GREAT LAKES DREDGE & DOCK CORP - 10-Q Quarterly Report

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 11, 2003, there were outstanding 16,169.82 shares of Class A Common Stock, 33,639 shares of Class B Common Stock and 44,857 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 September 30, 2003


Part I	Financial Information

	Item 1	Financial Statements (Unaudited)	Page

		Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002	2

		Condensed Consolidated Statements of Income for the Three and Nine Months ended September 30, 2003 and 2002	3

		Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2003 and 2002	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	24

	Item 4	Controls and Procedures	24

Part II	Other Information

	Item 5	Other Information	25

	Item 6	Exhibits and Reports on Form 8-K	25

Signature			25

Exhibit Index			26

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


					September 30,			December 31,
					2003			2002

				Assets
Current assets:
Cash and equivalents					$	746		$	1,456
Accounts receivable, net						59,432			52,125
Contract revenues in excess of billings						14,691			13,052
Inventories						14,812			13,282
Prepaid expenses and other current assets						17,753			18,283

		Total current assets				107,434			98,198
Property and equipment, net						138,393			139,419
Goodwill						28,894			29,405
Inventories						10,211			9,828
Investments in joint ventures						7,192			5,552
Other assets						4,122			5,084

		Total assets			$	296,246		$	287,486

				Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable					$	41,886		$	31,598
Accrued expenses						22,533			30,114
Billings in excess of contract revenues						4,812			10,915
Current maturities of long-term debt						1,762			11,000

		Total current liabilities				70,993			83,627
Long-term debt						171,800			161,769
Deferred income taxes						48,228			46,363
Other						6,363			5,787

		Total liabilities				297,384			297,546
Minority interest						1,760			2,346
Commitments and contingencies (Note 13)						—			—
Stockholders’ deficit:
	Preferred stock, $.01 par value; 250,000 shares authorized: 45,000 issued; 44,857 outstanding in 2003 and 2002					1			1
	Common stock, $.01 par value; 2003: 500,000 shares authorized, 50,000 shares issued and 49,808.82 shares outstanding; 2002: 50,000,000 shares authorized, 5,000,000 shares issued and 4,980,882 shares outstanding					50			50
	Additional paid-in capital					50,457			50,457
	Accumulated deficit					(53,242	)		(62,787	)
	Accumulated other comprehensive income					47			103
	Treasury stock, at cost; 143 preferred shares and 19,118 common shares in 2003 and 2002					(162	)		(162	)
	Note receivable from stockholder					(49	)		(68	)

			Total stockholders’ deficit			(2,898	)		(12,406	)

		Total liabilities and stockholders’ deficit			$	296,246		$	287,486

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Contract revenues		$	98,104		$	100,055		$	302,161		$	263,443
Costs of contract revenues			80,001			80,339			250,912			214,715

	Gross profit		18,103			19,716			51,249			48,728
General and administrative expenses			6,768			8,387			20,208			21,713

	Operating income		11,335			11,329			31,041			27,015
Interest expense, net			(5,181	)		(5,415	)		(15,374	)		(16,009	)
Equity in earnings of joint ventures			319			127			1,063			209
Minority interests			(72	)		(419	)		(2	)		902

	Income before income taxes		6,401			5,622			16,728			12,117
Income tax expense			(2,836	)		(2,682	)		(7,183	)		(1,697	)

	Net income	$	3,565		$	2,940		$	9,545		$	10,420

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


				Nine Months Ended
				September 30,

				2003			2002

Operating Activities
Net income				$	9,545		$	10,420
Adjustments to reconcile net income to net cash flows from operating activities:
	Depreciation				12,202			11,755
	Earnings of equity method investments				(1,063	)		(209	)
	Minority interests				2			(902	)
	Deferred income taxes				1,567			(506	)
	Gain on dispositions of property and equipment				(805	)		(428	)
	Other, net				1,824			1,325
	Changes in assets and liabilities:
		Accounts receivable, net			(7,307	)		(15,379	)
		Contract revenues in excess of billings			(1,639	)		9,929
		Inventories			(1,913	)		1,760
		Prepaid expenses and other current assets			3,158			1,760
		Accounts payable and accrued expenses			2,707			(10,187	)
		Billings in excess of contract revenues			(6,103	)		2,522

			Net cash flows from operating activities		12,175			11,860
Investing Activities
Purchases of property and equipment					(14,179	)		(14,862	)
Dispositions of property and equipment					838			5,413
Disposition of interest in Riovia investment					1,200			—
Purchase portion of minority interests’ share in North American Site Developers, Inc.					(75	)		—
Equity investment in land acquisition					(1,047	)		—

			Net cash flows from investing activities		(13,263	)		(9,449	)
Financing Activities
Repayments of long-term debt					(9,238	)		(8,000	)
Borrowings of revolving loans, net of repayments					10,000			6,000
Financing fees					(403	)		—
Repayment on note receivable from stockholder					19			18

			Net cash flows from financing activities		378			(1,982	)

Net change in cash and equivalents					(710	)		429
Cash and equivalents at beginning of period					1,456			2,590

Cash and equivalents at end of period				$	746		$	3,019

Supplemental Cash Flow Information
	Cash paid for interest			$	18,777		$	19,296

	Cash paid for taxes			$	6,294		$	4,002

Supplemental Schedule of Noncash Investing and Financing Activities
	Reclass of property and equipment to assets held for sale, a component of prepaid expenses and other current assets			$	2,970		$	—

	Issuance of common stock to certain members of management; shares issued from treasury stock			$	—		$	50

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

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, 2002.

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.

The Company can have significant fluctuations in dredging equipment utilization throughout the year. Accordingly, for interim reporting, the Company defers or accrues fixed equipment costs and amortizes the expenses in proportion to revenues recognized over the year to better match revenues and expenses.

Total comprehensive income comprises net income and net unrealized gains and losses on cash flow hedges. Total comprehensive income for the three months ended September 30, 2003 and 2002 was $3,436 and $3,176, respectively. Total comprehensive income for the nine months ended September 30, 2003 and 2002 was $9,489 and $11,307, respectively.

The Company uses derivative instruments to manage commodity price and foreign currency exchange risks. Such instruments are not used for trading purposes. As of September 30, 2003, 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 October 2004. As of September 30, 2003, there were 8.0 million gallons remaining on these contracts. Under these agreements, the Company will pay fixed prices ranging from $0.72 to $0.78 per gallon. At September 30, 2003 and December 31, 2002, the fair value on these contracts was estimated to be $77 and $169, 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 September 30, 2003 will be reclassified into earnings over the next thirteen months, corresponding to the period during which the hedged fuel is expected to be utilized.

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. At September 30, 2003 and December 31, 2002, the Company had long-term subordinated notes outstanding with a recorded book value of $154,800 and $154,769, respectively. The fair value of these notes was $163,525 and $161,386 at September 30, 2003 and December 31, 2002, respectively, based on quoted market prices.

The components of contracts in progress at September 30, 2003 and December 31, 2002 are as follows:


		September 30,			December 31,
		2003			2002

Costs and earnings in excess of billings:
	Costs and earnings for contracts in progress	$	273,601		$	190,837
	Amounts billed		(260,059	)		(179,468	)

Costs and earnings in excess of billings for contracts in progress			13,542			11,369
Costs and earnings in excess of billings for completed contracts			1,149			1,683

		$	14,691		$	13,052

Prepaid contract costs (included in prepaid expenses and other current assets)		$	901		$	3,218

Billings in excess of costs and earnings:
	Amounts billed	$	(105,660	)	$	(69,909	)
	Costs and earnings for contracts in progress		100,848			58,994

		$	(4,812	)	$	(10,915	)

In March 2003, the Company amended its Credit Agreement to increase its revolving credit facility from $70,000 to $80,000. The revolving credit facility may be used for borrowings or for letters of credit; it expires in 2006.

The Company has authorized and issued 250,000 and 45,000 shares, respectively, of preferred stock. The preferred stock has a stated value of $1,000 per share and is entitled to annual dividends, if declared. Such dividends are cumulative, whether or not declared, and accrue at the rate of 12%, compounding annually. The preferred stock may be redeemed at any time at the option of the Company at its stated value plus cumulative dividends accrued and unpaid thereon. At September 30, 2003 and December 31, 2002, dividends in arrears on the preferred stock were $35,053 and $28,719, respectively. At December 31, 2002, the Company had authorized and issued 25,000,000 and 1,636,100 shares, respectively, of class A voting common stock, and 25,000,000 and 3,363,900 shares, respectively, of class B nonvoting common stock, with a par value of $.01 per share. On April 29, 2003, the Company affected a 100 for 1 reverse stock split of its common stock, such that the number of authorized shares was reduced to 50,000, in total, and the number of issued and outstanding shares reduced accordingly

In May 2003, the Company concluded the sale of its interest in Riovia S.A., a venture whose sole business is the performance of a dredging contract in Argentina and Uruguay. The Company realized a gain of $470, which is reflected in equity from earnings of joint ventures in the statement of income.

11. Purchase of minority interest’s share in North American Site Developers, Inc.

On September 30, 2003, the Company paid $75 to purchase all the shares of one of the management stockholders of North American Site Developers, Inc. (“NASDI”), in connection with his voluntary termination from NASDI. The purchase price was determined in accordance with the terms of the NASDI Stock Purchase Agreement. The Company applied purchase accounting on a preliminary basis, which resulted in a reduction of goodwill in the amount of $511. This accounting is subject to adjustment; however, the Company does not expect that such adjustments will have a material effect on its consolidated financial statements.

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:


Delaware (State or other jurisdiction of incorporation or organization)		13-3634726 (IRS Employer Identification No.)

2122 York Road, Oak Brook, Illinois (Address of principal executive offices)		60523 (Zip Code)


PART I — Financial Information
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Income
		Condensed Consolidated Statements of Cash Flows
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — Other Information
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EXHIBIT INDEX
Restated Certificate of Incorporation
Certification
Certification
Certification
Certification
Press Release


		September 30,				December 31,
		2003				2002

Completed contracts	$		22,375		$		15,134
Contracts in progress			29,297				31,466
Retainage			8,510				6,511

			60,182				53,111
Allowance for doubtful accounts			(750	)			(986	)

	$		59,432		$		52,125


	September 30,		December 31,
	2003		2002

Payroll and employee benefits	$	5,939	$	8,615
Insurance		5,266		6,477
U.S. income and other taxes		5,036		4,721
Interest		2,301		6,880
Fixed equipment costs		1,808		—
Other		2,183		3,421

	$	22,533	$	30,114

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


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