Great Lakes Dredge & Dock Corporation
Great Lakes Dredge & Dock CORP (Form: 10-Q, Received: 11/05/2013 17:29:15)
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 September 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 November 1, 2013, 59,625,043 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 September 30, 2013

INDEX

 

         Page  

Part I Financial Information (Unaudited)

     3  

Item 1

  Financial Statements      3   
  Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012      3   
  Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2013 and 2012      4   
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2013 and 2012      5   
  Condensed Consolidated Statements of Equity for the Nine Months ended September 30, 2013 and 2012      6   
  Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 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      35   

Item 4

  Controls and Procedures      36   

Part II Other Information

     37   

Item 1

  Legal Proceedings      37   

Item 1A

  Risk Factors      37   

Item 2

  Unregistered Sales of Equity Securities and Use of Proceeds      37   

Item 3

  Defaults Upon Senior Securities      37   

Item 4

  Mine Safety Disclosures      37   

Item 5

  Other Information      37   

Item 6

  Exhibits      38   

Signature

     39   

Exhibit Index

     40   

 

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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)

 

     September 30,     December 31,  
     2013     2012  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 41,322     $ 24,440  

Accounts receivable—net

     143,437       149,142  

Contract revenues in excess of billings

     83,759       69,574  

Inventories

     32,321       28,726  

Prepaid expenses and other current assets

     56,867       41,808  
  

 

 

   

 

 

 

Total current assets

     357,706       313,690  

PROPERTY AND EQUIPMENT—Net

     358,350       346,540  

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

     81,684       104,031  

INVENTORIES—Noncurrent

     37,812       37,392  

INVESTMENTS IN JOINT VENTURES

     7,518       7,047  

OTHER

     13,353       17,695  
  

 

 

   

 

 

 

TOTAL

   $ 856,423     $ 826,395  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 128,330     $ 123,082  

Accrued expenses

     44,146       38,490  

Billings in excess of contract revenues

     4,341       11,280  

Current portion of long term debt

     2,509       13,098  
  

 

 

   

 

 

 

Total current liabilities

     179,326       185,950  

7 3/8% SENIOR NOTES

     250,000       250,000  

REVOLVING CREDIT FACILITY

     45,000       —     

DEFERRED INCOME TAXES

     106,481       106,767  

OTHER

     23,097       10,253  
  

 

 

   

 

 

 

Total liabilities

     603,904       552,970  
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 10)

    

EQUITY:

    

Common stock—$.0001 par value; 90,000 authorized, 59,625 and 59,359 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively.

     6       6  

Additional paid-in capital

     274,279       271,418  

Retained earnings (accumulated deficit)

     (20,769     2,591  

Accumulated other comprehensive loss

     (633     (380
  

 

 

   

 

 

 

Total Great Lakes Dredge & Dock Corporation equity

     252,883       273,635  

NONCONTROLLING INTERESTS

     (364     (210
  

 

 

   

 

 

 

Total equity

     252,519       273,425  
  

 

 

   

 

 

 

TOTAL

   $ 856,423     $ 826,395  
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Contract revenues

   $ 198,826     $ 162,484     $ 540,536     $ 480,498  

Costs of contract revenues

     176,510       154,664       487,256       433,950  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     22,316       7,820       53,280       46,548  

General and administrative expenses

     19,219       11,667       56,717       36,390  

Proceeds from loss of use claim

     —          —          (13,272     —     

Impairment of goodwill

     —          —          21,474       —     

Gain on sale of assets—net

     (3,146     (108     (3,086     (232
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     6,243       (3,739     (8,553     10,390  

Interest expense—net

     (5,542     (5,105     (16,671     (15,747

Equity in earnings of joint ventures

     1,427       177       452       153  

Loss on foreign currency transactions—net

     (178     (40     (403     (55
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     1,950       (8,707     (25,175     (5,259

Income tax (provision) benefit

     (684     3,351       1,664       2,036  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     1,266       (5,356     (23,511     (3,223

Net loss attributable to noncontrolling interests

     182       20       151       226  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,448     $ (5,336   $ (23,360   $ (2,997
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.02     $ (0.09   $ (0.39   $ (0.05

Basic weighted average shares

     59,526       59,253       59,444       59,154  

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

   $ 0.02     $ (0.09   $ (0.39   $ (0.05

Diluted weighted average shares

     60,082       59,253       59,444       59,154  

Dividends declared per share

   $ —        $ 0.02     $ —        $ 0.06  

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     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Net income (loss)

   $ 1,266     $ (5,356   $ (23,511   $ (3,223

Currency translation adjustment—net of tax (1)

     (51     —          (131     (4

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

     (88     742       (122     (546
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)—net of tax

     (139     742       (253     (550
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     1,127       (4,614     (23,764     (3,773

Comprehensive loss attributable to noncontrolling interests

     182       20       151       226  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,309     $ (4,594   $ (23,613   $ (3,547
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net of income tax expense of $34 and $0 for the three months ended September 30, 2013 and 2012, respectively, and $85 and $3 for nine months ended September 30, 2013 and 2012, respectively.
(2) Net of income tax (expense) benefit of $(58) and $493 for the three months ended September 30, 2013 and 2012, respectively, and $(81) and $ (363) for the nine months ended September 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              
                      Retained     Accumulated              
    Shares of           Additional     Earnings     Other              
    Common     Common     Paid-In     (Accumulated     Comprehensive     Noncontrolling        
    Stock     Stock     Capital     Deficit)     Loss     Interests     Total  

BALANCE—January 1, 2013

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

Share-based compensation

    75       —          2,452       —          —          —          2,452  

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

    69       —          (305     —          —          —          (305

Exercise of options and purchases from employee stock plans

    122       —          581       —          —          —          581  

Excess income tax benefit from share-based compensation

    —          —          133       —          —          —          133  

Distributions paid to noncontrolling interests

    —          —          —          —          —          (3     (3

Net loss

    —          —          —          (23,360     —          (151     (23,511

Other comprehensive loss—net of tax

    —          —          —          —          (253     —          (253
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE—September 30, 2013

    59,625     $ 6     $ 274,279     $ (20,769   $ (633   $ (364   $ 252,519  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

BALANCE—January 1, 2012

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

Share-based compensation

    145       —          2,389       —          —          —          2,389  

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

    82       —          (212     —          —          —          (212

Exercise of stock options

    48       —          200       —          —          —          200  

Excess income tax benefit from share-based compensation

    —          —          139       —          —          —          139  

Dividends declared and paid

    —          —          —          (3,726     —          —          (3,726

Dividend equivalents paid on restricted stock units

    —          —          —          (39     —          —          (39

Distributions paid to noncontrolling interests

    —          —          —          —          —          (133     (133

Net loss

    —          —          —          (2,997     —          (226     (3,223

Other comprehensive loss—net of tax

    —          —          —          —          (550     —          (550
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE—September 30, 2012

    59,274     $ 6     $ 270,434     $ 17,280     $ (547   $ 209     $ 287,382  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

     Nine Months Ended  
     September 30,  
     2013     2012  

OPERATING ACTIVITIES:

    

Net loss

   $ (23,511   $ (3,223

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

    

Depreciation and amortization

     35,707        26,637   

Equity in earnings of joint ventures

     (452     (153

Deferred income taxes

     (1,742     1,386   

Gain on dispositions of property and equipment

     (3,086     (232

Impairment of goodwill

     21,474        —     

Gain on adjustment of contingent earnout

     —          (240

Amortization of deferred financing fees

     865        957   

Unrealized foreign currency loss

     99        207   

Share-based compensation expense

     2,452        2,389   

Excess income tax benefit from share-based compensation

     (133     (139

Changes in assets and liabilities:

    

Accounts receivable

     10,162        (9,375

Contract revenues in excess of billings

     (14,063     (32,245

Inventories

     (4,015     (10,616

Prepaid expenses and other current assets

     (11,523     (17,044

Accounts payable and accrued expenses

     (672     (1,733

Billings in excess of contract revenues

     (6,939     7,189   

Other noncurrent assets and liabilities

     (1,889     (2,177
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     2,734        (38,412

INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (38,255     (30,813

Proceeds from dispositions of property and equipment

     4,332        563   

Proceeds from vendor performance obligations

     13,600        —     
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (20,323     (30,250

FINANCING ACTIVITIES:

    

Deferred financing fees

     —          (2,039

Distributions paid to minority interests

     (3     (133

Repayments of long term note payable

     (10,547     —     

Dividends paid

     —          (3,726

Dividend equivalents paid on restricted stock units

     —          (39

Taxes paid on settlement of vested share awards

     (305     (212

Repayments of equipment debt

     (42     (502

Exercise of options and purchases from employee stock plans

     581        200   

Excess income tax benefit from share-based compensation

     133        139   

Borrowings under revolving loans

     194,500        —     

Repayments of revolving loans

     (149,500     —     
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     34,817        (6,312
  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     (346     10   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     16,882        (74,964

Cash and cash equivalents at beginning of period

     24,440        113,288   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 41,322      $ 38,324   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

    

Cash paid for interest

   $ 19,525      $ 19,051   
  

 

 

   

 

 

 

Cash paid (refunded) for income taxes

   $ 431      $ (4,840
  

 

 

   

 

 

 

Non-cash Investing and Financing Activities

    

Property and equipment purchased but not yet paid

   $ 12,432      $ 7,693   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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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 September 30, 2013, and its results of operations for the three and nine months ended September 30, 2013 and 2012 and cash flows for the nine months ended September 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 a goodwill impairment charge of $21,474 at the demolition reporting unit. This impairment of goodwill is discussed in Note 4. The Company performed its most recent annual test of impairment as of July 1, 2013 for the remaining goodwill with no indication of goodwill impairment as of the test date. The Company will perform its next scheduled annual test of goodwill in the third quarter of 2014.

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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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 nine months ended September 30, 2013, the dilutive effect of 556 thousand shares of stock options and restricted stock units were excluded from the diluted weighted-average common shares outstanding as the Company incurred a loss during this period. For the three and nine months ended September 30, 2012, the dilutive effect of 462 thousand and 413 thousand shares of stock options and restricted stock units were excluded from the diluted weighted-average common shares outstanding, respectively, as the Company incurred a loss during these periods. The impact of these shares would have been antidilutive. For the three months ended September 30, 2013, 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:

 

     Three Months Ended     Nine Months Ended  
(shares in thousands)    September 30,     September 30,  
   2013      2012     2013     2012  

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

   $ 1,448      $ (5,336   $ (23,360   $ (2,997

Weighted-average common shares outstanding — basic

     59,526        59,253       59,444       59,154  

Effect of stock options and restricted stock units

     556        —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding — diluted

     60,082        59,253       59,444       59,154  
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings (loss) per share — basic

   $ 0.02      $ (0.09   $ (0.39   $ (0.05

Earnings (loss) per share — diluted

   $ 0.02      $ (0.09   $ (0.39   $ (0.05

3. Accounts receivable and contracts in progress

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

 

     September 30,     December 31,  
     2013     2012  

Completed contracts

   $ 38,919     $ 43,898  

Contracts in progress

     87,335       91,459  

Retainage

     24,803       24,419  
  

 

 

   

 

 

 
     151,057       159,776  

Allowance for doubtful accounts

     (3,470     (2,050
  

 

 

   

 

 

 

Total accounts receivable—net

   $ 147,587     $ 157,726  
  

 

 

   

 

 

 

Current portion of accounts receivable—net

   $ 143,437     $ 149,142  

Long-term accounts receivable and retainage

     4,150       8,584  
  

 

 

   

 

 

 

Total accounts receivable—net

   $ 147,587     $ 157,726  
  

 

 

   

 

 

 

 

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

 

     September 30,     December 31,  
     2013     2012  

Costs and earnings in excess of billings:

    

Costs and earnings for contracts in progress

   $ 652,752      $ 458,750  

Amounts billed

     (570,411     (392,860
  

 

 

   

 

 

 

Costs and earnings in excess of billings for contracts in progress

     82,341        65,890  

Costs and earnings in excess of billings for completed contracts

     1,418        3,684  
  

 

 

   

 

 

 

Total contract revenues in excess of billings

   $ 83,759      $ 69,574  
  

 

 

   

 

 

 

Billings in excess of costs and earnings:

    

Amounts billed

   $ (171,908   $ (338,741

Costs and earnings for contracts in progress

     167,567        327,461  
  

 

 

   

 

 

 

Total billings in excess of contract revenues

   $ (4,341   $ (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.

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 recorded an impairment charge of $21,474 in the second quarter of 2013.

The Company finalized its step two evaluation in the third quarter ended September 30, 2013 and determined there was no change to the amount of the impairment charge recorded for the nine months ended September 30, 2013.

 

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The change in the carrying value of goodwill for the nine months ended September 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 — September 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 September 30, 2013 and December 31, 2012, the Company held certain derivative contracts that it uses to manage foreign currency risk and 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 September 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

   $ 381      $ —         $ 381      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            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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Foreign exchange contracts

The Company has exposure to foreign currencies that fluctuate in relation to the U.S. dollar. The Company periodically enters into foreign exchange forward contracts to hedge this risk. At September 30, 2013, the Company had one outstanding contract related to the Australian Dollar. This foreign exchange contract is not accounted for as a hedge.

Fuel hedge contracts

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

As of September 30, 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 July 2014. As of September 30, 2013, there were 4.2 million gallons remaining on these contracts which represent approximately 80% of the Company’s forecasted fuel purchases through July 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 September 30, 2013, the fair value liability of the fuel hedge contracts was estimated to be $381 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 nine months ended September 30, 2013 was $237. The remaining gains and losses included in accumulated other comprehensive loss at September 30, 2013 will be reclassified into earnings over the next ten 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 September 30, 2013 and December 31, 2012 is as follows:

 

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

Liability derivatives:

        

Derivatives designated as hedges

        

Fuel hedge contracts

     Accrued expenses       $ 381       $ 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 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.

The Company recorded a goodwill impairment charge of $21,474 at the demolition reporting unit. The fair value of goodwill was determined using quantitative models that contained significant unobservable inputs. See Note 4.

 

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     Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)
 
     2013  

Goodwill

  

Balance at January 1,

   $ 100,799  

Impairment of goodwill

     (21,474
  

 

 

 

Balance at September 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
September 30,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  

Cumulative translation adjustments—net of tax

   $ (51   $ —        $ (131   $ (4

Derivatives:

        

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

     (53     (85     237       (348

Change in fair value of derivatives—net of tax

     (35     827       (359     (198
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (88     742       (122     (546
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ (139   $ 742     $ (253   $ (550
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

          Three months ended
September 30,
    Nine months ended
September 30,
 
    

Statement of Operations Location

   2013     2012     2013      2012  

Derivatives:

            

Fuel hedge contracts

   Costs of contract revenues    $ (88   $ (141   $ 395      $ (579
  

Income tax (provision) benefit

     (35     (56     158        (231
     

 

 

   

 

 

   

 

 

    

 

 

 
      $ (53   $ (85   $ 237      $ (348
     

 

 

   

 

 

   

 

 

    

 

 

 

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 September 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 $248,125 at September 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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6. Accrued expenses

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

 

     September 30,      December 31,  
     2013      2012  

Construction liabilities

   $ 13,577      $ 6,426  

Payroll and employee benefits

     10,841        9,906  

Insurance

     9,148        9,070  

Interest

     3,656        7,837  

Income and other taxes

     2,259        1,699  

Percentage of completion adjustment

     1,694        1,552  

Other

     2,971         2,000  
  

 

 

    

 

 

 

Total accrued expenses

   $ 44,146      $ 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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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 September 30, 2013, the Company had $45,000 of borrowings on the revolver and $71,391 of letters of credit outstanding, resulting in $58,609 of availability under the Credit Agreement. At September 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 September 30, 2013, Great Lakes had no letters of credit outstanding under this facility. At September 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 $1,000 and $2,452, respectively, for the three and nine months ended September 30, 2013 and $675 and $2,389, respectively, for the three and nine months ended September 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     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Dredging

        

Contract revenues

   $ 155,469      $ 138,811      $ 465,915      $ 397,799   

Operating income

     13,129        1,765        46,698        18,361   

Demolition

        

Contract revenues

   $ 47,078      $ 23,673      $ 78,611      $ 84,148   

Operating loss

     (6,886     (5,504     (55,251     (7,971

Intersegment revenues

   $ (3,721   $ —          (3,990     (1,449

Total

        

Contract revenues

   $ 198,826      $ 162,484      $ 540,536      $ 480,498   

Operating income (loss)

     6,243        (3,739     (8,553     10,390   

Foreign dredging revenue of $32,651 and $104,384 for the three and nine months ended September 30, 2013 and $36,329 and $75,202 for the three and nine months ended September 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.

During the second quarter of 2013, the Company identified certain pending change orders for one demolition project where previously recognized revenue no longer met the Company’s policy for revenue recognition. The Company reversed the recognition of revenue for these pending change orders because of new developments in the second quarter. As a result of these reversals, contract revenues were reduced by $5,568 for the quarter ended June 30, 2013.

 

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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 September 30, 2013, the Company had outstanding performance bonds valued at approximately $794,344; however, the revenue value remaining in backlog related to these projects totaled approximately $371,672.

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 plaintiffs filed an amended class action complaint on August 9, 2013, which the defendants moved to dismiss on October 8, 2013. The Company denies liability and intends to vigorously defend this action.

 

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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 has since been transferred to DuPage County Circuit Court and consolidated with the Hammoud action. The Hammoud/St. Lucie plaintiffs have leave to file a consolidated amended complaint on December 9, 2013, but the action is otherwise stayed until there is a ruling on the motion to dismiss the securities class action. 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. The Griffin action is also stayed pending a ruling on the motion to dismiss the securities class action.

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 September 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 September 30, 2013 and December 31, 2012;

 

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

 

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

 

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GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF SEPTEMBER 30, 2013

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
     GLDD
Corporation
    Eliminations     Consolidated
Totals
 

ASSETS

           

CURRENT ASSETS:

           

Cash and cash equivalents

   $ 38,087     $ 3,235      $ —        $ —        $ 41,322  

Accounts receivable — net

     140,176       3,261        —          —          143,437  

Receivables from affiliates

     105,859       9,840        9,624       (125,323     —     

Contract revenues in excess of billings

     80,154       3,956        —          (351     83,759  

Inventories

     32,321       —           —          —          32,321  

Prepaid expenses and other current assets

     39,412       370        17,085       —          56,867  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     436,009       20,662        26,709       (125,674     357,706  

PROPERTY AND EQUIPMENT—Net

     358,328       22        —          —          358,350  

GOODWILL AND OTHER INTANGIBLE ASSETS—Net

     81,621       63        —          —          81,684  

INVENTORIES — Noncurrent

     37,812       —           —          —          37,812  

INVESTMENTS IN JOINT VENTURES

     7,518       —           —          —          7,518  

INVESTMENTS IN SUBSIDIARIES

     2,762       —           641,597       (644,359     —     

OTHER

     7,866       3        5,484       —          13,353  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL

   $ 931,916     $ 20,750      $ 673,790     $ (770,033   $ 856,423  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

           

CURRENT LIABILITIES:

           

Accounts payable

   $ 126,115     $ 1,802      $ 413     $ —        $ 128,330  

Payables to affiliates

     94,009       16,622        14,574       (125,205     —     

Accrued expenses

     39,385       870        3,891       —          44,146  

Billings in excess of contract revenues

     4,252       558        —          (469     4,341  

Current portion of long term debt

     2,509       —           —          —          2,509  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     266,270       19,852        18,878       (125,674     179,326  

7 3/8% SENIOR NOTES

     —          —           250,000       —          250,000  

REVOLVING CREDIT FACILITY

     —          —           45,000       —          45,000  

DEFERRED INCOME TAXES

     (364     —           106,845       —          106,481  

OTHER

     22,549       —           548       —          23,097  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     288,455       19,852        421,271       (125,674     603,904  

Total Great Lakes Dredge & Dock Corporation Equity

     643,461       898        252,883       (644,359     252,883  

NONCONTROLLING INTERESTS

     —          —           (364     —          (364
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL EQUITY

     643,461       898        252,519       (644,359     252,519  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

TOTAL

   $ 931,916     $ 20,750      $ 673,790     $ (770,033   $ 856,423  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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 SEPTEMBER 30, 2013

(In thousands)

 

    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

  $ 195,080     $ 11,516     $ —        $ (7,770   $ 198,826  

Costs of contract revenues

    (171,043     (13,237     —          7,770       (176,510
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    24,037       (1,721     —          —          22,316  

OPERATING EXPENSES:

         

General and administrative expenses

    19,030       189       —          —          19,219  

Proceeds from loss of use claim

    —          —          —          —          —     

Impairment of goodwill

    —          —          —          —          —     

Gain on sale of assets—net

    (3,146     —          —          —          (3,146
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    8,153       (1,910     —          —          6,243  

Interest expense—net

    (65     (71     (5,406     —          (5,542

Equity in earnings of subsidiaries

    106       —          7,401       (7,507     —     

Equity in earnings of joint ventures

    1,427       —          —          —          1,427  

Gain (loss) on foreign currency transactions, net

    (187     9       —          —          (178
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    9,434       (1,972     1,995       (7,507     1,950  

Income tax (provision) benefit

    45       —          (729     —          (684
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    9,479       (1,972     1,266       (7,507     1,266  

Net loss attributable to noncontrolling interests

    —          —          182       —          182  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 9,479     $ (1,972   $ 1,448     $ (7,507   $ 1,448  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 9,391     $ (2,023   $ 1,309     $ (7,368   $ 1,309  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

(In thousands)

 

    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

  $ 161,720     $ 2,300     $ —        $ (1,536   $ 162,484  

Costs of contract revenues

    (153,932     (2,268     —          1,536       (154,664
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    7,788       32       —          —          7,820  

OPERATING EXPENSES:

         

General and administrative expenses

    10,901       192       574       —          11,667  

Gain on sale of assets—net

    (192     —          84       —          (108
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (2,921     (160     (658     —          (3,739

Interest expense—net

    (96     (36     (4,973     —          (5,105

Equity in earnings (loss) of subsidiaries

    (37     —          28       9       —     

Equity in loss of joint ventures

    177       —          —          —          177  

Loss on foreign currency transactions, net

    (40     —          —          —          (40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (2,917     (196     (5,603     9       (8,707

Income tax (provision) benefit

    3,104       —          247       —          3,351  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    187       (196     (5,356     9       (5,356

Net income attributable to noncontrolling interests

    —          —          20       —          20  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 187     $ (196   $ (5,336   $ 9     $ (5,336
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 929     $ (196   $ (4,594   $ (733   $ (4,594
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013

(In thousands)

 

    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

  $ 527,647     $ 25,442     $ —        $ (12,553   $ 540,536  

Costs of contract revenues

    (472,534     (27,275     —          12,553       (487,256
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    55,113       (1,833     —          —          53,280  

OPERATING EXPENSES:

         

General and administrative expenses

    56,150       567       —          —          56,717  

Proceeds from loss of use claim

    (13,272     —          —          —          (13,272

Impairment of goodwill

    21,224       250       —          —          21,474  

Gain on sale of assets—net

    (3,086     —          —          —          (3,086
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (5,903     (2,650     —          —          (8,553

Interest expense—net

    (214     (160     (16,297     —          (16,671

Equity in earnings of subsidiaries

    41       —          1,159       (1,200     —     

Equity in earnings of joint ventures

    452       —          —          —          452  

Loss on foreign currency transactions—net

    (55     (348     —          —          (403
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (5,679     (3,158     (15,138     (1,200     (25,175

Income tax (provision) benefit

    10,035       2       (8,373     —          1,664  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    4,356       (3,156     (23,511     (1,200     (23,511

Net loss attributable to noncontrolling interests

    —          —          151       —          151  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 4,356     $ (3,156   $ (23,360   $ (1,200   $ (23,360
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 4,234     $ (3,287   $ (23,613   $ (947   $ (23,613
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(In thousands)

 

    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

Contract revenues

  $ 480,206     $ 6,350     $ —        $ (6,058   $ 480,498  

Costs of contract revenues

    (433,172     (6,836     —          6,058       (433,950
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    47,034       (486     —          —          46,548  

OPERATING EXPENSES:

         

General and administrative expenses

    34,149       540       1,701       —          36,390  

(Gain) loss on sale of assets—net

    (327     —          95       —          (232
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    13,212       (1,026     (1,796     —          10,390  

Interest expense—net

    (634     (87     (15,026     —          (15,747

Equity in earnings (loss) of subsidiaries

    (639     —          15,062       (14,423     —     

Equity in loss of joint ventures

    153       —          —          —          153  

Loss on foreign currency transactions—net

    (55     —          —          —          (55
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    12,037       (1,113     (1,760     (14,423     (5,259

Income tax (provision) benefit

    3,499       —          (1,463     —          2,036  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    15,536       (1,113     (3,223     (14,423     (3,223

Net loss attributable to noncontrolling interests

    —          —          226       —          226  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 15,536     $ (1,113   $ (2,997   $ (14,423   $ (2,997
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 14,990     $ (1,117   $ (3,547   $ (13,873   $ (3,547
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 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

  $ 39,489     $ (7,213   $ (29,542   $ —        $ 2,734  

INVESTING ACTIVITIES:

         

Purchases of property and equipment

    (38,255     —          —          —          (38,255

Proceeds from dispositions of property and equipment

    4,332       —          —          —          4,332  

Proceeds from vendor performance obligations

    13,600       —          —          —          13,600  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities

    (20,323     —          —          —          (20,323

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

    —          —          (305     —          (305

Net change in accounts with affiliates

    (5,309     9,700       (4,391     —          —     

Capital contributions

    —          926        (926     —          —     

Repayments of equipment debt

    (42     —          —          —          (42

Exercise of options and purchases from employee stock plans

    —          —          581       —          581  

Excess income tax benefit from share-based compensation

    —          —          133       —          133  

Borrowings under revolving loans

    —          —          194,500       —          194,500  

Repayments of revolving loans

    —          —          (149,500     —          (149,500
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

    (5,351     10,626       29,542       —          34,817  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

    —          (346     —          —          (346
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

    13,815       3,067       —          —          16,882  

Cash and cash equivalents at beginning of period

    24,272       168       —          —          24,440  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 38,087     $ 3,235     $ —        $ —        $ 41,322  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 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

  $ (8,984   $ 57     $ (29,485   $ —        $ (38,412

INVESTING ACTIVITIES:

         

Purchases of property and equipment

    (30,813     —          —          —          (30,813

Proceeds from dispositions of property and equipment

    563       —          —          —          563  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities

    (30,250     —          —          —          (30,250

FINANCING ACTIVITIES:

         

Deferred financing fees

    —          —          (2,039     —          (2,039

Distributions paid to minority interests

        (133       (133

Dividends paid

    —          —          (3,726     —          (3,726

Dividend equivalents paid on restricted stock units

    —          —          (39     —          (39

Taxes paid on settlement of vested share awards

    —          —          (212       (212

Net change in accounts with affiliates

    (31,092     (4,203     35,295       —          —     

Repayments of equipment debt

    (502     —          —          —          (502

Exercise of stock options

    —          —          200       —          200  

Excess income tax benefit from share-based compensation

    —          —          139       —          139  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

    (31,594     (4,203     29,485       —          (6,312
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

    —          10       —          —          10  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (70,828     (4,136     —          —          (74,964
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at beginning of period

    108,985       4,303       —          —          113,288  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 38,157     $ 167     $ —        $ —        $ 38,324  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 22% of its dredging revenues for the first nine 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 nine 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 48% 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 nine months of 2013, demolition revenues accounted for 15% 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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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 (loss) attributable to Great Lakes Dredge & Dock Corporation and Adjusted EBITDA, as defined below, as a percentage of contract revenues for the three and nine months ended September 30, 2013 and 2012:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2013     2012     2013     2012  

Contract revenues

     100.0     100.0      100.0      100.0 

Costs of contract revenues

     (88.8     (95.2     (90.1     (90.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     11.2        4.8        9.9        9.7   

General and administrative expenses

     9.7        7.2        10.5        7.6   

Proceeds from loss of use claim

     —          —          (2.5     —     

Impairment of goodwill

     —          —          4.0        —     

Gain on sale of assets—net

     (1.6     (0.1     (0.6     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     3.1        (2.3     (1.5     2.1   

Interest expense—net

     (2.8     (3.1     (3.1     (3.3

Equity in earnings of joint ventures

     0.7        0.1        0.1        —     

Loss on foreign currency transactions—net

     (0.1     —          (0.1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     1.0        (5.3     (4.6     (1.2

Income tax (provision) benefit

     (0.4     2.1        0.3        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     0.6        (3.2     (4.3     (0.8

Net loss attributable to noncontrolling interests

     0.1        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     0.7     (3.2 )%      (4.3 )%      (0.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     9.9     4.8     9.0     8.2
  

 

 

   

 

 

   

 

 

   

 

 

 

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 (loss) attributable to Great Lakes Dredge & Dock Corporation:

 

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Table of Contents
     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(in thousands)    2013      2012     2013     2012  

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

   $ 1,448      $ (5,336   $ (23,360   $ (2,997

Adjusted for:

         

Accelerated maintenance expenses

     —           922       —          2,198  

Impairment of goodwill

     —           —          21,474       —     

Interest expense—net

     5,542        5,105       16,671       15,747  

Income tax provision (benefit)

     684        (3,351     (1,664     (2,036

Depreciation and amortization

     11,972        10,514       35,707       26,637  
  

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 19,646      $ 7,854     $ 48,828     $ 39,549  
  

 

 

    

 

 

   

 

 

   

 

 

 

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     Nine Months Ended  
     September 30,     September 30,  
Revenues (in thousands)    2013     2012      Change     2013     2012     Change  

Dredging:

             

Capital—U.S.

   $ 43,045     $ 45,456        (5.3 )%    $ 128,027     $ 117,547       8.9 

Capital—foreign

     32,651       36,329        (10.1 )%      104,384       75,202       38.8 

Coastal protection

     54,398       20,935        159.8      163,546       92,576       76.7 

Maintenance

     12,687       26,060        (51.3 )%      47,090       86,673       (45.7 )% 

Rivers & lakes

     12,688       10,031        26.5      22,868       25,801       (11.4 )% 
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total dredging revenues

     155,469       138,811        12.0      465,915       397,799       17.1 

Demolition

     47,078       23,673        98.9      78,611       84,148       (6.6 )% 

Intersegment revenue

     (3,721     —           100.0     (3,990     (1,449     175.4 
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 198,826     $ 162,484        22.4    $ 540,536     $ 480,498       12.5 
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue for the 2013 third quarter was $198.8 million, up $36.3 million or 22% from $162.5 million during the 2012 third quarter. For the nine months ended September 30, 2013 and 2012, total revenue increased to $540.5 million from $480.5 million during such period in 2012, an increase of 12%. For the nine months ended September 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 $2.4 million, or 5%, to $43.0 million, in the 2013 third quarter compared to the 2012 third quarter. Domestic capital dredging revenue increased $10.5 million, or 9%, in the first nine months of 2013 compared to the same period in 2012. Domestic capital dredging revenues in the nine months ended September 30, 2013 continued to be generated by two coastal restoration projects in Louisiana as well as deepening projects in Delaware and New York. The preliminary stages of the PortMiami deepening project also contributed to the increase in revenue for the first nine months of 2013. These increases were slightly offset by a project in Florida during nine months ended September 30, 2012 that did not reoccur in 2013.

 

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Foreign dredging revenue decreased $3.7 million, or 10%, for the third quarter of 2013 to $32.7 million, and increased $29.2 million to $104.4 million for the nine months ended September 30, 2013. Revenue in the first nine months 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 third quarter increased $33.5 million, or 160%, from the 2012 third quarter. Year-to-date 2013 coastal protection revenue increased $71.0 million, or 77%, compared to the first three quarters of 2012. The significant increase in revenue during the nine months ended September 30, 2013 is primarily the result of projects in New York and New Jersey, which included emergency work as well as supplemental work as a result of Superstorm Sandy. Additionally, the Company worked on projects in North Carolina, Delaware and Florida. These increases were slightly offset by a project in Virginia that did reoccur in 2013.

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 third quarter decreased by $13.4 million, or 51%, compared to the 2012 third quarter. Maintenance revenue in the first nine months of 2013 decreased by $39.6 million, or 46%, compared to the first nine months of 2012. The Company performed a greater amount of harbor work in the first three quarters of 2012 that was not repeated in the first three quarters of 2013. In addition, the Company worked on several large maintenance projects in Louisiana in the nine months ended September 30, 2012 that did not reoccur in 2013. The Company worked on projects in Florida, Maryland, Georgia and Tennessee during the first three quarters 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 third quarter of 2013 was $12.7 million, an increase of $2.7 million or 26% compared to the third quarter of 2012. Year-to-date 2013 revenue was $22.9 million compared to $25.8 million, a decrease of 11%, compared to the first nine months of 2012. This decrease was attributable to projects in Mississippi and along the Mississippi River that did not reoccur during the first three quarters of 2013. During the nine months ended September 30, 2013, Rivers & lakes teamed with Terra on a remediation project in the Midwest and continued work on its large municipal lake project in Texas.

The Demolition segment, which consists of demolition and remediation services, recorded revenues of $47.1 million and $78.6 million for the three and nine months ended September 30, 2013, respectively, compared to $23.7 million and $84.1 million for the same period in 2012. The year-to-date 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 first nine months 2012. The decrease in the nine months ended September 30, 2013 was partially offset by $48.1 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, as well as a remediation project in New Jersey.

Consolidated gross profit for the 2013 third quarter increased by 185% to $22.3 million, from $7.8 million in the third quarter of 2012. Gross profit margin (gross profit divided by revenue) for the 2013 third quarter increased to 11.2% from 4.8% in the 2012 third quarter. Gross profit for the nine months ended September 30, 2013 increased by 14% to $53.3 million from $46.5 million in the same 2012 period, resulting in a slight increase in gross profit margin to 9.9% from 9.7%. Gross profit margin for the three and nine months ended September 30, 2013 was higher due to an increase in revenue and higher contract margins in the Dredging segment as well as strong results at Terra. In addition, weather impacts in the first and third quarters of 2012, as well as equipment production delays, lowered dredge fixed cost coverage and negatively affected the first nine months of 2012. This was partially offset by lower demolition margins on fewer projects for the nine months ended September 30, 2013.

The Company’s general and administrative expenses totaled $19.2 million and $56.7 million for the three and nine months ended September 30, 2013. General and administrative expenses totaled $11.7 million and $36.4 million for the three and nine months ended September 30, 2012. During the first nine months of 2013, the Company incurred additional payroll and benefit expenses representing an increase of $3.6 million over the same period in 2012. General and administrative expenses of $7.8 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 $4.0 million, technical and consulting of $1.5 million and additional bad debt expense of $3.2 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 nine months ended September 30, 2013.

 

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The operating income for the three months ended September 30, 2013 was $6.2 million compared to an operating loss of $3.7 million in the same period of 2012. The Company had an operating loss of $8.6 million for the nine months ended September 30, 2013 compared to operating income of $10.4 million for the nine months ended September 30, 2012. This was driven by the goodwill impairment charge recorded at the demolition reporting unit during the 2013 second quarter as well as higher general and administrative expenses partially offset by improved contract margins and the receipt of claim proceeds, as described above. In addition, the Company recorded a $3.2 million gain on the sale of an underutilized dredge in the Middle East.

The Company’s net interest expense totaled $5.5 million and $16.7 million for the three and nine months ended September 30, 2013, respectively, in line with interest expense of $5.1 million and $15.7 million from the same period of 2012.

The income tax expense for the three and nine months ended September 30, 2013 was a provision of $0.7 million and a benefit of $1.7 million, respectively, compared to a benefit of $3.4 million and $2.0 million for the same 2012 periods. The decrease in income tax benefit for the nine months ended September 30, 2013 was attributable to the improved taxable operating income in 2013. The effective tax rate for the nine months ended September 30, 2013 was impacted by the nondeductible pretax goodwill impairment charge of $21.5 million. Excluding this item, the effective tax rate for the nine months ended September 30, 2013 would be 45.0%, which is above the effective tax rate of 38.7% 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 40%.

Net income attributable to Great Lakes Dredge & Dock Corporation was $1.4 million and the earnings per diluted share was $0.02 for the 2013 third quarter compared to a net loss attributable to Great Lakes Dredge & Dock Corporation of $5.3 million and loss per share of $(0.09) for the same 2012 period. Net loss attributable to Great Lakes Dredge & Dock Corporation and loss per diluted share for the nine months ended September 30, 2013 was $23.4 million and $0.39, respectively, compared to net loss attributable to Great Lakes Dredge & Dock Corporation of $3.0 million and loss per diluted share of $(0.05) for the same 2012 period. The decrease in 2013 is due to lower operating results for the periods described above, which include the noncash goodwill impairment charge incurred in the second quarter of 2013.

Adjusted EBITDA (as defined on page 27) was $19.6 million and $48.8 million for the three and nine months ended September 30, 2013, respectively, compared with $7.9 million and $39.5 million in the same 2012 periods. This increase is the result of higher depreciation expense in the first nine months of 2013 as well as the receipt of claim proceeds, as described above.

Results by segment

Dredging

Dredging revenues for the three and nine months ended September 30, 2013 were $155.5 million and $465.9 million, respectively, compared to $138.8 million and $397.8 million for the same periods of 2012. The dredging segment for the three and nine months ended September 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 nine months ended September 30, 2013 were driven by a significant project in Qatar, coastal protection projects in New York and New Jersey 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 14.5% and 14.2% for the three and nine months ended September 30, 2013 compared to gross profit margin of 8.3% and 12.4% for the three and nine months ended September 30, 2012, respectively. Dredging gross profit margin was higher due to improved contract margins and higher revenue, resulting in better fixed cost coverage. In addition, weather impacts in the first and third quarters of 2012, as well as equipment production delays, lowered dredge fixed cost coverage and negatively affected the first nine months of 2012.

Dredging segment operating income was $13.1 million and $46.7 million for the three and nine months ended September 30, 2013, compared to operating income of $1.8 million and $18.4 million for the three and nine months ended September 30, 2012, respectively. The increase in operating income for the nine months ended September 30, 2013 is a result of the increase in contract margins, proceeds from the dredge New York loss of use claim and the $3.2 million gain on the sale of an underutilized dredge in the Middle East, slightly offset by an increase in general and administrative expenses.

Demolition

Demolition revenues for the three and nine months ended September 30, 2013 totaled $47.1 million and $78.6 million, respectively, compared to $23.7 million and $84.1 million for the same 2012 periods. Demolition revenues for the first nine months of 2013 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 nine months of 2013 compared to the same period in 2012. The year-to-date decrease was partially offset by $48.1 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.

 

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The demolition segment had a negative gross profit margin of 0.5% and 16.5% for the three and nine months ended September 30, 2013 and a negative gross profit margin of 15.7% and a gross profit margin of 3.3% for the three and nine months ended September 30, 2012, respectively. During the nine months ended September 30, 2013, the demolition segment experienced lower revenue and cost overruns on projects.

The demolition segment had an operating loss of $6.9 million and $55.3 million for the three and nine months ended September 30, 2013, respectively, compared to an operating loss of $5.5 million and $8.0 million for the same periods of 2012. The foregoing decrease in operating income for the nine months ended September 30, 2013 was due to the lower gross margin, the goodwill impairment charge in the 2013 second quarter as well as an increase in general and administrative expenses, specifically additional bad debt expense of $2.3 million and $7.8 million related to the Terra business acquisition as the business did not become part of the Company until the first quarter of 2013.

The Company has announced that it is assessing strategic alternatives for its historical demolition business and is engaging a financial advisor to help evaluate its alternatives.

Bidding Activity and Backlog

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

 

     September 30,      December 31,     September 30,  
Backlog (in thousands)    2013      2012     2012  

Dredging:

       

Capital—U.S.

   $ 149,071      $ 43,177     $ 96,354  

Capital—foreign

     108,458        218,953       243,542  

Coastal protection

     157,782        80,245       41,875  

Maintenance

     76,592        22,406       46,555  

Rivers & lakes

     16,885        24,510       34,827  
  

 

 

    

 

 

   

 

 

 

Dredging Backlog

     508,788        389,291       463,153  

Demolition

     97,098        60,148     42,574  
  

 

 

    

 

 

   

 

 

 

Total Backlog

   $ 605,886      $ 449,439     $ 505,727  
  

 

 

    

 

 

   

 

 

 

 

* December 31, 2012 demolition backlog includes backlog acquired by the Company on December 31, 2012 in connection with the Terra acquisition.

The Company’s contract backlog represents its estimate of the revenues that will be realized under the portion of the contracts remaining to be performed. For dredging contracts these estimates are based primarily upon the time and costs required to mobilize the necessary assets to and from the project site, the amount and type of material to be dredged and the expected production capabilities of the equipment performing the work. For demolition contracts, these estimates are based on the time and remaining costs required to complete the project, relative to total estimated project costs and project revenues agreed to with the customer. However, these estimates are necessarily subject to variances based upon actual circumstances. Because of these factors, as well as factors affecting the time required to complete each job, backlog is not always indicative of future revenues or profitability. Also, 69% of the Company’s September 30, 2013 dredging backlog relates to federal government contracts, which can be canceled at any time without penalty to the government, subject to the Company’s contractual right to recover the Company’s actual committed costs and profit on work performed up to the date of cancellation. The Company’s backlog may fluctuate significantly from quarter to quarter based upon the type and size of the projects the Company is awarded from the bid market. A quarterly increase or decrease of the Company’s backlog does not necessarily result in an improvement or a deterioration of the Company’s business. The Company’s backlog includes only those projects for which the Company has obtained a signed contract with the customer.

The domestic dredging bid market for the 2013 third quarter totaled $500.3 million, resulting in $1,058.7 million of work awarded during the first nine months of 2013. This represents an increase of $380.6 million from the same period in the prior year. During the year the Company was awarded the first phase of the PortMiami project, for $122 million, which resulted in the Company winning 75%, or $232.3 million of the capital projects awarded through September 30, 2013. We currently expect the next two phases, totaling $80 million, to be awarded by January 2014. For the contracts released and awarded through the year-to-date September 30, 2013, the

 

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Company won 57%, or $230.9 million, of the coastal protection projects, as well as 33%, or $107.3 million, of the maintenance projects and 44%, or $9.0 million, of the rivers & lakes projects. The Company won 55% of the overall domestic bid market through September 30, 2013, which is above the Company’s prior three year average of 37%, driven by the PortMiami projects and the high coastal protection win rate. Variability in contract wins from quarter to quarter is not unusual and one quarter’s win rate is generally not indicative of the win rate the Company is likely to achieve for a full year.

The Company’s contracted dredging backlog was $508.8 million at September 30, 2013 compared to $389.3 million as of December 31, 2012. These amounts do not reflect approximately $94.6 million of domestic low bids pending formal award and additional phases (“options”) pending on projects currently in backlog at September 30, 2013. At December 31, 2012 the amount of domestic low bids and options pending award was $82.1 million.

Domestic capital dredging backlog at September 30, 2013 was $105.9 million greater than at December 31, 2012 due to the award of the PortMiami project noted above. Dredging on this project is expected to begin in the fourth quarter of 2013. The Company also continues to work on a deepening project in New York. The Company expects two projects on the Delaware River to be let for bid in the next twelve months. In addition, the Company anticipates an active capital dredging bid market over the next twelve months, specifically related to coastal restoration work in the Gulf.

Coastal protection dredging backlog at September 30, 2013 was $77.5 million higher than at December 31, 2012 as the Company added several projects in New York and New Jersey as a result of Superstorm Sandy which impacted the East Coast in October 2012. The government has appropriated $50.5 billion in Superstorm Sandy relief, including nearly $4.0 billion for Corps projects to assist the region. The Corps is expected to let for bid the second wave of projects for East Coast markets from this funding in 2014. Additionally, the Company won two significant privately funded coastal protection projects along the East Coast.

Maintenance dredging backlog was $54.2 million higher at September 30, 2013 than at December 31, 2012. The Company won four maintenance projects in New York and New Jersey as well as three maintenance projects in Florida during the third quarter. The Company completed work on seven projects along the East Coast in the nine months ended September 30, 2013. The maintenance bid market during the first three quarters of 2013 is in line with the bid market from the same period in the prior year. In October 2013 the House passed the Water Resources Reform and Development Act of 2013 which includes language that will require over time, more money from the Harbor Maintenance Trust Fund to be spent on maintenance dredging. The Senate passed its version of the bill earlier in 2013. The Senate and House bills are expected to be reconciled in conference soon and passage is possible before year-end.

Rivers & lakes backlog is $7.6 million lower at September 30, 2013 than at December 31, 2012. Rivers & lakes continued to earn on projects in its backlog, including work on a remediation project in the Midwest with Terra, on a lake in Texas and on the Mississippi River and its tributaries performing maintenance dredging and levee repair projects. The Company won a project in Kansas and Nebraska during the third quarter.

Foreign capital dredging backlog decreased to $108.5 million at September 30, 2013 from $219.0 million December 31, 2012, due primarily to the conclusion of work on our large land reclamation project in Bahrain that the Company has worked on since 2006. In addition, recognition of revenue on Wheatstone, a project in Brazil and other Middle East projects decreased backlog. We are continuing negotiations on a project in the Middle East valued at over $100 million. We continue to look for work internationally to fully utilize our fleet of vessels. The Company also sees additional opportunities in the Middle East, Southeast Asia and South America that it continues to pursue.

Demolition services backlog was $37.0 million higher at September 30, 2013 from December 31, 2012. The increase was primarily driven by the award of a large bridge project in New York in the third quarter. Terra continued work on a project in the Midwest valued at approximately $30 million that combines Terra’s services and Rivers & lakes’ dredging abilities.

Liquidity and Capital Resources

The Company’s principal sources of liquidity are net cash flows provided by operating activities and proceeds from previous issuances of long term debt. The Company’s principal uses of cash are to meet debt service requirements, finance capital expenditures, provide working capital and other general corporate purposes.

The Company’s net cash provided by (used in) operating activities for the nine months ended September 30, 2013 and 2012 totaled $2.7 million, and $(38.4) million, respectively. Normal increases or decreases in the level of working capital relative to the level of operational activity impact cash flow from operating activities. In the first nine months of 2013, net cash provided by operating activities was primarily the result of changes in accounts receivable between periods.

The Company’s net cash flows used in investing activities for the first nine months of 2013 and 2012 totaled $20.3 million and $30.3 million, respectively. Investing activities in both periods primarily relate to normal course upgrades and capital maintenance of the Company’s dredging fleet. During the nine months ended September 30, 2013, the Company spent $14.7 million on construction in progress for a vessel being built to our specifications that we intend to have funded through an operating lease upon delivery.

 

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The Company’s net cash flows provided by (used in) financing activities for the nine months ended September 30, 2013 and 2012 totaled $34.8 million and $(6.3) million, respectively. Increases were primarily due to net borrowings on the Company’s revolver during the first nine months of 2013 of $45.0 million. The Company also paid $10.5 million on a promissory note related to the Terra acquisition.

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 million, subfacilities for the issuance of standby letters of credit up to a $125 million sublimit, multicurrency borrowings up to a $50 million sublimit and swingline loans up to a $10 million 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 million. This is subject to lenders providing incremental commitments for such increase, provided that no default or event of default exists, the Company will be in pro forma compliance with the existing financial covenants both before and after giving effect to the increase and 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.

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 September 30, 2013, the Company had $45.0 million of borrowings on the revolver and $71.4 million of letters of credit outstanding, resulting in $58.6 million of availability under the Credit Agreement. Borrowings under the line of credit may be limited based on the Company’s requirements to comply with its covenants. At September 30, 2013, the Company was in compliance with its various covenants under its Credit Agreement.

The Company’s obligations under its international letter of credit facility are secured by the Company’s foreign accounts receivable. The Company’s obligations under its senior notes are unsecured. The Company’s material agreements related to long term debt contain various restrictive covenants, including limitations on dividends, redemption and repurchases of capital stock, and the incurrence of indebtedness and requirements to maintain certain financial covenants. The Company is in compliance with its various covenants under the respective agreements as of September 30, 2013.

The impact of changes in functional currency exchange rates against the U.S. dollar on non-U.S. dollar cash balances, primarily the Brazilian Real and Australian Dollar, is reflected in the cumulative translation adjustment, net within accumulated other comprehensive loss. Cash held in non-U.S. dollar currencies primarily is used for project-related and other operating costs in those currencies reducing the Company’s exposure to future realized exchange gains and losses.

 

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The Company believes its cash and cash equivalents, its anticipated cash flows from operations and availability under its revolving credit facility will be sufficient to fund the Company’s operations, capital expenditures and the scheduled debt service requirements for the next twelve months. Beyond the next twelve months, the Company’s ability to fund its working capital needs, planned capital expenditures, scheduled debt payments and dividends, if any, and to comply with all the financial covenants under the revolving credit facility and bonding agreement, depends on its future operating performance and cash flows, which in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company’s control.

Critical Accounting Policies and Estimates

In preparing its consolidated financial statements, the Company follows accounting principles generally accepted in the United States of America. The application of these principles requires significant judgments or an estimation process that can affect the results of operations, financial position and cash flows of the Company, as well as the related footnote disclosures. The Company continually reviews its accounting policies and financial information disclosures. There have been no material changes in the Company’s critical accounting policies or estimates since December 31, 2012.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The market risk of the Company’s financial instruments as of September 30, 2013 has not materially changed since December 31, 2012. The market risk profile of the Company on December 31, 2012 is disclosed in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

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Table of Contents
Item 4. Controls and Procedures.

a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of September 30, 2013. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act a) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure and b) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective in providing such a reasonable assurance as a result of the identified material weakness in internal control over financial reporting as further described in Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2012. Notwithstanding the material weakness, management has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

b) Changes in internal control over financial reporting.

Other than described below, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management has developed a remediation plan to address the internal control deficiencies described above. Our plan was designed to ensure that each area affected by a material control weakness was remediated properly. The remediation plan includes the following actions:

 

    A comprehensive review of the organizational resources at our demolition segment, focused on the project management and accounting functions, to determine the appropriate level of staffing and skills and to ensure those resources are put in place.

 

    The finance team at the demolition segment will report directly to the corporate finance function, instead of divisional leadership.

 

    Increasing the level of resources in the accounting, internal audit and compliance functions at the corporate office.

 

    Evaluating information technology systems in our demolition segment to ensure timely and accurate information is available for period-end reporting and analysis. The Company is currently installing new estimating and project management software at its demolition segment.

 

    Training all appropriate demolition segment and corporate accounting personnel regarding the application of the Company’s accounting policy regarding revenue recognition.

Management is in the process of remediating the internal control deficiency. The remediation plan is being administered by the Chief Financial Officer and involves key leaders from across the organization, including the Chief Executive Officer and Chief Legal Officer.

 

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PART II — Other Information

 

Item 1. Legal Proceedings.

See Note 10 “Commitments and Contingencies” in the Notes to Condensed Consolidated Financial Statements.

 

Item 1A. Risk Factors.

There have been no material changes during the nine months ended September 30, 2013 to the risk factors previously disclosed in Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) None.

(b) None.

(c) None.

 

Item 3. Defaults Upon Senior Securities.

(a) None.

(b) None.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

Item 5. Other Information

(a) None.

(b) Not applicable.

 

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Item 6. Exhibits

 

  31.1    Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
  31.2    Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
  32.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
  32.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101.INS    XBRL Instance Document. *
101.SCH    XBRL Taxonomy Extension Schema. *
101.CAL    XBRL Taxonomy Extension Calculation Linkbase. *
101.DEF    XBRL Taxonomy Extension Definition Linkbase. *
101.LAB    XBRL Taxonomy Extension Label Linkbase. *
101.PRE    XBRL Taxonomy Extension Presentation Linkbase. *

 

* Filed herewith.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Great Lakes Dredge & Dock Corporation
(registrant)
By:  

/s/ W ILLIAM S. S TECKEL

  William S. Steckel
  Senior Vice President and Chief Financial Officer
  (Principal Financial and Accounting Officer and Duly Authorized Officer)

Date: November 5, 2013

 

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EXHIBIT INDEX

 

Number

  

Document Description

  31.1    Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
  31.2    Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
  32.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
  32.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101.INS    XBRL Instance Document. *
101.SCH    XBRL Taxonomy Extension Schema. *
101.CAL    XBRL Taxonomy Extension Calculation Linkbase. *
101.DEF    XBRL Taxonomy Extension Definition Linkbase. *
101.LAB    XBRL Taxonomy Extension Label Linkbase. *
101.PRE    XBRL Taxonomy Extension Presentation Linkbase. *

 

* Filed herewith.

 

40

Exhibit 31.1

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

 

I, Jonathan W. Berger, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Great Lakes Dredge & Dock Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2013

 

/s/ Jonathan W. Berger

Jonathan W. Berger

Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

 

I, William S. Steckel, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Great Lakes Dredge & Dock Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2013

 

/s/ William S. Steckel

William S. Steckel

Senior Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Great Lakes Dredge & Dock Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jonathan W. Berger, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by Great Lakes Dredge & Dock Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

/s/ Jonathan W. Berger

Jonathan W. Berger

Chief Executive Officer

Date: November 5, 2013

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Great Lakes Dredge & Dock Corporation and will be retained by Great Lakes Dredge & Dock Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Great Lakes Dredge & Dock Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William S. Steckel, Senior Vice President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by Great Lakes Dredge & Dock Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

/s/ William S. Steckel

William S. Steckel

Senior Vice President and Chief Financial Officer

Date: November 5, 2013

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Great Lakes Dredge & Dock Corporation and will be retained by Great Lakes Dredge & Dock Corporation and furnished to the Securities and Exchange Commission or its staff upon request.