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GLDD > SEC Filings for GLDD > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for GREAT LAKES DREDGE & DOCK CORP

Form 10-Q for GREAT LAKES DREDGE & DOCK CORP


9-Aug-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 23% of its dredging revenues for the first six months of 2013, above the Company's prior three year average of 16%. The mobility of the Company's fleet enables the Company to move equipment in response to changes in demand for dredging services.

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

The Company's largest domestic dredging customer is the U.S. Army Corps of Engineers (the "Corps"), which is responsible for federally funded projects related to navigation and flood control of U.S. waterways. In the first six months of 2013, the Company's dredging revenues earned from contracts with federal government agencies, including the Corps as well as other federal entities such as the U.S. Coast Guard and the U.S. Navy, and third parties operating under contracts with federal agencies, were approximately 45% of dredging revenues, compared to the Company's prior three year average of 62%.

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

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


Table of Contents

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

Results of Operations

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



                                                   Three Months Ended             Six Months Ended
                                                        June 30,                      June 30,
                                                  2013            2012          2013           2012
Contract revenues                                   100.0 %        100.0 %       100.0 %        100.0 %
Costs of contract revenues                          (96.6 )        (88.5 )       (90.9 )        (87.8 )

Gross profit                                          3.4           11.5           9.1           12.2
General and administrative expenses                  12.0            7.0          11.0            7.8
Proceeds from loss of use claim                      (8.7 )           -           (3.9 )           -
Impairment of goodwill                               14.1             -            6.3             -
(Gain) loss on sale of assets-net                      -            (0.1 )          -              -

Operating income (loss)                             (14.0 )          4.6          (4.3 )          4.4
Interest expense-net                                 (3.5 )         (3.3 )        (3.3 )         (3.3 )
Equity in loss of joint ventures                     (0.4 )           -           (0.3 )           -
Loss on foreign currency transactions-net              -              -           (0.1 )           -

Income (loss) before income taxes                   (17.9 )          1.3          (8.0 )          1.1
Income tax (provision) benefit                        1.4           (0.5 )         0.7           (0.5 )

Net income (loss)                                   (16.5 )          0.8          (7.3 )          0.6
Net (income) loss attributable to
noncontrolling interests                               -             0.1            -             0.1

Net income (loss) attributable to Great
Lakes Dredge & Dock Corporation                     (16.5 )%         0.9 %        (7.3 )%         0.7 %

Adjusted EBITDA                                       7.2 %         10.4 %         8.5 %         10.0 %

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


Table of Contents
                                                  Three Months Ended             Six Months Ended
                                                       June 30,                      June 30,
                                                 2013            2012          2013            2012
(in thousands)
Net income (loss) attributable to Great
Lakes Dredge & Dock Corporation                $ (25,241 )     $  1,271      $ (24,808 )     $  2,339
Adjusted for:
Accelerated maintenance expenses                      -           1,276             -           1,276
Impairment of goodwill                            21,474             -          21,474             -
Interest expense-net                               5,396          5,383         11,129         10,642
Income tax provision (benefit)                    (2,244 )          751         (2,348 )        1,315
Depreciation and amortization                     11,660          8,359         23,735         16,123

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

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

                                              Three Months Ended                           Six Months Ended
                                                   June 30,                                    June 30,
Revenues (in thousands)                2013           2012         Change          2013           2012         Change
Dredging:
Capital-U.S.                         $  39,474      $  45,184        (12.6 )%    $  84,982      $  72,091         17.9 %
Capital-foreign                         33,348         20,848         60.0 %        71,733         38,873         84.5 %
Coastal protection                      52,227         40,458         29.1 %       109,148         71,641         52.4 %
Maintenance                              6,639         20,068        (66.9 )%       34,403         60,613        (43.2 )%
Rivers & lakes                           4,799          8,757        (45.2 )%       10,180         15,770        (35.4 )%

Total dredging revenues                136,487        135,315          0.9 %       310,446        258,988         19.9 %
Demolition                              16,645         27,929        (40.4 )%       31,533         60,475        (47.9 )%
Intersegment revenue                      (269 )         (137 )       96.4 %          (269 )       (1,449 )      (81.4 )%

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

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

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

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

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


Table of Contents

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

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

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

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

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

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

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

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


Table of Contents

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

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

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

Results by segment

Dredging

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

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

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

Demolition

Demolition revenues for the three and six months ended June 30, 2013 totaled $16.6 million and $31.5 million, respectively, compared to $27.9 million and $60.5 million for the same 2012 periods. Demolition revenues for the 2013 first half were down due to a lower backlog at year end 2012, excluding the backlog acquired by the Company on December 31, 2012 in conjunction with the Terra acquisition, resulting in fewer projects on which to earn revenue in the first six months of 2013 compared to the same period in 2012. Additionally, the . . .

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