Back to GetFilings.com



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2004

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission file number:
333-64687

 

Great Lakes Dredge & Dock Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3634726

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

2122 York Road, Oak Brook, IL

 

60523

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(630) 574-3000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý  Yes  o  No

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

o Yes      ý   No

 

All of the Company’s common stock is held by a holding company.

 

As of August 10, 2004, there were outstanding 1,000 shares of Common Stock and zero shares of Preferred Stock.

 

 



 

Great Lakes Dredge & Dock Corporation and Subsidiaries
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period ended June 30, 2004

 

INDEX

 

Part I

Financial Information

 

 

 

 

 

 

Item 1

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003

2

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2004 and 2003

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2004 and 2003

4

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

 

 

 

 

 

Item 2

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

17

 

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

 

 

Item 4

Controls and Procedures

26

 

 

 

 

Part II

Other Information

 

 

 

 

 

 

Item 6

Exhibits and Reports on Form 8-K

27

 

 

 

 

Signature

 

 

27

 

 

 

 

Exhibit Index

 

 

28

 



 

PART I – Financial Information

 

Great Lakes Dredge & Dock Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share amounts)

 

 

 

Successor Basis

 

 

 

June 30,
2004

 

December 31,
2003

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents

 

$

720

 

$

2,775

 

Accounts receivable, net

 

47,212

 

64,869

 

Contract revenues in excess of billings

 

18,112

 

11,236

 

Inventories

 

15,080

 

13,603

 

Prepaid expenses and other current assets

 

20,662

 

21,178

 

Total current assets

 

101,786

 

113,661

 

Property and equipment, net

 

263,132

 

264,132

 

Goodwill

 

103,972

 

103,917

 

Other intangible assets, net

 

4,529

 

7,441

 

Inventories

 

11,266

 

10,968

 

Investments in joint ventures

 

8,382

 

7,551

 

Other assets

 

12,122

 

15,274

 

Total assets

 

$

505,189

 

$

522,944

 

 

 

 

 

 

 

Liabilities and Stockholder’s Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

31,482

 

$

36,991

 

Accrued expenses

 

12,967

 

15,456

 

Billings in excess of contract revenues

 

6,577

 

8,808

 

Current maturities of long-term debt

 

1,950

 

1,950

 

Total current liabilities

 

52,976

 

63,205

 

Long-term debt

 

254,275

 

256,750

 

Deferred income taxes

 

94,515

 

96,626

 

Other

 

8,113

 

7,632

 

Total liabilities

 

409,879

 

424,213

 

Minority interest

 

1,719

 

1,731

 

Commitments and contingencies (Note 9)

 

 

 

Stockholder’s equity:

 

 

 

 

 

Common stock, $.01 par value; 1,000 shares issued and outstanding

 

 

 

Additional paid-in capital

 

97,000

 

97,000

 

Accumulated deficit

 

(3,679

)

 

Accumulated other comprehensive income

 

270

 

 

Total stockholder’s equity

 

93,591

 

97,000

 

Total liabilities and stockholder’s equity

 

$

505,189

 

$

522,944

 

 

See notes to unaudited condensed consolidated financial statements.

 

2



 

Great Lakes Dredge & Dock Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

Successor
Basis

 

Predecessor
Basis

 

Successor
Basis

 

Predecessor
Basis

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

72,104

 

$

104,364

 

$

176,051

 

$

204,057

 

Costs of contract revenues

 

66,259

 

89,256

 

153,807

 

170,911

 

Gross profit

 

5,845

 

15,108

 

22,244

 

33,146

 

General and administrative expenses

 

6,257

 

6,499

 

13,380

 

13,440

 

Amortization of intangible assets

 

1,120

 

 

2,912

 

 

Operating income (loss)

 

(1,532

)

8,609

 

5,952

 

19,706

 

Interest expense, net

 

(6,996

)

(5,137

)

(11,606

)

(10,193

)

Equity in earnings of joint venture

 

682

 

677

 

831

 

744

 

Minority interests

 

6

 

91

 

12

 

70

 

Income (loss) before income taxes

 

(7,840

)

4,240

 

(4,811

)

10,327

 

Income tax benefit (expense)

 

2,403

 

(1,747

)

1,132

 

(4,347

)

Net income (loss)

 

$

(5,437

)

$

2,493

 

$

(3,679

)

$

5,980

 

 

See notes to unaudited condensed consolidated financial statements.

 

3



 

Great Lakes Dredge & Dock Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

Successor
Basis

 

Predecessor
Basis

 

 

 

2004

 

2003

 

Operating Activities

 

 

 

 

 

Net income (loss)

 

$

(3,679

)

$

5,980

 

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

 

 

 

 

 

Depreciation and amortization

 

13,576

 

8,135

 

Earnings of joint ventures

 

(831

)

(744

)

Minority interests

 

(12

)

(70

)

Deferred income taxes

 

(2,069

)

495

 

Gain on dispositions of property and equipment

 

(144

)

(110

)

Other, net

 

820

 

665

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

17,657

 

(9,745

)

Contract revenues in excess of billings

 

(6,876

)

(1,389

)

Inventories

 

(1,775

)

(1,929

)

Prepaid expenses and other current assets

 

408

 

2,442

 

Accounts payable and accrued expenses

 

(7,998

)

8,602

 

Billings in excess of contract revenues

 

(2,231

)

(6,781

)

Other noncurrent assets and liabilities

 

2,931

 

 

Net cash flows from operating activities

 

9,777

 

5,551

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of property and equipment

 

(9,892

)

(9,337

)

Dispositions of property and equipment

 

144

 

129

 

Adjustment to acquisition price of Predecessor common and preferred shares

 

527

 

 

Disposition of interest in Riovia investment

 

 

1,200

 

Equity investment in land

 

 

(843

)

Net cash flows from investing activities

 

(9,221

)

(8,851

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Repayments of long-term debt

 

(3,475

)

(6,475

)

Borrowings under revolving loans, net of repayments

 

1,000

 

10,000

 

Financing fees

 

(136

)

(403

)

Repayment on notes receivable from stockholders

 

 

19

 

Net cash flows from financing activities

 

(2,611

)

3,141

 

Net change in cash and equivalents

 

(2,055

)

(159

)

Cash and equivalents at beginning of period

 

2,775

 

1,456

 

Cash and equivalents at end of period

 

$

720

 

$

1,297

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

Cash paid for interest

 

$

8,557

 

$

9,528

 

Cash paid for taxes

 

$

 

$

6,010

 

 

See notes to unaudited condensed consolidated financial statements.

 

4



 

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands)

 

1.              Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information.  Accordingly, these financial statements do not include all the information in the notes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations and cash flows as of and for the dates presented.  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”) and the notes thereto, included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2003.

 

The acquisition of the Company by Madison Dearborn Capital Partners IV, L.P. in December 2003 was accounted for as a purchase in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” resulting in a new basis of accounting subsequent to the transaction.  For presentation herein, the financial statements up to the date of the sale are denoted as Predecessor Basis, while the financial statements prepared subsequent to the sale are denoted as Successor Basis. See Note 4 for a description of the transaction.

 

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.              Comprehensive income (loss)

 

Total comprehensive income (loss) comprises net income (loss) and net unrealized gains and losses on cash flow hedges.  Total comprehensive income (loss) for the three months ended June 30, 2004 and 2003 was $(5,155) and $2,534, respectively.  Total comprehensive income (loss) for the six months ended June 30, 2004 and 2003 was $(3,410) and $6,053, respectively.

 

3.              Risk management activities

 

The Company uses derivative instruments to manage commodity price and foreign currency exchange risks.  Such instruments are not used for trading purposes.   As of June 30, 2004, the Company is 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 September 2005.  As of June 30, 2004, there were 9.0 million gallons remaining on these contracts.  Under these agreements, the Company will pay fixed prices ranging from $0.75 to $0.92 per gallon.  At June 30, 2004 and December 31, 2003, the fair value on these contracts was estimated to be $950 and $509, respectively, based on quoted market prices, and is recorded in other current assets. Ineffectiveness related to these fuel hedge arrangements was determined to be immaterial.  The remaining gains included in accumulated other comprehensive income at June 30, 2004 will be reclassified into earnings over the next fifteen months, corresponding to the period during which the hedged fuel is expected to be utilized.

 

5



 

In February 2004, the Company entered into an interest rate swap arrangement 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 7¾% senior subordinated debt.  The fair value of the swap at June 30, 2004 was $(1,757) and is recorded in accrued expenses.  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 carrying values of other financial instruments included in current assets and current liabilities approximate fair values due to the short-term maturities of these instruments.  The carrying value of long-term bank debt is a reasonable estimate of its fair value as interest rates are variable, based on the prevailing market rates.  The fair value of the Company’s $175,000 of 7¾% senior subordinated notes was $148,750 and $180,250 at June 30, 2004 and December 31, 2003, respectively, based on quoted market prices.

 

4.     Sale transaction

 

On December 22, 2003, the Company was acquired by Madison Dearborn Capital Partners IV, L.P. (MDP), an affiliate of Chicago-based private equity investment firm Madison Dearborn Partners, LLC.  The initial purchase price totaled $362,111, including fees and expenses, and was financed by new equity contributions of $97,000; term loan and revolver borrowings under a new senior credit facility of approximately $60,300 and $2,000, respectively; the issuance of $175,000 of 7.75% Senior Subordinated Notes due 2013; the rollover of term loan borrowings under a new equipment financing facility of $23,400; the rollover of approximately $1,558 million of capital leases; and cash on hand of $2,853.  The purchase price was subject to certain working capital and debt adjustments to be finalized approximately three months subsequent to the transaction, as defined per the merger agreement.  The adjustments were finalized in April of 2004, resulting in a decrease to the initial purchase price of $527.

 

The acquisition was accounted for by the purchase method of accounting and, accordingly, the purchase price was allocated to the Company’s assets and liabilities based on their fair values at the date of acquisition.  The allocation of purchase price to property and equipment and identifiable intangible assets has been prepared on a preliminary basis, using valuation information that was available up to the point of financial statement preparation.  This allocation is therefore subject to adjustment.

 

At June 30, 2004, the net book value of intangible assets identified with respect to the transaction is as follows: 

 

 

 

Estimated
Life

 

Cost

 

Accumulated
Amortization

 

Net

 

Customer contract backlog

 

13-15 mos.

 

$

4,237

 

$

2,700

 

$

1,537

 

Demolition customer relationships

 

7-10 years

 

1,995

 

142

 

1,853

 

Software and databases

 

7 years

 

1,209

 

70

 

1,139

 

 

 

 

 

$

7,441

 

$

2,912

 

$

4,529

 

 

6



 

The following pro forma results for the three and six months ended June 30, 2003 have been prepared as if the acquisition took place at the beginning of the period and include certain adjustments such as additional depreciation and amortization charges resulting from the allocation of purchase price to property and equipment and intangible assets, and reductions to interest expense resulting from the terms of the new debt structure.  The pro forma operating results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that may occur in the future or that would have occurred had this acquisition been consummated at the beginning of the period presented.

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

Actual
2004

 

Pro forma
2003

 

Actual
2004

 

Pro forma
2003

 

Contract revenues

 

$

72,104

 

$

104,364

 

$

176,051

 

$

204,057

 

Operating income (loss)

 

(1,532

)

6,045

 

5,952

 

14,258

 

Income (loss) before income taxes

 

(7,840

)

2,054

 

(4,811

)

5,628

 

Net income (loss)

 

(5,437

)

1,186

 

(3,679

)

3,170

 

 

5.              Accounts receivable

 

Accounts receivable at June 30, 2004 and December 31, 2003 are as follows:

 

 

 

Successor Basis

 

 

 

June 30,
2004

 

December 31,
2003

 

Completed contracts

 

$

19,819

 

$

15,962

 

Contracts in progress

 

21,770

 

40,737

 

Retainage

 

6,498

 

8,969

 

 

 

48,087

 

65,668

 

Allowance for doubtful accounts

 

(875

)

(799

)

 

 

 

 

 

 

 

 

$

47,212

 

$

64,869

 

 

7



 

6.              Contracts in progress

 

The components of contracts in progress at June 30, 2004 and December 31, 2003 are as follows:

 

 

 

Successor Basis

 

 

 

June 30,
2004

 

December 31,
2003

 

Costs and earnings in excess of billings:

 

 

 

 

 

Costs and earnings for contracts in progress

 

$

213,239

 

$

261,013

 

Amounts billed

 

(196,764

)

(251,034

)

Costs and earnings in excess of billings for contracts in progress

 

16,475

 

9,979

 

Costs and earnings in excess of billings for completed contracts

 

1,637

 

1,257

 

 

 

 

 

 

 

 

 

$

18,112

 

$

11,236

 

 

 

 

 

 

 

Prepaid contract costs (included in prepaid expenses and other current assets)

 

$

1,842

 

$

570

 

 

 

 

 

 

 

Billings in excess of costs and earnings:

 

 

 

 

 

Amounts billed

 

$

(182,218

)

$

(180,096

)

Costs and earnings for contracts in progress

 

175,641

 

171,288

 

 

 

 

 

 

 

 

 

$

(6,577

)

$

(8,808

)

 

7.              Accrued expenses

 

Accrued expenses at June 30, 2004 and December 31, 2003 are as follows:

 

 

 

Successor Basis

 

 

 

June 30,
2004

 

December 31,
2003

 

Insurance

 

$

3,274

 

$

4,736

 

Payroll and employee benefits

 

2,472

 

6,658

 

U.S. income and other taxes

 

2,429

 

1,252

 

Interest rate swap liability

 

1,757

 

 

Interest

 

1,095

 

339

 

Equipment leases

 

885

 

882

 

Foreign income taxes

 

80

 

210

 

Other

 

975

 

1,379

 

 

 

 

 

 

 

 

 

$

12,967

 

$

15,456

 

 

8



 

8.              Segment information

 

The Company and its subsidiaries 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.   Segment information for the periods presented is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

Successor
Basis

 

Predecessor
Basis

 

Successor
Basis

 

Predecessor
Basis

 

 

 

2004

 

2003

 

2004

 

2003

 

Dredging

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

62,271

 

$

94,828

 

$

159,071

 

$

186,197

 

Operating income (loss)

 

(2,275

)

8,825

 

4,961

 

19,123

 

 

 

 

 

 

 

 

 

 

 

Demolition

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

9,833

 

$

9,536

 

$

16,980

 

$

17,860

 

Operating income (loss)

 

743

 

(216

)

991

 

583

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

72,104

 

$

104,364

 

$

176,051

 

$

204,057

 

Operating income (loss)

 

(1,532

)

8,609

 

5,952

 

19,706

 

 

9.              Commitments and contingencies

 

At June 30, 2004, the Company is contingently liable, in the normal course of business, for $15,182 in undrawn letters of credit, relating to contract performance guarantees or covering the Company’s insurance payment liabilities.

 

Amboy Aggregates, a joint venture in which the Company has a 50% equity interest, has a $2,000 revolving credit facility with a bank, which contains certain restrictive covenants, including limitations on the amount of distributions to its joint venture partners.  The Company has guaranteed 50% of the outstanding borrowings and accrued interest, which totaled $200 at June 30, 2004.

 

The Company finances certain key vessels used in its operations with operating lease arrangements with unrelated lessors, requiring annual rentals decreasing from $14 to $9 million over the next five years.  These operating 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.  It is impractical to develop an estimate of the maximum potential exposure under these lease indemnification arrangements, since it is entirely dependent on the unique tax circumstances of each lessor.  The Company has additional rental commitments for office facilities and dozer leases totaling approximately $1 million to $2 million, annually.

 

Borrowings under the Company’s Credit Agreement are secured by first lien mortgages on certain operating equipment of the Company with a net book value of $77,845 at December 31, 2003. Additionally, the Company obtains its performance and bid bonds through a bonding

 

9



 

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 approximately $92,340 at December 31, 2003. The net book value of equipment serving as collateral under these agreements at June 30, 2004 does not materially differ from the values at December 31, 2003.  Both the Credit Agreement and bonding agreement contain certain provisions and covenants; the Company is in compliance with such covenants at June 30, 2004.  The performance and bid bonds are customarily required for dredging and marine construction projects, as well as some demolition projects.  Bid bonds are generally obtained for a percentage of bid value and aggregate amounts outstanding typically range between $5 to $10 million.  Performance bonds typically cover 100% of the contract value with no maximum bond amounts.  At June 30, 2004, the Company had outstanding performance bonds valued at approximately $490 million; however the revenue value remaining in backlog related to these projects totaled approximately $235 million at June 30, 2004.

 

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.

 

The Company considers it unlikely that it would have to perform under any of these aforementioned contingent obligations and performance has never been required in any of these circumstances in the past.

 

As is customary with negotiated 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 and 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 adverse impact on the financial position or operations of the Company.

 

In the normal course of business, the Company is a defendant in various legal proceedings.  Except as described below, the Company is not currently a party to any material legal proceedings or environmental claims.

 

A joint venture in which the Company holds an approximately 36% interest was subject to a counterclaim filed by the Red Sea Ports Authority relating to a contract performed in Al Sukhna, Egypt between 1999 and 2001. The joint venture instituted arbitration proceedings against the Red Sea Ports Authority for monetary claims arising out of the contract and sought approximately $40 million in damages.  The Red Sea Ports Authority counterclaimed for $74 million in damages, alleging environmental damage from the project, including damage to coastline, fisheries and coral reefs, and misuse of the designated disposal site.  In July 2003, an arbitration hearing was held in Egypt regarding the joint venture’s claim and the Red Sea Ports Authority’s counterclaim.  A decision was rendered in June of 2004, whereby the joint venture was awarded approximately $8 million for its claims, including approximately $4 million for outstanding invoices which had previously been settled through non-payment risk insurance.  All counterclaims against the joint venture were dismissed.  The Company recognized $1.3 million of revenue in the second quarter of 2004 related to this settlement.

 

10



 

10.       Supplemental condensed consolidating financial information

 

Included in the Company’s long-term debt is $175,000 of 7¾% senior subordinated notes which will mature on December 15, 2013.  The payment obligations of the Company under the senior subordinated notes are guaranteed by the Company’s domestic subsidiaries (the “Subsidiary Guarantors”).  Such guarantees are full, unconditional and joint and several.  Separate financial statements of the Subsidiary Guarantors are not presented because the Company’s management has determined that they would not be material to investors.  The following supplemental financial information sets forth, on a combined basis, the balance sheets, statements of operations and statements of cash flows for the Subsidiary Guarantors, the Company’s non-guarantor subsidiary and for the Company (“GLD Corporation”).

 

11



 

Condensed Consolidating Balance Sheet at June 30, 2004

 

Successor Basis

 

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

712

 

$

8

 

$

 

$

 

$

720

 

Accounts receivable, net

 

47,212

 

 

 

 

47,212

 

Receivables from affiliates

 

3,555

 

2,922

 

4,540

 

(11,017

)

 

Contract revenues in excess of billings

 

18,112

 

 

 

 

18,112

 

Inventories

 

15,080

 

 

 

 

15,080

 

Prepaid expenses and other current assets

 

17,801

 

 

2,861

 

 

20,662

 

Total current assets

 

102,472

 

2,930

 

7,401

 

(11,017

)

101,786

 

Property and equipment, net

 

248,366

 

19

 

14,747

 

 

263,132

 

Goodwill

 

103,972

 

 

 

 

103,972

 

Other intangible assets

 

4,529

 

 

 

 

4,529

 

Investments in subsidiaries

 

2,944

 

 

285,369

 

(288,313

)

 

Notes receivable from affiliates

 

 

 

24,972

 

(24,972

)

 

Inventories

 

11,266

 

 

 

 

11,266

 

Investments in joint ventures

 

8,382

 

 

 

 

8,382

 

Other assets

 

329

 

 

11,793

 

 

12,122

 

 

 

$

482,260

 

$

2,949

 

$

344,282

 

$

(324,302

)

$

505,189

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

31,482

 

$

 

$

 

$

 

$

31,482

 

Payables to affiliates

 

 

 

6,477

 

(6,477

)

 

Accrued expenses

 

8,174

 

 

4,793

 

 

12,967

 

Billings in excess of contract revenues

 

6,577

 

 

 

 

6,577

 

Current maturities of long-term debt

 

6,490

 

 

 

(4,540

)

1,950

 

Total current liabilities

 

52,723

 

 

11,270

 

(11,017

)

52,976

 

Long-term debt

 

20,475

 

 

233,800

 

 

254,275

 

Notes payable to affiliates

 

24,972

 

 

 

(24,972

)

 

Deferred income taxes

 

89,059

 

5

 

5,451

 

 

94,515

 

Other

 

7,429

 

 

684

 

 

8,113

 

Total liabilities

 

194,658

 

5

 

251,205

 

(35,989

)

409,879

 

Minority interests

 

 

 

 

1,719

 

1,719

 

Stockholder’s equity

 

287,602

 

2,944

 

93,077

 

(290,032

)

93,591

 

 

 

$

482,260

 

$

2,949

 

$

344,282

 

$

(324,302

)

$

505,189

 

 

12



 

Condensed Consolidating Balance Sheet at December 31, 2003

 

Successor Basis

 

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

2,766

 

$

9

 

$

 

$

 

$

2,775

 

Accounts receivable, net

 

64,869

 

 

 

 

64,869

 

Receivables from affiliates

 

7,867

 

2,941

 

4,540

 

(15,348

)

 

Contract revenues in excess of billings

 

11,236

 

 

 

 

11,236

 

Inventories

 

13,603

 

 

 

 

13,603

 

Prepaid expenses and other current assets

 

14,558

 

 

6,620

 

 

21,178

 

Total current assets

 

114,899

 

2,950

 

11,160

 

(15,348

)

113,661

 

Property and equipment, net

 

241,594

 

38

 

22,500

 

 

264,132

 

Goodwill

 

103,917

 

 

 

 

103,917

 

Other intangible assets

 

7,441

 

 

 

 

7,441

 

Investments in subsidiaries

 

2,976

 

 

281,967

 

(284,943

)

 

Note receivable from affiliate

 

 

 

27,242

 

(27,242

)

 

Inventories

 

10,968

 

 

 

 

10,968

 

Investments in joint ventures

 

7,551

 

 

 

 

7,551

 

Other assets

 

3,605

 

 

11,669

 

 

15,274

 

 

 

$

492,951

 

$

2,988

 

$

354,538

 

$

(327,533

)

$

522,944

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

36,911

 

$

 

$

80

 

$

 

$

36,991

 

Payables to affiliates

 

9

 

 

10,919

 

(10,928

)

 

Accrued expenses

 

14,587

 

 

869

 

 

15,456

 

Billings in excess of contract revenues

 

8,808

 

 

 

 

8,808

 

Current maturities of long-term debt

 

6,490

 

 

 

(4,540

)

1,950

 

Total current liabilities

 

66,805

 

 

11,868

 

(15,468

)

63,205

 

Long-term debt

 

21,450

 

 

235,300

 

 

256,750

 

Note payable to affiliate

 

27,242

 

 

 

(27,242

)

 

Deferred income taxes

 

86,927

 

12

 

9,687

 

 

96,626

 

Other

 

6,949

 

 

683

 

 

7,632

 

Total liabilities

 

209,373

 

12

 

257,538

 

(42,710

)

424,213

 

Minority interests

 

 

 

 

1,731

 

1,731

 

Stockholder’s equity

 

283,578

 

2,976

 

97,000

 

(286,554

)

97,000

 

 

 

$

492,951

 

$

2,988

 

$

354,538

 

$

(327,533

)

$

522,944

 

 

13



 

Condensed Consolidating Statement of Operations for the three months ended June 30, 2004

 

Successor Basis

 

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

72,104

 

$

 

$

 

$

 

$

72,104

 

Costs of contract revenues

 

(66,578

)

(9

)

328

 

 

(66,259

)

Gross profit (loss)

 

5,526

 

(9

)

328

 

 

5,845

 

General and administrative expenses

 

(6,243

)

(15

)

1

 

 

(6,257

)

Amortization of intangible assets

 

(1,120

)

 

 

 

(1,120

)

Operating income (loss)

 

(1,837

)

(24

)

329

 

 

(1,532

)

Interest expense, net

 

(967

)

 

(6,029

)

 

(6,996

)

Equity in loss of subsidiaries

 

(16

)

 

(3,751

)

3,767

 

 

Equity in earnings of joint venture

 

682

 

 

 

 

682

 

Minority interests

 

 

 

 

6

 

6

 

Income (loss) before income taxes

 

(2,138

)

(24

)

(9,451

)

3,773

 

(7,840

)

Income tax (expense) benefit

 

538

 

8

 

3,969

 

(2,112

)

2,403

 

Net income (loss)

 

$

(1,600

)

$

(16

)

$

(5,482

)

$

1,661

 

$

(5,437

)

 

Condensed Consolidating Statement of Operations for the three months ended June 30, 2003

 

Predecessor Basis

 

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

104,364

 

$

 

$

 

$

 

$

104,364

 

Costs of contract revenues

 

(88,974

)

(16

)

(266

)

 

(89,256

)

Gross profit (loss)

 

15,390

 

(16

)

(266

)

 

15,108

 

General and administrative expenses

 

(6,464

)

(13

)

(22

)

 

(6,499

)

Operating income (loss)

 

8,926

 

(29

)

(288

)

 

8,609

 

Interest expense, net

 

(654

)

 

(4,483

)

 

(5,137

)

Equity in earnings (loss) of subsidiaries

 

(28

)

 

5,581

 

(5,553

)

 

Equity in earnings of joint ventures

 

677

 

 

 

 

677

 

Minority interests

 

 

 

 

91

 

91

 

Income (loss) before income taxes

 

8,921

 

(29

)

810

 

(5,462

)

4,240

 

Income tax (expense) benefit

 

(3,583

)

12

 

1,824

 

 

(1,747

)

Net income (loss)

 

$

5,338

 

$

(17

)

$

2,634

 

$

(5,462

)

$

2,493

 

 

14



 

Condensed Consolidating Statement of Operations for the six months ended June 30, 2004

 

Successor Basis

 

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

176,051

 

$

 

$

 

$

 

$

176,051

 

Costs of contract revenues

 

(154,311

)

(19

)

523

 

 

(153,807

)

Gross profit (loss)

 

21,740

 

(19

)

523

 

 

22,244

 

General and administrative expenses

 

(13,267

)

(30

)

(83

)

 

(13,380

)

Amortization of intangible assets

 

(2,912

)

 

 

 

(2,912

)

Operating income (loss)

 

5,561

 

(49

)

440

 

 

5,952

 

Interest expense, net

 

(2,091

)

 

(9,515

)

 

(11,606

)

Equity in earnings (loss) of subsidiaries

 

(32

)

 

2,306

 

(2,274

)

 

Equity in earnings of joint venture

 

831

 

 

 

 

831

 

Minority interests

 

 

 

 

12

 

12

 

Income (loss) before income taxes

 

4,269

 

(49

)

(6,769

)

(2,262

)

(4,811

)

Income tax (expense) benefit

 

(2,000

)

17

 

2,843

 

272

 

1,132

 

Net income (loss)

 

$

2,269

 

$

(32

)

$

(3,926

)

$

(1,990

)

$

(3,679

)

 

Condensed Consolidating Statement of Operations for the six months ended June 30, 2003

 

Predecessor Basis

 

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

204,057

 

$

 

$

 

$

 

$

204,057

 

Costs of contract revenues

 

(170,147

)

(32

)

(622

)

(110

)

(170,911

)

Gross profit (loss)

 

33,910

 

(32

)

(622

)

(110

)

33,146

 

General and administrative expenses

 

(13,366

)

(22

)

(52

)

 

(13,440

)

Operating income (loss)

 

20,544

 

(54

)

(674

)

(110

)

19,706

 

Interest expense, net

 

(1,337

)

 

(8,856

)

 

(10,193

)

Equity in earnings (loss) of subsidiaries

 

(51

)

 

12,035

 

(11,984

)

 

Equity in earnings of joint ventures

 

744

 

 

 

 

744

 

Minority interests

 

 

 

 

70

 

70

 

Income (loss) before income taxes

 

19,900

 

(54

)

2,505

 

(12,024

)

10,327

 

Income tax (expense) benefit

 

(7,986

)

23

 

3,616

 

 

(4,347

)

Net income (loss)

 

$

11,914

 

$

(31

)

$

6,121

 

$

(12,024

)

$

5,980

 

 

15



 

Condensed Consolidating Cash Flows for the six months ended June 30, 2004

 

Successor Basis

 

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

Net cash flows from operating activities

 

$

7,305

 

$

(20

)

$

2,492

 

$

 

$

9,777

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(10,077

)

 

 

 

(10,077

)

Dispositions of property and equipment

 

329

 

 

 

 

329

 

Adjustment to acquisition price of Predecessor common and preferred shares

 

527

 

 

 

 

527

 

Net cash flows from investing activities

 

(9,221

)

 

 

 

(9,221

)

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

(975

)

 

(2,500

)

 

(3,475

)

Borrowings under revolving loans, net of repayments

 

 

 

1,000

 

 

1,000

 

Net change in accounts with affiliates

 

837

 

19

 

(856

)

 

 

Financing fees

 

 

 

(136

)

 

(136

)

Net cash flows from financing activities

 

(138

)

19

 

(2,492

)

 

(2,611

)

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and equivalents

 

(2,054

)

(1

)

 

 

(2,055

)

Cash and equivalents at beginning of period

 

2,766

 

9

 

 

 

2,775

 

Cash and equivalents at end of period

 

$

712

 

$

8

 

$

 

$

 

$

720

 

 

Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 2003

 

Predecessor Basis

 

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

Net cash flows from operating activities

 

$

12,369

 

$

(10

)

$

(6,808

)

$

 

$

5,551

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(9,337

)

 

 

 

(9,337

)

Dispositions of property and equipment

 

129

 

 

 

 

129

 

Disposition of interest in Riovia investment

 

1,200

 

 

 

 

1,200

 

Equity investment in land acquistion

 

(843

)

 

 

 

(843

)

Net cash flows from investing activities

 

(8,851

)

 

 

 

(8,851

)

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

 

(6,475

)

 

(6,475

)

Borrowings under revolving loans, net of repayments

 

 

 

10,000

 

 

10,000

 

Net change in accounts with affiliates

 

(3,769

)

83

 

3,686

 

 

 

Financing fees

 

 

 

(403

)

 

(403

)

Repayments on notes receivable from stockholders

 

19

 

 

 

 

19

 

Net cash flows from financing activities

 

(3,750

)

83

 

6,808

 

 

3,141

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and equivalents

 

(232

)

73

 

 

 

(159

)

Cash and equivalents at beginning of period

 

1,451

 

5

 

 

 

1,456

 

Cash and equivalents at end of period

 

$

1,219

 

$

78

 

$

 

$

 

$

1,297

 

 

16



 

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

 

Statement Under the Private Securities Litigation Reform Act

 

Certain information in this quarterly report on Form 10-Q, including but not limited to the Management’s Discussion and Analysis of Financial Condition and Results of Operations, may constitute forward-looking statements as such term is defined in Section 27A of the Securities Exchange Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934.  Certain forward-looking statements can be identified by the use of forward-looking terminology such as, “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “anticipates,” or “hopeful,” or the negative thereof or other comparable terminology, or by discussions of strategy, plans or intentions.  Forward-looking statements involve risks and uncertainties, including those described in the Risk Factors section of the Company’s Form S-4 Registration Statement (Registration No. 333-114059), which could cause actual results to be materially different than those in the forward-looking statements, which speak only as of the date hereof.  The Company assumes no obligation to update such information.

 

General

 

The Company is the largest provider of dredging services in the United States.  Dredging generally involves the enhancement or preservation of the 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, Maintenance and Beach Nourishment, in which the Company experienced an average combined U.S. bid market share of 42% over the last three years (2001 to 2003).  The Company’s bid market is defined as the population of projects on which it bid or could have bid if not for capacity constraints (“bid market”).  In addition, the Company has continued its role as the only U.S. dredging contractor with significant international operations, which averaged 13% of its contract revenues over the last three years.

 

The Company was acquired by Madison Dearborn Capital Partners IV, L.P. (“MDP”) in December 2003.  In accordance with U.S. generally accepted accounting principles, a new basis of accounting resulted from the acquisition.  Therefore, within this report, the three and six month periods ended June 30, 2004 have been identified as the Successor Basis and the three and six month periods ended June 30, 2003 as the Predecessor Basis.  The significant differences between periods as a result of the new basis of accounting are discussed in the following Results of Operations section.

 

The Company also owns 85% of the capital stock of North American Site Developers, Inc. (“NASDI”), a demolition service provider located 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.  One NASDI management stockholder retains a 15% non-voting interest in NASDI, which is reflected as a minority interest within the financial statements.

 

The Company’s equity in earnings of joint ventures relates to the Company’s 50% ownership interest in Amboy Aggregates (“Amboy”) which is accounted for using the equity method.

 

17



 

Results of Operations

 

The following table sets forth the components of net income (loss) and EBITDA as a percentage of contract revenues for the three and six months ended June 30, 2004 and 2003:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

Successor
Basis

 

Predecessor
Basis

 

Successor
Basis

 

Predecessor
Basis

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Costs of contract revenues

 

(91.9

)

(85.5

)

(87.4

)

(83.8

)

Gross profit

 

8.1

 

14.5

 

12.6

 

16.2

 

General and administrative expenses

 

(8.6

)

(6.2

)

(7.6

)

(6.6

)

Amortization of intangible assets

 

(1.6

)

 

(1.6

)

 

Operating income (loss)

 

(2.1

)

8.3

 

3.4

 

9.6

 

Interest expense, net

 

(9.6

)

(4.9

)

(6.6

)

(5.0

)

Equity in earnings of joint ventures

 

0.9

 

0.6

 

0.5

 

0.4

 

Minority interest

 

 

 

 

 

Income (loss) before income taxes

 

(10.8

)

4.0

 

(2.7

)

5.0

 

Income tax benefit (expense)

 

3.3

 

(1.6

)

0.6

 

(2.1

)

Net income (loss)

 

(7.5

)%

2.4

%

(2.1

)%

2.9

%

 

 

 

 

 

 

 

 

 

 

EBITDA

 

7.8

%

12.9

%

11.6

%

14.0

%

 

 “EBITDA,” as provided herein, represents earnings from continuing operations before net interest expense, income taxes, depreciation and amortization expense.  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.   The Company presents EBITDA as additional information because it is among the bases upon which the Company assesses its financial performance, and certain covenants in its borrowing arrangements are tied to similar measures. The Company believes EBITDA is a useful measure for the users of its financial statements because it provides information that can be used to evaluate the effectiveness of the Company’s business from an operational perspective, exclusive of costs to finance its activities, income taxes, depreciation of operating assets and amortization of intangible assets, none of which is directly relevant to the efficiency of its operations.  EBITDA is not calculated identically by all companies; therefore, the Company’s presentation of EBITDA may not be comparable to similarly titled measures of other companies.  The following table reconciles net income (loss) to EBITDA for the periods indicated:

 

18



 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

Successor
Basis

 

Predecessor
Basis

 

Successor
Basis

 

Predecessor
Basis

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(5,437

)

$

2,493

 

$

(3,679

)

$

5,980

 

Adjusted for:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

6,996

 

5,137

 

11,606

 

10,193

 

Income tax expense (benefit)

 

(2,403

)

1,747

 

(1,132

)

4,347

 

Depreciation and amortization

 

6,451

 

4,068

 

13,576

 

8,135

 

EBITDA

 

$

5,607

 

$

13,445

 

$

20,371

 

$

28,655

 

 

The following table sets forth, by segment and dredging type of work, the Company’s contract revenues for the three and six months ended and backlog as of the periods indicated:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

Successor
Basis

 

Predecessor
Basis

 

Successor
Basis

 

Predecessor
Basis

 

Revenues (in thousands)

 

2004

 

2003

 

2004

 

2003

 

Dredging:

 

 

 

 

 

 

 

 

 

Capital - U.S.

 

$

22,753

 

$

56,615

 

$

48,672

 

$

110,428

 

Capital - foreign

 

17,395

 

19,514

 

45,161

 

29,551

 

Beach

 

12,120

 

11,283

 

42,478

 

31,073

 

Maintenance

 

10,003

 

7,416

 

22,760

 

15,145

 

Demolition

 

9,833

 

9,536

 

16,980

 

17,860

 

 

 

$

72,104

 

$

104,364

 

$

176,051

 

$

204,057

 

 

 

 

June 30,

 

 

 

Successor Basis

 

Backlog (in thousands)

 

2004

 

2003

 

Dredging:

 

 

 

 

 

Capital - U.S.

 

$

94,953

 

$

177,126

 

Capital - foreign

 

19,165

 

50,677

 

Beach

 

3,660

 

2,883

 

Maintenance

 

11,274

 

13,989

 

Demolition

 

12,596

 

15,492

 

 

 

$

141,648

 

$

260,167

 

 

Consolidated revenues for the second quarter of 2004 were $72.1 million, representing a decrease of $32.3 million or 30.9% over second quarter 2003 revenues of $104.4 million.  Revenues for the first half of 2004 were $176.1 million, a decrease of $28.0 million or 13.7% over revenues for the first half of 2003 of $204.1 million.   The decline in 2004 revenues was anticipated due to the slow-down in domestic dredging bid activity that began in the second half of 2003 and has continued through the first half of 2004.  This continuing lower level of bid activity has led to intense competition within the industry for work that has been bid this year, which has

 

19



 

significantly compressed margins.  Most of the decline in revenues is due to reduced levels of domestic capital dredging revenues.  Although the Company has continued to maintain a higher percentage of capital dredging work in backlog, performance on certain of these projects is being postponed by the Army Corps of Engineers (“Corps”) due to a lack of current funding.  This combination of the reduced bid market and the postponement of work within the Company’s backlog resulted in decreased utilization of the Company’s fleet.

 

The Company’s gross profit margin declined to 8.1% and 12.6% for the quarter and six months ended June 30, 2004, respectively, compared to 14.5% and 16.2% for the same periods of 2003.  The margin decline is partly attributable to some reduction in contract margin resulting from the mix of work, including a higher percentage of foreign work, which is typically bid and performed at lower margins.  However, more significantly, the margin decline is a result of the impact of fixed costs relative to the reduced level of utilization, as well as the impact of approximately $1.3 million of additional quarterly depreciation in 2004 resulting from the revaluation of the Company’s operating assets in connection with the sale of the Company in December of 2003.

 

Capital projects include large port deepenings and other infrastructure projects.  Domestic capital dredging revenue declined $33.9 million and $61.8 million in the second quarter and first half of 2004, respectively, as compared to the same periods of 2003.  As mentioned previously, this is a result of a slow-down in domestic bidding activity, coupled with the postponement of certain capital project work within backlog.  As discussed in previous filings, the capital market includes “Deep Port” projects that have been authorized by the 1986 Water Resource Development Act (“WRDA”) and subsequent bills.  In 1997, the Corps announced Deep Port work, authorized by WRDA, to be completed through 2005, with an aggregate value in excess of $2.0 billion, and supplemental authorizations have increased this amount to approximately $4.0 billion, with work to be completed through 2010.  Currently, over $2.4 billion of these authorized Deep Port projects have yet to be let for bid.  Deep Port work has comprised a substantial portion of recent bid markets, averaging 36% of the bid market over the last three years (2001 to 2003).  The Company’s bid market share of Deep Port projects averaged 45% over the last three years.

 

During the second quarter of 2004, the Company’s domestic capital revenues included continuing work on Deep Port projects in Kill Van Kull, New York; Houston, Texas; and Manatee Harbor, Florida.  These projects contributed combined revenue to the quarter of $15.6 million.  The new work capital project along the Providence River and harbor in the Rhode Island area added another $5.5 million of revenue to the quarter.  Foreign capital revenues in the second quarter of 2004 totaled $17.4 million, which was generated by a number of projects in the Middle East, including the ongoing port terminal project in Bahrain and a maintenance project performed in Umm Qasr, Iraq, which is the second project the Company has completed in that country.  Additionally, the Company recorded revenue of $1.3 million relating to the second quarter 2004 settlement of certain claims with respect to the Al Sukhna, Egypt joint venture project which was concluded in 2001.

 

Beach nourishment projects include rebuilding of shoreline areas that have been damaged by storm activity or ongoing erosion.  Second quarter 2004 revenues from beach nourishment projects totaled $12.1 million, which primarily relates to a single project performed in Absecon Island/Atlantic Beach, New Jersey.

 

Maintenance projects include routine dredging of ports, rivers and channels to remove the regular build up of sediment.  Maintenance revenues totaled $10.0 million in the second quarter of 2004, reflecting a typical level for the Company.  The second quarter maintenance revenues included $2.9 million generated by a project in Tampa Harbor and the Alafia Rivers, as well as $1.1 million in mobilization revenue on the Oakland/Richmond Harbor project. This is a three-year

 

20



 

maintenance project, and the Company will perform the current years’ portion of the work in the second half of 2004.

 

NASDI’s demolition revenues for the second quarter of 2004 totaled $9.8 million, which is consistent with the comparable period of 2003. NASDI’s second quarter revenues were generated by numerous small projects; however, a few larger projects made a significant contribution to the quarter, including $1.1 million for the ongoing take-down of the South Boston power plant and receipts for the sale of steel and metal scrap salvaged from this project; $1.3 million from two demolition projects recently won in Florida; and $2.1 million from the first phase of a $3 million project entailing select interior demolition and asbestos removal within a Boston office building.

 

Net interest expense for the second quarter and first half of 2004 was $7.0 million and $11.6 million, respectively, compared to $5.1 million and $10.2 million for the same periods of 2003.  As a result of the sale transaction in December 2003, the Company’s debt level increased to approximately $260 million at December 31, 2003, compared to approximately $173 million at the beginning of 2003.  However, despite the increased debt level, the 2004 cash interest expense related to the Company’s senior and subordinated debt has remained relatively consistent with the 2003 expense, due to significantly lower interest rates on the new debt structure.  In February 2004, the Company entered into an interest rate swap arrangement to swap a portion of its fixed-rate debt to floating, to manage the interest rate paid with respect to the Company’s 7¾% senior subordinated debt.  At June 30, 2004, the fair value accounting for the swap resulted in $1.8 million of an additional non-cash charge to interest expense.

 

The Company generated a net loss of $5.4 million and $3.7 million for the second quarter and first six months of 2004, respectively, compared to net income of $2.5 million and $6.0 million for the same periods of 2003.  The net loss in the 2004 periods reflects the reduced dredging volume and the impact of fixed costs relative to the levels of revenue generated, given the lower than typical utilization levels for the Company. The 2004 periods also include additional depreciation and amortization expense resulting from the revaluation of the Company’s assets and liabilities in connection with sale of the Company in December of 2003, as well as non-cash interest expense resulting from the interest rate swap arrangement, mentioned above.  EBITDA (as defined on page 18) was $5.6 million and $20.4 million for the quarter and six months ended June 30, 2004, compared to $13.4 million and $28.7 million for the same periods of 2003.  EBITDA declined due to the reduction in revenues and earnings as discussed previously.

 

Backlog

 

The Company’s contract backlog represents management’s current estimate of the revenues that will be realized under the portion of the contracts remaining to be performed.  Such estimates are subject to fluctuations based upon the amount of material actually dredged, as well as factors affecting the time required to complete the job. In addition, because a substantial portion of the Company’s backlog relates to government contracts, the Company’s backlog can be canceled at any time without penalty.  However, the Company can generally recover the actual committed costs and profit on work performed up to the date of cancellation.  Consequently, backlog is not necessarily indicative of future revenues. The Company’s backlog includes only those projects for which the Company has obtained a signed contract with the customer.

 

The Company’s backlog continues to be impacted by the slow domestic dredging bid market.  Due to the minimal backlog added during the quarter, dredging backlog declined to $129.1 million at June 30, 2004 as the Company primarily worked off backlog during the second quarter.  This compares to $189.2 million at March 31, 2004 and $244.7 million at June 30, 2003.  The second quarter 2004 domestic dredging bid market, representing work awarded during the period, totaled $113 million and brings the year-to-date market to $221 million.   The 2004 bidding

 

21



 

activity has remained sluggish, coming off a low bid market for 2003 which totaled only $425 million.  This compares to a domestic bid market of over $900 million in 2002, and an average over the five preceding years (1998 to 2002) of approximately $650 million.  Although the Corps’ budgets have remained at similar levels in recent years, management continues to believe that the market is being impacted by the diversion of Corps’ personnel and financial resources to the reconstruction efforts in Iraq, as well as distractions related to reorganization within the Corps and general uncertainty surrounding the upcoming elections and the impact on the Corps’ 2005 fiscal year budget.

 

The decline in the current bid market has significantly impacted pricing in the short-term, as competition within the industry has increased for the work that is being bid.   In fact, some of the work recently bid has been won by competitors at prices equal to the Company’s cash costs.   The Company, however, is selective in its bidding and its does not want to take on work and put wear and tear on its equipment without some level of recovery.  Thus, for the second quarter, Great Lakes was awarded only $5 million for two small maintenance projects, representing only 4% of the quarters’ awards.   During the quarter, the final phase of the 43 foot Arthur Kill Deep Port project was bid.  This was the only Deep Port project bid during the quarter, and the Company was the successful low bidder at $66 million.  Award of the project is pending approval of Great Lakes’ disposal plans, as is typical for this type of project.  In the meantime, a competitor protested award of this project to the Company; however, the protest has since been dismissed by the Corps and the Company still anticipates receiving award of this project in the third quarter.  Additionally, at the end of July 2004, the Company was awarded the $66 million Brunswick Inner Channel project, which the Company bid in 2002 and recently obtained court resolution in the its favor on its disagreement with the Corps’ estimate.   Dredging is expected to commence on both of these projects in the fourth quarter of 2004.

 

At June 30, 2004, over 65% of backlog is comprised of domestic capital dredging projects, which are generally higher margin work.  This includes the work remaining on Deep Port capital projects in Kill Van Kull, New York; Los Angeles, California; Houston, Texas; Wilmington, North Carolina; Manatee Harbor, Florida; and Port Jersey Channel, New Jersey.   As mentioned above, the Company was low bidder on a $66 million Deep Port project in Arthur Kill, New York, and the Company received a positive court ruling on the $66 million Brunswick, Georgia Deep Port project. These projects, along with an additional $48 million of low bids pending award and other options pending on projects in backlog, will significantly increase the Company’s domestic backlog, once awarded.

 

Foreign capital project backlog, which comprises $19.2 million or 14% of the June 30, 2004 backlog, relates primarily to work remaining on the long-term port terminal project in Bahrain and the channel deepening project for a liquid natural gas plant in Egypt.   In July 2004, the Company received a signed letter of intent for award of a $30 million LNG terminal project in Ocean Cay Bahamas.  This project will increase foreign backlog, once the final contract is signed.

 

Beach backlog at June 30, 2004 declined to $3.7 million, as the Company performed on work in its year-end backlog.  Beach work is often bid in the second half of the year, since the work is generally performed between the months of September to March, due to environmental restrictions.  During the quarter, only three beach nourishment projects were bid and awarded with a value of approximately $19 million, all of which were won by competitors.

 

Maintenance backlog at June 30, 2004 was $11.3 million, which includes the first year’s portion of the $31 million Oakland Harbor project, as well as remaining work on a few smaller projects.  There were over fifteen maintenance projects bid during the quarter, the majority of which was won by competitors.  The pricing of maintenance work bid recently has been very low, as the industry attempts to employ its assets that are not currently employed on capital or beach projects.

 

22



 

The demolition services backlog at June 30, 2004 was $12.6 million, compared to $14.7 million at March 31, 2004 and $15.5 million at June 30, 2003.  The June backlog includes five projects with over $1 million of revenue remaining, as well as a typical complement of mid-size projects.  The New England demolition market continues to be competitive; however, the demolition bidding activity has increased in recent months.  NASDI’s management anticipates that a few larger projects will be awarded within the next six months, which should enable NASDI to maintain its operations at a level consistent with the first half of 2004.

 

Market Outlook

 

The slow down in the domestic dredging bid market that began in 2003 and has continued through the second quarter of 2004 has led to increasing uncertainty with respect to funding of all projects in the Corps’ program.  Additionally, there is ongoing debate on the Corps’ budget for fiscal year 2005. In February of 2004, the President presented his Civil Works Budget for 2005, announcing lower budget levels. Then, as typically happens when it reached the House appropriations committee, the committee added an additional $700 million to the appropriation request, but the bill’s increased funding may face opposition as it moves through the full House and Senate for final approval.  Even if the appropriation level is agreed to, it is unclear whether a budget will even be passed in the current year due to the impending elections, in which case the Corps will be forced to operate under a continuing resolution, as was the case going into 2003.

 

The current legislation also targets changes to beach nourishment funding, proposing that the administration no longer honor any cost-sharing agreements for shoreline protection and no longer provide funding for investigations, studies or the preparation of plans and specifications for such projects.  Thus, the local communities and State agencies would be required to fund and administer these projects in the future.  The federal funding of shoreline protection has often been the target of administrations seeking to control spending, but the resulting congressional lobbies generally have been successful in amending the budget and restoring federal funding.  However, given the state of the deficit and the diversion of funds to support the nation’s efforts in Iraq, many continue to be concerned for the future of the beach program.  Although funds have been appropriated for the fiscal year 2004 program, the Company continues to receive indications that projects are on hold pending a decision on funding.  If the current legislation is successful and federal funding is not made available, in management’s view, the local agencies are not prepared either financially or administratively to execute their contracts in the near term.  The effects on the industry of this uncertain funding environment continue to be evident entering the third quarter, and it appears that most of the industry’s hopper dredge fleet may remain idle through the third quarter.

 

Despite the uncertainty surrounding the current bid market and funding environment, authorizations for future work continue to move forward.  The WRDA legislation, which forms the basis for authorizing the Corps’ civil works projects, including the Deep Port projects, is generally enacted every other year.  The most recent WRDA bill was passed by Congress in 2000 and the recent Deep Port work that has come out for bid and those projects expected for 2004 and 2005 bidding have already been authorized by this or prior WRDA legislation. While no bill was passed in 2002 or 2003, a 2004 WRDA has been introduced. The 2004 WRDA bill includes a change to increase the federal cost sharing percentages as ports are brought to greater depths, which should provide some incentive for certain state legislatures to push for its adoption. However, the bill in its current form as approved by the Senate Environment and Public Works Committee, includes a proposal to create additional environmental regulations for beach nourishment projects.  This provision was apparently added to the bill even though the Committee held no hearings on the environmental effects of beach nourishment projects. Thus, the American Shore and Beach Preservation Association has objected to the legislation and has requested that such provision be removed from the bill.  Given the controversial nature of this

 

23



 

new language, it is expected that the bill will be tabled in hopes the political environment will be more friendly next year for passage of a WRDA bill.

 

As discussed in the Company’s 2003 Form 10-K, in an effort to provide a more level playing field for all competitors, the industry has been pursuing a legislative solution to close the grandfather clause loophole which has allowed Bean/Stuyvesant to expand its domestic dredging operations, despite its control by Boskalis, a Dutch company and one of the largest dredging contractors in the world.   In the third quarter of 2003, one of the industry’s domestic dredging companies protested a bid which it lost to Bean/Stuyvesant on the grounds that the bid couldn’t be awarded to Bean/Stuyvesant, since they are operating illegally in the U.S., on the basis that they are less than 75% owned by U.S. citizens.  The case was heard in the court of claims where it was decided that Bean/Stuyvesant was not operating under the intent of the law.  As expected, Bean/Stuyvesant appealed this decision.  The appeal was heard in the second quarter of 2004 and the ruling was overturned.   The domestic competitor has requested a rehearing, but it is unclear as to whether the courts will respond.  Therefore, the industry will continue to pursue a legislative solution to this matter.

 

In summary, the Company is currently operating in an industry market unlike any experienced in recent years.  While there are a number of factors contributing to uncertainty regarding project funding and timing, the work continues to be required.  At some point in the future, all the work deferred currently will need to be performed.  The Deep Port projects underway are not fully functional until all parts of the channels are taken to their final depths, and other authorized projects have been proven to be necessary to accommodate the deeper draft vessels in use throughout the world.  Similarly, the maintenance dredging, if not performed currently, will accumulate and grow in volume as channels continue to fill with sedimentation, eventually to the point were ships can no longer safely navigate into the ports, and beach nourishment work will reach a point of urgency as waterfront assets and recreational communities become jeopardized.  Therefore, Company management believes that the current environment represents only a deferral of work, and not any permanent reduction in the industry.  In fact, at a recent Corps industry meeting, the Corps expressed concern as to whether private industry has sufficient capacity to take on all the work that is in the pipeline.   However, it still remains unclear as to how long this deferral will continue.

 

Given the continued uncertainty in the industry, it is apparent that the third quarter of 2004 will also be impacted by the reduced bid market and slow down in funding, with the Company’s utilization levels expected to be similar to levels experienced in the second quarter.  Although the Company has a solid backlog level going into the third quarter and has recently won a couple of major projects to be added to backlog, given the timing of the bidding and awards, and requested deferral of certain projects such as the Wilmington and Los Angeles deepening projects, much of the Company’s backlog cannot be performed until the fourth quarter of 2004 and future quarters.

 

Liquidity and Capital Resources

 

The Company’s principal sources of liquidity are cash flow generated from operations and borrowings under its new senior credit facility.  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 generated by operating activities for the six months ended June 30, 2004 and 2003 totaled $9.8 million and $5.6 million, respectively.  The fluctuation between periods results from the normal timing differences on the recognition and billing of revenues relative to the current level of activity, as well as the receipt of income tax refunds in connection with the

 

24



 

payment of expenses related to the sale in December of 2003, which also increased the cash generated by operations in the 2004 period.

 

The Company’s net cash flows used in investing activities were $9.2 million compared to $8.9 million for first half of 2004 and 2003, respectively.  The use of cash relates primarily to equipment acquisitions and capital improvements to existing equipment.  With respect to the 2004 equipment acquisitions, approximately $1.9 million was funded by proceeds received in 2003 from the sale of two tugboats as part of like-kind exchange transaction, and the Company intends to offset approximately $3.1 million of its year-to-date spending on construction of two new barges with the proceeds from a sale-leaseback transaction to take place in the fourth quarter.  In May of 2004, the Company received cash of approximately $0.5 million from its former shareholders, representing the final adjustment to the purchase price with respect to the acquisition of the Company by MDP in December 2003.  In the 2003 period, the Company also utilized $0.8 million to purchase 50% of a real estate interest related to its Amboy joint venture and received proceeds of $1.2 million related to the sale of its interest in the Riovia S.A. joint venture.

 

The Company’s net cash used in financing activities for six months ended June 30, 2004 totaled $2.6 million, compared to a source of cash of $3.1 million for the six months ended June 30, 2003.  In the 2004 period, the Company paid down debt, while it borrowed funds in the 2003 period, based on its working capital needs in the respective periods.

 

In February 2004, the Company entered into an interest rate swap arrangement 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 7¾% senior subordinated debt.  At June 30, 2004, the fair value accounting for the swap resulted in $1.8 million of an additional non-cash charge to interest expense.  While this represents the current fair value of the swap arrangement based on the anticipated future rates, the Company did receive a payment of approximately $0.3 million in the second quarter on this swap arrangement, such that cash flow has been positively impacted to date.

 

Given the current uncertainty surrounding the bidding and funding environment discussed previously, the Company has begun taking steps to reduce discretionary overhead and maintenance costs and capital spending.  With these reductions, the Company believes the anticipated cash flows from operations and available credit under its revolving credit facility will be sufficient to fund the Company’s operations and its revised capital expenditures, and meet its current debt service requirements of approximately $20 million for the year.  The Company is currently in compliance with all financial covenants contained in its Credit Agreement and Equipment Term Loan (collectively, “senior credit agreements”) at June 30, 2004 and expects to be in the compliance at the end of the third quarter as well.  However, if the difficult market conditions continue through the remainder of 2004, the Company may not remain in compliance with all of the financial covenants contained in its senior credit agreements beginning with the financial covenants for the fourth quarter of 2004.  Therefore, the Company has commenced discussions with its senior lenders to seek an amendment or waiver to avoid violating these financial covenants for the fourth quarter through 2005.  Based on these initial discussions, the Company anticipates that its senior lenders will provide such an amendment or waiver, if necessary.  However, if there is a violation of any of the financial covenants and the Company is not successful in obtaining an amendment or waiver, a default would occur under the Company’s senior credit agreements, which could result in a material adverse impact on the Company’s financial condition.

 

The Company’s ability to fund its working capital needs, planned capital expenditures and scheduled debt payments, and to comply with all of the financial covenants under its debt agreements, depends on its future operating performance and cash flow, which in turn, are subject

 

25



 

to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company’s control.

 

Critical Accounting Policies and Estimates

 

In preparing its consolidated financial statements, the Company follows accounting principles generally accepted in the United States of America.  The application of these principles requires significant judgments or an estimation process that can affect the results of operations, financial position and cash flows of the Company, as well as the related footnote disclosures.  The Company continually reviews its accounting policies and financial information disclosures.  There have been no material changes in policies or estimates since December 31, 2003.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

The market risk of the Company’s financial instruments as of June 30, 2004 has not significantly changed since December 31, 2003.  The market risk profile of the Company on December 31, 2003 is disclosed in the Company’s 2003 Annual Report on Form 10-K.

 

Item 4.  Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures.  The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, such officers have concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion.

 

(b) Changes in Internal Controls. There have been no changes in our internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

26



 

PART II – Other Information

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)

 

Exhibits

 

 

 

31.1

 

Certification Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

 

Certification Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 


*  Filed or furnished herein.

 

(b)                               Reports on Form 8-K

 

1.               A Current Report on Form 8-K filed on April 21, 2004 regarding a press release announcing earnings information for the quarter ended March 31, 2004.

 

SIGNATURE

 

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

 

 

 

Great Lakes Dredge & Dock Corporation

 

 

 

 

Date:   August 12, 2004

 

By:

/s/ Deborah A. Wensel

 

 

 

Deborah A. Wensel

 

 

 

Senior Vice President
and Chief Financial Officer

 

 

 

 

(Principal Financial and Accounting Officer and
Duly Authorized Officer)

 

27



 

EXHIBIT INDEX

 

Number

 

Document Description

 

 

 

31.1

 

Certification Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

 

Certification Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 


* Filed or furnished herewith.

 

28