Form 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 21, 2011

 

 

Great Lakes Dredge & Dock Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-33225   20-5336063

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

2122 York Road

Oak Brook, Illinois 60523

(Address of principal executive offices)

Registrant’s telephone number, including area code: (630) 574-3000

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 8.01—Other Events

On January 28, 2011, Great Lakes Dredge & Dock Corporation (the “Company”) completed a private placement of $250 million of its 7.375% senior unsecured notes due February 1, 2019 (the “New Notes”). The New Notes were offered to qualified institutional buyers under Rule 144A and to persons outside the United States under Regulation S of the Securities Act. The New Notes are guaranteed by the Company’s wholly-owned domestic subsidiaries.

A portion of the proceeds of the New Notes were used to redeem the Company’s $175 million of 7.75% senior subordinated notes due December 15, 2013 (the “Old Notes”). The Old Notes were guaranteed by all of the Company’s domestic subsidiaries (the “Old Notes Guarantors”). As two of the Old Notes Guarantors, NASDI, LLC (“NASDI”) and Yankee Environmental Services, LLC (“Yankee”), were not “100% owned” within the meaning of the Securities and Exchange Commission (“SEC”) Rule 3-10 of Regulation S-X, the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 included separate audited financial statements as well as separate selected financial data, separate supplementary financial information and separate management's discussion and analysis of financial condition and results of operations for each of NASDI and Yankee.

In April 2011 and effective as of January 2011, the Company acquired the remaining non-controlling equity interest in NASDI that the Company did not previously own. As a result, NASDI became a wholly-owned domestic subsidiary and a guarantor of the New Notes. Yankee is not a guarantor of the New Notes.

In connection with the private placement of the New Notes, the Company entered into an agreement giving registration rights to initial purchasers of the New Notes (the "Registration Rights Agreement"). The terms of the Registration Rights Agreement require, among other things, that the Company will use its commercially reasonable efforts to consummate an offer (the “Exchange Offer”) to exchange the New Notes for registered, publicly tradable notes that have substantially identical terms as the New Notes (the “Exchange Notes”). The Exchange Notes also will be guaranteed by the Company’s wholly-owned domestic subsidiaries (the “Exchange Notes Guarantors”). In order to discharge its obligations under the Registration Rights Agreement, the Company intends to file a registration statement with the SEC relating to the issuance of the Exchange Notes pursuant to the Exchange Offer. The Company is filing this Current Report on Form 8-K to reflect, as set forth in the Exhibits hereto, the following:

 

   

Updated Selected Financial Data (Item 6), Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 7), Financial Statements and Supplementary Data (Item 8) and Financial Statement Schedules to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Form 10-K”) for the purpose of

 

   

Recasting the condensed consolidating financial information included within Note 22 to the Company’s consolidated financial statements to present financial information for the Exchange Notes Guarantors in lieu of financial information for the Old Notes Guarantors. Exclusively for comparability purposes, the Company has recast the condensed consolidating financial information as if the Exchange Notes Guarantors had guaranteed the Old Notes as of December 31, 2010 and 2009 and for each of the three years ended December 31, 2010.

 

   

Removing the separate presentations of NASDI and Yankee information previously required in respect of the guarantee by NASDI and Yankee of the Old Notes.

The presentation of condensed consolidating financial information for the Exchange Notes Guarantors in lieu of condensed consolidating financial information for the Old Notes Guarantors does not change the amounts reported in the consolidated financial statements presented in Financial Statements and Supplementary Data (Item 8) of the 2010 Form 10-K. Other events and transactions from the date the 2010 Form 10-K was filed until the date of this Current Report on Form 8-K have not been otherwise reflected. The information in this Current Report on Form 8-K should be read in conjunction with the 2010 Form 10-K and any filings made by the Company with the SEC since March 14, 2011.

 

   

Additional financial information for the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011. The unaudited consolidated financial statements therein presented now include condensed consolidating financial information for the Exchange Notes Guarantors as of March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and 2010. The inclusion of condensed consolidating financial information for the Exchange Notes Guarantors does not change the amounts reported in the unaudited consolidated financial statements presented in Financial Statements (Item 1) of the Form 10-Q for the quarter ended March 31, 2011. No publicly registered debt securities were outstanding as of March 31, 2011. The condensed consolidating financial information is provided exclusively for comparability purposes.

 

   

Updated unaudited pro forma condensed combined financial information which describes the effect of the acquisition of the business and substantially all of the assets of L.W. Matteson, Inc. on the fiscal year ended December 31, 2010.


Item 9.01—Financial Statements and Exhibits

 

(d) Exhibits

The following exhibits are furnished herewith:

 

23.1    Consent of Deloitte & Touche LLP
99.1    Selected Financial Data (updated Item 6 to exclude the stand alone sections related to NASDI, LLC and Yankee Environmental Services, LLC)
99.2    Management’s Discussion and Analysis of Financial Condition and Results of Operations (updated Item 7 to exclude the stand alone sections related to NASDI, LLC and Yankee Environmental Services, LLC)
99.3    Financial Statements and Supplementary Data (updated Item 8 to exclude the stand alone sections related to NASDI, LLC and Yankee Environmental Services, LLC)
99.4    Consolidated Financial Statements and Financial Statement Schedule (updated to recast Note 22 to the consolidated financial statements and to exclude the stand alone sections related to NASDI, LLC and Yankee Environmental Services, LLC)
99.5    Unaudited Consolidated Financial Statements of Great Lakes Dredge & Dock Corporation and Subsidiaries as of March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and 2010, reflecting the subsidiary guarantors of the Company’s $250 million 7.375% senior unsecured notes due February 1, 2019.
99.6    Unaudited pro forma condensed combined statement of operations of Great Lakes Dredge & Dock Corporation and Subsidiaries for the year ended December 31, 2010, giving effect to the acquisition of the business and substantially all of the assets of L.W. Matteson, Inc.

 

2


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 hereunto duly authorized.

 

      GREAT LAKES DREDGE & DOCK CORPORATION
     

/s/    BRUCE J. BIEMECK        

Date:

  July 21, 2011     Bruce J. Biemeck
      President and Chief Financial Officer

 

3


EXHIBIT INDEX

 

Number

  

Exhibit

23.1    Consent of Deloitte & Touche LLP
99.1    Selected Financial Data (updated Item 6 to exclude the stand alone sections related to NASDI, LLC and Yankee Environmental Services, LLC)
99.2    Management’s Discussion and Analysis of Financial Condition and Results of Operations (updated Item 7 to exclude the separately stated sections related to NASDI, LLC and Yankee Environmental Services, LLC)
99.3    Financial Statements and Supplementary Data (updated Item 8 to exclude the separately stated sections related to NASDI, LLC and Yankee Environmental Services, LLC)
99.4    Consolidated Financial Statements and Financial Statement Schedule (updated to recast Note 22 to the consolidated financial statements and to exclude the separately stated sections related to NASDI, LLC and Yankee Environmental Services, LLC)
99.5    Unaudited Consolidated Financial Statements of Great Lakes Dredge & Dock Corporation and Subsidiaries as of March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and 2010, reflecting the subsidiary guarantors of the Company’s $250 million 7.375% senior unsecured notes due February 1, 2019.
99.6    Unaudited pro forma condensed combined statement of operations of Great Lakes Dredge & Dock Corporation and Subsidiaries for the year ended December 31, 2010, giving effect to the acquisition of the business and substantially all of the assets of L.W. Matteson, Inc.
Consent of Deloitte & Touche LLP

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-153207 on Form S-3 and Registration Statement No. 333-150067 on Form S-8 of our report dated March 14, 2011 (July 21, 2011 as to Note 22), relating to the consolidated financial statements and financial statement schedule of Great Lakes Dredge & Dock Corporation and subsidiaries as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010, appearing in this Current Report on Form 8-K of Great Lakes Dredge & Dock Corporation filed on July 21, 2011.

/s/ Deloitte & Touche LLP

Chicago, Illinois

July 21, 2011

Selected Financial Data

Exhibit 99.1

 

Item 6. Selected Financial Data

The following table sets forth selected financial data and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s audited consolidated financial statements and notes thereto included elsewhere in this current report. The selected financial data presented below have been derived from the Company’s consolidated financial statements; items may not sum due to rounding.

On December 26, 2006, GLDD Acquisitions Corp., then the Company’s parent corporation, was merged with a subsidiary of Aldabra Acquisition Corporation, or “Aldabra.” This merger, referred to in this current report as the “Aldabra Merger,” was accounted for as a reverse acquisition. Under this method of accounting, the Company was the acquiring company for financial reporting purposes. Accordingly, the merger was treated as the equivalent of the Company issuance of stock for the net monetary assets of Aldabra accompanied by a recapitalization. The net monetary assets of Aldabra, primarily cash, were stated at their fair value, which was equivalent to the carrying value, and accordingly no goodwill or other intangible assets were recorded.

Prior to the merger in 2006, the Company had Redeemable Preferred Stock. Dividends on the Company’s Series A and Series B Preferred Stock were cumulative semiannually and payable upon declaration at a rate of 8%. The preferred stock was recorded at its redemption and liquidation value of $1 per share, or $87 million plus accrued and unpaid dividends. Prior to the merger, there was $23.2 million in accumulated dividends outstanding. The holders of Preferred Stock were entitled to payment before any capital distribution was made with respect to any junior securities and had no voting rights. As a result of the merger on December 26, 2006, the preferred stock and accumulated dividends were exchanged for shares of Aldabra stock. The fair value of stock received was in excess of the carrying value of the Redeemable Preferred Stock at the time of the exchange. Therefore, the net loss available to common shareholders for the year ended December 31, 2006 was adjusted by $2.8 million in determining earnings per share. The historical results prior to the merger date of December 26, 2006, were that of GLDD Acquisitions Corp. The merger was considered a reverse acquisition, and therefore the weighted-average shares outstanding for all prior periods were retroactively restated to reflect the shares that were issued to acquire GLDD Acquisitions Corp common stock. Accordingly, 9,287,669, were deemed to be outstanding at the beginning of the earliest period presented.

 

    Year Ended December 31,  
  2010     2009     2008     2007     2006  
  (in millions except share and per share data)  

Income Statement Data:

         

Contract revenues

  $ 686.9      $ 622.2      $ 586.9      $ 515.8      $ 426.0   

Costs of contract revenues

    564.1        534.0        517.6        447.8        369.0   
                                       

Gross profit

    122.8        88.2        69.3        67.9        57.0   

General and administrative expenses

    54.4        46.0        43.2        39.0        31.4   
                                       

Operating income

    68.4        42.3        26.1        29.0        25.6   

Interest expense, net

    (13.5     (16.2     (17.0     (17.5     (24.3

Equity in earnings (loss) of joint ventures

    (0.6     (0.4     (0.0     2.0        2.0   
                                       

Income before income taxes

    54.3        25.7        9.1        13.5        3.3   

Income tax expense

    (20.6     (11.0     (3.8     (6.4     (1.0
                                       

Net income

    33.7        14.7        5.3        7.1        2.3   

Net (income) loss attributable to noncontrolling interests

    0.9        2.7        (0.3     (0.0     (0.1
                                       

Net income attributable to Great Lakes Dredge & Dock Corporation

  $ 34.6      $ 17.5      $ 5.0      $ 7.1      $ 2.2   
                                       

Redeemable preferred stock dividends

    —          —          —          —          (8.2

Redemption of preferred stock

    —          —          —          —          (2.8
                                       

Net income (loss) available to common stockholders of Great Lakes Dredge & Dock Corporation

  $ 34.6      $ 17.5      $ 5.0      $ 7.1      $ (8.8
                                       

Basic earnings (loss) per share (1)

  $ 0.59      $ 0.30      $ 0.09      $ 0.14      $ (0.90

Basic weighted average shares

    58,649,681        58,506,608        58,469,431        48,911,491        9,779,781   

Diluted earnings (loss) per share (1)

  $ 0.59      $ 0.30      $ 0.09      $ 0.14      $ (0.90

Diluted weighted average shares

    58,873,936        58,612,282        58,477,779        52,211,010        9,779,781   

Note: Items may not sum due to rounding.

 

1


     Year Ended December 31,  
   2010     2009     2008     2007     2006  
     (in millions)  

Other Data:

  

EBITDA (2)

   $ 103.0      $ 77.6      $ 55.9      $ 57.5      $ 52.6   

Net cash flows from operating activities

     123.5        54.0        14.8        (6.3     33.9   

Net cash flows from investing activities

     (62.7     (24.9     (26.3     (77.8     (21.5

Net cash flows from financing activities

     (15.6     (36.4     13.7        88.6        (9.4

Depreciation and amortization

     34.3        32.9        30.1        26.5        25.1   

Maintenance expense

     48.2        46.4        41.9        43.8        32.7   

Capital expenditures (3)

     29.9        27.3        44.6        111.0        29.8   

 

(1) Refer to Note 1 in the Company’s Consolidated Financial Statements for the years ended December 31, 2010, 2009 and 2008 and above information for additional details regarding these calculations.

 

(2) See definition of EBITDA below

 

(3) Capital expenditures in 2007 included the purchase of three vessels for $40.4 million. It also included the purchase of another vessel for $25.5 million, funded through a sale-leaseback transaction, as well as the buy-out of certain equipment previously under operating leases for $14.6 million. Capital expenditures in 2006 included approximately $3.9 million spent to buy-out certain equipment previously under operating leases and $10.4 million related to the reconfiguration of a dredge into a material handling barge that was funded through a sale-leaseback transaction.

 

     As of December 31,  
   2010      2009      2008      2007      2006  
     (in millions)  

Balance Sheet Data:

  

Cash and equivalents

   $ 48.5       $ 3.3       $ 10.5       $ 8.2       $ 3.6   

Working capital

     90.2         91.3         87.7         82.3         42.9   

Total assets

     693.8         665.4         666.2         624.4         528.4   

Long term senior debt, promissory notes and subordinated notes

     182.5         186.0         216.5         196.5         194.7   

Total stockholder's equity

     279.0         245.8         228.1         230.4         130.5   

 

2


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

 

    Year Ended December 31,  
  2010     2009     2008     2007     2006  
    (in millions)  

Net income attributable to Great Lakes Dredge & Dock Corporation

  $ 34.6      $ 17.5      $ 5.0      $ 7.1      $ 2.2   

Adjusted for:

         

Interest expense, net

    13.5        16.2        17.0        17.5        24.3   

Income tax expense

    20.6        11.0        3.8        6.4        1.0   

Depreciation and amortization

    34.3        32.9        30.1        26.5        25.1   
                                       

EBITDA

  $ 103.0      $ 77.6      $ 55.9      $ 57.5      $ 52.6   
                                       

 

3

Management's Discussion and Analysis of Financial Conditions

Exhibit 99.2

 

Item 7.    Management’s  Discussion and Analysis of Financial Condition and Results of Operations

Overview

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 approximately 14% of the Company’s dredging revenues for 2010, down from the Company’s three year average of 23%.

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, beach nourishment 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 has experienced an average combined bid market share in the U.S. of 39% over the past three years, including 44%, 32% and 52% of the capital, beach nourishment and maintenance sectors, respectively. These bid market shares do not reflect the activities of Matteson prior to December 31, 2010.

With its acquisition of Matteson, on January 1, 2011 the Company began to provide the following additional dredging and other services: inland lake and river dredging, inland levee and construction dredging, environmental restoration and habitat improvement and other marine construction. In 2010, Matteson’s revenues were $37.2 million.

Our fleet of 35 dredges, of which 10 are deployed internationally, 21 material transportation barges, two drillboats, and numerous other specialized support vessels is the largest and most diverse fleet of any U.S. dredging company. The mobility of the Company’s fleet enables us to move equipment in response to changes in demand for dredging services to take advantage of the most attractive opportunities to employ our dredges. The Company estimates the replacement cost of the Company’s fleet to be in excess of $1.5 billion in the current market.

Our largest domestic dredging customer is the Army Corp of Engineers (“Corps”) which is responsible for federally funded projects related to navigation and flood control of U.S. waterways. Approximately 60% of our 2010 dredging revenues resulted 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. This is comparable with the Company’s three year average.

The Company also owns a majority interest in NASDI, a demolition service provider headquartered in the Boston, Massachusetts area. NASDI’s principal services consist of interior and exterior demolition of commercial and industrial buildings, salvage and recycling of related materials, and removal of hazardous substances and materials. The majority of NASDI’s work has historically been performed in the New England area; however, NASDI is currently expanding into the New York area and other markets including marine and bridge demolition. In January 2009, the Company acquired a 65% interest in Yankee, a provider of environmental remediation services including asbestos abatement and removal of other hazardous materials for private and governmental entities. Prior to this acquisition, Yankee served as a subcontractor on many NASDI projects, and continues to serve as a subcontractor many NASDI projects subsequent to the acquisition.

The Company has a 50% ownership interest in Amboy. Amboy’s primary business is mining sand from the entrance channel to New York harbor in order to provide sand and aggregate for use in road and building construction. Together with the Company’s Amboy joint venture partner, the Company owns a 50% interest in land that is adjacent to Amboy’s property and may be used in conjunction with Amboy’s operations. The Company’s investment in Amboy is accounted for using the equity method.

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

Contract Revenues

Most of the Company’s dredging contracts are obtained through competitive bidding on terms specified by the party inviting the bid. The types of equipment required to perform the specified service and the estimated project duration affect the cost of performing the contract and the price that dredging contractors will bid.

 

1


The Company recognizes contract revenues under the percentage-of-completion method, based on the Company’s engineering estimates of the physical percentage completed for dredging projects and using a cost-to-cost approach for demolition projects. For dredging projects, costs of contract revenues are adjusted to reflect the gross profit percentage expected to be achieved upon ultimate completion of each dredging project. For demolition projects, contract revenues are adjusted to reflect the estimated gross profit percentage. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Claims for additional compensation due to the Company are not recognized in contract revenues until such claims are settled. Billings on contracts are generally submitted after verification with the customers of physical progress and may not match the timing of revenue recognition. The difference between amounts billed and recognized as revenue is reflected in the balance sheet as either contract revenues in excess of billings or billings in excess of contract revenues. Contract modifications may be negotiated when a change from the original contract specifications is encountered, necessitating a change in project scope or performance methodology and/or material disposal. Significant expenditures incurred incidental to major contracts are deferred and recognized as costs of contracts based on contract performance over the duration of the related project. These expenditures are reported as prepaid expenses.

Costs and Expenses

The components of costs of contract revenues include labor, equipment (including depreciation, maintenance, insurance and long-term rentals), fuel, subcontracts, rentals and project overhead. Hourly labor is generally hired on a project-by-project basis. Costs of contract revenues vary significantly depending on the type and location of work performed and assets utilized. Generally, capital projects have the highest margins due to the complexity of the projects, while beach nourishment projects have the most volatile margins because they are most often exposed to variability in weather conditions.

The Company’s cost structure includes significant annual equipment related costs, including depreciation, maintenance, insurance and long-term equipment rentals, averaging approximately 21% to 22% of total costs of contract revenues over the last three years. During the year, both equipment utilization and the timing of cost expenditures fluctuate significantly. Accordingly, the Company allocates these 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 the Company’s dredging contracts to expected annual revenues and recognizes equipment costs on the same proportionate basis. In the fourth quarter, any over and under allocated equipment costs are recognized such that the expense for the year equals actual equipment costs incurred during the year. As a result of this methodology, the recorded expense in any interim period may be higher or lower than the actual equipment costs incurred in that interim period.

Primary Factors that Determine Operating Profitability

Dredging.    The Company’s results of operations for its dredging segment for a calendar or quarterly period are generally determined by the following three factors:

 

   

Bid wins and dredge employment—The Company’s dredging segment generates revenues when the Company wins a bid for a dredging contract and starts that project. Although the Company’s dredging equipment is subject to downtime for scheduled periodic maintenance and repair, the Company seeks to maximize its revenues by employing its dredging equipment on a full-time basis. If a dredge is idle (i.e., the dredge is not employed on a dredging project or undergoing scheduled periodic maintenance and repair), the Company does not earn revenue with respect to that dredge during the time period for which it is idle.

 

   

Project and dredge mix—The Company’s domestic dredging projects generally involve domestic capital, maintenance and beach nourishment work and its foreign dredging projects generally involve capital work. In addition, the Company’s dredging projects vary in duration and, in general, projects of longer duration result in less dredge downtime in a given period. Moreover, the Company’s dredges have different physical capabilities and typically work on certain types of dredging projects. Accordingly, the Company’s dredges have different daily revenue generating capacities.

 

2


The Company generally expects to achieve different levels of gross margin (i.e., gross profit divided by revenues) for work performed on the different types of dredging projects and for work performed by different types of dredges. The Company’s expected gross margin for a project is based upon the Company’s estimates at the time of the bid. Although the Company seeks to bid on and win projects that will maximize its gross margin, the Company cannot control the type of dredging projects that are bid from time to time, the type of dredge that is needed to complete these projects or the time schedule upon which these projects are required to be completed. As a result, in some quarters the Company works on a mix of dredging projects that, in the aggregate, have relatively high expected gross margins (based on project type and dredges employed) and in other quarters, the Company works on a mix of dredging projects that, in the aggregate, have relatively low expected gross margins (based on project type and dredges employed).

 

   

Project execution—The Company seeks to execute all of its dredging projects consistent with its project estimates. In general, the Company’s ability to achieve its project estimates depends upon many factors including weather, variances from estimated project conditions, equipment mobilization time periods, unplanned equipment downtime or other events or circumstances beyond the Company’s control. If the Company experiences any of these events and circumstances, the completion of a dredging project will often be accelerated or delayed, as applicable, and, consequently, the Company will experience project results that are better or worse than its estimates. The Company does its best to estimate for events and circumstances that are not within its control; however, these situations are inherent in dredging.

Demolition.    The Company’s demolition segment generates revenues when the Company is awarded a contract for demolition services and performs the project. The Company’s revenues from its demolition segment increase or decrease based upon market demand. Like the Company’s dredging segment, results of operations for the Company’s demolition segment fluctuate based upon project mix and the Company’s ability to execute its projects consistent with its estimates.

Critical Accounting Policies and Estimates

Our significant accounting policies are discussed in the Notes to the Consolidated Financial Statements. The application of certain of these policies requires significant judgments or an estimation process that can affect the Company’s results of operations, financial position and cash flows, as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating the Company’s reported financial results.

Percentage-of-completion method of revenue recognition—The Company’s contract revenues are recognized under the percentage-of-completion method, which is by its nature based on an estimation process. For dredging projects, the Company uses engineering estimates of the physical percentage of completion. For demolition projects, the Company uses estimates of remaining costs-to-complete to determine the percentage of project completion. In preparing the Company’s estimates, it draws on its extensive experience in the dredging and demolition businesses and its database of historical dredging information to assure that its estimates are as accurate as possible, given current circumstances. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Claims for additional compensation are not recognized in contract revenues until such claims are settled. Cost and profit estimates are reviewed on a periodic basis to reflect changes in expected project performance.

Impairment of goodwill—Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company believes that this estimate is a critical accounting estimate because: (i) goodwill is a material asset and (ii) the impact of an impairment could be material to the consolidated balance sheet and consolidated statement of operations. The Company performs its annual

 

3


impairment test as of July 1 each year. The Company operates in two reporting segments: dredging and demolition. These reporting segments are the Company’s operating segments and reporting units at which the Company tests goodwill for impairment.

The Company assesses the fair values of its reporting units using both a market approach and an income approach. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of factors, including estimates of future market growth trends, forecasted revenues and expenses, expected periods the assets will be utilized, appropriate discount rates and other variables. The estimates are based on assumptions that the Company believes to be reasonable, but which are unpredictable and inherently uncertain. Changes in these estimates and assumptions could materially affect the determination of fair value, and may result in the impairment of goodwill in the event that actual results differ from those estimates.

The market approach measures the value of an entity 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 EBITDA. The Company analyzed companies that performed similar services or are considered competitors. Due to the fact that there are no public companies that are direct competitors, the Company weighed the results of this approach less than the income approach.

At December 31, 2010, the majority of goodwill represents the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed by Madison Dearborn Capital Partners IV, L.P. on December 23, 2003. Goodwill was allocated between the Company’s two reporting segments, dredging and demolition, based on the value assigned to each segment at that time. At both December 31, 2010 and 2009, dredging goodwill was $76.6 million and demolition goodwill was $21.5 million.

The Company performed its most recent annual test of impairment as of July 1, 2010 for the goodwill in both the dredging and demolition segments with no indication of goodwill impairment as of the test date. As of the test date, the fair value of both the dredging segment and the demolition segment were in excess of their carrying values by approximately 25%.

No goodwill impairment test was performed in the fourth quarter for either segment because no triggering event occurred which would require such a test.

Impairment of long-lived assets—The Company evaluates the carrying value of long-lived assets whenever events or changes in circumstances indicate that an impairment may exist. Our policy is to recognize an impairment charge when an asset’s carrying value exceeds its net undiscounted future cash flows. The amount of the charge is the difference between the asset’s book value and fair market value. Our policy is to estimate the undiscounted future cash flows using financial projections that require the exercise of significant judgment on the part of management. Changes in these projections may expose us to future impairment charges. If a triggering event requiring impairment testing occurs, the Company would evaluate the remaining useful lives of these assets to determine whether the lives are still appropriate.

Self-insurance reserves—The Company self-insures costs associated with its seagoing employees covered by the provisions of Jones Act, workers’ compensation claims, hull and equipment liability and general business liabilities up to certain limits. Insurance reserves are established for estimates of the loss that the Company will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet reported. In determining its estimates, the Company considers historical loss experience and judgments about the present and expected levels of cost per claim. Trends in actual experience are a significant factor in the determination of such reserves.

 

4


Results of Operations—Fiscal Years

The following table sets forth the components of net income as a percentage of contract revenues for the years ended December 31:

 

     2010     2009     2008  

Contract revenues

     100.0     100.0     100.0

Costs of contract revenues

     (82.1     (85.8     (88.2
                        

Gross profit

     17.9        14.2        11.8   

General and administrative expenses

     (7.9     (7.4     (7.4
                        

Operating income

     10.0        6.8        4.4   

Interest expense, net

     (2.0     (2.6     (2.9

Equity in earnings of joint ventures

     (0.1     (0.1     —     
                        

Income before income taxes

     7.9        4.1        1.5   

Income tax provision

     (3.0     (1.8     (0.7
                        

Net income

     4.9        2.3        0.8   

Net (income) loss attributable to noncontrolling interests

     0.1        0.4          
                        

Net income attributable to Great Lakes Dredge & Dock Corporation

     5.0     2.7     0.8
                        

Components of Contract Revenues

The following table sets forth, by segment and type of work, the Company’s contract revenues for the years ended December 31 (in thousands):

 

     2010      2009      2008  

Revenues

        

Dredging:

        

Capital—U.S.  

   $ 300,873       $ 203,147       $ 153,414   

Capital—foreign

     82,898         134,123         172,345   

Beach nourishment

     106,163         62,133         63,550   

Maintenance

     119,035         174,908         95,350   
                          

Total dredging revenues

     608,969         574,311         484,659   

Demolition

     77,953         47,933         102,220   
                          

Total revenues

   $ 686,922       $ 622,244       $ 586,879   
                          

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Dredging revenues were $609 million in 2010, an increase of $34.7 million, or 6%, over 2009 dredging revenues of $574.3 million. This increase was primarily due to higher revenues in the capital and beach markets more than offsetting lower revenues in the foreign and maintenance markets. Highlights from the Company’s primary dredging sectors are as follows:

 

   

Revenues from domestic capital dredging projects of $300.9 million in 2010 increased $97.7 million, or 48.1%, from 2009 revenues of $203.1 million. During the second half of 2010, several of the Company’s dredges and ancillary equipment worked on sand berm construction off the coast of Louisiana in response to the Deepwater Horizon oil spill in the Gulf of Mexico. In addition, capital dredging revenues included continued deepening work in the ports of New York, New Jersey, and Jacksonville.

 

5


   

Revenues from beach nourishment projects of $106.2 million in 2010 increased $44.1 million, or 71.0%, from $62.1 million in 2009. The amount of beach work won by the Company in the second half of 2009 significantly exceeded the amount of beach work won by the Company in the second half of 2008. As the Company performs much of its beach work during the first half of each year, when environmental windows are open, the increased backlog at the end of 2009 resulted in increased 2010 beach revenues.

 

   

Revenues from maintenance dredging projects in 2010 were $119.0 million, a decrease of $55.9 million, or 31.9%, from $174.9 million in 2009. Maintenance revenue in 2009 was uncharacteristically high because the Corps put many delayed projects out to bid. The Company believes that funding of many maintenance projects bid in 2009 was augmented by the federal economic stimulus. The Company believes that substantially all of the stimulus funded projects were completed by June 30, 2010. In addition, the number of maintenance projects worked on during the second half of the year declined due to the dredging industry’s response to the Deepwater Horizon oil spill in the Gulf of Mexico.

 

   

Revenues from foreign dredging operations in 2010 totaled $82.9 million, a decrease of $51.2 million, or 38.2%, from 2009 revenues of $134.1 million. Foreign revenues started to decline in the second half of 2009 as the global recession significantly slowed the rate of infrastructure development in the Middle East. In 2010, the Company worked on international projects outside of Bahrain, including in the United Arab Emirates and Brazil.

Demolition segment revenues in 2010 were $78.0 million, an increase of $30.1 million, or 62.6%, over 2009 revenues of $47.9 million. This increase was primarily related to improved market conditions in Massachusetts and increased activity in New York as well as with respect to bridge demolition, new markets for the demolition segment. In 2009, demolition revenues were negatively impacted by the slowdown in the U.S. construction industry.

Dredging segment gross profit increased 32.4% to $117.7 million from $88.9 million in 2009, and dredging segment gross profit margin (dredging gross profit divided by dredging revenue) was 19.3%, up from 15.6% in 2009. The increases in gross profit and gross profit margin were primarily due to increased dredging revenues and dredging project execution that in the aggregate was better than the Company’s estimates.

Demolition segment gross profit increased $5.7 million from a gross loss of $0.7 million in 2009 to a gross profit of $5.0 million in 2010 and demolition segment gross profit margin was 6.5%, up from a negative gross profit margin of 1.8% in 2009, primarily due to improved market conditions which resulted in increased revenues. While demolition segment gross profit margins have improved in comparison to 2009, they remain lower than pre-recession gross profit margins, reflecting continuing competitive pricing pressures.

Dredging segment operating income for 2010 increased 41.4% reaching $70.5 million versus $49.8 million in 2009, as increased gross profit offset a 20.9% increase in general and administrative expenses. These expenses increased primarily due to $7.2 million in costs that were incurred for severance, legal and consulting expenses that were incurred in conjunction with the senior management reorganization. See Note 21 “Senior Management Reorganization” in the Notes to Consolidated Financial Statements.

Demolition segment operating loss for 2010 decreased $5.5 million from $7.6 million in 2009 to $2.1 million in 2010. Despite improved gross profit, the demolition segment incurred losses with respect to certain projects including a large bridge demolition project, one of the demolition segment’s first projects of this type. In 2010, the demolition segment recorded a loss of $3.0 million related to this bridge demolition project. In addition, demolition segment operating results in 2009 were negatively impacted by certain projects that had been worked on in 2008 and canceled in 2009, resulting in write-offs of $3.8 million. Demolition segment general and administrative expenses for 2010 of $6.8 million increased 7.9% compared with $6.3 million in 2009 primarily as a result of an increase in bad debt expense and incentive pay.

Consolidated general and administrative expenses as a percentage of revenue have been generally consistent, ranging between 7.4% and 7.9% of revenues over the last three years. In 2010, general and administrative expenses increased due to additional expenses related to the Company’s senior management reorganization.

 

6


The Company’s net interest expense for 2010 totaled $13.5 million compared with $16.2 million in 2009. This decrease is due to the lower average outstanding borrowings on the Company’s revolving credit facility during 2010. In addition, in 2010 the Company realized a $2.1 million gain on its outstanding interest rate swaps compared to a $0.4 million gain during 2009.

The Company incurred income tax expense of $20.6 million in 2010 compared with $10.9 million in 2009. This $9.7 million increase is primarily the result of the increase in the Company’s operating income. The effective tax rate for the year ended December 31, 2010 was 37.9% compared to 42.7% for the year ended December 31, 2009. The decrease in the effective tax rate was due to the resolution of certain state tax matters.

For the year ended December 31, 2010, net income attributable to Great Lakes was $34.6 million compared to $17.5 million for the year ended December 31, 2009. This $17.1 million increase was primarily driven by higher operating income in 2010.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Dredging revenues were $574.3 million in 2009, an increase of $89.6 million, or 18.7%, over 2008 dredging revenues of $484.7 million, due to a higher level of dredge employment in 2009. In particular, the 2009 increase was the result of increased domestic dredging operations that more than offset decreased foreign dredging activity. Dredging gross margin was 15.6%, up from 11.8% in 2008, primarily due to increased dredging revenues and project execution that was better than the Company’s estimates for certain projects, particularly in the first half of the year. Highlights from the Company’s primary dredging sectors are as follows:

 

   

Revenues from domestic capital dredging projects of $203.1 million in 2009 were up $49.7 million, or 32.4%, from 2008 revenues of $153.4 million. This increase was driven by additional capital projects, including deepening work in the ports of New York, New Jersey, Jacksonville and Tampa, Florida and three coastal restoration projects in Louisiana.

 

   

Revenues from beach nourishment projects of $62.1 million in 2009 decreased $1.4 million, or 2.2%, from $63.5 million in 2008. Beach revenues were negatively impacted throughout 2008 and the beginning of 2009 as state and local governments experienced delays in getting the necessary funding to put projects out to bid. More beach work was bid and worked in the second half of 2009.

 

   

Revenues from maintenance dredging projects in 2009 were $174.9 million, an increase of $79.6 million, or 83.4%, from $95.4 million in 2008. This increase was due to the Corps continuing to put out maintenance work that had long been delayed. The Company believes that many maintenance projects were supported by the federal economic stimulus funding.

 

   

Revenues from foreign dredging operations in 2009 totaled $134.1 million, a decrease of $38.2 million, or 22%, from 2008 revenues of $172.3 million. Revenues decreased due to the postponement of a portion of the Company’s largest foreign project and declining Middle Eastern demand resulting from the global recession, instability in oil prices and the deterioration of the region’s real estate market in 2008 and 2009.

Demolition segment revenues in 2009 were $47.9 million, a decrease of $54.3 million, or 53%, over 2008 revenues of $102.2 million. As the construction and real estate development market continued to slow in 2009, new project opportunities were scarce. In addition, a few projects that had been worked on in 2008 were canceled in 2009, resulting in write offs related to those projects. Moreover, several large demolition projects were worked on in 2008 and were not replaced in 2009. As a result, the demolition segment recorded negative gross profit margin of 1.8% compared to gross profit margin of 11.9% in 2008.

Dredging segment operating income for 2009 increased 124% reaching $49.8 million versus $22.2 million in 2008, as strong gross profit performance offset a 12.1% increase in general and administrative expenses. These expenses increased primarily due to higher payroll and incentive costs, legal expenses and other costs related to the Company’s August 2009 secondary offering of stock.

 

7


In 2009, the demolition segment produced an operating loss of $7.6 million, compared to operating income of $3.9 million in 2008 due to weaker gross profit performance including write offs related to canceled projects. Demolition segment general and administrative expenses for 2009 of $6.3 million decreased 21.6% compared with $8.0 million in 2008 primarily as a result of a decrease in incentive pay.

Consolidated general and administrative expenses as a percentage of revenue have been generally consistent, ranging between 7.3% and 7.5% of revenues over the last three years.

The Company’s net interest expense for the year ended December 31, 2009 totaled $16.2 million compared with $17.0 million in 2008. While average debt levels were consistent year over year, lower interest rates decreased interest expense. The Company entered into new interest rate swap agreements in 2009 for which the Company realized a $0.5 million gain during the year. In 2008 the Company also realized a $0.5 million gain on its former swap agreements.

The Company incurred income tax expense of $10.9 million compared with $3.8 million in 2008. This $7.1 million increase is primarily the result of the increase in the Company’s operating income. The effective tax rate for the year ended December 31, 2009 was 42.7% compared to 42.1% for the year ended December 31, 2008.

For the year ended December 31, 2009, net income attributable to Great Lakes was $17.5 million compared to $5.0 million for the year ended December 31, 2008. This $12.5 million increase was driven by higher operating income in 2009 as previously described.

Bidding Activity and Backlog

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

 

     December 31,
2010
     December 31,
2009
     December 31,
2008
 

Backlog

        

Dredging:

        

Capital—U.S.  

   $ 117,866       $ 203,294       $ 176,051   

Capital—foreign

     65,334         35,715         139,479

Beach nourishment

     18,080         63,390         18,934   

Maintenance

     56,140         63,335         26,726   

Rivers & Lakes **

     25,116         —           —     
                          

Total dredging backlog

     282,536         365,734         361,190   

Demolition

     80,984         16,448         23,501   
                          

Total backlog

   $ 363,520       $ 382,182       $ 384,691   
                          

 

* For comparison purposes, foreign backlog has been decreased by $56,908 to reflect the portion of the Diyar contract that was reclassified as an option pending award in the first quarter of 2009

 

** Represents backlog acquired by the Company on December 31, 2010 in connection with the Matteson 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

 

8


variances based upon actual circumstances. Because of these factors, as well as factors affecting the time required to complete each job, backlog is not necessarily indicative of future revenues or profitability. In addition, a significant amount of the Company’s dredging backlog relates to federal government contracts, which can be canceled at any time without penalty to the government, subject to the Company’s contractual right to recover the Company’s actual committed costs and profit on work performed up to the date of cancellation. In addition, the Company’s backlog may fluctuate significantly from quarter to quarter based upon the type and size of the projects the Company is awarded from the bid market. A quarterly increase or decrease of the Company’s backlog does not necessarily result in an improvement or a deterioration of the Company’s business. The Company’s backlog includes only those projects for which the Company has obtained a signed contract with the customer.

Approximately 95% of the Company’s December 31, 2010 backlog is expected to be completed in 2011.

Dredging.

The 2010 domestic dredging bid market totaled $875 million, a 23% decline from the 2009 domestic dredging bid market of $1.1 billion. The 2009 bid market was larger than the 2010 bid market primarily because the 2009 bid market was bolstered by maintenance dredging projects that were funded by the U.S. government economic stimulus package. In addition, the 2010 bid market excludes dredging work related to the construction of sand berms off the coast of Louisiana in response to the Deepwater Horizon oil spill in the Gulf of Mexico. Over $100 million of this sand berm construction work was awarded to the Company directly by the prime contractor rather than through the customary bidding process.

The Company won 30% of the overall 2010 domestic bid market compared to 47% of the overall 2009 domestic bid market. The Company’s five-year average win rate is 41%. This range underscores the variability that can occur in the quarter to quarter and year to year bid results.

The Company’s December 31, 2010 dredging backlog was $282.5 million, which includes $25.1 million attributable to the Matteson acquisition. This represents an increase of $61.2 million, or 27.6%, over the Company’s September 30, 2010 dredging backlog of $221.4 million, but a decrease of $83.2 million, or 22.8%, from the Company’s December 31, 2009 dredging backlog. This decrease in the Company’s annual dredging backlog is primarily the result of the decreased 2010 domestic dredging bid market and the Company’s lower 2010 bid win rate.

The Company won 21%, or $75 million, of the capital dredging projects awarded in 2010, including a large project in Virginia that was awarded in the fourth quarter. The Company’s 2010 project win rate was adversely affected by the loss of one large capital dredging project, for which the Company may ultimately perform work as a subcontractor. Approximately $117.9 million, or 42%, of the Company’s December 31, 2010 dredging backlog consists of domestic capital dredging work, a substantial portion of which is expected to be performed in 2011. December 31, 2010 capital dredging backlog is less than the prior year because the Company worked off most of its backlog related to deepening projects in the ports of New York and New Jersey and no large capital projects were added to backlog at year end. Predominantly all of the capital work in backlog at the end of 2010 is federally funded. The Company continues to believe that the expansion of the Panama Canal will heighten the need for the U.S. to deepen its East and Gulf Coast ports; however, it does not appear that any sizable new deepening projects probably will be bid until the fourth quarter of 2011. In addition, on October 6, 2010, President Obama signed an executive order establishing the Gulf Coast Restoration Task Force. The Company believes that this emphasis on Gulf coast restoration, including the Corps’ Mississippi Coastal Improvement Program, will provide additional growth opportunities with the domestic capital dredging market.

The Company won 73%, or $55 million, of the beach nourishment projects awarded in 2010. However, the Company’s December 31, 2010 beach nourishment backlog was $18.1 million at the end of 2010 compared to $63.4 million at the end of 2009. The 2009 beach nourishment bid market was very active in the second half of 2009 and totaled $183 million for that year. This is substantially above the average bid market over the last three years of $127 million. The Company’s beach nourishment backlog fluctuates from period to period based on various factors, including which beaches require nourishment and funding and permitting issues.

 

9


The Company won 30%, or $131 million, of the maintenance dredging projects awarded in 2010. The Company’s December 31, 2010 maintenance dredging backlog was $56.1 million compared to $63.3 million at the end of 2009. The 2010 maintenance dredging bid market was $443.8 million, which is significantly below the 2009 maintenance dredging bid market of $645 million but still above the five year average maintenance dredging bid market of $393 million. The 2009 bid market was atypically large because it included maintenance dredging projects that were funded by the U.S. government economic stimulus package. The Company’s share of the 2010 maintenance dredging bid market was 30%, slightly below its 32% average over the last three years. On January 5, 2011, the Realize America’s Promise Act was introduced into the U.S. House of Representatives and on February 17, 2011, the Harbor Maintenance Act of 2011 was introduced into the U.S. Senate. The two bills are substantially similar and provide that all resources of the Harbor Maintenance Trust Fund may be used only for harbor maintenance programs. If enacted, the Company anticipates that this legislation would increase the Corps’ annual budget by approximately $500 million, with the majority of such amount likely to be allocated for maintenance dredging.

Foreign capital dredging backlog increased to $65.3 million at the end of 2010 from $35.7 million at the end of 2009, primarily as a result of the last phase of the Diyar land reclamation project being awarded to the Company in the fourth quarter of 2010. The Company cannot predict if or to what extent its operations or business prospects in the Middle East will be affected by the recent civil unrest that many Middle Eastern countries have experienced.

Demolition.    Demolition services backlog was $81.0 million at December 31, 2010, a 392% increase from $16.4 million at 2009 year end, reflecting the Company’s continuing progress in expanding into new markets, specifically the New York area, a renewed increase in activity in the Boston area, and the addition of a $26 million bridge demolition project in Louisiana. The demolition business continues to gain momentum. The demolition business faces operating and other challenges that can impact profitability as it moves into new markets.

Liquidity and Capital Resources

The Company’s principal sources of liquidity are cash flow generated from operations and borrowings under its senior credit facility (see Note 12, “Long-Term Debt” in the Notes to Consolidated Financial Statements). The Company’s principal uses of cash are to meet debt service requirements, finance its capital expenditures, provide working capital and meet other general corporate purposes.

The Company’s net cash provided by operating activities for the years ended December 31, 2010, 2009 and 2008 totaled $123.5 million, $54.0 million and $14.8 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 2010, lower activity in foreign operations (which usually experience longer accounts receivable collection periods) coupled with payments being made on foreign accounts receivable that had been outstanding at the end of 2009 drove the increase in cash generated. Additionally, the increase in cash was generated by strong domestic operations in 2010, which have by comparison shorter accounts receivable collections periods. In 2009, an increase in domestic accounts receivable resulting from increased domestic activity, offset by a decrease in pipe and spare parts inventory as well as other working capital items, decreased net cash provided by operating activities. In 2008, the increase in investment in the Company’s foreign operations was partially offset by favorable billing terms on one domestic project. Significant investments in pipe and spare parts inventory were included in 2008.

The Company’s net cash flows used in investing activities for the years ended December 31, 2010, 2009 and 2008 totaled $62.7 million, $24.9 million and $26.3 million, respectively. The increase in 2010 is primarily due to the Company’s acquisition of Matteson on December 31, 2010. See Note 19 “Matteson Acquisition” in the notes to the Consolidated Financial Statements. Investing activities in all years related to normal course upgrades and capital maintenance of our dredging fleet. The 2010 expenditures included $14.6 million on the upgrade of the dredge Ohio. Investing activities in 2008 included $17.7 million of capital expenditures on the dredges Ohio, Reem Island and Noon Island for upgrades and other activities related to placing these vessels into service. Another $5.5 million was spent in 2008 on continuing construction of the power barge that enhanced the operating efficiency of the dredge Florida; $7.2 million was spent on this vessel in 2007. Work on this vessel was completed in October 2008 and the vessel was then sold via a sale leaseback for $16.6 million. An immaterial loss was fully recognized on this transaction.

 

10


The Company’s net cash flows provided by (used in) financing activities for the years ended December 31, 2010, 2009 and 2008 totaled ($15.6) million, ($36.4) million and $13.7 million, respectively. The Company's financing cash flows represent net repayment or borrowings on its revolving credit facility, approximately $4.0 million in annual dividends, and approximately $1.0 million to $2.0 million of annual repayments on other debt and capital leases.

On June 12, 2007, the Company entered into a credit agreement (the “Credit Agreement”) with Bank of America N.A. and various other financial institutions as lenders. The Credit Agreement provides for a revolving credit facility of up to $145.0 million in borrowings and includes sublimits for the issuance of letters of credit and swingline loans. The revolving credit facility matures on June 12, 2012. The revolving credit facility bears interest at rates selected at the option of Great Lakes, currently equal to either LIBOR plus an applicable margin or the “Base Rate” plus an applicable margin. The applicable margins for LIBOR loans and Base Rate loans, as well as any non-use fee, are subject to adjustment based upon the Company’s ratio of Total Funded Debt to Adjusted Consolidated EBITDA (each as defined in the Credit Agreement). The obligations of Great Lakes under the Credit Agreement are unconditionally guaranteed by its direct and indirect domestic subsidiaries. Additionally, the obligations are secured by a perfected first priority lien on certain equipment of Great Lakes’ subsidiary, Great Lakes Dredge & Dock Company, LLC (“GLDD Company”); a perfected second priority lien on certain other equipment of GLDD Company, subject to a perfected first priority lien in favor of Great Lakes’ bonding company; a perfected first priority lien on the inter-company receivables of Great Lakes and its direct and indirect domestic subsidiaries and having an equal priority to the liens of Great Lakes’ bonding company; and a perfected second priority lien on the accounts receivable of Great Lakes and its direct and indirect subsidiaries that relate to bonded projects. The Credit Agreement contains various covenants and restrictions including (i) limitations on dividends to $5 million per year, (ii) limitations on redemptions and repurchases of capital stock, (iii) limitations on the incurrence of indebtedness, liens, leases and investments, and (iv) maintenance of certain financial covenants.

As of December 31, 2010, the Company had no borrowings and $11.9 million of letters of credit outstanding, resulting in $133.1 million of availability under, the Credit Agreement. On December 31, 2010, the Company amended the Credit Agreement to permit it to increase the principal amount of unsecured debt it may issue to refinance its senior subordinated notes from an aggregate of $175 million to an aggregate of $300 million, subject to compliance with the financial covenants set forth in the Credit Agreement, as amended, and to eliminate the requirement that such refinanced debt be subordinated to the obligations under the Credit Agreement. The Company is evaluating the possibility of extending and increasing the commitments under the Credit Agreement during the first half of 2011. Leading positions in the Company’s credit facility are held by Bank of America, Royal Bank of Scotland, GE Capital Corporation and Wells Fargo Bank.

The Company obtains performance, bid and payment bonds through a bonding agreement with Travelers Casualty and Surety Company of America. The bonds issued under the bonding agreement are customarily required for dredging and marine construction projects, as well as demolition projects. At December 31, 2010, the Company had outstanding performance bonds valued at approximately $369.0 million; however, the revenue value remaining in backlog related to these projects totaled approximately $176.5 million. On June 12, 2007, the Company and Travelers entered into a fourth amendment to the third amended and restated underwriting and continuing indemnity agreement (the “Fourth Amendment”) with Travelers. The Fourth Amendment provides, among other things, for new equipment collateral securing the obligations under the Company’s bonding agreement and permits the Credit Agreement and related collateral securing the obligations under the Credit Agreement. On January 24, 2011, the Company and Travelers entered into a sixth amendment to third amended and restated underwriting and continuing indemnity agreement (the “Sixth Amendment”). The Sixth Amendment was entered into to, among other things, permit the Company to incur up to $250 million of debt as part of the January 2011 refinancing of the Company’s $175 million principal amount senior subordinated notes due December 2013. The amendment also provides that if the Company’s outstanding credit exposure under its senior credit facility exceeds $25 million, then at Travelers’ request the Company is required to provide Travelers with $20 million of additional collateral (in cash or an irrevocable letter of credit, at the Company’s discretion). In addition, the Company is required to grant Travelers a first priority security interest in such additional collateral in accordance with the terms and conditions of the Company’s intercreditor agreement.

 

11


In addition to its credit facility, the Company has a $24 million International Letter of Credit Facility with Wells Fargo HSBC Trade Bank. This facility is used for performance and advance payment guarantees on foreign contracts. The obligations under the agreement are guaranteed by the Company’s foreign accounts receivable under Ex-Im Bank’s Working Capital Guarantee Program which covers 90% of the obligations owing under the facility. The Company had $15.7 million of letters of credit issued under this facility at December 31, 2010.

In January 2011, the Company issued $250 million in aggregate principal amount of its 7.375% senior unsecured notes due February 1, 2019 (the “Senior Unsecured Notes”) in a private placement. Approximately $180 million of the net proceeds from the issuance of the Senior Unsecured Notes was used to prepay all of the Company’s 7.75% senior subordinated notes due December 2013, including prepayment premiums and accrued and unpaid interest. The remaining net proceeds from the issuance of the Senior Unsecured Notes will be used for general corporate purposes, which may include acquisitions. The Indenture governing the Senior Unsecured Notes, among other things, limits the ability of the Company and its restricted subsidiaries to (i) pay dividends, or make certain other restricted payments or investments; (ii) incur additional indebtedness and issue disqualified stock; (iii) create liens on its assets; (iv) transfer and sell assets; (v) merge, consolidate or sell all or substantially all of its assets; (vi) enter into certain transactions with affiliates; (vii) create restrictions on dividends or other payments by its restricted subsidiaries and (viii) create guarantees of indebtedness by restricted subsidiaries. These covenants are subject to a number of important limitations and exceptions that are described in the Indenture governing the Senior Unsecured Notes.

On January 2011, in connection with the issuance of the Senior Unsecured Notes, the Company, its subsidiaries which guaranteed the Senior Unsecured Notes and the initial purchasers of the Senior Unsecured Notes entered into a Registration Rights Agreement (the “Registration Rights Agreement”). The Registration Rights Agreement requires the Company, among other things, to (i) use its commercially reasonable efforts to cause a registration statement with respect to an exchange offer for the Senior Unsecured Notes to become effective within 365 days after the issue date of the Senior Unsecured Notes; (ii) consummate the exchange offer within 30 business days after the target date for effectiveness of the registration statement with respect to the exchange offer and (iii) use its commercially reasonable efforts to file a shelf registration statement for the resale of the Senior Unsecured Notes in certain circumstances. If the Company fails to satisfy it registration obligations under the Registration Rights Agreement, then the Company will be required to pay liquidated damages to the holders of the Senior Unsecured Notes, which will accrue at an annual rate of 0.25% of the aggregate principal amount of the outstanding Senior Unsecured Notes.

The Company paid dividends of approximately $1 million each quarter of 2010 and 2009 and in the first quarter of 2011. The declaration and payment of dividends will be at the discretion of the Company’s board of directors and will depend on many factors, including general economic and business conditions, the Company’s strategic plans, its financial results and condition, legal requirements, including restrictions and limitations contained in the Credit Agreement, bonding agreements and the indenture relating to its senior unsecured notes. Accordingly, the Company cannot make any assurances as to the size of any such dividend or that it will pay any such dividend in future quarters.

The Company believes 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 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 of the financial covenants under the Credit Agreement and bonding agreement, depends on its future operating performance and cash flow, 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.

 

12


Contractual Obligations

The following table summarizes the Company’s contractual cash obligations at December 31, 2010. Additional information related to these obligations can be found in Note 11 “Long-Term Debt” and Note 14 “Lease Commitments” to Consolidated Financial Statements.

 

       Total        Obligations coming due in year(s) ending:  
          2011        2012-
  2014  
     2015-
  2017  
     2018 and
  beyond  
 
     (in millions)  

Long term bank debt (1)

   $ —         $ —         $ —         $ —         $ —     

Senior subordinated notes (2)

     215.7         13.6         202.1         —           —     

Operating lease commitments

     109.1         17.4         44.0         39.6         8.1   

Promissory note (3)

     8.9         3.0         5.9         —           —     

Equipment notes

     0.4         0.3         0.1         —           —     
                                            

Total

   $ 334.0       $ 34.2       $ 252.1       $ 39.6       $ 8.1   
                                            

 

(1) Represents the Company’s senior credit facility. No amounts were outstanding at December 31, 2010.

 

(2) Includes cash interest payments calculated at stated fixed rate of 7.75%. In January 2011, the Company refinanced the senior subordinated notes with the issuance of $250 million senior unsecured notes due February 1, 2019. The senior unsecured notes bear interest at 7.375%.

 

(3) Includes cash interest payments calculated at stated fixed rate of 6.00%. This note was issued in connection with the Matteson acquisition.

Excluded from the above table are $0.8 million in liabilities for uncertain tax positions for which the period of settlement is not determinable.

Other Off-Balance Sheet and Contingent Obligations

The Company had outstanding letters of credit relating to foreign contract guarantees and insurance payment liabilities totaling $27.6 million at December 31, 2010. All issued letters of credit were undrawn at year-end.

The Company has granted liens on a substantial portion of its owned operating equipment as security for borrowings under its Credit Agreement and its bonding agreement. The Company’s Credit Agreement and bonding agreement also contain provisions that require the Company to maintain certain financial ratios and restrict its ability to pay dividends, incur indebtedness, create liens, and take certain other actions.

The Company finances certain key vessels used in its operations with off-balance sheet lease arrangements with unrelated lessors, requiring annual rentals of $17.3 million which decline to $0.4 million over the next ten years. These off-balance sheet leases contain default provisions, which are triggered by an acceleration of debt maturity under the terms of the Company’s Credit Agreement. Additionally, the leases typically contain provisions whereby the Company indemnifies the lessors for the tax treatment attributable to such leases based on the tax rules in place at lease inception. The tax indemnifications do not have a contractual dollar limit. To date, no lessors have asserted any claims against the Company under these tax indemnification provisions.

Performance and bid bonds are customarily required for dredging and marine construction projects, as well as some demolition projects. The Company obtains its performance and bid bonds through its bonding agreement with Travelers, which has been granted a security interest in a substantial portion of the Company’s operating equipment with a net book value of $70.7 million at December 31, 2010. The bonding agreement contains provisions that require the Company to maintain certain financial ratios and that restrict the Company’s ability to pay dividends, incur indebtedness, create liens and take certain other actions. At December 31, 2010, the Company was in

 

13


compliance with its covenants under the bonding agreement. Bid bonds are generally obtained for a percentage of bid value and amounts outstanding typically range from $1 million to $10 million. At December 31, 2010, the Company had outstanding performance bonds valued at approximately $369.0 million; however, the revenue value remaining in backlog related to these projects totaled approximately $176.5 million.

Certain foreign projects performed by the Company have warranty periods, typically spanning no more than three to five 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.

Prior to February 2011, the Company was a member of an insurance association that provides personal injury coverage for its maritime workforce in excess of self-insurance retention limits. As part of this arrangement, the Company was subject to retroactive premium adjustments based on the association’s claims experience and investment performance. The Company accrued for retroactive premium adjustments when assessed by the insurance association. During the years ended December 31, 2010 and 2009, there were $2.2 million and $2.0 million recorded for retroactive assessments, respectively. In February 2011, the Company withdrew from this insurance association and purchased insurance to provide personal injury coverage for its maritime workforce in excess of self-insurance retention limits. The Company’s withdrawal from the insurance association and payment of the related release call discharges the Company from any future liability to the insurance association.

The Company considers it unlikely that it would have to perform under any of the aforementioned contingent obligations, other than operating leases and retroactive insurance premium adjustments associated with the Company’s insurance coverage, and performance has never been required in any of these circumstances in the past.

 

14

Financial Statements and Supplementary Data

Exhibit 99.3

 

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements (including financial statement schedule of the Company called for by this Item, together with the Report of Independent Registered Public Accounting Firm dated March 14, 2011 (July 21, 2011 as to Note 22), are set forth in Exhibit 99.4 of this Report, and are hereby incorporated by reference into this Item. Financial statement schedules not included in this Report have been omitted because they are not applicable or because the information called for is shown in the consolidated financial statements or notes thereto.

Quarterly Results of Operations (Unaudited)

The following tables set forth our unaudited quarterly results of operations for 2010 and 2009. We have prepared this unaudited information on a basis consistent with the audited consolidated financial statements contained in this report and this unaudited information includes all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of our results of operations for the quarters presented. You should read this quarterly financial data along with the Condensed Consolidated Financial Statements and the related notes to those statements included in our Quarterly Reports on Form 10-Q filed with the Commission. The operating results for any quarter are not necessarily indicative of the results for the annual period or any future period.

 

    Quarter Ended  
  March 31,     June 30,     September 30,     December 31,  
  Unaudited  
  (in millions except share and per share data)  

2010

       

Contract revenues

  $ 161.4      $ 180.1      $ 173.3      $ 172.1   

Costs of contract revenues

    (130.9     (145.5     (140.6     (147.0
                               

Gross profit

    30.5        34.6        32.7        25.1   

General and administrative expenses

    (11.1     (14.4     (16.5     (12.3
                               

Operating income

    19.4        20.2        16.2        12.8   

Interest expense, net

    (3.2     (3.0     (3.3     (4.0

Equity in earnings (loss) of joint ventures

    (0.7     (0.1     0.1        0.1   
                               

Income before income taxes

    15.5        17.1        12.8        8.9   

Income tax provision

    (6.2     (6.8     (5.1     (2.5
                               

Net income

    9.3        10.3        7.7        6.4   

Net loss attributable to noncontrolling interests

    0.1        0.5        —          0.4   
                               

Net income attributable to Great Lakes Dredge & Dock Corporation

  $ 9.4      $ 10.8      $ 7.7      $ 6.8   
                               

Basic earnings per share

  $ 0.16      $ 0.18      $ 0.13      $ 0.12   

Basic weighted average shares

    58,547,990        58,601,649        58,698,299        58,750,621   

Diluted earnings per share

  $ 0.16      $ 0.18      $ 0.13      $ 0.11   

Diluted weighted average shares

    58,705,175        58,780,611        58,900,824        59,067,964   

 

1


    Quarter Ended  
  March 31,     June 30,     September 30,     December 31,  
  Unaudited  
  (in millions except share and per share data)  

2009

       

Contract revenues

  $ 179.2      $ 142.5      $ 140.0      $ 160.6   

Costs of contract revenues

    (152.2     (113.9     (123.0     (145.0
                               

Gross profit

    27.0        28.6        17.0        15.6   

General and administrative expenses

    (10.6     (11.8     (12.0     (11.6
                               

Operating income

    16.4        16.8        5.0        4.0   

Interest expense, net

    (4.3     (4.7     (3.2     (3.9

Equity in earnings (loss) of joint ventures

    (0.6     —          0.2        —     
                               

Income before income taxes

    11.6        12.0        2.0        0.1   

Income tax benefit (provision)

    (5.2     (4.6     (0.9     (0.3
                               

Net income (loss)

    6.4        7.4        1.1        (0.2

Net (income) attributable to noncontrolling interests

    0.9        —          0.5        1.3   
                               

Net income attributable to Great Lakes Dredge & Dock Corporation

  $ 7.3      $ 7.4      $ 1.6      $ 1.1   
                               

Basic earnings (loss) per share

  $ 0.13      $ 0.13      $ 0.03      $ 0.02   

Basic weighted average shares

    58,488,394        58,499,312        58,506,332        58,532,394   

Diluted earnings (loss) per share

  $ 0.13      $ 0.13      $ 0.03      $ 0.02   

Diluted weighted average shares

    58,488,394        58,553,842        58,688,696        58,745,421   

Note: Items may not sum due to rounding.

 

2

Consolidated Financial Statements

Exhibit 99.4

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

     Page  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     2   

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2010 AND 2009, AND FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

  

Consolidated Balance Sheets

     3   

Consolidated Statements of Operations

     4   

Consolidated Statements of Equity

     5   

Consolidated Statements of Cash Flows

     6   

Notes to Consolidated Financial Statements

     7-28   

 

1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Great Lakes Dredge & Dock Corporation

Oak Brook, Illinois

We have audited the accompanying consolidated balance sheets of Great Lakes Dredge & Dock Corporation and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the accompanying financial statement schedule. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Great Lakes Dredge & Dock Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2011, not presented herein, expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

/s/ Deloitte & Touche LLP

Chicago, Illinois

March 14, 2011 (July 21, 2011 as to Note 22)

 

2


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2010 AND 2009

(In thousands, except share and per share amounts)

 

     2010     2009  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 48,478      $ 3,250   

Accounts receivable—net

     95,548        153,901   

Contract revenues in excess of billings

     24,842        28,004   

Inventories

     31,734        29,192   

Prepaid expenses

     3,448        2,644   

Other current assets

     18,919        15,445   
                

Total current assets

     222,969        232,436   

PROPERTY AND EQUIPMENT—Net

     323,231        291,157   

GOODWILL

     98,049        98,049   

OTHER INTANGIBLE ASSETS—Net

     3,280        1,037   

INVENTORIES—Noncurrent

     27,128        27,662   

INVESTMENTS IN JOINT VENTURES

     7,329        7,943   

OTHER

     11,839        7,142   
                

TOTAL

   $ 693,825      $ 665,426   
                

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 82,721      $ 83,783   

Accrued expenses

     32,809        31,265   

Billings in excess of contract revenues

     14,484        24,901   

Current portion of note payable

     2,500        —     

Current portion of equipment debt

     303        1,200   
                

Total current liabilities

     132,817        141,149   

REVOLVING CREDIT FACILITY

     —          11,000   

LONG TERM NOTE PAYABLE

     5,000        —     

7.75% SENIOR SUBORDINATED NOTES

     175,000        175,000   

DEFERRED INCOME TAXES

     92,466        81,642   

OTHER

     11,717        12,086   
                

Total liabilities

     417,000        420,877   
                

COMMITMENTS AND CONTINGENCIES (Note 18)

    

EQUITY

    

Common stock—$0.0001 par value; authorized, 90,000,000 shares; issued and outstanding, 58,770,369 shares and 58,542,038 shares at December 31, 2010 and 2009, respectively

     6        6   

Additional paid-in capital

     266,329        263,579   

Retained earnings (accumulated deficit)

     12,261        (18,336

Accumulated other comprehensive income

     357        539   
                

Total Great Lakes Dredge & Dock Corporation Equity

     278,953        245,788   

NONCONTROLLING INTERESTS

     (2,128     (1,239
                

Total equity

     276,825        244,549   
                

TOTAL

   $ 693,825      $ 665,426   
                

See notes to the consolidated financial statements.

 

3


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(In thousands, except per share amounts)

 

     2010     2009     2008  

CONTRACT REVENUES

   $ 686,922      $ 622,244      $ 586,879   

COSTS OF CONTRACT REVENUES

     564,140        534,000        517,576   
                        

GROSS PROFIT

     122,782        88,244        69,303   

GENERAL AND ADMINISTRATIVE EXPENSES

     54,352        45,993        43,206   
                        

Total operating income

     68,430        42,251        26,097   
                        

OTHER EXPENSE:

      

Interest expense—net

     (13,542     (16,150     (16,971

Equity in loss of joint ventures

     (614     (384     (15
                        

Total other expense

     (14,156     (16,534     (16,986
                        

INCOME BEFORE INCOME TAXES

     54,274        25,717        9,111   

INCOME TAX EXPENSE

     (20,554     (10,983     (3,839
                        

NET INCOME

     33,720        14,734        5,272   

Net (income) loss attributable to noncontrolling interests

     889        2,734        (293
                        

NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS OF GREAT LAKES DREDGE & DOCK CORPORATION

   $ 34,609      $ 17,468      $ 4,979   
                        

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

   $ 0.59      $ 0.30      $ 0.09   

Basic weighted-average shares

     58,647        58,507        58,469   

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

   $ 0.59      $ 0.30      $ 0.09   

Diluted weighted-average shares

     58,871        58,612        58,478   

See notes to the consolidated financial statements.

 

4


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(In thousands, except share and per share amounts)

 

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

BALANCE—January 1, 2008

    58,459,824      $ 6      $ 260,669      $ (32,810   $ 470      $ 2,061      $ 230,396   

Acquisition of NASDI Noncontrolling Interest

    —          —          1,373        —          —          (1,521     (148

Repurchase of shares

    (3,622     —          (6     —          —          —          (6

Share-based compensation

    28,040        —          465        —          —          —          465   

Dividends declared and paid

    —          —          —          (3,981     —          —          (3,981

Comprehensive income:

             

Net income

    —          —          —          4,979        —          293        5,272   

Reclassification of derivative losses to earnings (net of tax of $145)

    —          —          —          —          218        —          218   

Change in fair value of derivatives (net of tax of $2,720)

    —          —          —          —          (4,103     —          (4,103
                                                       

Total comprehensive income:

              293        1,387   
                         

BALANCE—December 31, 2008

    58,484,242        6        262,501        (31,812     (3,415     833        228,113   

Acquisition of Yankee Environmental Services

    —          —          —          —          —          662        662   

Share-based compensation

    57,796        —          1,078        —          —          —          1,078   

Dividends declared and paid

    —          —          —          (3,992     —          —          (3,992

Comprehensive income (loss):

             

Net income (loss)

    —          —          —          17,468        —          (2,734     14,734   

Reclassification of derivative losses to earnings (net of tax of $2,101)

    —          —          —          —          3,164        —          3,164   

Change in fair value of derivatives (net of tax of $524)

    —          —          —          —          790        —          790   
                                                       

Total comprehensive income (loss):

              (2,734     18,688   
                         

BALANCE—December 31, 2009

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

Share-based compensation

    79,067        —          2,094        —          —          —          2,094   

Vesting of restricted stock units

    13,302                  —     

Exercise of stock options

    135,962        —          656              656   

Dividends declared and paid

    —          —          —          (4,012     —          —          (4,012

Comprehensive income (loss):

             

Net income (loss)

    —          —          —          34,609        —          (889     33,720   

Reclassification of derivative gains to earnings (net of tax of $213)

    —          —          —          —          (321     —          (321

Change in fair value of derivatives (net of tax of $92)

    —          —          —          —          139        —          139   
                                                       

Total comprehensive income (loss):

              (889     33,538   
                         

BALANCE—December 31, 2010

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

See notes to the consolidated financial statements.

 

5


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(In thousands)

 

     2010     2009     2008  

OPERATING ACTIVITIES:

      

Net income

   $ 33,720      $ 14,734      $ 5,272   

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

      

Depreciation and amortization

     34,301        33,023        30,124   

Equity in loss of joint ventures

     614        384        15   

Distribution from equity joint ventures

     —          621        625   

Deferred income taxes

     7,405        1,401        1,596   

Gain on dispositions of property and equipment

     (505     (651     (553

Amortization of deferred financing fees

     1,607        1,677        1,892   

Share-based compensation expense

     2,094        1,078        465   

Changes in assets and liabilities:

      

Accounts receivable

     56,603        (33,281     (4,911

Contract revenues in excess of billings

     3,510        2,925        (17,088

Inventories

     2,630        9,836        (16,218

Prepaid expenses and other current assets

     (847     3,529        (986

Accounts payable and accrued expenses

     (5,053     12,591        (2,068

Billings in excess of contract revenues

     (11,078     5,119        14,345   

Other noncurrent assets and liabilities

     (1,470     1,012        2,295   
                        

Net cash flows provided by operating activities

     123,531        53,998        14,805   
                        

INVESTING ACTIVITIES:

      

Purchases of property and equipment

     (25,258     (24,666     (44,484

Dispositions of property and equipment

     431        1,028        17,445   

Purchase of Matteson

     (37,869     —          —     

Acquisition of controlling interest in Yankee Environmental Services

     —          (1,229     —     

Changes in restricted cash

     —          —          787   

Purchase of noncontrolling interest in NASDI, LLC

     —          —          (5
                        

Net cash flows used in investing activities

     (62,696     (24,867     (26,257
                        

FINANCING ACTIVITIES:

      

Borrowings under revolving loans

     14,968        158,877        222,443   

Repayments of revolving loans

     (25,968     (189,377     (202,443

Exercise of stock options

     656        —          —     

Dividends paid

     (4,012     (3,992     (3,981

Repayments of long-term debt

     (1,186     (1,774     (2,148

Repayment of capital lease debt

     (65     (93     (174

Repurchase of preferred and common shares

     —          —          (6
                        

Net cash flows provided by (used in) financing activities

     (15,607     (36,359     13,691   
                        

NET CHANGE IN CASH AND CASH EQUIVALENTS

     45,228        (7,228     2,239   

CASH AND CASH EQUIVALENTS—Beginning of year

     3,250        10,478        8,239   
                        

CASH AND CASH EQUIVALENTS—End of year

   $ 48,478      $ 3,250      $ 10,478   
                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

      

Cash paid for interest

   $ 13,269      $ 14,764      $ 15,357   
                        

Cash paid for taxes

   $ 16,332      $ 8,677      $ 4,695   
                        

NONCASH INVESTING ACTIVITY

      

Property and equipment purchased but not yet paid

   $ 8,559      $ 4,187      $ 3,187   
                        

Property and equipment purchased on equipment notes

   $ 109      $ 615      $ 2,213   
                        

Purchase price of Matteson comprised of promissory notes and other liabilities

   $ 9,140      $ —        $ —     
                        

See notes to the consolidated financial statements.

 

6


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2010 AND 2009 AND FOR THE

YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(In thousands, except share and per share amounts)

1.     NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization—Great Lakes Dredge & Dock Corporation and its subsidiaries (the “Company” or “Great Lakes”) are in the business of marine construction, primarily dredging, and commercial and industrial demolition. The Company’s primary dredging customers are domestic and foreign government agencies, as well as private entities, and its primary demolition customers are general contractors, corporations that commission projects, nonprofit institutions such as universities and hospitals, and local government and municipal agencies.

Principles of Consolidation and Basis of Presentation—The consolidated financial statements include the accounts of Great Lakes Dredge & Dock Corporation and its majority-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. The equity method of accounting is used for investments in unconsolidated investees in which the Company has significant influence, but not control. Other investments, if any, are carried at cost.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Revenue and Cost Recognition on Contracts—Substantially all of the Company’s contracts for dredging services are fixed-price contracts, which provide for remeasurement based on actual quantities dredged. The majority of the Company’s demolition contracts are also fixed-price contracts, with others managed as time-and-materials. Contract revenues are recognized under the percentage-of-completion method, based on the Company’s engineering estimates of the physical percentage completed for dredging projects and using a cost-to-cost approach for demolition projects. For dredging projects, costs of contract revenues are adjusted to reflect the gross profit percentage expected to be achieved upon ultimate completion. For demolition contracts, contract revenues are adjusted to reflect the estimated gross profit percentage. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Claims for additional compensation due to the Company are not recognized in contract revenues until such claims are settled. Billings on contracts are generally submitted after verification with the customers of physical progress and may not match the timing of revenue recognition. The difference between amounts billed and recognized as revenue is reflected in the balance sheet as either contract revenues in excess of billings or billings in excess of contract revenues. Modifications may be negotiated when a change from the original contract specification is encountered, and a change in project scope, performance methodology and/or material disposal is necessary. Thus, the resulting modification is considered a change in the scope of the original project to which it relates. Significant expenditures incurred incidental to major contracts are deferred and recognized as contract costs based on contract performance over the duration of the related project. These expenditures are reported as prepaid expenses.

The components of costs of contract revenues include labor, equipment (including depreciation, maintenance, insurance and long-term rentals), subcontracts, fuel and project overhead. Hourly labor is generally hired on a project-by-project basis. Costs of contract revenues vary significantly depending on the type and location of work performed and assets utilized. Generally, capital projects have the highest margins due to the complexity of the projects, while beach nourishment projects have the most volatile margins because they are most often exposed to variability in weather conditions.

 

7


1.    NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

Classification of Current Assets and Liabilities—The Company includes in current assets and liabilities amounts realizable and payable in the normal course of contract completion, unless completion of such contracts extends significantly beyond one year.

Cash Equivalents—The Company considers all highly liquid investments with a maturity at purchase of three months or less to be cash equivalents.

Accounts receivable-net—Accounts receivable represent amounts due or billable under the terms of contracts with customers, including amounts related to retainage. The Company anticipates collection of retainage generally within one year, and accordingly presents retainage as a current asset. In 2010 it was concluded that a portion of retainage would not be collected until after one year. This amount, $5,923, is classified as other non-current assets. The Company provides an allowance for estimated uncollectible accounts receivable when events or conditions indicate that amounts outstanding are not recoverable.

Inventories—Inventories consist of pipe and spare parts used in the Company’s dredging operations. Pipe and spare parts are purchased in large quantities; therefore, a certain amount of pipe and spare part inventories is not anticipated to be used within the current year and is classified as long-term. Inventories are stated at the weighted average historical cost.

Property and Equipment—Capital additions, improvements, and major renewals are classified as property and equipment and are carried at depreciated cost. Maintenance and repairs that do not significantly extend the useful lives of the assets or enhance the capabilities of such assets are charged to expenses as incurred. Depreciation is recorded over the estimated useful lives of property and equipment using the straight-line method and the mid-year depreciation convention. The estimated useful lives by class of assets are:

 

Class

   Useful Life
(years)
 

Buildings and improvements

     10   

Furniture and fixtures

     5-10   

Vehicles, dozers, and other light operating equipment and systems

     3-5   

Heavy operating equipment (dredges and barges)

     10-30   

Leasehold improvements are amortized over the shorter of their remaining useful lives or the remaining terms of the leases.

Goodwill and Other Intangibles—Goodwill represents the excess of cost over fair value. Other identifiable intangibles mainly represent developed technology and databases, customer relationships, and customer contracts acquired in business combinations and are being amortized over a one to ten-year period. Goodwill is tested annually for impairment in the third quarter of each year, or more frequently should circumstances dictate. GAAP requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

 

8


1.    NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Company assesses the fair values of its reporting units using 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. The income approach is dependent on a number of factors, including estimates of future market growth trends, forecasted revenues and expenses, expected periods the assets will be utilized, appropriate discount rates and other variables. The estimates are based on assumptions that the Company believes to be reasonable, but which are unpredictable and inherently uncertain. Changes in these estimates and assumptions could materially affect the determination of fair value, and may result in the impairment of goodwill in the event that actual results differ from those estimates.

The market approach measures the value of an entity 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 EBITDA. The Company analyzed companies that performed similar services or are considered peers. Due to the fact that there are no public companies that are our direct competitors, the Company weighed the results of this approach less than the income approach.

The Company operates in two reportable segments: dredging and demolition. These reportable segments are the Company’s operating segments and the reporting units at which the Company tests goodwill for impairment. The Company performed its most recent annual test of impairment as of July 1, 2010 for the goodwill in both the dredging and demolition segments with no indication of goodwill impairment as of the test date. As of the test date, the fair value of both the dredging segment and the demolition segment were in excess of their carrying values by approximately 25%. No test was performed in the fourth quarter as based on the segments’ current forecasts no triggering events which would require a test were deemed to have occurred. The Company will perform its next scheduled annual test of goodwill in the third quarter of 2011 should no triggering events occur which would require a test prior to the next annual test.

Long-Lived Assets—Long-lived assets are comprised of property and equipment and intangible assets subject to amortization. Long-lived assets to be held and used are reviewed for possible impairment whenever events indicate that the carrying amount of such assets may not be recoverable by comparing the undiscounted cash flows associated with the assets to their carrying amounts. If such a review indicates an impairment, the carrying amount would be reduced to fair value. If long-lived assets are to be disposed, depreciation is discontinued, if applicable, and the assets are reclassified as held for sale at the lower of their carrying amounts or fair values less estimated costs to sell. No triggering events were identified in 2010 or 2009.

Self-insurance Reserves—The Company self-insures costs associated with its seagoing employees covered by the provisions of Jones Act, workers’ compensation claims, hull and equipment liability, and general business liabilities up to certain limits. Insurance reserves are established for estimates of the loss that the Company will ultimately incur on reported claims, as well as estimates of claims that have been incurred but not yet reported. In determining its estimates, the Company considers historical loss experience and judgments about the present and expected levels of cost per claim. Trends in actual experience are a significant factor in the determination of such reserves.

The Company is a member of an insurance association that provides personal injury coverage for its maritime workforce in excess of self-insurance retention limits. The Company is subject to retroactive premium adjustments based on the association’s claims experience and investment performance. The Company accrues for retroactive premium adjustments when assessed by the insurance association. During the years ended December 31, 2010, 2009 and 2008, there were $2,207, $1,983 and $2,183 recorded for retroactive assessments, respectively.

Income Taxes—The provision for income taxes includes federal, foreign, and state income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities. Recorded deferred income tax assets and liabilities are based on the estimated future tax effects of differences between the financial and tax basis of assets and liabilities, given the effect of currently enacted tax laws.

 

9


1.    NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Fair Value of Financial Instruments—The carrying value of financial instruments included in current assets and current liabilities approximates fair values due to the short-term maturities of these instruments. The fair value of the Company’s long-term senior subordinated notes is $177,188 at December 31, 2010. The fair value of other financial instruments approximates their carrying values at December 31, 2010.

Noncontrolling Interest—The Company previously owned 85% of the capital stock of North American Site Developers, Inc. (“NASDI Inc”), a demolition service provider located in the Boston, Massachusetts area. On April 30, 2008, the Company acquired the remaining 15% of the capital stock from Christopher A. Berardi, the then President of NASDI Inc. Additionally, the Company entered into a series of transactions for the purpose of restructuring the Company’s arrangements with Mr. Berardi. Noncontrolling interest as currently recorded represents the 35% Class B interests in NASDI, LLC (“NASDI”) currently owned by Mr. Berardi.

On January 1, 2009 the Company acquired a 65% interest in Yankee Environmental Services (“Yankee”) (See Note 20).

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. At December 31, 2010, the impact of options to purchase shares of common stock (“NQSO”) was dilutive and, accordingly, no options are excluded from the calculation of diluted earnings per share based on the application of the treasury stock method. At December 31, 2009 and 2008, 356,774 stock options would have an antidilutive effect on earnings per share and therefore are excluded from the calculation.

The computations for basic and diluted earnings per share for the years ended December 31, 2010, 2009 and 2008 are as follows:

 

     2010      2009      2008  

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

   $ 34,609       $ 17,468       $ 4,979   

Weighted-average common shares outstanding—basic

     58,647         58,507         58,469   

Effect of stock options and restricted stock units

     224         105         9   
                          

Weighted-average common shares outstanding—diluted

     58,871         58,612         58,478   
                          

Earnings per share—basic

   $ 0.59       $ 0.30       $ 0.09   

Earnings per share—diluted

   $ 0.59       $ 0.30       $ 0.09   

2.    ACCOUNTS RECEIVABLE

Accounts receivable at December 31, 2010 and 2009, are as follows:

 

     2010     2009  

Completed contracts

   $ 20,093      $ 19,468   

Contracts in progress

     64,399        105,717   

Retainage

     12,711        29,966   
                
     97,203        155,151   

Allowance for doubtful accounts

     (1,655     (1,250
                

Total accounts receivable—net

   $ 95,548      $ 153,901   
                

 

10


3.    CONTRACTS IN PROGRESS

The components of contracts in progress at December 31, 2010 and 2009, are as follows:

 

     2010     2009  

Costs and earnings in excess of billings:

    

Costs and earnings for contracts in progress

   $ 287,291      $ 264,073   

Amounts billed

     (263,665     (236,780
                

Costs and earnings in excess of billings for contracts in progress

     23,626        27,293   

Costs and earnings in excess of billings for completed contracts

     1,216        711   
                

Total contract revenues in excess of billings

   $ 24,842      $ 28,004   
                

Billings in excess of costs and earnings:

    

Amounts billed

   $ (429,688   $ (434,893

Costs and earnings for contracts in progress

     415,204        409,992   
                

Total billings in excess of contract revenues

   $ (14,484   $ (24,901
                

4.    GOODWILL

The change in the carrying amount of goodwill during the years ended December 31, 2010 and 2009 is as follows:

 

     Dredging
Segment
     Demolition
Segment
    Total  

Balance—January 1, 2009

       

Goodwill

   $ 76,575       $ 26,040      $ 102,615   

Accumulated impairment losses

     —           (4,816     (4,816
                         
     76,575         21,224        97,799   

Goodwill acquired during 2009:

       

Acquisition of Yankee Environmental Services Inc.  

     —           250        250   
                         

Balance—December 31, 2009

     76,575         21,474        98,049   
     —           —          —     
                         

Balance—December 31, 2010

   $ 76,575       $ 21,474      $ 98,049   
                         

There were no changes in goodwill during 2010 as the Matteson acquisition resulted in no recognition of goodwill.

5.    PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2010 and 2009 are as follows:

 

     2010     2009  

Land

   $ 2,870      $ 2,870   

Buildings and improvements

     5,190        4,629   

Furniture and fixtures

     3,074        2,737   

Operating equipment

     499,976        435,103   
                

Total property and equipment

     511,110        445,339   

Accumulated depreciation

     (187,879     (154,182
                

Property and equipment—net

   $ 323,231      $ 291,157   
                

 

11


5.    PROPERTY AND EQUIPMENT (Continued)

 

Depreciation expense was $33,874, $32,251, and $29,684 for the years ended December 31, 2010, 2009, and 2008, respectively.

6.    SHARE-BASED COMPENSATION

The Company’s 2007 Long-Term Incentive Plan (the “Incentive Plan”), as approved by the Board of Directors on September 18, 2007, permits the grant of stock options, stock appreciation rights, restricted stock and restricted stock units (“RSUs”) to its employees and directors for up to 5.8 million shares of common stock.

Compensation cost charged to expense related to these stock-based compensation arrangements was $2,094, $1,078 and $315 for the years ended December 31, 2010, 2009 and 2008, respectively.

Non-qualified stock options

The NQSO awards were granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. The option awards generally vest in three equal annual installments commencing on the first anniversary of the grant date, and have ten year exercise periods.

The fair value of the NQSOs was determined at the grant date using a Black-Scholes option pricing model, which requires the Company to make several assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The annual dividend yield on the Company’s common stock is based on estimates of future dividends during the expected term of the NQSOs. The expected life of the NQSOs was determined based upon a simplified assumption that the NQSOs will be exercised evenly from vesting to expiration, as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected life.

For grants issued in 2010, the volatility assumptions were based on historical volatility of Great Lakes and comparable publicly-traded companies, primarily more mature and well-established companies in the engineering and construction sector.

For grants issued in 2009 and 2008, the volatility assumptions were based upon historical volatilities of comparable companies whose shares are traded using daily stock price returns equivalent to the expected term of the option. Due to a lack of sufficient historical information at the time these NQSOs were issued (since the Company’s shares were not publicly traded until December of 2006) the historical volatility data for the Company was not considered in determining expected volatility. The Company also considered implied volatility data for comparable companies, using current exchange traded options.

There is not an active market for options on the Company’s common stock and, as such, implied volatility for the Company’s stock was not considered. Additionally, the Company’s general policy is to issue new shares of registered common stock to satisfy stock option exercises or grants of restricted stock.

The weighted-average grant-date fair value of options granted during the years ended December 31, 2010, 2009 and 2008 was $2.52, $1.86 and $2.24 respectively. The fair value of each option was estimated using the following assumptions:

 

     2010     2009     2008  

Expected volatility

     50.0     60.0     45.0

Expected dividends

     1.2     1.8     1.3

Expected term (in years)

     5.5 - 6.5        5.0 - 6.0        5.5 - 6.5   

Risk free rate

     2.2% - 2.8     2.2     3.0

 

12


6.    SHARE-BASED COMPENSATION (Continued)

 

A summary of stock option activity under the Incentive Plan as of December 31, 2010 and 2009, and changes during the years ended December 31, 2010 and 2009 is presented below:

 

Options

   Shares     Weighted
Average
Exercise
Price
     Weighted-
Average
Remaining
Contract
Term (yrs)
     Aggregate
Intrinsic
Value
($000’s)
 

Outstanding as of January 1, 2010

     727,843      $ 4.60         8.4       $ 505   

Granted

     347,485        5.70         9.4         987   

Exercised

     (135,962     —           —           —     

Forfeited or Expired

     (98,922     —           —           —     
                                  

Outstanding as of December 31, 2010

     840,444      $ 4.99         8.6       $ 692   
                                  

Vested at December 31, 2010

     400,510      $ 4.84         7.9       $ 677   

Vested or expected to vest at December 31, 2010

     802,013      $ 5.82         9.9       $ 804   

Restricted stock units

RSUs generally vest in one installment on the third anniversary of the grant date. The fair value of RSUs was based upon the Company’s stock price on the date of grant. A summary of the status of the Company’s non-vested RSUs as of December 31, 2010 and 2009, and changes during the years ended December 31, 2010 and 2009 is presented below:

 

Nonvested Restricted Stock Units

   Shares     Grant
Date Price
     Weighted-
Average Grant-
Date Fair Value
 

Outstanding as of January 1, 2010

     285,600      $ 4.63       $ 4.63   

Granted

     122,716        5.70         5.70   

Vested

     (13,302     —           —     

Forfeited

     (39,716     —           —     
                         

Outstanding as of December 31, 2010

     355,298      $ 4.97       $ 5.69   
                         

Vested at December 31, 2010

     13,302      $ 5.41       $ 5.41   

Vested or expected to vest at December 31, 2010

     319,035      $ 5.01       $ 5.01   

As of December 31, 2010, there was $1.1 million of total unrecognized compensation cost related to non-vested NQSOs and RSUs granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.1 years.

Director Compensation

Beginning in May 2008, the Company used a combination of cash and stock-based compensation to attract and retain qualified candidates to serve on our Board of Directors. Compensation is paid to non-employee directors. Directors who are not outside directors receive no additional compensation for services as members of the Board or any of its committees. All of our directors are outside directors with the exception of Jonathan W. Berger and Bruce J. Biemeck. Douglas B. Mackie, remains a director but is no longer an employee of the Company. Through December 31, 2010, he has not yet received any compensation as a director. Stock-based compensation is paid pursuant to the Incentive Plan. Each non-employee director of the Company received an annual retainer of $125,000, payable quarterly in arrears, and was paid 50% in cash and 50% in common stock of the Company.

In the years ended December 31, 2010 and 2009, 60,651 and 57,796 shares, respectively, of the Company’s common stock were issued to non-employee directors under the Incentive Plan.

In September 2010, Messrs Berger and Biemeck each received 9,208 shares of the Company’s common stock per the terms of their respective employment agreements.

 

13


7.    INTANGIBLE ASSETS

At December 31, 2010, the net book value of identifiable intangible assets was as follows:

 

As of December 31, 2010

   Cost      Accumulated
Amortization
     Net  

Customer relationships

   $ 1,481       $ 1,223       $ 258   

Backlog

     2,611         480         2,131   

Software and databases

     1,209         991         218   

Non-compete agreement

     744         137         607   

Trade names

     88         35         53   

Other

     83         70         13   
                          
   $ 6,216       $ 2,936       $ 3,280   
                          

At December 31, 2009, the net book value of identifiable intangible assets was as follows:

 

As of December 31, 2009

   Cost      Accumulated
Amortization
     Net  

Customer relationships

   $ 1,481       $ 1,047       $ 434   

Demolition backlog

     480         480         —     

Software and databases

     1,209         849         360   

Non-compete agreement

     205         68         137   

Trade names

     88         18         70   

Other

     83         47         36   
                          
   $ 3,546       $ 2,509       $ 1,037   
                          

On January 1, 2009 the Company acquired a 65% interest in Yankee Environmental Services, Inc. (“Yankee”) resulting in the recognition of additional intangible assets (See Note 20). The weighted average amortization period for intangible assets acquired in 2009 is 3.2 years.

On December 31, 2010 the Company acquired the assets of L.W. Matteson, Inc. (“Matteson”) resulting in the recognition of additional intangible assets (See Note 19). The weighted average amortization period for intangible assets acquired in 2010 is 1.8 years.

Amortization expense was $427, $773 and $440, for the years ended December 31, 2010, 2009 and 2008, respectively. Prior to 2010, amortization expense was shown separately in the consolidated statements of operations, but is now included as a component of general and administrative expenses. Amortization expense related to these intangible assets is estimated to be $2,466 in 2011, $254 in 2012, $254 in 2013, $163 2014 and $143 in 2015.

8.    OTHER NONCURRENT ASSETS

At December 31, 2010 and 2009, other noncurrent assets include $1,500 of cash held in escrow as security for the Company’s lease rental obligation under a long-term equipment operating lease.

9.    ACCRUED EXPENSES

Accrued expenses at December 31, 2010 and 2009 are as follows:

 

     2010      2009  

Payroll and employee benefits

   $ 13,573       $ 11,233   

Insurance

     11,039         8,521   

Income and other taxes

     2,977         4,094   

Percentage of completion adjustment

     3,232         5,901   

Interest

     604         726   

Other

     1,384         790   
                 

Total accrued expenses

   $ 32,809       $ 31,265   
                 

 

14


10.    RELATED-PARTY TRANSACTIONS

The demolition business is operated out of a building owned by Christopher A. Berardi, who has a 35% profits interest in NASDI. In 2010, 2009 and 2008, NASDI paid Mr. Berardi $312, $312 and $359, respectively, for rent and property taxes.

Matteson operates out of a facility owned by Lawrence W. Matteson, former owner of Matteson. The Company will pay $95 in rent to Mr. Matteson during 2011. As the purchase of Matteson occurred on December 31, 2010, no rents were paid in 2010.

11.    LONG-TERM DEBT

Long-term debt at December 31, 2010 and 2009 is as follows:

 

     2010     2009  

Equipment notes payable

   $ 366      $ 1,450   

Note payable

     7,500        —     

Revolving credit facility

     —          11,000   

7.75% senior subordinated notes

     175,000        175,000   
                

Subtotal

     182,866        187,450   

Current portion of note payable

     (2,500     —     

Current portion of equipment debt

     (303     (1,200
                

Total

   $ 180,063      $ 186,250   
                

On June 12, 2007, the Company entered into a credit agreement (the “Credit Agreement”) with Bank of America N.A. as Administrative Agent and Issuing Lender, various other financial institutions as lenders and certain subsidiaries of the Company as Loan Parties. The Credit Agreement, provides for a revolving credit facility of up to $145,000 in borrowings and includes sublimits for the issuance of letters of credit and swingline loans. The revolving credit facility matures on June 12, 2012. The revolving credit facility bears interest at rates selected at the option of Great Lakes, currently equal to either LIBOR plus an applicable margin or the Base Rate plus an applicable margin. The applicable margins for LIBOR loans and Base Rate loans, as well as any non-use fee, are subject to adjustment based upon the Company’s ratio of Total Funded Debt to Adjusted Consolidated Earnings before interest, taxes, depreciation and amortization (“EBITDA”) (each as defined in the Credit Agreement).

The obligations of Great Lakes under the Credit Agreement are unconditionally guaranteed by its direct and indirect domestic subsidiaries. Additionally, the obligations are secured by a perfected first priority lien on certain equipment of Great Lakes’ subsidiary, Great Lakes Dredge & Dock Company, LLC (“GLDD Company”); a perfected second priority lien on certain other equipment of GLDD Company, subject to a perfected first priority lien in favor of Great Lakes’ bonding company; a perfected first priority lien on the intercompany receivables of Great Lakes and its direct and indirect domestic subsidiaries and having an equal priority to the liens of Great Lakes’ bonding company; and a perfected second priority lien on the accounts receivable of Great Lakes and its direct and indirect subsidiaries that relate to bonded projects. The Credit Agreement contains various covenants and restrictions, including (i) limitations on dividends to $5 million per year, (ii) limitations on redemptions and repurchases of capital stock, (iii) limitations on the incurrence of indebtedness, liens, leases, and investments, and (iv) maintenance of certain financial covenants.

As of December 31, 2010, the Company had no borrowings and $11,923 of letters of credit outstanding, resulting in $133,077 of availability under the Credit Agreement.

During a year, the Company frequently borrows and repays amounts under its revolving credit facility. The net activity in 2010 and 2009 resulted in a decrease in debt balances of $11,000 and $30,500, respectively.

 

15


11.    LONG-TERM DEBT (Continued)

 

The Company incurred amortization of deferred financing fees related to the Credit Agreement of $590 and $593 for the years ended December 31, 2010 and 2009, respectively.

At December 31, 2010, the Company was in compliance with its various covenants under its Credit Agreement.

Great Lakes has a $24,000 International Letter of Credit Facility with Wells Fargo HSBC Trade Bank. This facility is used for performance and advance payment guarantees on foreign contracts, including our long-term land reclamation project in Bahrain (“Diyar”). The Company’s obligations under the agreement are guaranteed by the Company’s foreign accounts receivable. In addition, the Export-Import Bank of the United States (“Ex-Im”) has issued a guarantee under the Ex-Im Bank’s Working Capital Guarantee Program, which covers 90% of the obligations owing under the facility. At December 31, 2010, there were $15,703 letters of credit outstanding on this facility.

The Company has $175,000 of 7.75% senior subordinated notes (“Notes”) outstanding that mature on December 15, 2013. The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior debt, including borrowings under the Credit Agreement. The Company’s obligations under the Notes are guaranteed on a senior subordinated basis by all of the Company’s domestic subsidiaries.

In accordance with the purchase of Matteson (See Note 19), the Company issued a secured promissory note in the amount of $7,500 to the former owners of Matteson. Principal payments of $2,500 are due on December 31, 2011, 2012 and 2013. Interest payments at the rate of 6% are due quarterly.

The scheduled principal payments through the maturity date of the Company’s long-term debt, excluding equipment notes, at December 31, 2010, are as follows:

 

Years Ending December 31

      

2011

   $ 2,500   

2012

     2,500   

2013

     177,500   

2014

     —     

2015

     —     
        

Total

   $ 182,500   
        

In January 2011, the Company redeemed all of the Notes for $180,014, which included a premium, a redemption fee and accrued and unpaid interest. Also in January 2011 the Company issued $250,000 of 7.375% senior unsecured notes due February 1, 2019. The notes were priced at 100% of face value and the proceeds were used to redeem the Company’s Notes. Proceeds received from the issuance of these notes, net of expenses were $244,899. These new notes are senior unsecured obligations of the Company and its subsidiaries that guarantee the Notes. Each of the Company’s existing and future wholly owned domestic subsidiaries are guarantors of the Notes.

The Company sometimes enters into equipment note arrangements to finance the acquisition of dozers and excavators. In 2010 and 2009, the Company entered into equipment notes totaling $109 and $615, respectively. The current portion of equipment notes payable is $303 and $1,200, at December 31, 2010 and 2009, respectively. The long-term portion of these equipment notes is included in other long-term liabilities and totaled $63 and $250 at December 31, 2010 and 2009, respectively. The terms of these equipment notes extend through 2012. The net book value of the related assets was $1,335 and $3,499 at December 31, 2010 and 2009, respectively. Payments on these equipment notes will be $303, $39, and $24 in 2011, 2012, and 2013.

12.    RISK MANAGEMENT ACTIVITIES

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

 

16


12.    RISK MANAGEMENT ACTIVITIES (Continued)

 

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 December 31, 2010 and 2009, the Company held certain derivative contracts that it uses to manage commodity price risk and interest rate risk. Such instruments are not used for trading purposes. The fair value of these derivative contracts is summarized as follows:

 

           Fair Value Measurements at Reporting Date
Using
 

Description

   At
December 31,
2010
    Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Fuel hedge contracts

   $ 595      $ —         $ 595       $ —     

Interest rate swap contracts-assets

     1,264        —           —           1,264   
                                  

Total assets measured at fair value

   $ 1,859      $ —         $ 595       $ 1,264   
                                  
           Fair Value Measurements at Reporting Date
Using
 

Description

   At
December 31,
2009
    Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Fuel hedge contracts

   $ 897      $ —         $ 897       $ —     

Interest rate swap contracts-assets

     1,529        —           —           1,529   

Interest rate swap contracts-liabilities

     (1,549     —           —           (1,549
                                  

Total assets measured at fair value

   $ 877      $ —         $ 897       $ (20
                                  

Interest Rate Swaps

In May 2009, the Company entered into two interest rate swap arrangements, which are effective through December 15, 2012, to swap a notional amount of $50 million from a fixed rate of 7.75% to a floating LIBOR-based rate in order to manage the interest rate paid with respect to the Company’s 7.75% senior subordinated notes. The current portion of the fair value asset of the swaps at December 31, 2010 is $816 and is recorded in other current assets. The long-term portion of the fair value asset of the swaps at December 31, 2010 was $448 and is recorded in other assets. The current portion of the fair value asset of the swap at December 31, 2009 is $1,529 and is recorded in current assets. The long-term portion of the fair value liability of the swaps at December 31, 2009 was $1,549 and is recorded in other long-term liabilities. The swap is not accounted for as a hedge; therefore, the changes in fair value are recorded as adjustments to interest expense in each reporting period.

 

17


12.    RISK MANAGEMENT ACTIVITIES (Continued)

 

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

 

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

Balance at January 1, 2009

   $ —     

Transfers to Level 3

     —     

Total unrealized gains or (losses) included in earnings

     (485

Total gains or (losses) included in other comprehensive income

     —     

Purchases and settlements

     465   
        

Balance at December 31, 2009

   $ (20
        

Transfers to Level 3

     —     

Total unrealized gains or (losses) included in earnings

     419   

Total gains or (losses) included in other comprehensive income

     —     

Purchases and settlements

     865   
        

Balance at December 31, 2010

   $ 1,264   
        

Fuel Hedge Contracts

The Company is exposed to certain market risks, primarily commodity price risk as it relates to the diesel fuel purchase requirements that 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 does not hold or issue derivatives for speculative or trading purposes. The Company’s goal is to hedge approximately 80% of the fuel requirements for work in backlog.

As of December 31, 2010, 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 October 2011. As of December 31, 2010, there were 5.3 million gallons remaining on these contracts which represent approximately 80% of the Company’s forecasted fuel purchases through October 2011. Under these swap agreements, the Company will pay fixed prices ranging from $2.13 to $2.55 per gallon.

The Company designates the commodity swap contracts as a cash flow hedge as defined by GAAP. Accordingly, the Company formally documents, at the inception of each hedge, all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to highly-probable forecasted transactions.

The Company formally assesses, at inception and on an ongoing basis, the effectiveness of hedges in offsetting changes in the cash flows of hedged items. Hedge accounting treatment is discontinued when (1) it is determined that the derivative is no longer highly effective in offsetting changes in the cash flows of a hedged item (including hedged items for forecasted fuel purchases), (2) the derivative expires or is sold, terminated or exercised, (3) it is no longer probable that the forecasted transaction will occur or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. If management elects to stop hedge accounting for its fuel hedges, it would be on a prospective basis and any hedges in place would be recognized in Accumulated Other Comprehensive Income (Loss) (“AOCI”) until all the related forecasted fuel purchases are utilized.

The Company is exposed to counterparty credit risk associated with non-performance of its hedging instruments. The Company’s risk would be limited to any unrealized gains on current positions. To help mitigate this risk, the Company transacts only with counterparties that are rated as investment grade or higher. In addition, all counterparties are monitored on a continuous basis.

 

18


12.    RISK MANAGEMENT ACTIVITIES (Continued)

 

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

At December 31, 2010 and 2009, the fair value asset on the fuel hedge contracts was estimated to be $595 and $897, respectively, and is recorded in other current assets. The gain reclassified to earnings from changes in fair value of derivatives, net of taxes, in 2010 was $321. The remaining gains included in accumulated other comprehensive income at December 31, 2010 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 interest rate and fuel hedge contracts outstanding as of December 31, 2010 and 2009, respectively, is as follows:

 

     Fair Value of Derivatives
At December 31, 2010
 
     Balance Sheet
Location
   Fair Value
Asset
     Balance Sheet
Location
   Fair Value
Liability
 

Interest rate swaps

   Other current assets    $ 816       Accrued expenses    $ —     

Interest rate swaps

   Other assets      448       Other Liabilities      —     

Fuel hedge contracts

   Other current assets      595       Accrued expenses      —     
                       

Total Derivatives

      $ 1,859          $ —     
                       
     Fair Value of Derivatives
At December 31, 2009
 
     Balance Sheet
Location
   Fair Value
Asset
     Balance Sheet
Location
   Fair Value
Liability
 

Interest rate swaps

   Other current assets    $ 1,529       Other Liabilities    $ (1,549

Fuel hedge contracts

   Other current assets      897       Accrued expenses      —     
                       

Total Derivatives

      $ 2,426          $ (1,549
                       

13.    INCOME TAXES

The provision for income taxes as of December 31, 2010, 2009 and 2008 is as follows:

 

     2010     2009     2008  

Federal:

      

Current

   $ 11,602      $ 7,632      $ 1,057   

Deferred

     6,772        1,737        1,896   

State:

      

Current

     2,431        1,967        1,186   

Deferred

     (602     (521     (300

Foreign—current

     351        168        —     
                        

Total

   $ 20,554      $ 10,983      $ 3,839   
                        

 

19


13.    INCOME TAXES (Continued)

 

The Company’s income tax provision reconciles to the provision at the statutory U.S. federal income tax rate as of December 31, 2010, 2009 and 2008 as follows:

 

     2010     2009      2008  

Tax provision at statutory U.S. federal income tax rate

   $ 18,996      $ 9,001       $ 3,189   

State income tax—net of federal income tax benefit

     1,497        729         519   

Foreign income tax benefit

     440        —           —     

Secondary offering expenses

     —          207         —     

Tax on (income) loss attributable to noncontrolling interests

     268        957         (103

Changes in unrecognized tax benefits

     (1,215     —           —     

Changes in valuation allowance

     59        

Other

     509        89         234   
                         

Income tax provision

   $ 20,554      $ 10,983       $ 3,839   
                         

At December 31, 2010 and 2009, the Company had net operating loss carryforwards for state income tax purposes totaling $17,481 and $7,778, respectively. The outstanding carryforwards will expire between 2017 and 2024. At December 31, 2010, a valuation allowance has been established for a portion of the deferred tax asset related to these state net operating loss carryforwards in the amount of $271.

The Company also has foreign net operating loss carryforwards of approximately $7,463 and $5,445 as of December 31, 2010 and 2009, respectively. The net operating losses expire between 2010 and 2030. At December 31, 2010 and 2009, a full valuation allowance has been established for the deferred tax asset of $1,265 and $1,477 respectively, related to foreign net operating loss carryforwards, as the Company believes it is more likely than not that the net operating loss carryforwards will not be realized.

As of December 31, 2010 and 2009, the Company had $630 and $2,038, respectively, in unrecognized tax benefits, the recognition of which would have an impact of $345 and $1,078 on the effective tax rate.

The Company does not expect that total unrecognized tax benefits will significantly increase or decrease within the next 12 months. Below is a tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period.

 

     2010     2009     2008  

Unrecognized tax benefits—January 1

   $ 2,038      $ 2,220      $ 1,867   

Gross increases—tax positions in prior period

     —          142        169   

Gross increases—current period tax positions

     —          69        184   

Gross decreases—expirations in prior period

     (113     (231  

Gross decreases—tax positions in prior period

     (1,015     (42  

Settlements

     (280     (120     —     
                        

Unrecognized tax benefits—December 31,

   $ 630      $ 2,038      $ 2,220   
                        

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2010 and 2009, the Company had approximately $175 and $765, respectively, of interest and penalties recorded.

The Company files income tax returns at the U.S. federal level and in various state and foreign jurisdictions. U.S. federal income tax years prior to 2007 are closed and no longer subject to examination. With few exceptions, the statute of limitations in state taxing jurisdictions in which the Company operates has expired for all years prior to 2006. In foreign jurisdictions in which the Company operates all significant years are closed and are no longer subject to examination.

 

20


13.    INCOME TAXES (Continued)

 

The Company’s deferred tax assets (liabilities) at December 31, 2010 and 2009 are as follows:

 

     2010     2009  

Deferred tax assets:

    

Accrued liabilities

   $ 10,387      $ 7,075   

Foreign NOLs

     1,265        1,477   

State NOLs

     777        625   

Valuation allowance

     (1,536     (1,477
                

Total deferred tax assets

     10,893        7,700   
                

Deferred tax liabilities:

    

Depreciation and amortization

     (94,713     (83,694

Investment in NASDI, LLC and Yankee Environmental Services

     (155     (576

Fuel hedges

     (237     (358
                

Total deferred tax liabilities

     (95,105     (84,628
                

Net deferred tax liabilities

   $ (84,212   $ (76,928
                

As reported in the balance sheet:

    

Net current deferred tax assets (included in other current assets)

   $ 8,254      $ 4,714   

Net noncurrent deferred tax liabilities

     (92,466     (81,642
                

Net deferred tax liabilities

   $ (84,212   $ (76,928
                

Deferred tax assets relate primarily to reserves and other liabilities for costs and expenses not currently deductible for tax purposes. Deferred tax liabilities relate primarily to the cumulative difference between book depreciation and amounts deducted for tax purposes. With the exception of certain state and foreign net operating loss carryforwards, a valuation allowance has not been recorded to reduce the balance of deferred tax assets at either December 31, 2010, or December 31, 2009, because the Company believes that it is more likely than not that the deferred income tax assets will ultimately be realized.

14.    LEASE COMMITMENTS

The Company leases certain operating equipment and office facilities under long-term operating leases expiring at various dates through 2020. The equipment leases contain renewal or purchase options that specify prices at the then fair value upon the expiration of the lease terms. The leases also contain default provisions that are triggered by an acceleration of debt maturity under the terms of the Company’s Credit Agreement, or, in certain instances, cross default to other equipment leases and certain lease arrangements require that the Company maintain certain financial ratios comparable to those required by its Credit Agreement. Additionally, the leases typically contain provisions whereby the Company indemnifies the lessors for the tax treatment attributable to such leases based on the tax rules in place at lease inception. The tax indemnifications do not have a contractual dollar limit. To date, no lessors have asserted any claims against the Company under these tax indemnification provisions.

In 2008 the Company entered into a sale-leaseback transaction for the vessel GL177. The Company sold the vessel for $16,665, and an immaterial loss was recorded on the sale. Proceeds of the sale were used for general corporate purposes. The Company will lease the vessel through November 2017 under a long-term operating lease.

 

21


14.    LEASE COMMITMENTS (Continued)

 

Future minimum operating lease payments at December 31, 2010, are as follows:

 

2011

   $ 17,372   

2012

     15,887   

2013

     14,270   

2014

     13,811   

2015

     13,832   

Thereafter

     33,838   
        

Total minimum operating lease payments

   $ 109,010   
        

Total rent expense under long-term operating lease arrangements for the years ended December 31, 2010, 2009 and 2008 was $17,397, $17,718, and $17,480, respectively. This excludes expenses for equipment and facilities rented on a short-term, as-needed basis.

15.    RETIREMENT PLANS

The Company sponsors three 401(k) savings plans, one covering substantially all non-union salaried employees (“Salaried Plan”), a second covering its non-union hourly employees (“Hourly Plan”) and a third plan specifically for its employees that are members of a tugboat union. Under the Salaried Plan and Hourly Plan, individual employees may contribute a percentage of compensation and the Company will match a portion of the employees’ contributions. Additionally, the Salaried Plan includes a profit-sharing component, permitting the Company to make discretionary employer contributions to all eligible employees of the Salaried Plan. The Company’s expense for matching and discretionary contributions for 2010, 2009 and 2008, was $4,726, $4,086, and $3,853, respectively. Participation in and contributions to the plan for the tugboat union employees are not significant.

The Company also contributes to various multi-employer pension plans pursuant to collective bargaining agreements. In the event of a plan’s termination or the Company’s withdrawal from a plan, the Company may be liable for a portion of the plan’s unfunded vested benefits. However, information from the plans’ administrators is not available to permit the Company to determine its share, if any, of unfunded vested benefits. Total contributions to multi-employer pension plans for the years ended December 31, 2010, 2009 and 2008, were $8,058, $6,662, and $6,013, respectively.

 

22


16.     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 2010, 2009 and 2008, is provided as follows:

 

     2010     2009     2008  

Dredging:

      

Contract revenues

   $ 608,969      $ 574,311      $ 484,659   

Operating income

     70,504        49,844        22,209   

Depreciation and amortization

     31,532        29,853        27,751   

Total assets

     646,158        626,746        591,179   

Property and equipment—net

     315,140        281,520        287,614   

Goodwill

     76,575        76,575        76,575   

Investment in joint ventures

     7,329        7,943        8,949   

Capital expenditures

     28,838        23,924        43,224   

Demolition:

      

Contract revenues

     77,953        47,933        102,220   

Operating income (loss)

     (2,074     (7,593     3,888   

Depreciation and amortization

     2,769        3,170        2,373   

Total assets

     47,667        38,680        74,976   

Property and equipment—net

     8,091        9,637        9,271   

Goodwill

     21,474        21,474        21,224   

Capital expenditures

     1,025        3,375        3,678   

Total:

      

Contract revenues

     686,922        622,244        586,879   

Operating income

     68,430        42,251        26,097   

Depreciation and amortization

     34,301        33,023        30,124   

Total assets

     693,825        665,426        666,155   

Property and equipment—net

     323,231        291,157        296,885   

Goodwill

     98,049        98,049        97,799   

Investment in joint ventures

     7,329        7,943        8,949   

Capital expenditures

     29,863        27,299        46,902   

The Company classifies the revenue related to its dredging projects into the following types of work:

 

     2010      2009      2008  

Capital dredging—U.S.

   $ 300,873       $ 203,147       $ 153,414   

Capital dredging—foreign

     82,898         134,123         172,345   

Beach nourishment dredging

     106,163         62,133         63,550   

Maintenance dredging

     119,035         174,908         95,350   
                          

Total Dredging

   $ 608,969       $ 574,311       $ 484,659   
                          

The Company derived revenues and gross profit from foreign project operations for the years ended December 31, 2010, 2009 and 2008, as follows:

 

     2010     2009     2008  

Contract revenues

   $ 82,898      $ 134,123      $ 172,345   

Costs of contract revenues

     (76,708     (124,355     (143,333
                        

Gross profit

   $ 6,190      $ 9,768      $ 29,012   
                        

 

23


16.     SEGMENT INFORMATION (Continued)

 

In 2010, 2009 and 2008, the majority of the Company’s foreign revenue came from projects in the Middle East, primarily Bahrain. 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. As of December 31, 2010 and 2009, long-lived assets with a net book value of $110,586 and $102,285, respectively, were located outside of the U.S.

The Company’s pre- tax income from domestic and foreign operations for the years ended December 31, 2010, 2009 and 2008 is as follows:

 

     2010     2009     2008  

Pre-tax income from domestic operations

   $ 56,333      $ 28,745      $ (1,827

Pre-tax income from foreign operations

     (2,059     (3,028     10,938   
                        

Total pre-tax income

   $ 54,274      $ 25,717      $ 9,111   
                        

17.     CONCENTRATIONS OF RISK

The Company’s primary dredging customer is the U.S. Army Corps of Engineers (the “Corps”), which has responsibility for federally funded projects related to waterway navigation and flood control. In 2010, 2009 and 2008, 53.5%, 56.0%, and 48.6%, respectively, of contract revenues were earned from dredging contracts with federal government agencies, including the Corps, as well as other federal entities such as the U.S. Coast Guard and U.S. Navy. At December 31, 2010 and 2009, approximately 32.9% and 47.4%, respectively, of accounts receivable, including contract revenues in excess of billings, were due on dredging contracts with federal government agencies. The Company depends on its ability to continue to obtain federal government dredging contracts, and indirectly, on the amount of federal funding for new and current government dredging projects. Therefore, the Company’s dredging operations can be influenced by the level and timing of federal funding.

In addition, the Company’s work overseas is primarily with the government of Bahrain which accounted for 8.1%, 20.3%, and 27.5% of total revenue in 2010, 2009 and 2008, respectively. At December 31, 2010 and 2009, approximately 20.7% and 35.5%, respectively, of accounts receivable, including contract revenues in excess of billings, were due on dredging contracts with the government of Bahrain. There is a dependence on future projects in the Bahrain region, as vessels are currently located there. However, certain of the vessels located in Bahrain can be moved back to the US or all can be moved to other international markets as opportunities arise.

18.     COMMITMENTS AND CONTINGENCIES

Performance and bid bonds are customarily required for dredging and marine construction projects, as well as some demolition projects. The Company obtains its performance and bid bonds through a bonding agreement with a surety company that has been granted a security interest in a substantial portion of the Company’s operating equipment with a net book value of $70,662 at December 31, 2010. The bonding agreement contains provisions requiring the Company to maintain certain financial ratios and restricting the Company’s ability to pay dividends, incur indebtedness, create liens and take certain other actions. At December 31, 2010, the Company was in compliance with its various covenants under the bonding agreement. Bid bonds are generally obtained for a percentage of bid value and amounts outstanding typically range from $1 million to $10 million. At December 31, 2010, the Company had outstanding performance bonds valued at approximately $368,964; however, the revenue value remaining in backlog related to these projects totaled approximately $176,487.

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.

 

24


18.     COMMITMENTS AND CONTINGENCIES (Continued)

 

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. Although the Company is subject to various claims and legal actions that arise in the ordinary course of business, except as described below, the Company is not currently a party to any material legal proceedings or environmental claims.

The Company or its former subsidiary, NATCO Limited Partnership, is named as a defendant in approximately 251 asbestos-related personal injury lawsuits, the majority of which were filed between 1989 and 2000. All of the cases, filed against the Company prior to 1996, were administratively dismissed in May 1996 and any cases filed since that time have similarly been administratively transferred to the inactive docket. Over the last year, hundreds of lawsuits have been reactivated in an effort to clean out the administrative docket. Prior to the commencement of discovery in any of the reactivated cases, counsel for plaintiffs agreed to name a group of cases that they intended to pursue and to dismiss the remaining cases without prejudice. Plaintiffs have now named 33 cases against the Company that they intend to pursue, each of which involves one plaintiff. The remaining cases against the Company, either have been or will be dismissed. Plaintiffs in the dismissed cases could file a new lawsuit if they develop a new disease allegedly caused by exposure to asbestos on board our vessels. Management does not believe that any of the 33 lawsuits will have a material adverse impact on our consolidated financial statements. We are presently unable to quantify the amounts of damages being sought in these lawsuits because none of the complaints specify a damage amount; therefore, we have not accrued any amounts in respect of these lawsuits. We do not believe that it is probable that losses from these claims could be material, and an estimate of a range of losses relating to these claims cannot reasonably be made.

On August 26, 2009, NASDI received a letter stating that the Attorney General for the Commonwealth of Massachusetts is investigating alleged violations of the Massachusetts Solid Waste Act. NASDI believes that the 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. Although the matter remains open, no lawsuit has been filed. Per the Attorney General’s request, NASDI executed a tolling agreement regarding the matter. Should charges be brought, NASDI intends to defend itself vigorously on this matter. Based on consideration of all of the facts and circumstances now known, the Company does not believe this claim will have a material adverse impact on its financial position or results of operations and cash flows.

19.     MATTESON ACQUISITION

On December 31, 2010, the Company acquired the assets of L.W. Matteson, Inc., a maintenance dredging, environmental dredging and levee construction company located in Burlington, IA, for a base purchase price of $45 million. The Matteson acquisition expands the Company’s service offering into inland river, lakes and environmental dredging and levee construction using dredge material. The purchase price was subject to an adjustment based upon the closing working capital balance, which resulted in the recognition of additional purchase price of $369. Furthermore, the seller may receive cash payments for any of the calendar years ended 2011, 2012 and 2013 if certain earnings based criteria are met. Per the purchase agreement, if Business EBITDA for any of these calendar years exceeds $9.0 million but is equal to or less than $12.0 million, the earnout payment shall be an amount equal to the product of (i) the amount by which Business EBITDA for such earnout period exceeds $9.0 million multiplied by (ii) 15%, and if Business EBITDA for such earnout period is greater than $12.0 million, the earnout payment shall be in an amount equal to the sum of (i) $450 plus (ii) the product of (x) the amount by which Business EBITDA for such earnout period exceeds $12.0 million multiplied by (y) 25%. There is no limit to the amount of earnout the seller may receive. The fair value of the recorded earnout liability is $1,640 of which $547 is recorded in accrued liabilities and $1,093 is recorded in other liabilities.

 

25


19.     MATTESON ACQUISITION (Continued)

 

Matteson operates within the dredging segment.

The acquisition was funded with $37.5 million in cash and a seller note of $7.5 million. The following table summarizes the allocation of purchase price:

 

Property, plant and equipment

   $ 36,173   

Inventories

     4,637   

Accounts receivable

     4,173   

Intangible assets

     2,670   

Other assets and liabilities - net

     (644
        

Total

   $ 47,009   
        

The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed using estimated fair values as of the acquisition date.

Amortization expense related to these intangible assets is estimated to be $2,239 in 2011, and $108 in 2012, 2013, 2014 and 2015. See Note 7 for more details on intangible assets.

As the acquisition took place on December 31, 2010, no income or earnings of Matteson were included in the consolidated statement of operations of the Company for the period ended December 31, 2010.

The following unaudited pro forma consolidated financial information present the consolidated results of operations of the Company as they may have appeared had the acquisition described above occurred as of January 1, 2009 for purposes of the unaudited pro forma consolidated statements of operations.

The unaudited pro forma consolidated financial information are provided for illustrative purposes only and do not purport to present what the actual results of operations would have been had the transaction actually occurred on the date indicated, nor does it purport to represent results of operations for any future period. The information does not reflect any cost savings or other benefits that may be obtained through synergies among the operations of the Company.

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

 

     2010      2009  
     (Unaudited)  

Revenue as reported

   $ 686,922       $ 622,244   

Revenue of purchased businesses for the period prior to acquisition

     37,183         41,003   
                 

Pro forma revenue

   $ 724,105       $ 663,247   
                 

Net income attributable to common stockholders of Great Lakes Dredge & Dock Corporation

   $ 34,609       $ 17,468   

Net income of Matteson including pro forma acquisition accounting adjustments

     3,257         4,134   
                 

Pro forma net income attributable to common stockholders of Great Lakes Dredge & Dock Corporation

   $ 37,866       $ 21,602   
                 

 

26


20.     YANKEE ACQUISITION

On January 1, 2009, the Company acquired Yankee. The acquisition of this business was accomplished as an asset purchase through a new subsidiary, Yankee Environmental Services, LLC. The total purchase price was $1,891 of which NASDI Holdings, contributed 65% of the purchase price, $1,229, with the remaining 35% of the purchase price paid by other investors, one of which is Christopher A. Berardi. Yankee provides environmental remediation services including asbestos abatement and removal of other hazardous materials to private and government entities including schools, universities, hospitals and other businesses throughout the New England area. Yankee has previously been a subcontractor on many NASDI projects, and continues to serve as a subcontractor on many NASDI projects subsequent to the acquisition. The acquisition of Yankee provides an avenue to diversify the Company’s demolition business to include abatement capabilities and make NASDI more competitive on jobs requiring these services. Yankee operates within the demolition segment.

The assets and liabilities associated with this 65% interest were adjusted to their estimated fair values. A summary of the allocation of purchase price to the assets acquired is as follows:

 

Property, plant and equipment

   $ 725   

Intangible assets

     879   

Goodwill

     250   

Other assets and liabilities

     37   
        

Total

   $ 1,891   

Noncontrolling interests

     662   
        

Company’s interest in Yankee

   $ 1,229   
        

Amortization expense related to these intangible assets is estimated to be $125 in 2011, $43 in 2012 and 2013 and $26 in 2014 and 2015. See Note 7 for more details on intangible assets.

21.     SENIOR MANAGEMENT REORGANIZATION

In April 2010, the Board of Directors of the Company eliminated the position of Chief Operating Officer and created a new position, President of Dredging Operations. In connection with this operational restructuring, Richard M. Lowry, Chief Operating Officer, left the Company and is receiving severance in accordance with his Employment Agreement.

On September 7, 2010, the Company announced the resignation of Douglas B. Mackie as President and Chief Executive Officer and the appointment of Jonathan W. Berger as Chief Executive Officer. Mr. Mackie will serve as Chairman Emeritus and Senior Advisor and continue as a director through his current term which expires at the 2011 Annual Meeting of Stockholders. Also, on September 7, 2010, the Company announced the resignation of Deborah A. Wensel as Senior Vice President, Chief Financial Officer, Treasurer and Secretary and the appointment of Bruce J. Biemeck as the President and Chief Financial Officer.

The Company recorded expense of $6,428, in connection with these arrangements during 2010. These payments are being made over a one to three year period per the terms of each former executive’s arrangement and, as of December 31, 2010, $4,474 remained unpaid and was included in accrued expense and other liabilities.

Effective September 7, 2010, Messrs. Berger and Biemeck continue as directors but are no longer appointed to Board Committees and Mr. Biemeck no longer serves as Lead Director.

 

27


22.     SUBSIDIARY GUARANTORS

The Company’s long-term debt at December 31, 2010 includes $175,000 of 7.75% senior subordinated notes which mature on December 15, 2013. The Company’s obligations under the senior subordinated notes are guaranteed by the Company’s domestic subsidiaries. Such guarantees are full, unconditional and joint and several. In January 2011, the Company redeemed these Notes (See Note 11).

Also in January 2011 the Company issued $250,000 of 7.375% senior unsecured notes due February 1, 2019 (“New Notes”). In connection with the private placement of the New Notes, the Company entered into an agreement giving registration rights to initial purchasers of the New Notes (the “Registration Rights Agreement”). The terms of the Registration Rights Agreement require, among other things, that the Company will use its commercially reasonable efforts to consummate an offer to exchange the New Notes for registered, publicly tradable notes that have substantially identical terms as the New Notes (the “Exchange Notes”). The Exchange Notes will be guaranteed by the Company’s wholly-owned domestic subsidiaries (the “Exchange Notes Guarantors”). Such guarantees are full, unconditional and joint and several. The Exchange Note Guarantors are presented in this supplemental financial information as “Subsidiary Guarantors.” The New Notes and the Exchange Notes are not included in this supplemental financial information as they were issued subsequent to December 31, 2010.

In April 2011 and effective as of January 2011, the Company acquired the remaining non-controlling equity interest in NASDI that the Company did not previously own. As a result, NASDI became a wholly-owned domestic subsidiary and a Subsidiary Guarantor. The entity has been presented as such in this supplemental financial information.

In conjunction with the redemption of the Notes, Yankee ceased to guarantee any public indebtedness of the Company. As a result, Yankee became a non-guarantor subsidiary. The entity has been presented as such in this supplemental financial information.

The following supplemental financial information sets forth for the Company’s 100%-Owned 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 December 31, 2010 and 2009;

 

  (ii) statements of operations for the years ended December 31, 2010, 2009 and 2008; and

 

  (iii) statements of cash flows for the year ended December 31, 2010, 2009 and 2008.

 

28


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2010

(In thousands)

 

     Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     GLDD
Corporation
    Eliminations     Consolidated
Totals
 

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

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

Accounts receivable—net

     93,983         1,565         —          —          95,548   

Receivables from affiliates

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

Contract revenues in excess of billings

     24,777         94         —          (29     24,842   

Inventories

     31,734         —           —          —          31,734   

Prepaid expenses

     3,246         —           202        —          3,448   

Other current assets

     9,853         8         9,058        —          18,919   
                                          

Total current assets

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

PROPERTY AND EQUIPMENT—Net

     322,958         273         —          —          323,231   

GOODWILL

     97,799         250         —          —          98,049   

OTHER INTANGIBLE ASSETS—Net

     3,017         263         —          —          3,280   

INVESTMENTS IN SUBSIDIARIES

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

INVENTORIES—Noncurrent

     27,128         —           —          —          27,128   

INVESTMENTS IN JOINT VENTURES

     7,329         —           —          —          7,329   

OTHER ASSETS

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

TOTAL

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

LIABILITIES AND EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable

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

Payables to affiliates

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

Accrued expenses

     30,511         693         1,605        —          32,809   

Billings in excess of contract revenues

     14,121         467         —          (104     14,484   

Current portion of note payable

     2,500         —           —          —          2,500   

Current portion of equipment debt

     303         —           —          —          303   
                                          

Total current liabilities

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

LONG TERM NOTE PAYABLE

     5,000         —           —          —          5,000   

7 3/4% SENIOR SUBORDINATED NOTES

     —           —           175,000        —          175,000   

DEFERRED INCOME TAXES

     —           —           92,681        (215     92,466   

OTHER

     9,048         —           2,669        —          11,717   
                                          

Total liabilities

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

Total Great Lakes Dredge & Dock Corporation Equity

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

NONCONTROLLING INTERESTS

     —           —           (2,128     —          (2,128
                                          

TOTAL EQUITY

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

TOTAL

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

 

29


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2009

(In thousands)

 

     Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     GLDD
Corporation
    Eliminations     Consolidated
Totals
 

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 3,028       $ 222       $ —        $ —        $ 3,250   

Accounts receivable—net

     152,274         1,627         —          —          153,901   

Receivables from affiliates

     4,558         4,661         17,881        (27,100     —     

Contract revenues in excess of billings

     28,004         42         —          (42     28,004   

Inventories

     29,192         —           —          —          29,192   

Prepaid expenses

     2,443         —           201        —          2,644   

Other current assets

     9,172         38         6,235        —          15,445   
                                          

Total current assets

     228,671         6,590         24,317        (27,142     232,436   

PROPERTY AND EQUIPMENT—Net

     290,707         450         —          —          291,157   

GOODWILL

     97,799         250         —          —          98,049   

OTHER INTANGIBLE ASSETS—Net

     639         398         —          —          1,037   

INVESTMENTS IN SUBSIDIARIES

     4,029         —           490,191        (494,220     —     

INVENTORIES—Noncurrent

     27,662         —           —          —          27,662   

INVESTMENTS IN JOINT VENTURES

     7,943         —           —          —          7,943   

OTHER ASSETS

     2,074         —           5,509        (441     7,142   
                                          

TOTAL

   $ 659,524       $ 7,688       $ 520,017      $ (521,803   $ 665,426   
                                          

LIABILITIES AND EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable

   $ 83,388       $ 395       $ —        $ —        $ 83,783   

Payables to affiliates

     24,384         2,758         —          (27,142     —     

Accrued expenses

     28,054         306         2,905        —          31,265   

Billings in excess of contract revenues

     24,701         200         —          —          24,901   

Current portion of equipment debt

     1,200         —           —          —          1,200   
                                          

Total current liabilities

     161,727         3,659         2,905        (27,142     141,149   

REVOLVING CREDIT FACILITY

     —           —           11,000        —          11,000   

7 3/4% SENIOR SUBORDINATED NOTES

     —           —           175,000        —          175,000   

DEFERRED INCOME TAXES

     2         —           82,081        (441     81,642   

OTHER

     7,604         —           4,482        —          12,086   
                                          

Total liabilities

     169,333         3,659         275,468        (27,583     420,877   

Total Great Lakes Dredge & Dock Corporation Equity

     490,191         4,029         245,788        (494,220     245,788   

NONCONTROLLING INTERESTS

     —           —           (1,239     —          (1,239
                                          

TOTAL EQUITY

     490,191         4,029         244,549        (494,220     244,549   
                                          

TOTAL

   $ 659,524       $ 7,688       $ 520,017      $ (521,803   $ 665,426   
                                          

 

30


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2010

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

CONTRACT REVENUES

   $ 683,460      $ 8,538      $ —        $ (5,076   $ 686,922   

COSTS OF CONTRACT REVENUES

     (559,754     (9,462     —          5,076        (564,140
                                        

GROSS PROFIT (LOSS)

     123,706        (924     —          —          122,782   

GENERAL AND ADMINISTRATIVE EXPENSES

     (50,084     (702     (3,566     —          (54,352
                                        

Total operating income (loss)

     73,622        (1,626     (3,566     —          68,430   

INTEREST EXPENSE (Net)

     26        (95     (13,473     —          (13,542

EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES

     (1,721     —          72,886        (71,165     —     

EQUITY IN LOSS OF JOINT VENTURE

     (614     —          —          —          (614
                                        

INCOME (LOSS) BEFORE INCOME TAXES

     71,313        (1,721     55,847        (71,165     54,274   

INCOME TAX (PROVISION) BENEFIT

     1,573        —          (22,127     —          (20,554
                                        

NET INCOME (LOSS)

     72,886        (1,721     33,720        (71,165     33,720   

NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     —          —          889        —          889   
                                        

NET INCOME (LOSS) ATTRIBUTABLE TO GREAT LAKES DREDGE & DOCK CORPORATION

   $ 72,886      $ (1,721   $ 34,609      $ (71,165   $ 34,609   
                                        

 

31


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2009

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

CONTRACT REVENUES

   $ 618,556      $ 7,776      $ —        $ (4,088   $ 622,244   

COSTS OF CONTRACT REVENUES

     (530,803     (7,240     (45     4,088        (534,000
                                        

GROSS PROFIT (LOSS)

     87,753        536        (45     —          88,244   

GENERAL AND ADMINISTRATIVE EXPENSES

     (41,809     (1,034     (3,150     —          (45,993
                                        

Total operating income (loss)

     45,944        (498     (3,195     —          42,251   

INTEREST EXPENSE (Net)

     (41     (115     (15,994     —          (16,150

EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES

     (613     —          47,308        (46,695     —     

EQUITY IN LOSS OF JOINT VENTURE

     (384     —          —          —          (384
                                        

INCOME (LOSS) BEFORE INCOME TAXES

     44,906        (613     28,119        (46,695     25,717   

INCOME TAX (PROVISION) BENEFIT

     2,402        —          (13,385     —          (10,983
                                        

NET INCOME (LOSS)

     47,308        (613     14,734        (46,695     14,734   

NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     —          —          2,734        —          2,734   
                                        

NET INCOME (LOSS) ATTRIBUTABLE TO GREAT LAKES DREDGE & DOCK CORPORATION

   $ 47,308      $ (613   $ 17,468      $ (46,695   $ 17,468   
                                        

 

32


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2008

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

CONTRACT REVENUES

   $ 586,879      $ —        $ —        $ —        $ 586,879   

COSTS OF CONTRACT REVENUES

     (517,379     —          (197     —          (517,576
                                        

GROSS PROFIT (LOSS)

     69,500        —          (197     —          69,303   

GENERAL AND ADMINISTRATIVE EXPENSES

     (41,486     (64     (1,656     —          (43,206
                                        

Total operating income (loss)

     28,014        (64     (1,853     —          26,097   

INTEREST EXPENSE—Net

     (1,027     —          (15,944     —          (16,971

EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES

     (42     —          25,946        (25,904     —     

EQUITY IN LOSS OF JOINT VENTURE

     (15     —          —          —          (15
                                        

INCOME (LOSS) BEFORE INCOME TAXES

     26,930        (64     8,149        (25,904     9,111   

INCOME TAX (PROVISION) BENEFIT

     (984     22        (2,877     —          (3,839
                                        

NET INCOME (LOSS)

     25,946        (42     5,272        (25,904     5,272   

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

     —          —          (293     —          (293
                                        

NET INCOME (LOSS) LOSS ATTRIBUTABLE TO GREAT LAKES DREDGE & DOCK CORPORATION

   $ 25,946      $ (42   $ 4,979      $ (25,904   $ 4,979   
                                        

 

33


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2010

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations      Consolidated
Totals
 

OPERATING ACTIVITIES—

           

Net cash flows provided by (used in) operating activities

   $ 157,248      $ (1,026   $ (32,691   $ —         $ 123,531   

INVESTING ACTIVITIES:

           

Purchases of property and equipment

     (25,204     (54     —          —           (25,258

Dispositions of property and equipment

     414        17        —          —           431   

Acquisition of L.W. Matteson

     (37,869     —          —          —           (37,869
                                         

Net cash flows used in investing activities

     (62,659     (37     —          —           (62,696
                                         

FINANCING ACTIVITIES:

           

Borrowings under revolving loans

     —          —          14,968        —           14,968   

Repayments of revolving loans

     —          —          (25,968     —           (25,968

Exercise of stock options

     656        —          —          —           656   

Dividends paid

     —          —          (4,012     —           (4,012

Net change in accounts with affiliates

     (48,606     903        47,703        —           —     

Repayments of long-term debt

     (1,186     —          —          —           (1,186

Repayment of capital lease debt

     (65     —          —          —           (65
                                         

Net cash flows provided by (used in) financing activities

     (49,201     903        32,691        —           (15,607
                                         

NET CHANGE IN CASH AND EQUIVALENTS

     45,388        (160     —          —           45,228   

CASH AND CASH EQUIVALENTS—Beginning of year

     3,028        222        —          —           3,250   
                                         

CASH AND CASH EQUIVALENTS—End of year

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

 

34


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2009

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

OPERATING ACTIVITIES—

          

Net cash flows provided by (used in) operating activities

   $ 82,946      $ (2,545   $ (26,403   $ —        $ 53,998   

INVESTING ACTIVITIES:

          

Purchases of property and equipment

     (24,666     —          —          —          (24,666

Dispositions of property and equipment

     1,028        —          —          —          1,028   

Acquisition of controlling interest in Yankee Environmental Services

     (1,229     (1,891     —          1,891        (1,229
                                        

Net cash flows used in investing activities

     (24,867     (1,891     —          1,891        (24,867
                                        

FINANCING ACTIVITIES:

          

Borrowings under revolving loans

     —          —          158,877        —          158,877   

Repayments of revolving loans

     —          —          (189,377     —          (189,377

Dividends paid

     —          —          (3,992     —          (3,992

Members’ capital contribution to acquire assets of Yankee

     —          1,891        —          (1,891     —     

Net change in accounts with affiliates

     (63,657     2,762        60,895        —          —     

Repayments of long-term debt

     (1,774     —          —          —          (1,774

Repayment of capital lease debt

     (93     —          —          —          (93

Distributions from subsidiaries

     —          —          —          —          —     
                                        

Net cash flows provided by (used in) financing activities

     (65,524     4,653        26,403        (1,891     (36,359
                                        

NET CHANGE IN CASH AND EQUIVALENTS

     (7,445     217        —          —          (7,228

CASH AND CASH EQUIVALENTS—Beginning of year

     10,473        5        —          —          10,478   
                                        

CASH AND CASH EQUIVALENTS—End of year

   $ 3,028      $ 222      $ —        $ —        $ 3,250   
                                        

 

35


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2008

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations      Consolidated
Totals
 

OPERATING ACTIVITIES—

           

Net cash flows provided by (used in) operating activities

   $ 38,820      $ (42   $ (23,973   $ —         $ 14,805   

INVESTING ACTIVITIES:

           

Purchases of property and equipment

     (44,484     —          —          —           (44,484

Dispositions of property and equipment

     17,445        —          —          —           17,445   

Changes in restricted cash

     787        —          —          —           787   

Purchase NASDI minority interest shares

     (5     —          —          —           (5
                                         

Net cash flows used in investing activities

     (26,257     —          —          —           (26,257
                                         

FINANCING ACTIVITIES:

           

Borrowings under revolving loans

     —          —          222,443        —           222,443   

Repayments of revolving loans

     —          —          (202,443     —           (202,443

Dividends paid

     (3,981     —          —          —           (3,981

Net change in accounts with affiliates

     (4,020     41        3,979        —           —     

Repayments of long-term debt

     (2,148     —          —          —           (2,148

Repayment of capital lease debt

     (174     —          —          —           (174

Repurchase of preferred and common shares

     —          —          (6     —           (6
                                         

Net cash flows provided by (used in) financing activities

     (10,323     41        23,973        —           13,691   
                                         

NET CHANGE IN CASH AND EQUIVALENTS

     2,240        (1     —          —           2,239   

CASH AND CASH EQUIVALENTS—Beginning of year

     8,233        6        —          —           8,239   
                                         

CASH AND CASH EQUIVALENTS—End of year

   $ 10,473      $ 5      $ —        $ —         $ 10,478   
                                         

 

36


GREAT LAKES DREDGE & DOCK CORPORATION

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(In thousands)

 

            Additions               
     Beginning
Balance
     Charged to
costs and
expenses
     Charged
to other
accounts
     Deductions     Ending
balance
 

Description

             

Year ended December 31, 2008

             

Allowances deducted from assets to which they apply:

             

Allowances for doubtful accounts

   $ 1,489       $       $       $ (239   $ 1,250   
                                           

Year ended December 31, 2009

             

Allowances deducted from assets to which they apply:

             

Allowances for doubtful accounts

   $ 1,250       $ 69       $       $ (69   $ 1,250   
                                           

Year ended December 31, 2010

             

Allowances deducted from assets to which they apply:

             

Allowances for doubtful accounts

   $ 1,250       $ 447       $       $ (42   $ 1,655   
                                           

 

37

Unauduted Consolidated Financials Statements

Exhibit 99.5

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 March 31, 2011

INDEX

 

              Page  
Part I Financial Information (Unaudited)   
   Item 1   Financial Statements   
     Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010      2   
     Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2011 and 2010      3   
     Condensed Consolidated Statements of Equity for the Three Months ended March 31, 2011 and 2010      4   
     Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2011 and 2010      5   
     Notes to Condensed Consolidated Financial Statements      6   

 

1


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

 

     March 31,
2011
    December 31,
2010
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 104,529      $ 48,478   

Accounts receivable—net

     113,743        95,548   

Contract revenues in excess of billings

     20,897        24,842   

Inventories

     30,767        31,734   

Prepaid expenses

     3,433        3,448   

Other current assets

     23,592        18,919   
                

Total current assets

     296,961        222,969   

PROPERTY AND EQUIPMENT—Net

     316,376        323,231   

GOODWILL

     98,049        98,049   

OTHER INTANGIBLE ASSETS—Net

     2,633        3,280   

INVENTORIES—Noncurrent

     28,091        27,128   

INVESTMENTS IN JOINT VENTURES

     6,738        7,329   

OTHER

     16,963        11,839   
                

TOTAL

   $ 765,811      $ 693,825   
                

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 79,412      $ 82,721   

Accrued expenses

     29,685        32,809   

Billings in excess of contract revenues

     16,071        14,484   

Current portion of note payable

     2,500        2,500   

Current portion of equipment debt

     179        303   
                

Total current liabilities

     127,847        132,817   

LONG TERM NOTE PAYABLE

     5,000        5,000   

7 3/8% SENIOR NOTES

     250,000        —     

7 3/4% SENIOR SUBORDINATED NOTES

     —          175,000   

DEFERRED INCOME TAXES

     91,957        92,466   

OTHER

     9,770        11,717   
                

Total liabilities

     484,574        417,000   
                

COMMITMENTS AND CONTINGENCIES

    

EQUITY:

    

Common stock—$.0001 par value; 90,000,000 authorized, 58,813,584 and 58,770,369 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively.

     6        6   

Additional paid-in capital

     266,809        266,329   

Accumulated earnings

     13,648        12,261   

Accumulated other comprehensive income

     923        357   
                

Total Great Lakes Dredge & Dock Corporation Equity

     281,386        278,953   

NONCONTROLLING INTERESTS

     (149     (2,128
                

Total equity

     281,237        276,825   
                

TOTAL

   $ 765,811      $ 693,825   
                

See notes to unaudited condensed consolidated financial statements.

 

2


Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2011     2010  

Contract revenues

   $ 155,338      $ 161,400   

Costs of contract revenues

     127,638        130,916   
                

Gross profit

     27,700        30,484   

General and administrative expenses

     12,089        11,070   
                

Operating income

     15,611        19,414   

Interest expense, net

     (5,950     (3,220

Equity in loss of joint ventures

     (591     (722

Loss on extinguishment of debt

     (5,145     —     
                

Income before income taxes

     3,925        15,472   

Income tax provision

     (1,527     (6,239
                

Net income

     2,398        9,233   

Net (income) loss attributable to noncontrolling interests

     (6     93   
                

Net income attributable to Great Lakes Dredge & Dock Corporation

   $ 2,392      $ 9,326   
                

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

   $ 0.04      $ 0.16   

Basic weighted average shares

     58,785        58,548   

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

   $ 0.04      $ 0.16   

Diluted weighted average shares

     59,237        58,703   

Dividends declared per share

   $ 0.02      $ 0.02   

See notes to unaudited condensed consolidated financial statements.

 

3


Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(Unaudited)

(in thousands, except per share amounts)

 

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

BALANCE—January 1, 2011

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

Share-based compensation

    43,215        —          520        —          —          —          520   

Acquisition of noncontrolling interest in NASDI

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

Dividends declared and paid

    —          —          —          (1,005     —          —          (1,005

Comprehensive income (loss):

             

Net income

    —          —          —          2,392        —          6        2,398   

Reclassification of derivative gains to earnings (net of tax of $414)

    —          —          —          —          (623     —          (623

Change in fair value of derivatives (net of tax of $790)

    —          —          —          —          1,189        —          1,189   
                                                       

Total comprehensive income

              6        2,964   
                         

BALANCE—March 31, 2011

    58,813,584      $ 6      $ 266,809      $ 13,648      $ 923      $ (149   $ 281,237   
                                                       
    Shares of
Common
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Accumulated
(Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interests
    Total  

BALANCE—January 1, 2010

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

Share-based compensation

    17,856        —          300        —          —          —          300   

Dividends declared and paid

    —          —          —          (1,000     —          —          (1,000

Comprehensive income (loss):

             

Net income (loss)

    —          —          —          9,326        —          (93     9,233   

Reclassification of derivative gains to earnings (net of tax of $98)

    —          —          —          —          (148     —          (148

Change in fair value of derivatives (net of tax of $20)

    —          —          —          —          30        —          30   
                                                       

Total comprehensive income (loss)

              (93     9,115   
                         

BALANCE—March 31, 2010

    58,559,894      $ 6      $ 263,879      $ (10,010   $ 421      $ (1,332   $ 252,964   
                                                       

See notes to unaudited condensed consolidated financial statements.

 

4


Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands, except per share amounts)

 

     Three Months Ended
March 31,
 
     2011     2010  

OPERATING ACTIVITIES:

    

Net income

   $ 2,398      $ 9,233   

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

    

Depreciation and amortization

     9,566        9,439   

Equity in loss of joint ventures

     591        722   

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

     5,145        —     

Deferred income taxes

     21        (1,031

Gain on dispositions of property and equipment

     (267     (183

Amortization of deferred financing fees

     389        402   

Share-based compensation expense

     520        300   

Changes in assets and liabilities:

    

Accounts receivable

     (18,365     27,549   

Contract revenues in excess of billings

     3,945        9,573   

Inventories

     4        458   

Prepaid expenses and other current assets

     (4,535     2,280   

Accounts payable and accrued expenses

     (4,160     (19,724

Billings in excess of contract revenues

     1,587        (155

Other noncurrent assets and liabilities

     (2,390     (1,664
                

Net cash flows provided by (used in) operating activities

     (5,551     37,199   

INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (4,420     (7,230

Proceeds from dispositions of property and equipment

     258        158   
                

Net cash flows used in investing activities

     (4,162     (7,072

FINANCING ACTIVITIES:

    

Proceeds from issuance of 7 3/8% senior notes

     250,000        —     

Redemption of 7 3/4% senior subordinated notes

     (175,000     —     

Senior subordinated notes redemption premium

     (2,264     —     

Deferred financing fees

     (5,829     —     

Dividends paid

     (1,005     (1,000

Repayments of long-term debt

     (135     (451

Repayment of capital lease debt

     (3     (1

Borrowings under revolving loans

     —          14,968   

Repayments of revolving loans

     —          (25,968
                

Net cash flows provided by (used in) financing activities

     65,764        (12,452
                

Net change in cash and cash equivalents

     56,051        17,675   

Cash and cash equivalents at beginning of period

     48,478        3,250   
                

Cash and cash equivalents at end of period

   $ 104,529      $ 20,925   
                

Supplemental Cash Flow Information

    

Cash paid for interest

   $ 2,972      $ 265   
                

Cash paid for income taxes

   $ 1,084      $ 2,203   
                

Non-cash Investing Activity

    

Property and equipment purchased but not yet paid

   $ 6,766      $ 520   
                

Property and equipment purchased on equipment notes

   $ —        $ 32   
                

Non-cash Financing Activity

    

Acquisition of noncontrolling interest in NASDI, LLC

   $ 40      $ —     
                

See notes to unaudited condensed consolidated financial statements.

 

5


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

The components of costs of contract revenues include labor, equipment (including depreciation, maintenance, insurance and long-term rentals), subcontracts, fuel and project overhead. Hourly labor is generally hired on a project-by-project basis. Costs of contract revenues vary significantly depending on the type and location of work performed and assets utilized. Generally, capital projects have the highest margins due to the complexity of the projects, while beach nourishment projects have the most volatile margins because they are most often exposed to variability in weather conditions.

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

The Company operates in two reportable segments: dredging and demolition. These reportable segments are the Company’s operating segments and the reporting units at which the Company tests goodwill for impairment. The Company performed its most recent annual test of impairment as of July 1, 2010 for the goodwill in both the dredging and demolition segments with no indication of goodwill impairment as of the test date. As of the test date, the fair value of both the dredging segment and the demolition segment were in excess of their carrying values by approximately 25%. No test was performed in the 2011 first quarter because, based on each segment’s current forecast, no triggering event occurred that would require a test to be performed. The Company will perform its next scheduled annual test of goodwill in the third quarter of 2011 unless a triggering event occurs that requires a test prior to the next annual test.

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

2. Earnings per share

Basic earnings per share is computed by dividing net income attributable to Great Lakes Dredge & Dock Corporation by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share is computed similar to basic earnings per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. At March 31, 2011 and 2010, the impact of options to purchase shares of common stock was dilutive and, accordingly, no options are excluded from the calculation of diluted earnings per share based on the application of the treasury stock method. In addition, the impact of restricted stock units was dilutive. The computations for basic and diluted earnings per share from continuing operations are as follows:

 

     Three Months Ended
March 31,
 
     2011      2010  

Numerator:

     

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

   $ 2,392       $ 9,326   

Denominator:

     

Denominator for basic earnings per share - weighted average shares outstanding

     58,785         58,548   

Dilutive impact of outstanding restricted stock units issued

     238         127   

Dilutive impact of outstanding stock options issued

     214         28   
                 

Denominator for diluted earnings per share adjusted weighted average shares

     59,237         58,703   
                 

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

   $ 0.04       $ 0.16   
                 

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

   $ 0.04       $ 0.16   
                 

 

6


3. Fair value measurements

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

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

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

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

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. At March 31, 2011, the Company held certain derivative contracts that it uses to manage commodity price risk and interest rate risk. Such instruments are not used for trading purposes. The fair value of these derivative contracts is summarized as follows:

 

             Fair Value Measurements at Reporting Date Using  

Description

   At March 31,
2011
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Fuel hedge contracts

   $ 1,536       $ —         $ 1,536       $ —     

Interest rate swap contracts-assets

     1,299         —           —           1,299   
                                   

Total assets measured at fair value

   $ 2,835       $ —         $ 1,536       $ 1,299   
                                   
             Fair Value Measurements at Reporting Date Using  

Description

   At December 31,
2010
     Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant Other
Observable Inputs

(Level 2)
     Significant
Unobservable  Inputs

(Level 3)
 

Fuel hedge contracts

   $ 595       $ —         $ 595       $ —     

Interest rate swap contracts-assets

     1,264         —           —           1,264   
                                   

Total assets measured at fair value

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

 

7


In May 2009, the Company entered into two interest rate swap arrangements, which are effective through December 15, 2012, to swap a notional amount of $50 million from a fixed rate of 7.75% to a floating LIBOR-based rate in order to manage the interest rate paid with respect to the Company’s 7.75% senior subordinated notes. Although the senior subordinated notes were redeemed in January 2011, the swaps remained in place. The current portion of the fair value asset of the swaps at March 31, 2011 is $1,206 and is recorded in other current assets. The long-term portion of the fair value asset of the swaps at March 31, 2011 is $93 and is recorded in other assets. The current portion of the fair value asset of the swaps at December 31, 2010 was $816 and was recorded in other current assets. The long-term portion of the fair value asset of the swaps at December 31, 2010 was $448 and was recorded in other assets. The swap is not accounted for as a hedge; therefore, the changes in fair value are recorded as adjustments to interest expense in each reporting period.

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

 

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

Balance at January 1,

  $ 1,264      $ (20

Total unrealized gains included in earnings

    35        794   

Total gains included in other comprehensive income

    —          —     

Purchases

    —          —     

Settlements

    —          —     
               

Balance at March 31,

  $ 1,299      $ 774   
               

The Company is exposed to certain market risks, primarily commodity price risk as it relates to the diesel fuel purchase requirements that 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 does not hold or issue derivatives for speculative or trading purposes. The Company’s goal is to hedge approximately 80% of the fuel requirements for work in backlog.

As of March 31, 2011, the Company was party to various swap arrangements to hedge the price of a portion of its diesel fuel purchase requirements for work in its backlog to be performed through December 2011. As of March 31, 2011, there were 4.2 million gallons remaining on these contracts which represent approximately 66% of the Company’s forecasted fuel purchases through December 2011. Under these swap agreements, the Company will pay fixed prices ranging from $2.14 to $3.10 per gallon.

At March 31, 2011 and December 31, 2010, the fair value asset on the fuel hedge contracts was estimated to be $1,536 and $595, respectively, and is recorded in other current assets. The gain reclassified to earnings from changes in fair value of derivatives, net of cash settlements and taxes, for the period ended March 31, 2011 was $1,189. The remaining gains included in accumulated other comprehensive income at December 31, 2010 will be reclassified into earnings over the next nine 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.

 

8


The fair value of interest rate and fuel hedge contracts outstanding as of March 31, 2011 and December 31, 2010 is as follows:

 

     Fair Value of Derivatives  
     At March 31, 2011  
     Balance Sheet Location    Fair Value
Asset
     Balance Sheet Location    Fair Value
Liability
 

Fuel hedge contracts

   Other current assets    $ 1,536       Accrued expenses    $ —     

Interest rate swaps

   Other current assets      1,206       Accrued expenses      —     

Interest rate swaps

   Other noncurrent assets      93       Other Liabilities      —     
                       

Total Derivatives

      $ 2,835          $ —     
                       
     Fair Value of Derivatives  
     At December 31, 2010  
     Balance Sheet Location    Fair
Value
Asset
     Balance Sheet Location    Fair Value
Liability
 

Interest rate swaps

   Other current assets    $ 816       Other Liabilities    $ —     

Interest rate swaps

   Other noncurrent assets      448       Other Liabilities      —     

Fuel hedge contracts

   Other current assets      595       Accrued expenses      —     
                       

Total Derivatives

      $ 1,859          $ —     
                       

Other financial instruments

The carrying value of financial instruments included in current assets and current liabilities approximates fair value due to the short-term maturities of these instruments. At December 31, 2010, the Company had long-term senior subordinated notes outstanding with a recorded book value of $175,000. The fair value of the senior subordinated notes was $177,188 at December 31, 2010, based on indicative market prices. In January 2011, the Company redeemed all of the senior subordinated notes for $180,014, which included a redemption premium and accrued and unpaid interest. Also in January 2011, the Company issued $250,000 of 7.375% senior notes due February 1, 2019. The senior notes were issued at 100% of face value resulting in net proceeds of $244,171. The senior notes are senior unsecured obligations of the Company and its subsidiaries that guarantee the senior notes. Each of the Company’s existing and future wholly owned domestic subsidiaries are required to guarantee the senior notes. At March 31, 2011, the Company had long-term senior notes outstanding with a recorded book value of $250,000. The fair value of the senior notes was $253,125 at March 31, 2011, based on indicative market prices.

4. Accounts receivable

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

 

     March 31,
2011
    December 31,
2010
 

Completed contracts

   $ 21,586      $ 20,093   

Contracts in progress

     79,710        64,399   

Retainage

     14,086        12,711   
                
     115,382        97,203   

Allowance for doubtful accounts

     (1,639     (1,655
                

Total accounts receivable

   $ 113,743      $ 95,548   
                

At March 31, 2011 and December 31, 2010, $6,093 and $5,923, respectively, of retainage was not expected to be collected within the next twelve months and is classified as other non-current assets.

 

9


5. Contracts in progress

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

 

     March 31,
2011
    December 31,
2010
 

Costs and earnings in excess of billings:

    

Costs and earnings for contracts in progress

   $ 140,408      $ 287,291   

Amounts billed

     (120,919     (263,665
                

Costs and earnings in excess of billings for contracts in progress

     19,489        23,626   

Costs and earnings in excess of billings for completed contracts

     1,408        1,216   
                

Total contract revenues in excess of billings

   $ 20,897      $ 24,842   
                

Billings in excess of costs and earnings:

    

Amounts billed

   $ (519,513   $ (429,688

Costs and earnings for contracts in progress

     503,442        415,204   
                

Total billings in excess of contract revenues

   $ (16,071   $ (14,484
                

6. Accrued expenses

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

 

     March 31,
2011
     December 31,
2010
 

Insurance

   $ 11,328       $ 11,039   

Payroll and employee benefits

     7,081         13,573   

Percentage of completion adjustment

     3,289         3,232   

Interest

     3,228         604   

Income and other taxes

     2,911         2,977   

Other

     1,848         1,384   
                 

Total accrued expenses

   $ 29,685       $ 32,809   
                 

7. 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
March 31,
 
     2011     2010  

Dredging

    

Contract revenues

   $ 136,597      $ 149,041   

Operating income

     17,821        19,569   

Demolition

    

Contract revenues

   $ 18,741      $ 12,359   

Operating loss

     (2,210     (155

Total

    

Contract revenues

   $ 155,338      $ 161,400   

Operating income

     15,611        19,414   

 

10


In addition, foreign dredging revenue of $21,871 and $25,572 for the three months ended March 31, 2011 and March 31, 2010, respectively, was primarily attributable to work done in Bahrain.

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.

8. Commitments and contingencies

Commercial commitments

The Company entered into a credit agreement (the “Credit Agreement”) with Bank of America N.A. as Administrative Agent and Issuing Lender, various other financial institutions as lenders and certain subsidiaries of the Company as Loan Parties. The Credit Agreement provides for a revolving credit facility of up to $145,000 in borrowings and includes sublimits for the issuance of letters of credit and swingline loans. The revolving credit facility matures on June 12, 2012. The revolving credit facility bears interest at rates selected at the option of Great Lakes, currently equal to either LIBOR plus an applicable margin or the Base Rate plus an applicable margin. The applicable margins for LIBOR loans and Base Rate loans, as well as any non-use fee, are subject to adjustment based upon the Company’s ratio of Total Funded Debt to Adjusted Consolidated EBITDA (each as defined in the Credit Agreement). As of March 31, 2011, the Company had no borrowings and $9,468 of letters of credit outstanding, resulting in $135,532 of availability under the Credit Agreement.

The Company obtains its performance, bid and payment bonds through a bonding agreement (the “Bonding Agreement”) with Travelers Casualty and Surety Company of America. The bonds issued under the Bonding Agreement are customarily required for dredging and marine construction projects, as well as demolition projects. As of March 31, 2011, Great Lakes had outstanding bonds valued at $296,469; however, the revenue value remaining in backlog related to these projects totaled approximately $139,582.

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 March 31, 2011, Great Lakes had $15,703 of letters of credit outstanding under this facility.

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

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

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

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

Legal proceedings and other contingencies

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

The Company or its former subsidiary, NATCO Limited Partnership, is named as a defendant in approximately 251 asbestos-related personal injury lawsuits, the majority of which were filed between 1989 and 2000. All of the cases, filed against the Company prior to 1996, were administratively dismissed in May 1996 and any cases filed since that time have similarly been administratively transferred to the inactive docket. Over the last year, hundreds of lawsuits have been reactivated in an effort to clean out the administrative docket. Prior to the commencement of discovery in any of the reactivated cases, counsel for plaintiffs agreed to name a group of cases that they intended to pursue and to dismiss the remaining cases without prejudice. Plaintiffs have currently named 38 cases against the Company that they intend to pursue, each of which involves one plaintiff. The remaining cases against the Company either

 

11


have been or will be dismissed. Plaintiffs in the dismissed cases could file a new lawsuit if they develop a new disease allegedly caused by exposure to asbestos on board our vessels. The Company is presently unable to quantify the amounts of damages being sought in these lawsuits because none of the complaints specify a damage amount; therefore, the Company has not accrued any amounts in respect of these lawsuits. The Company does not believe that it is probable that losses from these claims could be material, and an estimate of a range of losses relating to these claims cannot reasonably be made. Based on the foregoing, management does not believe that any of the 38 lawsuits will have a material adverse impact on our consolidated financial statements.

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 and has engaged in further discussions with the Massachusetts Attorney General’s office. The matter remains open, and, to the Company’s knowledge, no proceedings have currently been initiated against NASDI in this matter. 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 adverse 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 is conducting an internal investigation into this matter and is fully cooperating with the federal grand jury subpoena. Based on the early stage of the U.S. Department of Justice’s investigation and the limited information known to the Company, the Company cannot predict the outcome of the investigation, the U.S. Attorney’s views of the issues being investigated, any action the U.S. Attorney may take or the impact, if any, that this matter may have on the Company’s business, financial position, results of operations or cash flows.

On April 6, 2011, NASDI received a subpoena from the District Attorney for Richmond County, New York in connection with a grand jury investigation. The subpoena directs NASDI to furnish certain documents relating to one project performed by NASDI and one of its subcontractors. The subpoena appears to be related to the activities of NASDI’s subcontractor for this project. The Company is conducting an internal investigation into this matter and is fully cooperating with the New York grand jury subpoena.

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

9. Acquisition of noncontrolling interest

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

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

 

12


10. Subsidiary Guarantors

The Company’s long-term debt at March 31, 2011 includes $250,000 of 7.375% senior notes due February 1, 2019. The Company’s obligations under these senior notes are guaranteed by the Company’s wholly-owned domestic subsidiaries. Such guarantees are full, unconditional and joint and several.

In connection with the private placement of the senior notes, the Company entered into an agreement giving registration rights to initial purchasers of the senior notes (the “Registration Rights Agreement”). The terms of the Registration Rights Agreement require, among other things, that the Company will use its commercially reasonable efforts to consummate an offer to exchange the senior notes for registered, publicly tradable notes that have substantially identical terms as the senior notes (the “Exchange Notes”). The Exchange Notes will be guaranteed by the Company’s wholly-owned domestic subsidiaries (the “Exchange Notes Guarantors”). The Exchange Note Guarantors are presented in this supplemental financial information as “Subsidiary Guarantors.” The Exchange Notes are not included in this supplemental financial information as they were issued subsequent to March 31, 2011.

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 March 31, 2011 and December 31, 2010;

 

  (ii) statements of operations for the three months ended March 31, 2011 and 2010; and

 

  (iii) statements of cash flows for the three months ended March 31, 2011 and 2010.

 

13


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2011

(In thousands)

 

     Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     GLDD
Corporation
    Eliminations     Consolidated
Totals
 

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 104,155       $ 374       $ —        $ —        $ 104,529   

Accounts receivable—net

     111,951         1,792         —          —          113,743   

Receivables from affiliates

     22,664         6,834         68,461        (97,959     —     

Contract revenues in excess of billings

     20,897         87         —          (87     20,897   

Inventories

     30,767         —           —          —          30,767   

Prepaid expenses

     3,268         —           165        —          3,433   

Other current assets

     14,955         10         8,627        —          23,592   
                                          

Total current assets

     308,657         9,097         77,253        (98,046     296,961   

PROPERTY AND EQUIPMENT—Net

     316,159         217         —          —          316,376   

GOODWILL

     97,799         250         —          —          98,049   

OTHER INTANGIBLE ASSETS—Net

     2,401         232         —          —          2,633   

INVESTMENTS IN SUBSIDIARIES

     2,365         —           545,914        (548,279     —     

NOTES RECEIVABLE FROM AFFILIATES

     —           —           —          —          —     

INVENTORIES—Noncurrent

     28,091         —           —          —          28,091   

INVESTMENTS IN JOINT VENTURES

     6,738         —           —          —          6,738   

OTHER ASSETS

     10,981         —           6,555        (573     16,963   
                                          

TOTAL

   $ 773,191       $ 9,796       $ 629,722      $ (646,898   $ 765,811   
                                          

LIABILITIES AND EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable

   $ 78,087       $ 1,272       $ 53      $ —          79,412   

Payables to affiliates

     92,445         4,720         420        (97,585     —     

Accrued expenses

     24,140         803         4,742        —          29,685   

Billings in excess of contract revenues

     15,896         636         —          (461     16,071   

Current portion of note payable

     2,500         —           —          —          2,500   

Current portion of equipment debt

     179         —           —          —          179   
                                          

Total current liabilities

     213,247         7,431         5,215        (98,046     127,847   

LONG TERM NOTE PAYABLE

     5,000         —           —          —          5,000   

7 3/8% SENIOR SUBORDINATED NOTES

     —           —           250,000        —          250,000   

NOTES PAYABLE TO AFFILIATES

     —           —           —          —          —     

DEFERRED INCOME TAXES

     —           —           92,530        (573     91,957   

OTHER

     9,030         —           740        —          9,770   
                                          

Total liabilities

     227,277         7,431         348,485        (98,619     484,574   

Total Great Lakes Dredge & Dock Corporation Equity

     545,914         2,365         281,386        (548,279     281,386   

NONCONTROLLING INTERESTS

     —           —           (149     —          (149
                                          

TOTAL EQUITY

     545,914         2,365         281,237        (548,279     281,237   
                                          

TOTAL

   $ 773,191       $ 9,796       $ 629,722      $ (646,898   $ 765,811   
                                          

 

14


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2010

(In thousands)

 

      Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     GLDD
Corporation
    Eliminations     Consolidated
Totals
 

ASSETS

            

CURRENT ASSETS:

            

Cash and cash equivalents

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

Accounts receivable—net

     93,983         1,565         —          —          95,548   

Receivables from affiliates

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

Contract revenues in excess of billings

     24,777         94         —          (29     24,842   

Inventories

     31,734         —           —          —          31,734   

Prepaid expenses

     3,246         —           202        —          3,448   

Other current assets

     9,853         8         9,058        —          18,919   
                                          

Total current assets

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

PROPERTY AND EQUIPMENT—Net

     322,958         273         —          —          323,231   

GOODWILL

     97,799         250         —          —          98,049   

OTHER INTANGIBLE ASSETS—Net

     3,017         263         —          —          3,280   

INVESTMENTS IN SUBSIDIARIES

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

INVENTORIES—Noncurrent

     27,128         —           —          —          27,128   

INVESTMENTS IN JOINT VENTURES

     7,329         —           —          —          7,329   

OTHER ASSETS

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

TOTAL

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

LIABILITIES AND EQUITY

            

CURRENT LIABILITIES:

            

Accounts payable

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

Payables to affiliates

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

Accrued expenses

     30,511         693         1,605        —          32,809   

Billings in excess of contract revenues

     14,121         467         —          (104     14,484   

Current portion of note payable

     2,500         —           —          —          2,500   

Current portion of equipment debt

     303         —           —          —          303   
                                          

Total current liabilities

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

LONG TERM NOTE PAYABLE

     5,000         —           —          —          5,000   

7 3/4% SENIOR SUBORDINATED NOTES

     —           —           175,000        —          175,000   

DEFERRED INCOME TAXES

     —           —           92,681        (215     92,466   

OTHER

     9,048         —           2,669        —          11,717   
                                          

Total liabilities

     157,168         6,002         271,955        (18,125     (55,997

Total Great Lakes Dredge & Dock Corporation Equity

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

NONCONTROLLING INTERESTS

     —           —           (2,128     —          (2,128
                                          

TOTAL EQUITY

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

TOTAL

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

 

15


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING INCOME STATEMENT

FOR THE PERIOD ENDED MARCH 31, 2011

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

CONTRACT REVENUES

   $ 154,039      $ 3,317      $ —        $ (2,018   $ 155,338   

COSTS OF CONTRACT REVENUES

     (126,651     (3,005     —          2,018        (127,638
                                        

GROSS PROFIT (LOSS)

     27,388        312        —          —          27,700   

OPERATING EXPENSES

          

General and administrative expenses

     (11,204     (213     (672     —          (12,089
                                        

Total operating income

     16,184        99        (672     —          15,611   

INTEREST EXPENSE (Net)

     (80     (45     (5,825     —          (5,950

EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES

     54        —          16,551        (16,605     —     

EQUITY IN LOSS OF JOINT VENTURE

     (591     —          —          —          (591

LOSS ON EXTENGUISHMENT OF DEBT

     —          —          (5,145     —          (5,145
                                        

INCOME (LOSS) BEFORE INCOME TAXES

     15,567        54        4,909        (16,605     3,925   

INCOME TAX (PROVISION) BENEFIT

     984        —          (2,511     —          (1,527
                                        

NET INCOME (LOSS)

     16,551        54        2,398        (16,605     2,398   

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     —          —          (6     —          (6
                                        

NET INCOME (LOSS) ATTRIBUTABLE TO GREAT LAKES DREDGE & DOCK CORPORATION

   $ 16,551      $ 54      $ 2,392      $ (16,605   $ 2,392   
                                        

 

16


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING INCOME STATEMENT

FOR THE PERIOD ENDED MARCH 31, 2010

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations     Consolidated
Totals
 

CONTRACT REVENUES

   $ 160,829      $ 1,826      $ —        $ (1,255   $ 161,400   

COSTS OF CONTRACT REVENUES

     (130,532     (1,639     —          1,255        (130,916
                                        

GROSS PROFIT

     30,297        187        —          —          30,484   

OPERATING EXPENSES

          

General and administrative expenses

     (10,184     (195     (691     —          (11,070
                                        

Total operating income (loss)

     20,113        (8     (691     —          19,414   

INTEREST EXPENSE (Net)

     (7     (19     (3,194     —          (3,220

EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES

     (27     —          19,348        (19,321     —     

EQUITY IN LOSS OF JOINT VENTURE

     (722     —          —          —          (722
                                        

INCOME (LOSS) BEFORE INCOME TAXES

     19,357        (27     15,463        (19,321     15,472   

INCOME TAX PROVISION

     (9     —          (6,230     —          (6,239
                                        

NET INCOME (LOSS)

     19,348        (27     9,233        (19,321     9,233   

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     —          —          93        —          93   
                                        

NET INCOME (LOSS) ATTRIBUTABLE TO GREAT LAKES DREDGE & DOCK CORPORATION

   $ 19,348      $ (27   $ 9,326      $ 19,321      $ 9,326   
                                        

 

17


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE PERIOD ENDED MARCH 31, 2011

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations      Consolidated
Totals
 

OPERATING ACTIVITIES—

           

Net cash flows provided by (used in) operating activities

   $ 942      $ (992   $ (5,501   $ —         $ (5,551

INVESTING ACTIVITIES:

           

Purchases of property and equipment

     (4,420     —          —          —           (4,420

Dispositions of property and equipment

     258        —          —          —           258   
                                         

Net cash flows used in investing activities

     (4,162     —          —          —           (4,162
                                         

FINANCING ACTIVITIES:

           

Proceeds from issuance of 7.375% senior notes

     —          —          250,000        —           250,000   

Redemption of 7.75% senior subordinated notes

     —          —          (175,000     —           (175,000

Senior subordinated notes redemption premium

     —          —          (2,264     —           (2,264

Deferred financing fees

     —          —          (5,829     —           (5,829

Dividends paid

     —          —          (1,005     —           (1,005

Net change in accounts with affiliates

     59,097        1,304        (60,401     —           —     

Repayments of long-term debt

     (135     —          —          —           (135

Repayments of capital lease debt

     (3     —          —          —           (3
                                         

Net cash flows provided by (used in) financing activities

     58,959        1,304        5,501        —           65,764   
                                         

NET CHANGE IN CASH AND EQUIVALENTS

     55,739        312        —          —           56,051   

CASH AND CASH EQUIVALENTS—Beginning of year

     48,416        62        —          —           48,478   
                                         

CASH AND CASH EQUIVALENTS—End of year

   $ 104,155      $ 374      $ —        $ —         $ 104,529   
                                         

 

18


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE PERIOD ENDED MARCH 31, 2010

(In thousands)

 

     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    GLDD
Corporation
    Eliminations      Consolidated
Totals
 

OPERATING ACTIVITIES—

           

Net cash flows provided by (used in) operating activities

   $ 46,671      $ 1,034      $ (10,506   $ —         $ 37,199   

INVESTING ACTIVITIES:

           

Purchases of property and equipment

     (7,230     —          —          —           (7,230

Dispositions of property and equipment

     158        —          —          —           158   
                                         

Net cash flows used in investing activities

     (7,072     —          —          —           (7,072
                                         

FINANCING ACTIVITIES:

           

Borrowings under revolving loans

     —          —          14,968        —           14,968   

Repayments of revolving loans

     —          —          (25,968     —           (25,968

Dividends paid

     —          —          (1,000     —           (1,000

Net change in accounts with affiliates

     (21,434     (1,072     22,506        —           —     

Repayments of long-term debt

     (451     —          —          —           (451

Repayments of equipment debt

     —          —          —          —           —     

Repayments of capital lease debt

     (1     —          —          —           (1
                                         

Net cash flows provided by (used in) financing activities

     (21,886     (1,072     10,506        —           (12,452
                                         

NET CHANGE IN CASH AND EQUIVALENTS

     17,713        (38     —          —           17,675   

CASH AND CASH EQUIVALENTS—Beginning of year

     3,028        222        —          —           3,250   
                                         

CASH AND CASH EQUIVALENTS—End of year

   $ 20,741      $ 184      $ —        $ —         $ 20,925   
                                         

 

19

Unaudited pro forma condensed combined statement of operations

Exhibit 99.6

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information has been prepared from the historical financial statements of Great Lakes Dredge & Dock Corporation (the “Company”) and L.W. Matteson, Inc. (“Matteson”), to give effect to the Company’s acquisition of the business and substantially all of the assets (the “Acquisition”) of Matteson. See Note 1 for further information. The unaudited pro forma condensed combined financial statements do not purport to represent, and are not necessarily indicative of, what the Company’s results of operations would have been had the Acquisition occurred on the dates indicated.

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2010 are presented as if the Acquisition had occurred on January 1, 2010 and include all adjustments that (i) give effect to events that are directly attributable to the Acquisition, (ii) are expected to have a continuing impact, and (iii) are factually supportable. The historical consolidated statement of operations of Matteson for the year ended December 31, 2010 that was used in preparing the unaudited pro forma condensed combined statement of operations for the same period has not been audited.

The unaudited pro forma condensed combined financial statements should be read in conjunction with the Company’s historical consolidated financial statements, related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Exhibits 99.2, 99.3 and 99.4.


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF

OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2010

(in thousands)

 

     Great Lakes
Dredge & Dock
Corporation
(Historical)
    L.W.
Matteson,
Inc.
(Historical)
    Pro Forma
Adjustments
         Pro Forma
Combined
 

Contract revenues

   $ 686,922      $ 37,183      $ —           $ 724,105   

Costs of contract revenues

     564,140        25,151        (1,929  

(A)

     587,362   
                                   

Gross profit

     122,782        12,032        1,929           136,743   

General and administrative expenses

     54,352        5,998        2,239     

(A)

     62,589   
                                   

Operating income

     68,430        6,034        (310        74,154   

Interest expense, net

     (13,542     (3     (450  

(B)

     (13,995

Other non-operating income, net

     —          90        —             90   

Equity in loss of joint ventures

     (614     —          —             (614
                                   

Income before income taxes

     54,274        6,121        (760  

(C)

     59,635   

Income tax provision

     (20,554     —          (2,032        (22,586
                                   

Net income

     33,720        6,121        (2,792        37,049   

Net loss attributable to noncontrolling interests

     889        —          —             889   
                                   

Net income attributable to Great Lakes Dredge & Dock Corporation

   $ 34,609      $ 6,121      $ (2,792      $ 37,938   
                                   

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

   $ 0.59             $ 0.65   

Basic weighted average shares

     58,647               58,647   

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

   $ 0.59             $ 0.64   

Diluted weighted average shares

     58,871               58,871   


NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(dollar amounts in thousands)

1. Basis of Pro Forma Presentation

On December 31, 2010, Great Lakes Dredge & Dock Company LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company (the “LLC”), entered into and consummated an Asset Purchase Agreement with L.W. Matteson, Inc., an Iowa corporation, and Lawrence W. Matteson and Larry W. Matteson pursuant to which the LLC purchased for a base purchase price of $45,000 (a) the business and substantially all of the assets of Seller and (b) certain assets owned by Lawrence W. Matteson and used by the Seller in its business. The purchase price totaled $47,009 and included an adjustment based upon the closing working capital balance, which resulted in the recognition of additional purchase price of $369 and is subject to further adjustment in accordance with the Asset Purchase Agreement. Furthermore, the seller may receive cash payments for any of the calendar years ended 2011, 2012, and 2013 if certain earnings-based criteria, defined per the purchase agreement, are met. The fair value of the recorded earnout liability was $1,640. The transaction was accounted for using the acquisition method and as such Matteson’s assets acquired and liabilities assumed have been recorded at their fair value. Great Lakes Dredge & Dock Company, LLC was determined to be the accounting acquirer for purposes of these unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2010 gives effect to the acquisition as if it occurred on January 1, 2010.

The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and do not purport to present what the actual results of operations would have been had the transactions actually occurred on the dates indicated, nor do they purport to represent results of operations for any future period. These statements do not reflect any cost savings or other benefits that may be obtained through synergies among the operations of the Company.

For purposes of these unaudited pro forma condensed combined financial statements, the estimated purchase price paid by the LLC has been allocated to Matteson’s assets and liabilities based on their fair values as of December 31, 2010 as follows (in thousands):

 

Property, plant and equipment

   $ 36,173   

Inventories

     4,637   

Accounts receivable - net

     4,173   

Intangible assets

     2,670   

Other assets and liabilities - net

     (644
        

Total

   $ 47,009   
        

2. Pro Forma Adjustments

Adjustments included in the column under the heading “Pro Forma Adjustments” in the unaudited pro forma condensed combined financial statements correspond to the following descriptions:

Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations

(A) Reflects the elimination of Matteson depreciation and recognition of depreciation and amortization on the Matteson Assets after the acquisition.


     Pro Forma Depreciation
Expense
 
    

For the 

Year Ended

December 31, 2010

 

Matteson depreciation pre-sale

   $ (3,139

Expense incurred by Matteson for items capitalized by Great Lakes

     (1,189

Depreciation after sale

     2,399   
        

Total Adjustment

   $ (1,929
        

The inventory and fixed assets purchased had remaining useful lives of 3 years and 5-30 years, respectively.

 

                  Pro Forma Amortization
Expense
 
     Fair
Value
     Useful life
at purchase
  

For the 

Year Ended

December 31, 2010

 

Intangible Assets

        

Backlog

   $ 2,131       1 year    $ 2,131   

Non-Compete

     539       5 years      108   
                    
   $ 2,670          $ 2,239   
                    

(B) The seller note accrues interest at a rate of 6% per year. The Company would have recorded $450 of interest expense for the year ended December 31, 2010.

(C) Reflects the tax impact of the pro forma adjustments as well as Matteson’s net income, at the Company’s effective tax rate of 37.9% at December 31, 2010.