. 13 CH 15483, was filed in Cook County Circuit Court in Illinois on July 8, 2013, and a fourth, similar lawsuit (that additionally named one current and one former executive as defendants) captioned Griffin v. Berger et al., Case No. 1:13-cv-04907, was filed in the Northern District of Illinois on July 9, 2013.

In 2012, the Company contracted with a shipyard to perform the functional design drawings, detailed design drawings and follow on construction of a new Articulated Tug & Barge (“ATB”) Trailing Suction Hopper Dredge. In April 2013, the Company terminated the contract with the shipyard for default and the counterparty sent the Company a notice requesting arbitration under the contract on the Company’s termination for default, including but not limited to the Company’s right to draw on letters of credit that had been issued by the shipyard as financial security required in the contract. In May 2013, the Company drew upon the shipyard’s letters of credit related to the contract and received $13,600. As the matter is currently in arbitration, the Company has recorded the receipts from the letters of credit as a long-term liability and intends to use the proceeds to offset current and future costs of the ATB that are a result of the contract default, among other things. The Company cannot be assured of the outcome of the arbitration. The Company intends to pursue its claim for damages resulting from the termination in arbitration.

The Company has not accrued any amounts with respect to the above 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.

In May 2013, the Company concluded its litigation regarding the dredge New York loss of use claim. In January 2008, the Company filed suit against the M/V Orange Sun and her owners for damages incurred by the Company in connection with the allision in the approach channel to Port Newark, New Jersey. The Company received $13,272 which is included in proceeds from loss of use claim.

 

  11. Subsidiary guarantors

The Company’s long-term debt at June 30, 2013 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 100% 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 June 30, 2013 and December 31, 2012;

 

  (ii) statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2013 and 2012; and

 

  (iii) statements of cash flows for the six months ended June 30, 2013 and 2012.

 

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Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2013

(In thousands)

 

       Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
     GLDD
Corporation
    Eliminations     Consolidated
Totals
 

ASSETS

           

CURRENT ASSETS:

           

Cash and cash equivalents

   $ 19,325     $ 2,298      $ —        $ —        $ 21,623  

Accounts receivable — net

     144,876       5,064        —          —          149,940  

Receivables from affiliates

     94,960       6,339        14,883       (116,182     —     

Contract revenues in excess of billings

     70,031       2,381        —          (570     71,842  

Inventories

     30,578       —           —          —          30,578  

Prepaid expenses and other current assets

     35,605       334        14,264       —          50,203  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     395,375       16,416        29,147       (116,752     324,186  

PROPERTY AND EQUIPMENT—Net

     355,826       28        —          —          355,854  

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

     81,902       73        —          —          81,975  

INVENTORIES — Noncurrent

     35,762       —           —          —          35,762  

INVESTMENTS IN JOINT VENTURES

     6,072       —           —          —          6,072  

INVESTMENTS IN SUBSIDIARIES

     2,653       —           634,141       (636,794     —     

OTHER

     7,728       3        5,774       —          13,505  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL

   $ 885,318     $ 16,520      $ 669,062     $ (753,546   $ 817,354  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

           

CURRENT LIABILITIES:

           

Accounts payable

   $ 89,762     $ 1,612      $ 696     $ —        $ 92,070  

Payables to affiliates

     92,263       11,148        13,328       (116,739     —     

Accrued expenses

     35,537       818        8,618       —          44,973  

Billings in excess of contract revenues

     7,893       33        —          (13     7,913  

Current portion of long term debt

     2,515       —           —          —          2,515  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     227,970       13,611        22,642       (116,752     147,471  

7 3/8% SENIOR NOTES

     —          —           250,000       —          250,000  

REVOLVING CREDIT FACILITY

     —          —           41,000       —          41,000  

DEFERRED INCOME TAXES

     (16     —           105,073       —          105,057  

OTHER

     23,479       —           547       —          24,026  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     251,433       13,611        419,262       (116,752     567,554  

Total Great Lakes Dredge & Dock Corporation Equity

     633,885       2,909        249,982       (636,794     249,982  

NONCONTROLLING INTERESTS

     —          —           (182     —          (182
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL EQUITY

     633,885       2,909        249,800       (636,794     249,800  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL

   $ 885,318     $ 16,520      $ 669,062     $ (753,546   $ 817,354  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2012

(In thousands)

 

       Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     GLDD
Corporation
    Eliminations     Consolidated
Totals
 

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 24,272      $ 168      $ —        $ —        $ 24,440  

Accounts receivable — net

     147,610        1,532        —          —          149,142  

Receivables from affiliates

     102,968        7,680        38,115       (148,763     —     

Contract revenues in excess of billings

     69,649        5        —          (80     69,574  

Inventories

     28,726        —           —          —          28,726  

Prepaid expenses and other current assets

     27,147        28        14,633       —          41,808  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     400,372        9,413        52,748       (148,843     313,690  

PROPERTY AND EQUIPMENT—Net

     346,503        37        —          —          346,540  

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

     103,687        344        —          —          104,031  

INVENTORIES — Noncurrent

     37,392        —           —          —          37,392  

INVESTMENTS IN JOINT VENTURES

     7,047        —           —          —          7,047  

INVESTMENTS IN SUBSIDIARIES

     2,127        —           618,070       (620,197     —     

OTHER

     11,350        2        6,343       —          17,695  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL

   $ 908,478      $ 9,796      $ 677,161     $ (769,040   $ 826,395  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable

   $ 122,191      $ 891      $ —        $ —        $ 123,082  

Payables to affiliates

     105,303        4,843        38,647       (148,793     —     

Accrued expenses

     29,417        677        8,396       —          38,490  

Billings in excess of contract revenues

     11,207        123        —          (50     11,280  

Current portion of long term debt

     13,098        —           —          —          13,098  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     281,216        6,534        47,043       (148,843     185,950  

7 3/8% SENIOR NOTES

     —           —           250,000       —          250,000  

DEFERRED INCOME TAXES

     623        —           106,144       —          106,767  

OTHER

     9,704        —           549       —          10,253  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     291,543        6,534        403,736       (148,843     552,970  

Total Great Lakes Dredge & Dock Corporation Equity

     616,935        3,262        273,635       (620,197     273,635  

NONCONTROLLING INTERESTS

     —           —           (210     —          (210
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL EQUITY

     616,935        3,262        273,425       (620,197     273,425  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL

   $ 908,478      $ 9,796      $ 677,161     $ (769,040   $ 826,395  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2013

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

   $ 147,148     $ 10,167     $ —        $ (4,452   $ 152,863  

Costs of contract revenues

     (141,559     (10,575     —          4,452       (147,682
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5,589       (408     —          —          5,181  

OPERATING EXPENSES:

          

General and administrative expenses

     18,124       187       —          —          18,311  

Proceeds from loss of use claim

     (13,272     —          —          —          (13,272

Impairment of goodwill

     21,224       250       —          —          21,474  

Loss on sale of assets—net

     58       —          —          —          58  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (20,545     (845     —          —          (21,390

Interest expense—net

     (130     (47     (5,219     —          (5,396

Equity in loss of subsidiaries

     (18     —          (15,798     15,816       —     

Equity in loss of joint ventures

     (385     —          —          —          (385

Gain (loss) on foreign currency transactions, net

     96       (357     —          —          (261
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (20,982     (1,249     (21,017     15,816       (27,432

Income tax (provision) benefit

     6,413       2       (4,171     —          2,244  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (14,569     (1,247     (25,188     15,816       (25,188

Net income attributable to noncontrolling interests

     —          —          (53     —          (53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (14,569   $ (1,247   $ (25,241   $ 15,816     $ (25,241
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (14,620   $ (1,322   $ (25,367   $ 15,942     $ (25,367
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2012

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

   $ 163,042     $ 2,251     $ —        $ (2,186   $ 163,107  

Costs of contract revenues

     (144,073     (2,514     —          2,186       (144,401
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     18,969       (263     —          —          18,706  

OPERATING EXPENSES:

          

General and administrative expenses

     10,679       162       615       —          11,456  

Gain on sale of assets—net

     (93     —          —          —          (93
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     8,383       (425     (615     —          7,343  

Interest expense—net

     (257     (23     (5,103     —          (5,383

Equity in earnings (loss) of subsidiaries

     (223     —          8,687       (8,464     —     

Equity in loss of joint ventures

     (8     —          —          —          (8

Loss on foreign currency transactions, net

     (21     —          —          —          (21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     7,874       (448     2,969       (8,464     1,931  

Income tax (provision) benefit

     1,038       —          (1,789     —          (751
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     8,912       (448     1,180       (8,464     1,180  

Net income attributable to noncontrolling interests

     —          —          91       —          91  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 8,912     $ (448   $ 1,271     $ (8,464   $ 1,271  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 7,150     $ (456   $ (499   $ (6,694   $ (499
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

   $ 332,567     $ 13,926     $ —        $ (4,783   $ 341,710  

Costs of contract revenues

     (301,491     (14,038     —          4,783       (310,746
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     31,076       (112     —          —          30,964  

OPERATING EXPENSES:

          

General and administrative expenses

     37,120       378       —          —          37,498  

Proceeds from loss of use claim

     (13,272     —          —          —          (13,272

Impairment of goodwill

     21,224       250       —          —          21,474  

Loss on sale of assets—net

     60       —          —          —          60  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (14,056     (740     —          —          (14,796

Interest expense—net

     (149     (89     (10,891     —          (11,129

Equity in loss of subsidiaries

     (65     —          (6,242     6,307       —     

Equity in loss of joint ventures

     (975     —          —          —          (975

Gain (loss) on foreign currency transactions—net

     132       (357     —          —          (225
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (15,113     (1,186     (17,133     6,307       (27,125

Income tax (provision) benefit

     9,990       2       (7,644     —          2,348  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (5,123     (1,184     (24,777     6,307       (24,777

Net income attributable to noncontrolling interests

     —          —          (31     —          (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (5,123   $ (1,184   $ (24,808   $ 6,307     $ (24,808
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (5,157   $ (1,265   $ (24,923   $ 6,422     $ (24,923
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

   $ 318,486     $ 4,050     $ —        $ (4,522   $ 318,014  

Costs of contract revenues

     (279,240     (4,568     —          4,522       (279,286
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     39,246       (518     —          —          38,728  

OPERATING EXPENSES:

          

General and administrative expenses

     23,248       348       1,127       —          24,723  

(Gain) loss on sale of assets—net

     (135     —          11       —          (124
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     16,133       (866     (1,138     —          14,129  

Interest expense—net

     (538     (51     (10,053     —          (10,642

Equity in earnings (loss) of subsidiaries

     (602     —          15,034       (14,432     —     

Equity in loss of joint ventures

     (24     —          —          —          (24

Loss on foreign currency transactions—net

     (15     —          —          —          (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     14,954       (917     3,843       (14,432     3,448  

Income tax (provision) benefit

     395       —          (1,710     —          (1,315
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     15,349       (917     2,133       (14,432     2,133  

Net loss attributable to noncontrolling interests

     —          —          206       —          206  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 15,349     $ (917   $ 2,339     $ (14,432   $ 2,339  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 14,061     $ (921   $ 1,047     $ (13,140   $ 1,047  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations      Consolidated
Totals
 

OPERATING ACTIVITIES:

           

Net cash flows provided by (used in) operating activities

   $ 5,349     $ (6,349   $ (17,888   $ —         $ (18,888

INVESTING ACTIVITIES:

           

Purchases of property and equipment

     (27,954     —          —          —           (27,954

Proceeds from dispositions of property and equipment

     223       —          —          —           223  

Proceeds from vendor performance obligations

     13,600        —          —          —           13,600   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in investing activities

     (14,131     —          —          —           (14,131

FINANCING ACTIVITIES:

           

Repayments of long term note payable

     —          —          (10,547     —           (10,547

Distributions paid to minority interests

     —          —          (3     —           (3

Taxes paid on settlement of vested share awards

     —          —          (277     —           (277

Net change in accounts with affiliates

     3,871       8,509       (12,380     —           —     

Repayments of equipment debt

     (36     —          —          —           (36

Exercise of stock options

     —          —          2       —           2  

Excess income tax benefit from share-based compensation

     —          —          93       —           93  

Borrowings under revolving loans

     —          —          144,000       —           144,000  

Repayments of revolving loans

     —          —          (103,000     —           (103,000
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows provided by (used in) financing activities

     3,835       8,509       17,888       —           30,232  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     —          (30     —          —           (30
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     (4,947     2,130       —          —           (2,817
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at beginning of period

     24,272       168       —          —           24,440  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 19,325     $ 2,298     $ —        $ —         $ 21,623  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

24


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations      Consolidated
Totals
 

OPERATING ACTIVITIES:

           

Net cash flows provided by (used in) operating activities

   $ 9,867     $ 331     $ (25,028   $ —         $ (14,830

INVESTING ACTIVITIES:

           

Purchases of property and equipment

     (22,783     —          —          —           (22,783

Proceeds from dispositions of property and equipment

     226       —          —          —           226  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in investing activities

     (22,557     —          —          —           (22,557

FINANCING ACTIVITIES:

           

Deferred financing fees

     —          —          (2,039     —           (2,039

Distributions paid to minority interests

         (133        (133

Dividends paid

     —          —          (2,482     —           (2,482

Dividend equivalents paid on restricted stock units

     —          —          (22     —           (22

Taxes paid on settlement of vested share awards

     —          —          (212        (212

Net change in accounts with affiliates

     (25,246     (4,477     29,723       —           —     

Repayments of equipment debt

     (426     —          —          —           (426

Exercise of stock options

     —          —          75       —           75  

Excess income tax benefit from share-based compensation

     —          —          118       —           118  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows provided by (used in) financing activities

     (25,672     (4,477     25,028       —           (5,121
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     —          11       —          —           11  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     (38,362     (4,135     —          —           (42,497
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at beginning of period

     108,985       4,303       —          —           113,288  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 70,623     $ 168     $ —        $ —         $ 70,791  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
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 (“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 and uncertainties that are described in Item 1A. “Risk Factors” of Great Lakes’ Annual Report on Form 10-K for the year ended December 31, 2012, and in other securities filings by Great Lakes with the SEC.

Although Great Lakes 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. Great Lakes’ future financial condition and results of operations, 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 Great Lakes 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 23% of its dredging revenues for the first six months of 2013, above the Company’s prior three year average of 16%. 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 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, coastal protection and maintenance. 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. The Company experienced an average combined bid market share in the U.S. of 37% over the prior three years, including 29%, 60% and 31% of the domestic capital, coastal protection and maintenance sectors, respectively. The Company’s average bid market share of rivers & lakes in the two years of activity since the Matteson acquisition is 43%.

The Company’s largest domestic dredging customer is the U.S. Army Corps of Engineers (the “Corps”), which is responsible for federally funded projects related to navigation and flood control of U.S. waterways. In the first six months of 2013, 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, and third parties operating under contracts with federal agencies, were approximately 45% of dredging revenues, compared to the Company’s prior three year average of 62%.

The Company’s demolition subsidiaries, collectively, are a U.S. provider of commercial and industrial demolition and remediation services such as exterior and interior demolition for site preparation as well as environmental remediation. Historically, the majority of the work was performed in the New England area. Through increased collaboration with Great Lakes’ other lines of business, the demolition operations are pursuing opportunities outside of the New England area and into the marine demolition markets, specifically bridge demolition across the eastern part of the U.S. Through an acquisition in 2012, the segment’s scope of work has expanded into the Midwest U.S. market. In the first six months of 2013, demolition revenues accounted for 9% of total revenues, compared to the prior three year average of 14%.

The Company also owns 50% of Amboy Aggregates (“Amboy”) and 50% of TerraSea Environmental Solutions (“TerraSea”) as joint ventures. Amboy’s primary business is dredging 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 upstate New York and Nova Scotia and distributes it throughout the New York area. TerraSea is engaged in the environmental services business through its ability to remediate contaminated soil and dredged sediment treatment.

 

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Table of Contents

The Company operates in four operating segments that, through aggregation, comprise two reportable segments: dredging and demolition. Four operating segments were aggregated into two reportable segments as the segments have similarity in economic margins, services, production processes, customer types, distribution methods and regulatory environment. The Company has determined that the operating segments are the Company’s four reporting units.

Results of Operations

The following tables set forth the components of net income attributable to Great Lakes Dredge & Dock Corporation and Adjusted EBITDA, as defined below, as a percentage of contract revenues for the three and six months ended June 30, 2013 and 2012:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Contract revenues

     100.0     100.0     100.0     100.0

Costs of contract revenues

     (96.6     (88.5     (90.9     (87.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3.4        11.5       9.1        12.2  

General and administrative expenses

     12.0        7.0       11.0        7.8  

Proceeds from loss of use claim

     (8.7     —          (3.9     —     

Impairment of goodwill

     14.1        —          6.3        —     

(Gain) loss on sale of assets—net

     —          (0.1     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (14.0     4.6       (4.3     4.4  

Interest expense—net

     (3.5     (3.3     (3.3     (3.3

Equity in loss of joint ventures

     (0.4     —          (0.3     —     

Loss on foreign currency transactions—net

     —          —          (0.1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (17.9     1.3       (8.0     1.1  

Income tax (provision) benefit

     1.4        (0.5     0.7        (0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (16.5     0.8       (7.3     0.6  

Net (income) loss attributable to noncontrolling interests

     —          0.1       —          0.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (16.5 )%      0.9     (7.3 )%      0.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     7.2     10.4     8.5     10.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA, as provided herein, represents net income attributable to Great Lakes Dredge & Dock Corporation, adjusted for net interest expense, income taxes, depreciation and amortization expense, debt extinguishment, accelerated maintenance expense for new international deployments and goodwill impairment. In 2012, the Company modified the Adjusted EBITDA calculation for accelerated maintenance expense for new international deployments that are not directly recoverable under the related dredging contract and are therefore expensed as incurred. The Company does not frequently incur significant accelerated maintenance as a part of its international deployments. As such, the exclusion of these accelerated maintenance expenses from the calculation of Adjusted EBITDA allows users of the financial statements to more easily compare our year-to-year results. Adjusted EBITDA is not a measure derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). 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 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 accelerated maintenance expense for new international deployments, goodwill impairment, 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 attributable to Great Lakes Dredge & Dock Corporation:

 

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Table of Contents
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013     2012      2013     2012  
(in thousands)                          

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

   $ (25,241   $ 1,271      $ (24,808   $ 2,339  

Adjusted for:

         

Accelerated maintenance expenses

     —          1,276        —          1,276  

Impairment of goodwill

     21,474       —           21,474       —     

Interest expense—net

     5,396       5,383        11,129       10,642  

Income tax provision (benefit)

     (2,244     751        (2,348     1,315  

Depreciation and amortization

     11,660       8,359        23,735       16,123  
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 11,045     $ 17,040      $ 29,182     $ 31,695  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
Revenues (in thousands)    2013     2012     Change     2013     2012     Change  

Dredging:

            

Capital—U.S.

   $ 39,474     $ 45,184       (12.6 )%    $ 84,982     $ 72,091       17.9

Capital—foreign

     33,348       20,848       60.0     71,733       38,873       84.5

Coastal protection

     52,227       40,458       29.1     109,148       71,641       52.4

Maintenance

     6,639       20,068       (66.9 )%      34,403       60,613       (43.2 )% 

Rivers & lakes

     4,799       8,757       (45.2 )%      10,180       15,770       (35.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total dredging revenues

     136,487       135,315       0.9     310,446       258,988       19.9

Demolition

     16,645       27,929       (40.4 )%      31,533       60,475       (47.9 )% 

Intersegment revenue

     (269     (137     96.4     (269     (1,449     (81.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 152,863     $ 163,107       (6.3 )%    $ 341,710     $ 318,014       7.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue for the 2013 second quarter was $152.9 million, down $10.2 million or 6% from $163.1 million during the 2012 second quarter. For the six months ended June 30, 2013 and 2012, total revenue increased to $341.7 million from $318.0 million during such period in 2012, an increase of 7%. For the six months ended June 30, 2013, increases in domestic and foreign capital and coastal protection revenues were offset by decreases in maintenance, rivers & lakes and demolition revenues.

Capital dredging consists primarily of port expansion projects, which involve the deepening of channels to allow access by larger, deeper draft ships and the provision of land fill used to expand port facilities. In addition to port work, capital projects also include land reclamations, trench digging for pipelines, tunnels and cables, and other dredging related to the construction of breakwaters, jetties, canals and other marine structures. Domestic capital dredging revenue decreased by $5.7 million, or 13%, to $39.5 million, in the 2013 second quarter compared to the 2012 second quarter. Domestic capital dredging revenue increased $12.9 million, or 18%, in the first six months of 2013 compared to the same period in 2012. Domestic capital dredging revenues in the first half of 2013 continued to be generated by two coastal restoration projects in Louisiana as well as deepening projects in Delaware and New York. These increases were slightly offset by a project in Florida during the first half of 2012 that did not reoccur in 2013.

Foreign dredging revenue increased $12.5 million, or 60%, for the second quarter of 2013 to $33.3 million, and increased $32.9 million to $71.7 million for the six months ended June 30, 2013. Revenue in the first half of 2013 was driven by a significant project in Qatar as well as the mobilization and commencement of dredging activities for the Wheatstone LNG Project in Western Australia and a project in Brazil.

Coastal protection projects involve moving sand from the ocean floor to shoreline locations where erosion threatens shoreline assets. Coastal protection revenue in the 2013 second quarter increased $11.8 million, or 29%, from the 2012 second quarter. Year-to-date 2013 coastal protection revenue increased $37.5 million, or 52%, compared to the first two quarters of 2012. The increase in revenue during the first half of 2013 is primarily the result of projects in New York and New Jersey, which included some emergency work as well as supplemental work as a result of Superstorm Sandy. Additionally, the Company worked on projects in North Carolina and Florida.

 

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Table of Contents

Maintenance dredging consists of the re-dredging of previously deepened waterways and harbors to remove silt, sand and other accumulated sediments. Due to natural sedimentation, most channels generally require maintenance dredging every one to three years, thus creating a recurring source of dredging work that is typically non-deferrable if optimal navigability is to be maintained. In addition, severe weather such as hurricanes, flooding and droughts can also cause the accumulation of sediments and drive the need for maintenance dredging. Maintenance revenue in the 2013 second quarter decreased by $13.4 million, or 67%, compared to the 2012 second quarter. Maintenance revenue in the first six months of 2013 decreased by $26.2 million, or 43%, compared to the first six months of 2012. The Company performed a greater amount of harbor work in the first two quarters of 2012 that was not repeated in the first two quarters of 2013. In addition, the Company worked on a large maintenance project in Louisiana in the first half of 2012 that did not reoccur in the first half of 2013. The Company worked on projects in Florida, Maryland and Georgia during the first six months of 2013.

Domestic rivers & lakes dredging and related operations typically consist of lake and river dredging, inland levee and construction dredging, environmental restoration and habitat improvement and other marine construction projects. Rivers & lakes revenue in the second quarter of 2013 was $4.8 million, a decrease of $4.0 million or 45% compared to the second quarter of 2012. Year-to-date 2013 revenue was $10.2 million compared to $15.8 million, a decrease of 35%, compared to the first six months of 2012. This decrease was attributable to projects in Mississippi and along the Mississippi River that did not reoccur during the 2013 first half. Rivers & lakes continued work on its large municipal lake project in Texas during the first six months of 2013.

The Demolition segment which consists of demolition and remediation services recorded revenues of $16.6 million and $31.5 million for the three and six months ended June 30, 2013, respectively, compared to $27.9 million and $60.5 million for the same period in 2012. The decrease is partially attributable to a higher backlog at year end 2011, compared to 2012, excluding the backlog acquired by the Company on December 31, 2012 in conjunction with the Terra acquisition, which resulted in a greater number of projects for the demolition segment in the 2012 first half. Additionally, the Company has identified certain pending change orders for one demolition project for which previously recognized revenue no longer meets the Company’s policy for revenue recognition. The Company has reversed the recognition of revenue for these pending change orders because of new developments in the second quarter. These developments include the Company filing a lawsuit and lien against the general contractor and recent communications with the general contractor and the site owner. As a result of these reversals, contract revenues were reduced by $5.6 million for the three and six months ended June 30, 2013. The year-to-date decrease was partially offset by $16.2 million of revenue earned from the business acquired from Terra Contracting, LLC which did not become a part of the Company until the first quarter of 2013.

Consolidated gross profit for the 2013 second quarter decreased by 72% to $5.2 million, from $18.7 million in the second quarter of 2012. Gross profit margin (gross profit divided by revenue) for the 2013 second quarter decreased to 3.4% from 11.5% in the 2012 second quarter. Gross profit for the six months ended June 30, 2013 decreased by 20% to $31.0 million from $38.7 million in the same 2012 period, resulting in a decrease in gross profit margin to 9.1% from 12.2%. Gross profit margin for the three and six months ended June 30, 2013 was lower due to dredging mechanical and production delays, lower fixed cost coverage as well as the reversal of demolition revenue noted above and lower demolition margins on fewer projects.

The Company’s general and administrative expenses totaled $18.3 million and $37.5 million for the three and six months ended June 30, 2013. General and administrative expenses totaled $11.5 million and $24.7 million for the three and six months ended June 30, 2012. During the 2013 first half, the Company incurred additional payroll and benefit expenses representing an increase of $1.1 million over the same period in 2012. General and administrative expenses of $4.6 million related to the Terra business acquisition also contributed to the increase as the business did not become part of the Company until the first quarter of 2013. An increase in legal and professional fees of $2.6 million, technical and consulting of $0.9 million and additional bad debt expense of $2.3 million also contributed to the year-to-date 2013 increase compared to the same period in 2012.

In May 2013, the Company concluded its litigation regarding the dredge New York loss of use claim. In January 2008, the Company filed suit against the M/V Orange Sun and her owners for damages incurred by the Company in connection with the allision in the approach channel to Port Newark, New Jersey. The Company received $13.3 million which is included in proceeds from loss of use claim in the consolidated statement of operations for the three and six month periods ended June 30, 2013.

The operating loss for the three months ended June 30, 2013 was $21.4 million compared to operating income of $7.3 million in the same period of 2012. The Company had an operating loss of $14.8 million for the six months ended June 30, 2013 compared to operating income of $14.1 million for the six months ended June 30, 2012. The decrease in operating income is due to the goodwill impairment charge recorded at the demolition reporting unit during the 2013 second quarter as well as lower operating margins and higher general administrative expenses, partially offset by the receipt of claim proceeds, as described above.

The Company’s net interest expense totaled $5.4 million and $11.1 million, for the three and six months ended June 30, 2013, respectively, in line with interest expense of $5.4 million and $10.6 million from the same period of 2012.

 

29


Table of Contents

The income tax expense for the three and six months ended June 30, 2013 was a benefit of $2.2 million and $2.3 million, respectively, compared to $0.8 million and $1.3 million of provision for the same 2012 periods. The increase in income tax benefit was attributable to the losses generated in the 2013 first half. The effective tax rate for the six months ended June 30, 2013 was impacted by the nondeductible pre-tax goodwill impairment charge of $21.5 million. Excluding this item, the effective tax rate for the six months ended June 30, 2013 would be 36.8%, which is substantially consistent with the effective tax rate of 38.1% for the same period of 2012. The Company expects the tax rate for the full year before consideration of nondeductible pretax items to remain near 39%.

Net loss attributable to Great Lakes Dredge & Dock Corporation was $25.2 million and the loss per diluted share was $0.42 for the 2013 second quarter compared to net income attributable to Great Lakes Dredge & Dock Corporation of $1.3 million and earnings per share of $0.02 for the same 2012 period. Net loss attributable to Great Lakes Dredge & Dock Corporation and loss per diluted share for the six months ended June 30, 2013 was $24.8 million and $0.42, respectively, compared to Net income attributable to Great Lakes Dredge & Dock Corporation of $2.3 million and earnings per diluted share of $0.04 for the same 2012 period. The decrease in 2013 is due to lower operating results for the periods described above which includes the noncash goodwill impairment charge incurred in the second quarter of 2013.

Adjusted EBITDA (as defined on page 27) was $11.0 million and $29.2 million for the three and six months ended June 30, 2013, respectively, compared with $17.0 million and $31.7 million in the same 2012 periods. This decrease is the result of lower operating income described above.

Results by segment

Dredging

Dredging revenues for the three and six months ended June 30, 2013 were $136.5 million and $310.4 million, respectively, compared to $135.3 million and $259.0 million for the same periods of 2012. The dredging segment for the three and six months ended June 30, 2013 included increases in coastal protection and domestic and foreign capital revenues. These increases were partially offset by lower maintenance and rivers & lakes revenues. Increases in dredging revenues for the 2013 first half were driven by a significant project in Qatar and two coastal restoration projects in Louisiana as well as the mobilization and commencement of dredging activities in Western Australia and Brazil.

Gross profit margin in the dredging segment was 9.1% and 14.1% for the three and six months ended June 30, 2013 compared to gross profit margin of 16.1% and 14.7% for the three and six months ended June 30, 2012, respectively. Dredging gross profit margin slightly declined due to lower fixed cost coverage of the dredging fleet as well as mechanical and production delays during the first six months of 2013. Although the gross profit margin decreased, the overall gross profit increased on higher revenues.

Dredging segment operating income was $14.6 million and $33.6 million for the three and six months ended June 30, 2013, compared to operating income of $11.7 million and $16.6 million for the three and six months ended June 30, 2012, respectively. The increase in operating income for the six months ended June 30, 2013 is a result of the increase in gross profit and proceeds from the dredge New York loss of use claim, slightly offset by an increase in general and administrative expenses.

Demolition

Demolition revenues for the three and six months ended June 30, 2013 totaled $16.6 million and $31.5 million, respectively, compared to $27.9 million and $60.5 million for the same 2012 periods. Demolition revenues for the 2013 first half were down due to a lower backlog at year end 2012, excluding the backlog acquired by the Company on December 31, 2012 in conjunction with the Terra acquisition, resulting in fewer projects on which to earn revenue in the first six months of 2013 compared to the same period in 2012. Additionally, the Company has identified certain pending change orders for one demolition project for which previously recognized revenue no longer meets the Company’s policy for revenue recognition. The Company has reversed the recognition of revenue for these pending change orders because of new developments in the second quarter. These developments include the Company fi