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Great Lakes Dredge & Dock 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x

 

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

 

 

 

For the quarterly period ended June 30, 2007

 

 

 

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:

001-33225

Great Lakes Dredge & Dock Corporation

(Exact name of registrant as specified in its charter)

Delaware

 

20-5336063

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

2122 York Road, Oak Brook, IL

 

60523

(Address of principal executive offices)

 

(Zip Code)

 

(630) 574-3000

(Registrant’s telephone number, including area code)

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

Yes    x     No    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 Large Accelerated Filer    o

 

Accelerated Filer    o

 

Non-Accelerated Filer    x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    o      No    x

As of August 10, 2007, 58,459,824 shares of the Registrant’s Common Stock, par value $.0001 per share, were outstanding.

 




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, 2007

INDEX

Part I

 

Financial Information

 

 

 

 

 

 

 

 

 

 

Item 1

 

Financial Statements (Unaudited)

 

Page

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006

 

3

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2007 and 2006

 

4

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2007 and 2006

 


5

 

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

 

 

 

 

Item 2

 

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

 

20

 

 

 

 

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

 

 

 

 

 

Item 4

 

Controls and Procedures

 

28

 

 

 

 

 

 

 

Part II

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

 

28

 

 

Item 1A

 

Risk Factors

 

29

 

 

Item 6

 

Exhibits

 

29

 

 

 

 

 

 

 

Signature

 

 

 

 

 

30

 

 

 

 

 

 

 

Exhibit Index

 

 

 

 

 

31

 

2




PART I — Financial Information

Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

 

 

June 30,
2007

 

December 31,
2006

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents

 

$

1,135

 

$

3,640

 

Accounts receivable, net

 

86,151

 

89,505

 

Contract revenues in excess of billings

 

5,575

 

9,561

 

Inventories

 

21,509

 

21,082

 

Prepaid expenses and other current assets

 

30,557

 

30,458

 

Total current assets

 

144,927

 

154,246

 

Property and equipment, net

 

293,339

 

239,337

 

Goodwill

 

97,447

 

98,747

 

Other intangible assets, net

 

1,137

 

1,268

 

Inventories

 

18,434

 

13,353

 

Investments in joint ventures

 

10,145

 

9,996

 

Other assets

 

10,134

 

11,412

 

Total assets

 

$

575,563

 

$

528,359

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

51,949

 

$

57,826

 

Accrued expenses

 

18,764

 

30,192

 

Billings in excess of contract revenues

 

17,900

 

19,195

 

Current maturities of long-term debt

 

25,500

 

4,085

 

Total current liabilities

 

114,113

 

111,298

 

Long-term debt

 

198,500

 

190,600

 

Deferred income taxes

 

83,389

 

84,825

 

Other

 

13,028

 

11,109

 

Total liabilities

 

409,030

 

397,832

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

2,024

 

2,005

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock—$.0001 par value; 90,000,000 authorized, 46,423,746 shares issued and outstanding at June 30, 2007 and 39,985,678 shares issued and outstanding at December 31, 2006

 

5

 

4

 

Additional paid-in capital

 

200,490

 

168,830

 

Accumulated deficit

 

(36,228

)

(39,030

)

Accumulated other comprehensive income (loss)

 

242

 

(1,282

)

Total stockholders’ equity

 

164,509

 

128,522

 

Total liabilities and stockholders’ equity

 

$

575,563

 

$

528,359

 

 

See notes to unaudited condensed consolidated financial statements.

3




Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share data)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

115,625

 

$

114,060

 

$

242,357

 

$

222,487

 

Costs of contract revenues

 

97,462

 

96,501

 

210,480

 

193,317

 

Gross profit

 

18,163

 

17,559

 

31,877

 

29,170

 

General and administrative expenses

 

9,217

 

7,121

 

17,209

 

14,430

 

Subpoena-related expenses

 

69

 

69

 

71

 

429

 

Amortization of intangible assets

 

65

 

104

 

131

 

180

 

Operating income

 

8,812

 

10,265

 

14,466

 

14,131

 

Interest expense, net

 

(6,581

)

(6,015

)

(10,842

)

(12,216

)

Equity in earnings of joint ventures

 

637

 

465

 

899

 

582

 

Minority interest

 

(10

)

(87

)

(19

)

(125

)

Income before income taxes

 

2,858

 

4,628

 

4,504

 

2,372

 

Income tax expense

 

(1,179

)

(1,650

)

(1,861

)

(928

)

Net income

 

$

1,679

 

$

2,978

 

2,643

 

$

1,444

 

Redeemable Preferred Stock

 

 

(2,028

)

 

(4,039

)

Net income (loss) available to common stockholders

 

$

1,679

 

$

950

 

$

2,643

 

$

(2,595

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.04

 

$

0.10

 

$

0.07

 

$

(0.28

)

Basic weighted average shares

 

40,989

 

9,288

 

40,320

 

9,288

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

0.03

 

$

0.10

 

$

0.06

 

$

(0.28

)

Diluted weighted average shares

 

48,238

 

9,288

 

46,477

 

9,288

 

 

See notes to unaudited condensed consolidated financial statements.

4




Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

( in thousands, except per share amounts)

 

 

Six Months Ended
June 30

 

 

 

2007

 

2006

 

Operating Activities

 

 

 

 

 

Net income

 

$

2,643

 

$

1,444

 

Adjustments to reconcile net income to net cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

12,937

 

12,528

 

Earnings of joint ventures

 

(899

)

(582

)

Distribution from equity joint ventures

 

750

 

650

 

Minority interest

 

19

 

125

 

Deferred income taxes

 

288

 

(3,466

)

Gain on dispositions of property and equipment

 

(649

)

(380

)

Amortization of financing fees

 

1,702

 

899

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

3,354

 

4,334

 

Contract revenues in excess of billings

 

3,986

 

156

 

Inventories

 

(5,508

)

947

 

Prepaid expenses and other current assets

 

(1,789

)

907

 

Accounts payable and accrued expenses

 

(14,501

)

426

 

Billings in excess of contract revenues

 

(1,295

)

(518

)

Other noncurrent assets and liabilities

 

408

 

(86

)

Net cash flows from operating activities

 

1,446

 

17,384

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of property and equipment

 

(66,615

)

(11,604

)

Dispositions of property and equipment

 

2,823

 

857

 

Repayment of note receivable from related party

 

1,703

 

 

Net cash flows used in investing activities

 

(62,089

)

(10,747

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Repayments of long-term debt

 

(19,685

)

(3,975

)

Borrowings under revolving loans, net of repayments

 

49,000

 

2,000

 

Cash proceeds from conversion of warrants

 

31,588

 

 

 

Financing fees

 

(1,855

)

 

 

Repayment of capital lease debt

 

(910

)

(691

)

Net cash flows from financing activities

 

58,138

 

6,666

 

Net change in cash and equivalents

 

(2,505

)

(29

)

Cash and equivalents at beginning of period

 

3,640

 

601

 

Cash and equivalents at end of period

 

$

1,135

 

572

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

Cash paid for interest

 

$

8,583

 

$

10,818

 

Cash paid for taxes

 

$

6,411

 

$

598

 

 

 

 

 

 

 

NON CASH INVESTING ACTIVITY

 

$

4,805

 

$

 

 

See notes to unaudited condensed consolidated financial statements.

5




GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

( in thousands, except per share amounts)

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, 2006.

The financial results for the Company are compared with the results for the equivalent periods of GLDD Acquisitions Corp., which merged with a subsidiary of Aldabra Acquisition Corporation (“Aldabra”) on December 26, 2006. Following a holding company merger, the surviving company was renamed Great Lakes Dredge & Dock Corporation.  The merger was accounted for as the acquisition of Aldabra and was treated as a recapitalization.  Accordingly, the Company’s core operating activities were not affected by the merger.

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

Total comprehensive income (loss) is comprised of the Company’s net income (loss) and net unrealized gains (losses) on cash flow hedges as discussed in Note 3 below. Total comprehensive income for the three months ended June 30, 2007 and 2006 was $2,142 and $3,174, respectively.  Total comprehensive income for the six months ended June 30, 2007 and 2006 was $4,167 and $1,924, respectively.

3.              Stockholders’ Equity

As of June 30, 2007, 6.3 million of the Company’s warrants to purchase common stock had been exercised, resulting in cash proceeds to the Company of $31,588.  As a result of the exercise of the warrants, Stockholders’ Equity increased by this amount at June 30, 2007.

6




4.              Earnings per share

As indicated in Note 1, the merger with Aldabra was considered a reverse acquisition, and accordingly the weighted average shares outstanding for all prior periods reflect the shares that were issued to acquire GLDD Acquisitions Corp. common stock.  As a result, shares of 9,288 were deemed to be outstanding at the beginning of the earliest period presented.

The Company accrued dividends on its redeemable preferred stock in 2006, which reduced the net income available to stockholders.  Such preferred stock and all accrued dividends were exchanged for common stock in connection with the December 2006 merger.  As a result of the merger, 18.4 million warrants to purchase the Company’s common stock were deemed effective at the merger date.  At June 30, 2007, the Company had 12.1 million warrants to purchase common stock outstanding.  The potentially dilutive impact of these shares is included in the calculation of diluted earnings per share based on the application of the treasury stock method.

Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common share outstanding during the reporting period. Diluted earnings per share is computed similar to basic earnings per share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. The computations for basic and diluted earnings per share from continuing operations are as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Numerator:

 

 

 

 

 

 

 

 

 

Net earnings - numerator for basic earnings per share

 

$

1,679

 

$

2,978

 

$

2,643

 

$

1,444

 

Redeemable Preferred Stock dividends

 

 

(2,028

)

 

(4,039

)

 

 

 

 

 

 

 

 

 

 

Net earnings adjusted for preferred stock dividends numerator basic
earnings per share

 

$

1,679

 

$

950

 

$

2,643

 

$

(2,595

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share - weighted average shares

 

40,989

 

9,288

 

40,320

 

9,288

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Dilutive impact of warrants to purchase common stock

 

7,249

 

 

 

6,157

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted earnings per share adjusted weighted average shares

 

48,238

 

9,288

 

46,477

 

9,288

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.04

 

$

0.10

 

$

0.07

 

(0.28

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

0.03

 

$

0.10

 

$

0.06

 

(0.28

)

 

5.              Risk management activities

The Company uses derivative instruments to manage commodity price, interest rate, and foreign currency exchange risks. Such instruments are not used for trading purposes. As of June 30, 2007, the Company was party to various swap arrangements to hedge the price of a portion of its diesel fuel purchase requirements for work in its backlog to be performed through February 2008. As of June 30, 2007, there were 3.9 million gallons remaining on these contracts. Under these agreements, the Company will pay fixed prices ranging from $1.72 to $2.21 per gallon. At June 30, 2007 and December 31, 2006, the fair value liability on these contracts was estimated to be $183 and $2,113, respectively, based on quoted market prices, and is recorded in accrued liabilities.  At June 30, 2007 there was also a fair value asset on certain of the contracts estimated to be $583, based on quoted market prices, and is recorded in 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, 2007 will be reclassified into earnings over the next eight months, corresponding to the period during which the hedged fuel is expected to be utilized.

In February 2004, the Company entered into an interest rate swap arrangement, which is effective through December 15, 2013, 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 current portion of the fair value liability of the swap at June 30, 2007 and December 31, 2006 was $238 and $201, respectively, and is recorded in accrued liabilities. The long term portion of the fair value liability of the swap at June 30, 2007 and December 31, 2006 was $1,921 and $1,279, respectively and is recorded in other long term liabilities. The swap is not accounted for as a hedge; therefore, the changes in fair value are recorded as adjustments to interest expense in each reporting period.

7




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 the Company’s variable rate debt (primarily bank debt) approximates fair values, based on prevailing market rates.   The fair value of the Company’s $175,000 of 7¾% senior subordinated notes was $171,938 and $168,000 at June 30, 2007 and December 31, 2006, respectively, based on quoted market prices.

6.              Accounts receivable

Accounts receivable at June 30, 2007 and December 31, 2006 are as follows:

 

 

June 30,
2007

 

December 31,
2006

 

Completed contracts

 

$

21,483

 

$

18,252

 

Contracts in progress

 

52,015

 

60,522

 

Retainage

 

14,160

 

11,488

 

 

 

87,658

 

90,262

 

Allowance for doubtful accounts

 

(1,507

)

(757

)

 

 

 

 

 

 

 

 

$

86,151

 

$

89,505

 

 

7.              Contracts in progress

The components of contracts in progress at June 30, 2007 and December 31, 2006 are as follows:

 

 

June 30,
2007

 

December 31,
2006

 

 

Costs and earnings in excess of billings:

 

 

 

 

 

 

Costs and earnings for contracts in progress

 

$

61,005

 

$

172,263

 

 

Amounts billed

 

(55,601

)

(163,821

)

 

 

 

 

 

 

 

 

Costs and earnings in excess of billings for contracts in progress

 

5,404

 

8,442

 

 

 

 

 

 

 

 

 

Costs and earnings in excess of billings for completed contracts

 

171

 

1,119

 

 

 

 

 

 

 

 

 

 

 

$

5,575

 

$

9,561

 

 

 

 

 

 

 

 

 

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

 

$

4,840

 

$

7,602

 

 

 

 

 

 

 

 

 

Billings in excess of costs and earnings:

 

 

 

 

 

 

Amounts billed

 

$

(235,514

)

$

(216,218

)

 

Costs and earnings for contracts in progress

 

217,614

 

197,023

 

 

 

 

 

 

 

 

 

 

 

$

(17,900

)

$

(19,195

)

 

 

8




8.              Intangible assets

The net book value of intangible assets is as follows:

 

 

Cost

 

Accumulated
Amortization

 

Net

 

As of June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demolition customer relationships

 

$

1,093

 

$

670

 

$

423

 

Software and databases

 

1,209

 

495

 

714

 

 

 

$

2,302

 

$

1,165

 

$

1,137

 

 

 

 

 

 

 

 

 

 

 

Cost

 

Accumulated
Amortization

 

Net

 

As of December 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer contract backlog

 

$

4,237

 

$

4,237

 

$

 

Demolition customer relationships

 

1,093

 

609

 

484

 

Software and databases

 

1,209

 

425

 

784

 

 

 

 

 

 

 

 

 

Total

 

$

6,539

 

$

5,271

 

$

1,268

 

 

9.              Investment in Joint Ventures

The Company has a 50% ownership interest in Amboy Aggregates (“Amboy”), whose primary business is the dredge mining and sale of fine aggregate. The Company accounts for its investment in Amboy using the equity method. The following table includes Amboy’s summarized financial information for the periods presented.

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,127

 

$

6,293

 

$

11,139

 

$

10,395

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

$

1,590

 

$

1,871

 

$

2,819

 

$

2,409

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,274

 

$

930

 

$

1,798

 

$

1,164

 

 

 

 

 

 

 

 

 

 

 

Great Lakes 50% share

 

$

637

 

$

465

 

$

899

 

$

582

 

 

Amboy has a revolving loan with a bank for up to $3,000 which contains certain restrictive covenants, including limitations on the amount of distributions to its joint venture partners. It is the intent of the joint venture partners to periodically distribute Amboy’s earnings, to the extent allowed by Amboy’s bank agreement. The Company does not guarantee any of the outstanding borrowings and accrued interest under the facility.

The Company and its Amboy joint venture partner own a 50% interest in land, which is adjacent to the Amboy property and is used in connection with the Amboy operations. The Company’s recorded share of the property is $1,047 and is reflected in investments in joint ventures.

For the six months ended June 30, 2007 and 2006, the Company received distributions from Amboy and the adjacent land venture totaling $750 and $650, respectively.

9




10.       Accrued expenses

Accrued expenses at June 30, 2007 and December 31, 2006 are as follows:

 

 

June 30,
2007

 

December 31,
2006

 

Insurance

 

$

7,196

 

$

8,798

 

Payroll and employee benefits

 

4,994

 

9,159

 

Equipment leases

 

1,608

 

1,284

 

Income and other taxes

 

1,059

 

5,897

 

Interest

 

881

 

1,003

 

Fuel hedge liability

 

183

 

2,113

 

Other

 

2,846

 

1,938

 

 

 

$

18,764

 

$

30,192

 

 

11.       Income Taxes

Effective January 1, 2007, Great Lakes adopted FASB Interpretation No. 48, “Accounting for Uncertainties in Income Taxes” (“FIN 48”).  FIN 48 requires a company to evaluate whether the tax position taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority.  It also provides guidance on how a company should measure the amount of benefit that the company is to recognize in its financial statements.  The Company also adopted FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48”

As a result of the implementation of FIN 48, the Company recognized a $1,458 decrease in the liability for unrecognized tax benefits.  This was accounted for as an increase in retained earnings of $158 and an adjustment to goodwill of $1,300.  At January 1, 2007, the Company had $1,939 in unrecognized tax benefits, the recognition of which would have an impact of $862 on the effective tax rate.  During the quarter ended June 30, 2007, the Company recorded additional unrecognized tax benefits of $87, bringing the six month total to $195.  The Company does not anticipate the total amount of unrecognized tax benefits will significantly change over the next twelve months.

The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. At January 1, 2007, the Company had approximately $523 accrued for interest and penalties, net of tax. An additional amount of $34, net of tax, was accrued for interest and penalties during the second quarter, bringing the 2007 year to date total to $74.

The Company files income tax returns at the U.S. federal level and in various state and foreign jurisdictions. U.S. federal income tax years prior to 2003 are closed and no longer subject to examination. With few exceptions, the statute of limitations in state taxing jurisdictions in which the Company operates has expired for all years prior to 2002. The Company is not currently under examination by the U.S. federal government or any state jurisdiction. In foreign jurisdictions in which the Company operates all significant years prior to 2003 are closed and are no longer subject to examination. Ongoing, routine examinations of post-2002 years in Egypt, India and Mexico are not expected to result in any material adjustments.

10




12.       Segment information

The Company operates in two reportable segments: dredging and demolition. The Company’s financial reporting systems present various data for management to run the business, including profit and loss statements prepared according to the segments presented. Management uses operating income to evaluate performance between the two segments. Segment information for the periods presented is as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Dredging

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

101,910

 

$

101,339

 

$

217,282

 

$

198,721

 

Operating income

 

8,019

 

8,840

 

12,830

 

11,772

 

 

 

 

 

 

 

 

 

 

 

Demolition

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

13,715

 

$

12,721

 

$

25,075

 

$

23,766

 

Operating income

 

793

 

1,425

 

1,636

 

2,359

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

115,625

 

$

114,060

 

$

242,357

 

$

222,487

 

Operating income

 

8,812

 

10,625

 

14,466

 

14,131

 

 

In addition, foreign dredging revenue of $27,595 for the quarter was primarily attributable to work done in Bahrain. The majority of the Company’s long-lived assets are marine vessels and related equipment. At any point in time, the Company may employ certain assets outside of the U.S., as needed, to perform work on the Company’s foreign projects.

13.       Commitments and contingencies

At June 30, 2007, the Company was contingently liable, in the normal course of business, for $49,067 in undrawn letters of credit, relating to foreign contract performance guarantees and insurance payment liabilities.

The Company finances certain key vessels used in its operations and office facilities with operating lease arrangements with unrelated lessors, requiring annual rentals decreasing from $14,000 to $10,000 over the next five years. Certain of these operating leases contain default provisions that are triggered by an acceleration of debt maturity under the terms of the Company’s Credit Agreement. Additionally, the leases typically contain provisions whereby the Company indemnifies the lessors for the tax treatment attributable to such leases based on the tax rules in place at lease inception. The tax indemnifications do not have a contractual dollar limit. To date, no lessors have asserted any claims against the Company under these tax indemnification provisions.

On June 12, 2007, the Company entered into a new credit agreement (the “Credit Agreement”) with LaSalle Bank National Association, as Swing Line Lender, Sole Lead Arranger and Administrative Agent, and the financial institutions party thereto as lenders. The new Credit Agreement, which refinanced and replaced the Company’s former credit agreement and paid off its equipment debt, provides for a revolving credit facility of up to $155,000 in borrowings and includes sublimits for the issuance of letters of credit and swingline loans. The revolving credit facility matures on June 12, 2012. The revolving credit facility bears interest at rates selected at the option of Great Lakes, equal to either LIBOR plus an applicable margin or the Base Rate plus an applicable margin. The applicable margins for LIBOR loans and Base Rate loans are currently 2.50% and 0.75%, respectively. Beginning on December 12, 2007, the applicable margins are subject to adjustment based upon the Company’s ratio of total debt to EBITDA (each as defined in the Credit Agreement). The Credit Agreement also requires the payment of a 0.50% non-use fee. The obligations of Great Lakes under the Credit Agreement are unconditionally guaranteed by its direct and indirect domestic subsidiaries. The obligations under the Credit Agreement are secured by a perfected first priority lien on certain equipment of Great Lakes’ subsidiary, Great Lakes Dredge & Dock Company, LLC (“GLDD Company”); a perfected second priority lien on certain other equipment of GLDD Company, subject to a perfected first priority lien in favor of Great Lakes’ bonding company; a perfected first priority lien on the inter-company receivables of Great Lakes and its direct and indirect domestic subsidiaries and having an equal priority to the liens of Great Lakes’ bonding company; and a perfected second priority lien on the accounts receivable of Great Lakes and its direct and indirect subsidiaries that relate to bonded projects. The Credit Agreement contains various covenants and restrictions including (i) limitations on dividends to $5 million per year, (ii) limitations on redemptions and repurchases of capital stock, (iii) limitations on the incurrence of indebtedness, liens, leases and investments, and (iv) maintenance of certain financial covenants. As of June 30, 2007, the Company had $49,000 of borrowings outstanding on the revolver, $25,500 of which was classified in current liabilities.  In July, the Company refinanced the purchase of the dredge Terrapin Island through a long term operating lease and paid down $25,500 of the revolver with the proceeds.  In addition, $30,580 of letters of credit were outstanding and there was $75,420 million of availability on the facility.

11




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 approximately $97,000 at December 31, 2006. Additionally, the Company obtains its performance and bid bonds through an underwriting and indemnity 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 $80,000 at December 31, 2006. The net book value of equipment serving as collateral under these agreements at June 30, 2007 does not materially differ from the values at December 31, 2006. These agreements contain provisions requiring the Company to maintain certain financial ratios and restricting the Company’s ability to pay dividends, incur indebtedness, create liens, and take certain other actions. The Company was in compliance with all required covenants at June 30, 2007.

The performance and bid bonds issued under the bonding agreement 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 from $5,000 to $10,000. Performance bonds typically cover 100% of the contract value with no maximum bond amounts. At June 30, 2007, the Company had outstanding performance bonds valued at approximately $241,523; however the revenue value remaining in backlog related to these projects totaled approximately $116,255 at June 30, 2007.

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

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 and modifications or claims to competitively-bid contracts with the federal government, the government has the right to audit the books and records of the Company to ensure compliance with such contracts, modifications or claims and the applicable federal laws. The government has the ability to seek a price adjustment based on the results of such audit. Any such audits have not had and are not expected to have a material impact on the financial position, operations or cash flows of the Company.

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.

On February 10, 2004, the Company was served with a subpoena to produce documents in connection with a federal grand jury convened in the United States District Court for the District of South Carolina. The Company believes the grand jury has been convened to investigate the United States dredging industry in connection with work performed for the U.S. Army Corp of Engineers. For over six months the Company received no additional communications from the Justice Department, however in April some follow-up requests for additional information were received. The Company fully complied with these follow-up requests and has received no further communications. As noted previously, the matter continues to remain open and the Company is continuing to incur legal costs although at a much reduced level from 2004 and 2005. These expenses totaled approximately $69 for the three months ended June 30, 2007 and 2006 and $71 and $429 for the six months ended June 30, 2007 and 2006, respectively.

The Company’s results continue to be negatively impacted from the increase in reserves related to injury claims from our hourly workforce residing in Texas. In the normal course of business, the Company is party to various personal injury lawsuits for which it maintains insurance to cover claims that arise subject to a deductible. Over the last two years there has been a substantial increase in suits filed in Texas due, in large part, to two Texas law firms aggressively pursuing personal injury claims on behalf of dredging workers resident in Texas. Over the last several months, Maritime Jobs for Texas, a coalition of maritime employers has been working to reform Texas venue law with regard to the type of personal injury suits the dredging industry has recently faced. On May 24, 2007, the Texas legislature passed a bill which removed in part certain venue rules favorable to would-be plaintiffs.  As enacted, these legislative reforms could alleviate the increasing number of meritless personal injury suits facing the industry in Texas. The Company’s recorded self-insurance reserves represent its best estimate of the outcomes of outstanding claims and the Company does not believe that it is reasonably possible there will be a material adverse impact to the Company’s financial position or results of operations or cash flows related to outstanding claims. However, the occurrence in the future of new claims of a similar nature is not possible to predict and while the Company does not believe that additional claims would have a material impact on the Company’s financial position, it is possible they could be material to the results of operations and cash flows in future periods. The Company recorded an additional $1,078 in the second quarter of 2007, compared with $1,300 in the second quarter of 2006.  Year to date, the Company has recorded $1,978 for these claims, compared to $3,300 for the first half of 2006.

On April 24, 2006, a class action complaint was filed in the U.S. District Court for the Eastern District of Louisiana, on behalf of Louisiana citizens who allegedly suffered property damage from the floodwaters that flooded New Orleans and surrounding areas when Hurricane Katrina hit the area on August 29, 2005 (the “Katrina Claims”) (Reed v. United States). The Reed suit names as defendants the U.S. government, Great Lakes Dredge & Dock Company, and numerous other dredging companies which completed dredging projects on behalf of the Army Corps of Engineers in the Mississippi River Gulf Outlet (“MRGO”) between 1993 and 2005. The Reed complaint alleges that

12




dredging of MRGO caused the destruction of the Louisiana wetlands, which had provided a natural barrier against some storms and hurricanes. The complaint alleges that this loss of natural barriers contributed to the failure of the levees as Katrina floodwaters damaged plaintiffs’ property. The Reed complaint asserts claims of negligence, warranty, concealment and violations of the Water Pollution Control Act. Other plaintiffs have filed similar class action complaints. In addition, plaintiffs have filed one mass tort case. All these cases raise the same claims as Reed. Great Lakes, as well as several other dredging companies, have filed cross-claims against each other seeking contribution and indemnification. The amount of claimed damages is not stated, but is presumed to be significant. On October 19, 2006, Great Lakes filed for exoneration or limitation of liability under the Limitation of Liability Act in federal district court. This limitation action stays all outstanding Katrina lawsuits against Great Lakes, including the lawsuits mentioned above, pending resolution of Great Lakes’ exoneration and limitation claims. All Katrina Claims against Great Lakes must be filed in the limitation of liability proceeding; the deadline for doing so was July 30, 2007 so any claims not filed by that time are barred. Great Lakes believes it has meritorious claims to either exoneration from all liability or limitation of liability at not more than $55 million, which is the value of the vessels which conducted the MRGO dredging work. These defenses include arguments for both statutory and constitutional immunity from liability for the Katrina Claims. On March 9, 2007, the District Court dismissed with prejudice the Reed claim and one mass tort claim against Great Lakes and those plaintiffs have filed an appeal to the U.S. Court of Appeals for the Fifth Circuit. Great Lakes continues to prosecute its limitation of liability proceeding against all the plaintiffs in the District Court on similar grounds that lead to the dismissals in both claims. In addition, Great Lakes maintains $150 million in insurance coverage for the Katrina Claims. Great Lakes does not believe it is reasonably possible that the Katrina Claims will have a material adverse impact on its financial condition or results of operations and cash flows.

14.       Effects of recently issued accounting pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Great Lakes is currently evaluating the impact of adopting SFAS 157 on the consolidated financial statements.

In February 2007, the FASB issued SFAS 159 which expands the scope of what companies may carry at fair value. It is effective for financials statements issued after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 159 on the consolidated financial statements.

15.       Subsequent Events

On June 19, 2007, the Company issued a notice of redemption to the holders of the outstanding warrants to purchase shares of the Company’s common stock. The agreement governing the warrants provides that the Company is entitled to redeem the warrants if the last trading price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending three business days before the notice of redemption is sent. The redemption date for the warrants was July 19, 2007. All of the warrants were exercised or redeemed as of the redemption date, with proceeds related to the exercise totaling $91.8 million, of which $60.2 million was received subsequent to quarter end. The Company used a portion of the proceeds to repay the balance of the outstanding indebtedness under its revolving senior credit facility and will use the remaining proceeds for identified efficiency enhancements to existing equipment, potential new equipment acquisitions and general corporate purposes.

On July 6, 2007 the Company entered into a sale-leaseback with GATX Third Aircraft Corporation (“GATX”) for the dredge Terrapin Island.  The Company sold the vessel to GATX for $25,500 and paid down its revolver with the proceeds. The Company will lease it through July 2017 under a long term operating lease.

13




16.       Supplemental Unaudited 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. 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 Issuer (“GLD Corporation”).

14




CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2007

UNAUDITED

(in thousdands)

ASSETS

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

1,130

 

$

5

 

$

 

$

 

$

1,135

 

Accounts receivable—net

 

86,151

 

 

 

 

86,151

 

Receivables from affiliates

 

7,756

 

2,811

 

63,696

 

(74,263

)

 

Contract revenues in excess of billings

 

5,575

 

 

 

 

5,575

 

Inventories

 

21,509

 

 

 

 

21,509

 

Prepaid expenses and other current assets

 

20,714

 

 

9,843

 

 

30,557

 

Total current assets

 

142,835

 

2,816

 

73,539

 

(74,263

)

144,927

 

 

 

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT—Net

 

293,339

 

 

 

 

293,339

 

GOODWILL

 

97,447

 

 

 

 

97,447

 

OTHER INTANGIBLE ASSETS—Net

 

1,137

 

 

 

 

1,137

 

INVESTMENTS IN SUBSIDIARIES

 

2,816

 

 

370,758

 

(373,574

)

 

NOTES RECEIVABLE FROM AFFILIATES

 

 

 

22,702

 

(22,702

)

 

INVENTORIES

 

18,434

 

 

 

 

18,434

 

INVESTMENTS IN JOINT VENTURES

 

10,145

 

 

 

 

 

10,145

 

OTHER ASSETS

 

2,288

 

 

 

7,846

 

 

10,134

 

TOTAL

 

$

568,441

 

$

2,816

 

$

474,845

 

$

(470,539

)

$

575,563

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

51,879

 

$

 

$

70

 

$

 

$

51,949

 

Payables to affiliates

 

74,263

 

 

 

(74,263

)

 

Accrued expenses

 

17,311

 

 

1,453

 

 

18,764

 

Billings in excess of contract revenues

 

17,900

 

 

 

 

17,900

 

Current portion of Long-Term Debt

 

 

 

 

25,500

 

 

 

25,500

 

Total current liabilities

 

161,353

 

 

27,023

 

(74,263

)

114,113

 

 

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

 

 

198,500

 

 

198,500

 

NOTES PAYABLE TO AFFILIATES

 

22,702

 

 

 

(22,702

)

 

DEFERRED INCOME TAXES

 

1,249

 

 

82,140

 

 

83,389

 

OTHER

 

10,110

 

 

2,918

 

 

13,028

 

Total liabilities

 

195,414

 

 

310,581

 

(96,965

)

409,030

 

REDEEMABLE PREFERRED STOCK

 

 

 

 

 

 

 

 

 

 

 

MINORITY INTEREST

 

 

 

 

2,024

 

2,024

 

STOCKHOLDERS’ EQUITY (DEFICIT)

 

373,027

 

2,816

 

164,264

 

(375,598

)

164,509

 

TOTAL

 

$

568,441

 

$

2,816

 

$

474,845

 

$

(470,539

)

$

575,563

 

 

15




CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2006

(in thousands)

 

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

3,630

 

$

10

 

$

 

$

 

$

3,640

 

Accounts receivable—net

 

89,505

 

 

 

 

89,505

 

Receivables from affiliates

 

7,867

 

2,829

 

4,540

 

(15,236

)

 

Contract revenues in excess of billings

 

9,561

 

 

 

 

9,561

 

Inventories

 

21,082

 

 

 

 

21,082

 

Prepaid expenses and other current assets

 

18,114

 

 

12,344

 

 

30,458

 

Total current assets

 

149,759

 

2,839

 

16,884

 

(15,236

)

154,246

 

 

 

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT—Net

 

239,337

 

 

 

 

239,337

 

GOODWILL

 

98,747

 

 

 

 

98,747

 

OTHER INTANGIBLE ASSETS—Net

 

1,268

 

 

 

 

1,268

 

INVESTMENTS IN SUBSIDIARIES

 

2,839

 

 

359,294

 

(362,133

)

 

NOTES RECEIVABLE FROM AFFILIATES

 

 

 

22,702

 

(22,702

)

 

INVENTORIES

 

13,353

 

 

 

 

13,353

 

INVESTMENTS IN JOINT VENTURES

 

9,996

 

 

 

 

 

9,996

 

OTHER ASSETS

 

4,008

 

 

 

7,404

 

 

11,412

 

TOTAL

 

$

519,307

 

$

2,839

 

$

406,284

 

$

(400,071

)

$

528,359

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

57,382

 

$

 

$

444

 

$

 

$

57,826

 

Payables to affiliates

 

8,687

 

 

6,549

 

(15,236

)

 

Accrued expenses

 

23,432

 

 

6,760

 

 

30,192

 

Billings in excess of contract revenues

 

19,195

 

 

 

 

19,195

 

Current portion of Long-Term Debt

 

1,950

 

 

 

2,135

 

 

 

4,085

 

Total current liabilities

 

110,646

 

 

15,888

 

(15,236

)

111,298

 

 

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT

 

15,600

 

 

175,000

 

 

190,600

 

NOTES PAYABLE TO AFFILIATES

 

22,702

 

 

 

(22,702

)

 

DEFERRED INCOME TAXES

 

1,225

 

 

83,600

 

 

84,825

 

OTHER

 

9,115

 

 

1,994

 

 

11,109

 

Total liabilities

 

159,288

 

 

276,482

 

(37,938

)

397,832

 

REDEEMABLE PREFERRED STOCK

 

 

 

 

 

 

 

 

 

 

 

MINORITY INTEREST

 

 

 

 

2,005

 

2,005

 

STOCKHOLDERS’ EQUITY (DEFICIT)

 

360,019

 

2,839

 

129,802

 

(364,138

)

128,522

 

TOTAL

 

$

519,307

 

$

2,839

 

$

406,284

 

$

(400,071

)

$

528,359

 

 

16




Condensed Consolidating Statement of Operations

for the three months ended June 30, 2007

UNAUDITED

(in thousands)

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

115,625

 

$

 

$

 

$

 

$

115,625

 

Cost of contract revenues

 

(96,559

)

 

(903

)

 

(97,462

)

Gross profit

 

19,066

 

 

(903

)

 

18,163

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

(9,083

)

(14

)

(120

)

 

(9,217

)

Subpoena related expenses

 

(69

)

 

 

 

(69

)

Amortization of intangibles

 

(65

)

 

 

 

(65

)

Total operating income

 

9,849

 

(14

)

(1,023

)

 

8,812

 

Interest expense—net

 

(1,538

)

 

(5,043

)

 

(6,581

)

Equity in earnings (loss) of subsidiaries

 

(9

)

 

9,851

 

(9,842

)

 

Equity in earnings of joint venture

 

637

 

 

 

 

 

637

 

Minority interest

 

 

 

 

(10

)

(10

)

Income (loss) before income taxes

 

8,939

 

(14

)

3,785

 

(9,852

)

2,858

 

Income tax (provision) benefit

 

915

 

5

 

(6,236

)

4,137

 

(1,179

)

Net income (loss)

 

$

9,854

 

$

(9

)

$

(2,451

)

$

(5,715

)

$

1,679

 

 

 

Condensed Consolidating Statement of Operations

for the three months ended June 30, 2006

UNAUDITED

(in thousands)

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

114,060

 

$

 

$

 

$

 

$

114,060

 

Costs of contract revenues

 

(96,651

)

 

150

 

 

(96,501

)

Gross profit

 

17,409

 

 

150

 

 

17,559

 

General and administrative expenses

 

(7,096

)

(15

)

(10

)

 

(7,121

)

Subpoena-related expenses.

 

(69

)

 

 

 

(69

)

Amortization of intangible assets

 

(104

)

 

 

 

(104

)

Impairment of intangible assets

 

 

 

 

 

 

Operating income (loss)

 

10,140

 

(15

)

140

 

 

10,265

 

Interest expense, net

 

(1,102

)

 

(4,913

)

 

(6,015

)

Equity in (loss) earnings of subsidiaries

 

(9

)

 

10,106

 

(10,097

)

 

Equity in loss of joint ventures

 

465

 

 

 

 

465

 

Minority interests

 

 

 

 

(87

)

(87

)

Income (loss) before income taxes

 

9,494

 

(15

)

5,333

 

(10,184

)

4,628

 

Income tax (expense) benefit

 

693

 

6

 

(6,626

)

4,277

 

(1,650

)

Net income (loss)

 

$

10,187

 

$

(9

)

$

(1,293

)

$

(5,907

)

$

2,978

 

 

17




CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2007

UNAUDITED

(in thousands)

 

 

Guarantor
Subsidiaries

 

Other
Subsidiary

 

GLD
Corporation

 

Eliminations

 

Consolidated
Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract revenues

 

$

242,357

 

$

 

$

 

$

 

$

242,357

 

Cost of contract revenues

 

(209,577

)

 

(903

)

 

(210,480

)

Gross profit

 

32,780

 

 

(903

)

 

31,877