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GLDD > SEC Filings for GLDD > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for GREAT LAKES DREDGE & DOCK CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GREAT LAKES DREDGE & DOCK CORP


8-May-2013

Quarterly Report


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

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q may constitute "forward-looking" statements as defined in Section 27A of the Securities Act of 1933 (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), the Private Securities Litigation Reform Act of 1995 (the "PSLRA") or in releases made by the Securities and Exchange Commission ("SEC"), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Great Lakes Dredge & Dock Corporation and its subsidiaries ("Great Lakes" or the "Company"), or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words "plan," "believe," "expect," "anticipate," "intend," "estimate," "project," "may," "would," "could," "should," "seeks," or "scheduled to," or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the "safe harbor" provisions of such laws. Great Lakes cautions investors that any forward-looking statements made by Great Lakes are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to Great Lakes, include, but are not limited to, risks and uncertainties that are described in Item 1A. "Risk Factors" of Great Lakes' Annual Report on Form 10-K for the year ended December 31, 2012, and in other securities filings by Great Lakes with the SEC.

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

General

The Company is the largest provider of dredging services in the United States. In addition, the Company is the only U.S. dredging service provider with significant international operations, which represented 22% of its dredging revenues for the first three months of 2013, compared with the Company's prior three year average of 16%. The mobility of the Company's fleet enables the Company to move equipment in response to changes in demand for dredging services.

Dredging generally involves the enhancement or preservation of navigability of waterways or the protection of shorelines through the removal or replenishment of soil, sand or rock. The U.S. dredging market consists of three primary types of work: capital, coastal protection and maintenance. The Company's "bid market" is defined as the aggregate dollar value of domestic projects on which the Company bid or could have bid if not for capacity constraints. The Company experienced an average combined bid market share in the U.S. of 37% over the prior three years, including 29%, 60% and 31% of the domestic capital, coastal protection and maintenance sectors, respectively. The Company's average bid market share of rivers & lakes in the two years of activity since the Matteson acquisition is 43%.

The Company's largest domestic dredging customer is the U.S. Army Corps of Engineers (the "Corps"), which is responsible for civil projects related to navigation and improvements to U.S. waters and related resources. In the first three months of 2013, the Company's dredging revenues earned from contracts with federal government agencies, including the Corps as well as other federal entities such as the U.S. Coast Guard and the U.S. Navy, and third parties operating under contracts with federal agencies, were approximately 41% of dredging revenues, below the Company's prior three year average of 62%.

The Company's demolition subsidiaries, collectively, are a U.S. provider of commercial and industrial demolition and remediation services such as exterior and interior demolition for site preparation as well as environmental remediation. Historically, the majority of the work was performed in the New England area. Through increased collaboration with Great Lakes' other lines of business, the demolition operations are pursuing opportunities outside of the New England area and into the marine demolition markets, specifically bridge demolition across the eastern part of the U.S. Through an acquisition in 2012, the segment's scope of work has expanded into the Midwest U.S. market. In the first three months of 2013, demolition revenues accounted for 8% of total revenues, below the prior three year average of 14%.

The Company also owns 50% of Amboy Aggregates ("Amboy") and 50% of TerraSea Environmental Solutions ("TerraSea") as joint ventures. Amboy's primary business is dredging sand from the entrance channel to the New York harbor in order to provide sand and aggregate for use in road and building construction and for clean land fill. Amboy also imports stone from upstate New York and Nova Scotia and distributes it throughout the New York area. TerraSea is engaged in the environmental services business through its ability to remediate contaminated soil and dredged sediment treatment.


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

Results of Operations

The following tables set forth the components of net income attributable to
Great Lakes Dredge & Dock Corporation and Adjusted EBITDA, as defined below, as
a percentage of contract revenues for the three months ended March 31, 2013 and
2012:



                                                                 Three Months Ended
                                                                     March  31,
                                                                2013             2012
Contract revenues                                                100.0  %        100.0  %
Costs of contract revenues                                        (86.3 )         (87.1 )

Gross profit                                                       13.7            12.9
General and administrative expenses                                10.2             8.5
(Gain) loss on sale of assets-net                                    -               -

Operating income                                                    3.5             4.4
Interest expense-net                                               (3.0 )          (3.4 )
Equity in loss of joint ventures                                   (0.3 )            -
Gain on foreign currency transactions-net                            -               -

Income before income taxes                                          0.2             1.0
Income tax (provision) benefit                                      0.1            (0.4 )

Net income                                                          0.3             0.6
Net loss attributable to noncontrolling interests                    -              0.1

Net income attributable to Great Lakes Dredge & Dock
Corporation                                                        0.3  %          0.7  %

Adjusted EBITDA                                                    9.6  %          9.5  %

Adjusted EBITDA, as provided herein, represents net income attributable to Great Lakes Dredge & Dock Corporation, adjusted for net interest expense, income taxes, depreciation and amortization expense, debt extinguishment and accelerated maintenance expense for new international deployments. In 2012, the Company modified the Adjusted EBITDA calculation for accelerated maintenance expense for new international deployments that are not directly recoverable under the related dredging contract and are therefore expensed as incurred. The Company does not frequently incur significant accelerated maintenance as a part of its international deployments. As such, the exclusion of these accelerated maintenance expenses from the calculation of Adjusted EBITDA allows users of the financial statements to more easily compare our year-to-year results. This modification is not, however, relevant to Adjusted EBITDA calculations for the first quarter of 2012 or the first quarter of 2013. Adjusted EBITDA is not a measure derived in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The Company presents Adjusted EBITDA as an additional measure by which to evaluate the Company's operating trends. The Company believes that Adjusted EBITDA is a measure frequently used to evaluate performance of companies with substantial leverage and that the Company's primary stakeholders (i.e., its stockholders, bondholders and banks) use Adjusted EBITDA to evaluate the Company's period to period performance. Additionally, management believes that Adjusted EBITDA provides a transparent measure of the Company's recurring operating performance and allows management to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. For this reason, the Company uses a measure based upon Adjusted EBITDA to assess performance for purposes of determining compensation under the Company's incentive plan. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, amounts determined in accordance with GAAP including: (a) operating income as an indicator of operating performance; or (b) cash flows from operations as a measure of liquidity. As such, the Company's use of Adjusted EBITDA, instead of a GAAP measure, has limitations as an analytical tool, including the inability to determine profitability or liquidity due to the exclusion of accelerated maintenance expense for new international deployments, interest and income tax expense and the associated significant cash requirements and the exclusion of depreciation and amortization, which represent significant and unavoidable operating costs given the level of indebtedness and capital expenditures needed to maintain the Company's business. For these reasons, the Company uses operating income to measure the Company's operating performance and uses Adjusted EBITDA only as a supplement. The following is a reconciliation of Adjusted EBITDA to net income attributable to Great Lakes Dredge & Dock Corporation:


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                                                                   Three Months Ended
                                                                       March 31,
                                                                 2013              2012
(in thousands)
Net income attributable to Great Lakes Dredge & Dock
Corporation                                                    $     433         $  1,068
Adjusted for:
Interest expense-net                                               5,733            5,259
Income tax provision (benefit)                                      (104 )            564
Depreciation and amortization                                     12,075            7,764

Adjusted EBITDA                                                $  18,137         $ 14,655

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

                                               Three Months Ended
                                                    March 31,
                                        2013          2012          Change
            Revenues (in thousands)
            Dredging:
            Capital-U.S.              $  45,508     $  26,907         69.1  %
            Capital-foreign              38,385        18,025        113.0  %
            Coastal protection           56,921        31,183         82.5  %
            Maintenance                  27,764        40,545         (31.5 )%
            Rivers & lakes                5,381         7,013         (23.3 )%

            Total dredging revenues     173,959       123,673         40.7  %
            Demolition                   14,888        32,546         (54.3 )%
            Intersegment revenue             -         (1,312 )      (100.0 )%

            Total revenues            $ 188,847     $ 154,907         21.9  %

Total revenue for the 2013 first quarter was $188.8 million, up $33.9 million or 22% from $154.9 million during the 2012 first quarter. For the three months ended March 31, 2013, increases in coastal protection and domestic and foreign capital revenue were offset by decreases in maintenance and demolition revenue.

Capital dredging consists primarily of port expansion projects, which involve the deepening of channels to allow access by larger, deeper draft ships and the provision of land fill used to expand port facilities. In addition to port work, capital projects also include land reclamations, trench digging for pipelines, tunnels and cables, and other dredging related to the construction of breakwaters, jetties, canals and other marine structures. Domestic capital dredging revenue increased to $45.5 million, adding $18.6 million, or 69%, in the 2013 first quarter compared to the 2012 first quarter. Domestic capital dredging revenues in the quarter ended March 31, 2013 were driven by a costal restoration project in Louisiana as well as a deepening project in Delaware. These increases were slightly offset by a greater amount of work in the Port of New York/New Jersey in the first quarter of 2012.

Foreign dredging revenue increased $20.4 million, or 113%, for the first quarter of 2013 to $38.4 million. The first quarter 2013 foreign revenue was driven by the mobilization of the dredge New York and attendant plant for the Wheatstone LNG project in Western Australia as well as mobilization for a project in Brazil. The Company expects to commence dredging activities for these foreign capital projects in the second quarter of 2013.

Coastal protection projects involve moving sand from the ocean floor to shoreline locations where erosion threatens shoreline assets. Coastal protection revenue in the 2013 first quarter increased $25.7 million, or 83%, from the 2012 first quarter. The significant increase in coastal protection revenue in the first three months of 2013 was a result of a greater number of projects with higher contract values compared to the same period in 2012. In the 2013 first quarter, the Company worked on coastal protection projects in New York and New Jersey, which included some emergency work as a result of Superstorm Sandy, as well as projects in North Carolina and Florida.

Maintenance dredging consists of the re-dredging of previously deepened waterways and harbors to remove silt, sand and other accumulated sediments. Due to natural sedimentation, most channels generally require maintenance dredging every one to three years, thus creating a recurring source of dredging work that is typically non-deferrable if optimal navigability is to be maintained. In


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addition, severe weather such as hurricanes, flooding and droughts can also cause the accumulation of sediments and drive the need for maintenance dredging. Maintenance revenue in the 2013 first quarter decreased by $12.8 million, or 32%, compared to the 2012 first quarter. The Company performed a greater amount of harbor work in the first quarter 2012 that was not repeated in the first quarter of 2013. During the first quarter of 2013, the Company worked on projects in Florida, Maryland and Georgia.

Domestic rivers & lakes dredging and related operations typically consist of lake and river dredging, inland levee and construction dredging, environmental restoration and habitat improvement and other marine construction projects. Rivers & lakes revenue in the first quarter of 2013 was $5.4 million, a decrease of $1.6 million or 23% compared to the first quarter of 2012. The decrease in the first quarter relates to a greater number of projects in first quarter of 2012, including a project in Mississippi that did not reoccur in the current year. Rivers and lakes revenues in the first quarter is typically lower due to freezing conditions in northern regions of the U.S. Rivers & lakes continued work on its large municipal lake project in Texas during the first quarter of 2013.

The Demolition segment which consists of demolition and remediation services recorded revenues of $14.9 million for the three months ended March 31, 2013 compared to $32.5 million for the same period in 2012. The decrease is attributable to a higher backlog at year end 2011, compared to 2012, which resulted in a greater number of projects for the demolition segment in the 2012 first quarter. In addition, the first quarter 2013 was negatively impacted by three projects that were delayed. This decrease was slightly offset by $6.1 million of revenue earned from the business acquired from Terra Contracting, LLC which did not become a part of the Company until the first quarter of 2013.

Consolidated gross profit for the 2013 first quarter increased 29% to $25.8 million, from $20.0 million in the first quarter of 2012. Gross profit margin (gross profit divided by revenue) for the 2013 first quarter increased to 13.7% from 12.9% in the 2012 first quarter. The increase in consolidated gross profit and gross profit margin in the 2013 first quarter is primarily the result of better weather conditions as the first quarter of 2012 was negatively impacted by offshore weather conditions, primarily wind that produced rough seas. This increase was partially offset by lower Demolition margins on fewer projects and Dredging mechanical delays experienced on a few projects during the first three months of 2013.

The Company's general and administrative expenses totaled $19.2 million for the three months ended March 31, 2013 as compared to $13.3 million for the three months ended March 31, 2012. In the first quarter of 2013, the Company incurred additional payroll and benefit expenses, representing an increase of $1.4 million over the same period in the prior year. General and administrative expenses of $1.7 million related to the business acquired in the Terra acquisition also contributed to the increase as the business did not become a part of the Company until the first quarter of 2013. An increase in legal and professional fees of $1.2 million and additional bad debt expense of $1.0 million increased general and administrative expenses in the three months ended March 31, 2013 over the comparable period in 2012.

Operating income for the three months ended March 31, 2013 decreased by $0.2 million or 3% from $6.8 million in the same period of 2012 as higher operating margin was offset by increased general and administrative expenses described above.

The Company's net interest expense totaled $5.7 million for the three months ended March 31, 2013, in line with interest expense of $5.3 million for the first three months of 2012.

Income tax expense for the three months ended March 31, 2013 was a benefit of $0.1 million, compared to $0.6 million of provision for the same 2012 period. The effective tax rate for the three months ended March 31, 2013 was 33.9%, which is lower than the effective tax rate of 37.2% for the same period of 2012. The first quarter 2013 benefited from credits allowed in the 2012 tax return that were not reflected in the 2012 provision. The Company expects the tax rate for the full year to remain near 39%.

Net income attributable to Great Lakes Dredge & Dock Corporation was $0.4 million and the earnings per diluted share was $0.01 for the 2013 first quarter compared to net income attributable to Great Lakes Dredge & Dock Corporation of $1.1 million and earnings per share of $0.02 for the same 2012 period. The decrease in 2013 is due to the decrease in operating income for the three months ended March 31, 2013.

Adjusted EBITDA (as defined on page 23) was $18.1 million for the three months ended March 31, 2013 compared with $14.7 million in the same 2012 period, as increased depreciation expense in 2013 as a result of significant capital expenditures during 2012 negatively impacted operating income, but is excluded from Adjusted EBITDA.

Results by segment

Dredging

Dredging revenues for the three months ended March 31, 2013 were $174.0 million, compared to $122.4 million for the same period of 2012. The dredging segment for the three months ended March 31, 2013 experienced increases in coastal protection revenue as well as domestic and foreign capital revenue, partially offset by lower maintenance revenues. Increases in dredging revenue for the three months were driven by vessel mobilizations for the Wheatstone LNG project in Western Australia and a separate project in Brazil as well as a significant coastal restoration project in Louisiana.


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Gross profit margin in the dredging segment was 18.0% for the three months ended March 31, 2013 compared to gross profit margin in the dredging segment of 13.0% for the three months ended March 31, 2012. The increase in dredging gross profit margin is a result poor offshore weather conditions during the first quarter of 2012 that negatively impacted gross profit margin, partially offset by mechanical delays experienced on a few projects.

Dredging segment operating income was $19.0 million for the three months ended March 31, 2013, compared to operating income of $4.9 million for the three months ended March 31, 2012. The increase in operating income for the three months ended March 31, 2013 is a result of the increase in gross profit in the first quarter of 2013, as mentioned above, slightly offset by an increase in general and administrative expenses.

Demolition

Demolition revenues for the three months ended March 31, 2013 totaled $14.9 million, compared to $32.5 million for the same 2012 period. Demolition revenues for the 2013 first quarter were down due to a lower backlog at year end 2012, resulting in fewer projects on which to earn revenue in the first quarter of 2013 compared to the same period in 2012. In addition, the first quarter 2013 was negatively impacted by three projects that were delayed. These decreases were partially offset by $2.0 million of revenue recognized from customer acceptance of pending change orders and $6.1 million of revenue earned from the business acquired from Terra Contracting, LLC that was part of the Company only during the first quarter of 2013.

The demolition segment had a negative gross profit margin of 36.8% for the three months ended March 31, 2013 and a gross profit margin of 12.5% for the three months ended March 31, 2012. During the first quarter 2013, the demolition segment experienced cost overruns on projects. The demolition segment generated an operating loss of $12.4 million for the three months ended March 31, 2013, compared to operating income of $1.8 million for the same period of 2012. This decrease in operating income and increase in the operating loss was due to the negative gross profit margin described above as well as an increase in general and administrative expenses.

Bidding Activity and Backlog

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



                                   March 31,       December 31,      March 31,
                                      2013             2012             2012
          Backlog (in thousands)
          Dredging:
          Capital-U.S.             $  103,061     $       43,177     $  151,479
          Capital-foreign             195,292            218,953        247,257
          Coastal protection           33,978             80,245         70,767
          Maintenance                   2,211             22,406         22,166
          Rivers & lakes               26,339             24,510         32,273

          Dredging Backlog            360,881            389,291        523,942
          Demolition                   56,651             60,148 *       60,427

          Total Backlog            $  417,532     $      449,439     $  584,369

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

The Company's contract backlog represents its estimate of the revenues that will be realized under the portion of the contracts remaining to be performed. For dredging contracts these estimates are based primarily upon the time and costs required to mobilize the necessary assets to and from the project site, the amount and type of material to be dredged and the expected production capabilities of the equipment performing the work. For demolition contracts, these estimates are based on the time and remaining costs required to complete the project relative to total estimated project costs and project revenues agreed to with the customer. However, these estimates are necessarily subject to variances based upon actual circumstances. Because of these factors, as well as factors affecting the time required to complete each job, backlog is not always indicative of future revenues or profitability. Also, 27% of the Company's March 31, 2013 dredging backlog relates to federal government contracts, which can be canceled at any time without penalty to the government, subject to the Company's contractual right to recover the Company's actual committed costs and profit on work performed up to the date of cancellation. The Company's backlog may fluctuate significantly from quarter to quarter based upon the type and size of the projects the Company is awarded from the bid market. A quarterly increase or decrease of the Company's backlog does not necessarily result in an improvement or a deterioration of the Company's business. The Company's backlog includes only those projects for which the Company has obtained a signed contract with the customer.


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The domestic dredging bid market for the 2013 first quarter was $229.1 million, a small decrease of $0.5 million from the same period in the prior year. The bid market in the first quarter of 2013 was slightly lower than the same period in the prior year as there were larger contract value domestic capital projects let . . .

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