UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended September 30, 2017

OR

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)

 

 

(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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of November 3, 2017, 61,675,785 shares of the Registrant’s Common Stock, par value $.0001 per share, were outstanding.

 

 

 

 

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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, 2017

INDEX

 

 

 

 

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PART I — Financial Information

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)  

See notes to unaudited condensed consolidated financial statements.

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Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

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Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(in thousands)

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

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Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

(Unaudited)

(in thousands)

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

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Great Lakes Dredge & Dock Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

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See notes to unaudited condensed consolidated financial statements.

 

 

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GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollar amounts in thousands, except per share amounts or as otherwise noted)

 

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” or “Great Lakes”) and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management, all adjustments, which are of a normal and recurring nature (except as otherwise noted), that are necessary to present fairly the Company’s financial position as of September 30, 2017, and its results of operations for the three and nine months ended September 30, 2017 and 2016 and cash flows for the nine months ended September 30, 2017 and 2016 have been included.

The components of costs of contract revenues include labor, equipment (including depreciation, maintenance, insurance and long-term rentals), subcontracts, fuel, supplies, short-term rentals and project overhead. Hourly labor is generally hired on a project-by-project basis. Costs of contract revenues vary significantly depending on the type and location of work performed and assets utilized.

The Company’s cost structure includes significant annual equipment-related costs, including depreciation, maintenance, insurance and long-term rentals. These costs have averaged approximately 23% of total costs of contract revenues over the prior three years. During the year, both equipment utilization and the timing of fixed cost expenditures fluctuate significantly. Accordingly, the Company allocates these fixed equipment costs to interim periods in proportion to revenues recognized over the year, to better match revenues and expenses. Specifically, at each interim reporting date the Company compares actual revenues earned to date on its dredging contracts to expected annual revenues and recognizes equipment costs on the same proportionate basis. In the fourth quarter, any over or under allocated equipment costs are recognized such that the expense for the year equals actual equipment costs incurred during the year.

The Company has two operating segments: dredging and environmental & infrastructure, which are also the Company’s reportable segments and reporting units of which the Company tests goodwill for impairment. The Company performed its most recent annual test of impairment as of July 1, 2017 with no indication of impairment as of the test date. The Company will perform its next scheduled annual test of goodwill in the third quarter of 2018 should no triggering events occur which would require a test prior to the next annual test.

The condensed consolidated results of operations and comprehensive income for the interim periods presented herein are not necessarily indicative of the results to be expected for the full year.

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Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update No. 2017-04 (“ASU 2017-04”), Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendment removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. The guidance is effective for fiscal years beginning after December 15, 2019. The Company does not anticipate that the adoption of ASU 2017-04 will have a material effect on the Company’s consolidated financial statements.

In November 2016, the FASB issued Accounting Standard Update No. 2016-18 (“ASU 2016-18”), Statement of Cashflows (Topic 230): Restricted Cash. The amendments require that the statement of cash flows explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore amounts generally described as restricted cash or restricted cash equivalents should be included with the cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017. The Company does not anticipate that the adoption of ASU 2016-18 will have a material effect on the Company’s consolidated financial statements.

In August 2016, the FASB issued Accounting Standard Update No. 2016-15 (“ASU 2016-15”), Classification of Certain Cash Receipts and Cash Payments, which amends FASB’s standards for reporting cash flows in general-purpose financial statements. The amendments address the diversity in practice related to the classification of certain cash receipts and payments. The guidance is effective for fiscal years beginning after December 15, 2017. The Company does not anticipate that the adoption of ASU 2016-15 will have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued Accounting Standard Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842). The FASB issued this update to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements.

In May 2014, the FASB issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued other Accounting Standard Updates related to Accounting Standards Codification Topic 606 (collectively, “ASC 606”), which supersede the existing revenue recognition requirements. ASC 606 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 has been deferred to be effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, which will be our first quarter of fiscal 2018. Early adoption is permitted in fiscal 2017. The Company currently expects to adopt ASC 606 as of January 1, 2018, under the modified retrospective method where the cumulative effect is recognized at the date of initial application. The Company has evaluated the impact of ASC 606 and has determined that fixed-price contracts, which comprise substantially all of the Company’s revenue, will most often represent a single performance obligation. The Company will measure progress toward completion utilizing the cost-to-cost method, which represents a change from our current practice of measuring completion based on engineering estimates of the physical percentage completed for dredging projects. Also the Company will be required to capitalize certain pre-contract and pre-construction costs, and defer recognition over the life of the contract. In contrast, contract fulfillment costs will be required to be recognized in the income statement when incurred. Accordingly, the adoption of ASC 606 may result in a change in the timing of recognition of both contract revenue and cost from our current practices. In addition, the Company expects to add qualitative and quantitative disclosures around disaggregation of revenue, remaining performance obligation, and other impacts to the Company’s contract revenue balances. The Company continues its implementation of ASC 606 as it relates to the changes necessitated on our financial systems, existing internal controls and processes to comply with the guidance. As we expect full implementation of the standard to extend until year-end, the Company is still evaluating the effect of the adoption of ASC 606 on its consolidated financial statements.

 

Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per share is computed similarly 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. For the three months ended September 30, 2017, the dilutive effect of 611 thousand stock options and restricted stock units were excluded from the diluted weighted-average common shares outstanding as the Company incurred a loss during this period. For the nine months ended September 30, 2017 and 2016, the dilutive effect of 646 thousand and 576 thousand stock options and restricted stock units, respectively, were excluded from the diluted weighted-average common shares outstanding as the Company incurred a loss during these periods. For the three months ended September 30, 2017 and 2016, 1,288 thousand and 1,594 thousand stock options and restricted stock units, respectively, were excluded from the calculation of diluted

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earnings per share based on the application of the treasury stock method, as such stock options and restricted stock units were determined to be anti-dilutive. Similarly, for the nine months ended September 30, 2017 and 2016, 1,399 thousand and 1,603 thousand stock options and restricted stock units, respectively, were excluded from the calculation of diluted earnings per share as such stock options and restricted stock units were determined to be anti-dilutive.

The computations for basic and diluted earnings (loss) per share are as follows:

 

 

 

Accounts receivable at September 30, 2017 and December 31, 2016 are as follows:

 

 

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The components of contracts in progress at September 30, 2017 and December 31, 2016 are as follows:

 

 

The Company has $17,860 included in costs in excess of billings that are dependent upon the sale of environmental credits earned for a wetland mitigation project. The sale of these credits is subject to market factors that could cause the amount of expected revenue to be higher or lower than currently estimated. If the amount of proceeds received from the sale of the environmental credits is lower than our expectations, we could sustain a loss of part or all of the costs incurred related to this project. Additionally, the timing of realization may be impacted by a delay in the sale of these environmental credits, resulting in a longer period to recover our investment.

 

Accrued expenses at September 30, 2017 and December 31, 2016 are as follows:

 

 

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Credit Agreement

On December 30, 2016, the Company, Great Lakes Dredge & Dock Company, LLC, NASDI Holdings, LLC, Great Lakes Dredge & Dock Environmental, Inc., Great Lakes Environmental & Infrastructure Solutions, LLC and Great Lakes Environmental & Infrastructure, LLC (collectively, the “Credit Parties”) entered into a revolving credit and security agreement, as subsequently amended, (the “Credit Agreement”) with certain financial institutions from time to time party thereto as lenders, PNC Bank, National Association, as Agent, PNC Capital Markets, The PrivateBank and Trust Company, Suntrust Robinson Humphrey, Inc., Capital One, National Association and Bank of America, N.A., as Joint Lead Arrangers and Joint Bookrunners, Texas Capital Bank, National Association, as Syndication Agent and Woodforest National Bank, as Documentation Agent. The Credit Agreement, which replaced the Company’s former revolving credit agreement, provides for a senior secured revolving credit facility in an aggregate principal amount of up to $250,000, subfacilities for the issuance of standby letters of credit up to a $250,000 sublimit and swingline loans up to a $25,000 sublimit. The maximum borrowing capacity under the Credit Agreement is determined by a formula and may fluctuate depending on the value of the collateral included in such formula at the time of determination. The Credit Agreement also includes an increase option that will allow the Company to increase the senior secured revolving credit facility by an aggregate principal amount of up to $100,000. This increase is subject to lenders providing incremental commitments for such increase, the Credit Parties having adequate borrowing capacity and provided that no default or event of default exists both before and after giving effect to such incremental commitment increase.

The Credit Agreement contains customary representations and affirmative and negative covenants, including a springing financial covenant that requires the Credit Parties to maintain a fixed charge coverage ratio (ratio of earnings before income taxes, depreciation and amortization, net interest expenses, non-cash charges and losses and certain other non-recurring charges, minus capital expenditures, income and franchise taxes, to net cash interest expense plus scheduled cash principal payments with respect to debt plus restricted payments paid in cash) of not more than 1.10 to 1.00. The Credit Parties are also restricted in the amount of capital expenditures they may make in each fiscal year. The Credit Agreement also contains customary events of default (including non-payment of principal or interest on any material debt and breaches of covenants) as well as events of default relating to certain actions by the Company’s surety bonding providers. The obligations of the Credit Parties under the Credit Agreement will be unconditionally guaranteed, on a joint and several basis, by each existing and subsequently acquired or formed material direct and indirect domestic subsidiary of the Company. Borrowings under the Credit Agreement were or will be used to refinance existing indebtedness under the Company’s former revolving credit agreement, refinance existing indebtedness under the Company’s former term loan agreement, pay fees and expenses related to the Credit Agreement, finance acquisitions permitted under the Credit Agreement, finance ongoing working capital and for other general corporate purposes. The Credit Agreement matures on December 30, 2019.

The obligations under the Credit Agreement are secured by substantially all of the assets of the Credit Parties. The outstanding obligations thereunder shall be secured by a valid first priority perfected lien on substantially all of the vessels of the Credit Parties and a valid perfected lien on all domestic accounts receivable and substantially all other assets of the Credit Parties, subject to the permitted liens and interests of other parties (including the Company’s surety bonding provider).

Interest on the senior secured revolving credit facility of the Credit Agreement is equal to either a base rate option or LIBOR option, at the Company’s election. The base rate option is (1) the base commercial lending rate of PNC Bank, National Association, as publicly announced plus (2)(a) an interest margin of 2.0% or (b) after the date on which a borrowing base certificate is required to be delivered under Section 9.2 of the Credit Agreement (commencing with the fiscal quarter ending December 31, 2017, the “Adjustment Date”), an interest margin ranging between 1.5% and 2.0% depending on the quarterly average undrawn availability on the senior secured revolving credit facility. The LIBOR option is the sum of (1) LIBOR and (2)(a) an interest margin of 3.0% or (b) after the Adjustment Date, an interest rate margin ranging between 2.5% to 3.0% per annum depending on the quarterly average undrawn availability on the senior secured revolving credit facility. The Credit Agreement is subject to an unused fee ranging from 0.25% to 0.375% per annum depending on the amount of average daily outstandings under the senior secured revolving credit facility.

 

As of September 30, 2017, the Company had $90,000 of borrowings on the revolver and $33,750 of letters of credit outstanding, resulting in $101,796 of availability under the Credit Agreement.

 

Prior revolving credit agreement and term loan facility

In conjunction with the Credit Agreement entered into on December 30, 2016, the senior revolving credit agreement with an aggregate principal amount of up to $199,000 and the senior secured term loan facility consisting of a term loan in an aggregate principal amount of $50,000 were paid in full. Depending on the Company’s consolidated leverage ratio, previous borrowings under the revolving credit facility bore interest at the option of the Company at either a LIBOR rate plus a margin of between 1.50% to 2.50% per annum or a base rate plus a margin of between 0.50% to 1.50% per annum. The previous borrowings under the senior secured term loan facility bore interest at a fixed rate of 4.655% per annum.

Senior Notes

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In May 2017, the Company issued $325,000 of 8.000% senior notes (“8% Senior Notes”) due May 15, 2022. The 8% Senior Notes were issued at 100% of face value resulting in net proceeds of $321,653, net of underwriting fees. In connection with the issuance of the 8% Senior Notes, the Company retired all of its $275,000 of 7.375% senior notes due February 2019 for $282,638, which included a tender premium and accrued and unpaid interest. The Company used the remaining net proceeds from the debt offering to reduce the Company’s indebtedness under its Credit Agreement.

 

Other

The Company enters into note arrangements to finance certain vessels and ancillary equipment. The current portion of all equipment notes is $2,820. The long term portion is $13,518 and is included in notes payable or other long term liabilities.

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy has been established by GAAP that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The accounting guidance describes three levels of inputs that may be used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. At times, the Company holds certain derivative contracts that it uses to manage foreign currency risk or commodity price risk. The Company does not hold or issue derivatives for speculative or trading purposes. The fair values of these financial instruments are summarized as follows:

 

 

 

Fuel hedge contracts

The Company is exposed to certain market risks, primarily commodity price risk as it relates to diesel fuel purchase requirements, which occur in the normal course of business. The Company enters into heating oil commodity swap contracts to hedge the risk that fluctuations in diesel fuel prices will have an adverse impact on cash flows associated with its domestic dredging contracts. The Company’s goal is to hedge approximately 80% of the fuel requirements for work in domestic backlog.

As of September 30, 2017, 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 July 2018. As of September 30, 2017, there were 8.2 million gallons remaining on these contracts which represent approximately 80% of the Company’s forecasted domestic fuel purchases through July 2018. Under these swap agreements, the Company will pay fixed prices ranging from $1.53 to $1.76 per gallon.

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At September 30, 2017 and December 31, 2016, the fair value assets of the fuel hedge contracts were estimated to be $929  and$2,293, respectively, and are recorded in prepaid expenses and other current assets. For fuel hedge contracts considered to be highly effective, the losses reclassified to earnings from changes in fair value of derivatives, net of cash settlements and taxes, for the nine months ended September 30, 2017 were $160. The remaining gains and losses included in accumulated other comprehensive loss at September 30, 2017 will be reclassified into earnings over the next eleven months, corresponding to the period during which the hedged fuel is expected to be utilized. Changes in the fair value of fuel hedge contracts not considered highly effective are recorded as cost of contract revenues in the Statement of Operations. The fair values of fuel hedges are corroborated using inputs that are readily observable in public markets; therefore, the Company determines fair value of these fuel hedges using Level 2 inputs.

The Company is exposed to counterparty credit risk associated with non-performance of its various derivative instruments. The Company’s risk would be limited to any unrealized gains on current positions. To help mitigate this risk, the Company transacts only with counterparties that are rated as investment grade or higher. In addition, all counterparties are monitored on a continuous basis.

The fair value of the fuel hedge contracts outstanding as of September 30, 2017 and December 31, 2016 is as follows:

 

 

Accumulated other comprehensive income

Changes in the components of the accumulated balances of other comprehensive income are as follows:

 

Adjustments reclassified from accumulated balances of other comprehensive income (loss) to earnings are as follows:

 

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Other financial instruments

The carrying value of financial instruments included in current assets and current liabilities approximates fair value due to the short-term maturities of these instruments. Based on timing of the cash flows and comparison to current market interest rates, the carrying value of our revolving credit agreement approximates fair value. In May 2017, the Company issued a total of $325,000 of 8% senior notes due May 15, 2022, which were outstanding at September 30, 2017 (see Note 5). The 8% Senior Notes are senior unsecured obligations of the Company and its subsidiaries that guarantee the 8% Senior Notes. The fair value of the senior notes was $337,188 at September 30, 2017, which is a Level 1 fair value measurement as the senior notes’ value was obtained using quoted prices in active markets. It is impracticable to determine the fair value of outstanding letters of credit or performance, bid and payment bonds due to uncertainties as to the amount and timing of future obligations, if any.

 

 On May 11, 2017, the Company’s stockholders approved the Great Lakes Dredge & Dock Corporation 2017 Long-Term Incentive Plan (the “Incentive Plan”), which previously had been approved by the Company’s board of directors subject to stockholder approval. The Incentive Plan permits the granting of stock options, stock appreciation rights, restricted stock and restricted stock units to the Company’s employees and directors for up to 3.3 million shares of common stock, plus an additional 1.7 million shares underlying equity awards issued under the 2007 Long-Term Incentive Plan.

During the nine months ended September 30, 2017, the Company granted 920 thousand restricted stock units to certain employees. In addition, all non-employee directors on the Company’s board of directors are paid a portion of their board-related compensation in stock grants. Compensation cost charged to expense related to share-based compensation arrangements was $756 and $270 for the three months ended September 30, 2017 and 2016, respectively, and $2,514 and $2,276 for the nine months ended September 30, 2017 and 2016, respectively.

Beginning in the first quarter of 2017, the Company includes income taxes related to share-based compensation as a component of net income.

 

 

In 2017, a strategic review was begun to improve the Company's financial results in both domestic and international operations enabling debt reduction, improvements in return on capital and the continued renewal of our extensive fleet with new and efficient dredges to best serve our domestic and international clients. As a result of this review, management began execution of a plan to reduce general and administrative and overhead expenses, retire certain underperforming and underutilized assets and closeout the Company’s Brazil operations. These changes will result in a restructuring charge of approximately $42,000-$47,000, including severance, asset retirements and closeout costs, approximately $39,000-$44,000 of which will be non-cash. The majority of the charge will be recognized in the fourth quarter of 2017 with the remainder to be recognized in the following year.

 

Restructuring charges currently recognized for the above actions are summarized as follows:

 

 

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Commercial commitments

Performance and bid bonds are customarily required for dredging and marine construction projects, as well as some environmental & infrastructure projects. The Company has bonding agreements with Argonaut Insurance Company, Berkley Insurance Company, Chubb Surety and Liberty Mutual Insurance Company, under which the Company can obtain performance, bid and payment bonds. The Company also has outstanding bonds with Travelers Casualty, Surety Company of America and Zurich American Insurance Company (“Zurich”). Bid bonds are generally obtained for a percentage of bid value and amounts outstanding typically range from $1,000 to $10,000. At September 30, 2017, the Company had outstanding performance bonds with a notional amount of approximately $1,296,867, of which $41,085 relates to projects from the Company’s historical environmental & infrastructure businesses. The revenue value remaining in backlog related to these projects totaled approximately $456,005.

In connection with the sale of our historical demolition business, the Company was obligated to keep in place the surety bonds on pending demolition projects for the period required under the respective contract for a project and issued Zurich a letter of credit related to this exposure. In February 2017, the Company was notified by Zurich of an alleged default triggered on a historical demolition surety performance bond in the aggregate of approximately $20,000 for failure of the contractor to perform in accordance with the terms of a project. In May 2017, Zurich drew upon the letter of credit in the amount of $20,881. In order to fund the draw on the letter of credit, the Company had to increase the borrowings on its revolving credit facility. As the outstanding letters of credit previously reduced our availability under the revolving credit facility, this draw down on our letter of credit does not impact our liquidity or capital availability.

Pursuant to the terms of sale of our historical demolition business, the Company received an indemnification from the buyer for losses resulting from the bonding arrangement. The Company intends to aggressively pursue enforcement of the indemnification provisions if the buyer of the historical demolition business is found to be in default of its obligations. The Company cannot estimate the amount or range of recoveries related to the indemnification or resolution of the Company’s responsibilities under the surety bond. The surety bond claim impact has been included in discontinued operations and is discussed in Note 11.

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.

Legal proceedings and other contingencies

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.

Various legal actions, claims, assessments and other contingencies arising in the ordinary course of business are pending against the Company and certain of its subsidiaries. These matters are subject to many uncertainties, and it is possible that some of these matters could ultimately be decided, resolved, or settled adversely to the Company. Although the Company is subject to various claims and legal actions that arise in the ordinary course of business, except as described below, the Company is not currently a party to any material legal proceedings or environmental claims. The Company records an accrual when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe any of these proceedings, individually or in the aggregate, would be expected to have a material effect on results of operations, cash flows or financial condition.

On April 23, 2014, the Company completed the sale of NASDI, LLC (“NASDI”) and Yankee Environmental Services, LLC (“Yankee”), which together comprised the Company’s historical demolition business, to a privately owned demolition company. Legal actions brought by the Company to enforce the buyer’s obligations under the sale agreement are described below.

 On January 14, 2015, the Company and our subsidiary, NASDI Holdings, LLC, brought an action in the Delaware Court of Chancery to enforce the terms of the Company’s agreement to sell NASDI and Yankee. Under the terms of the agreement, the Company received cash of $5,309 and retained the right to receive additional proceeds based upon future collections of outstanding accounts receivable and work in process existing at the date of close. The Company seeks specific performance of the buyer’s obligation to collect and to remit the additional proceeds, and other related relief. Defendants have filed counterclaims alleging that the Company misrepresented the quality of its contracts and receivables prior to the sale. The Company denies defendants’ allegations and intends to vigorously defend against the counterclaims.

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Also pursuant to the terms of the agreement to sell NASDI and Yankee and as described above, the Company agreed to keep in place surety bonds for certain pending demolition projects, and the buyer agreed to indemnify the Company for all losses relating to those bonds. As described above, in May 2017, Zurich drew upon the Company’s letter of credit in the amount of $20,881. On May 26, 2017, the Company and NASDI Holdings, LLC brought a second action in the Delaware Court of Chancery seeking indemnification for all losses relating to the bonds for that project.

Except as noted above, the Company has not accrued any amounts with respect to the above matters, as the Company does not believe, based on information currently known to it, that a loss relating to these matters is probable, and an estimate of a range of potential losses relating to these matters cannot reasonably be made.

 

 

The Company owned 50% of TerraSea Environmental Solutions (“TerraSea”) as a joint venture. TerraSea was engaged in the environmental services business through its ability to remediate contaminated soil and dredged sediment treatment. At December 31, 2016, the Company had net advances to TerraSea of $24,696, which were recorded in prepaid expenses and other current assets. The Company had an accumulated deficit in joint ventures, which represents losses recognized to date in excess of our investment in TerraSea, of $17,016 at December 31, 2016, which was presented in accrued expenses. During the third quarter of 2017, the Company finalized the wind down of TerraSea with its joint venture partner.

During the second quarter of 2017, the Company and the joint venture partner agreed to a final resolution of the net advances through additional funding of the joint venture. The Company recorded additional losses of $1,458 related to this agreement during the nine months ended September 30, 2017. There are no remaining TerraSea projects at September 30, 2017.

 

 

Discontinued operations

On April 23, 2014, the Company entered into an agreement and completed the sale of NASDI and Yankee, its two former subsidiaries that comprised our historical demolition business. Under the terms of the agreement, the Company received cash of $5,309 and retained the right to receive additional proceeds based upon future collections of outstanding accounts receivable and work in process existing at the date of close, including recovery of outstanding claims for additional compensation from customers, net of future payments of accounts payable existing at the date of close, including any future payments of obligations associated with outstanding claims. The amount and timing of any realization of additional net proceeds has been impacted by the litigation with the buyer of the historical demolition business. However, management believes that the ultimate resolution of these matters will not be material to the Company’s consolidated financial position or results of operations.

As discussed in Note 9, the Company was notified by Zurich of an alleged default triggered on a historical demolition surety performance bond in the aggregate of approximately $20,000 for failure of the contractor to perform in accordance with the terms of a project. Zurich could be obligated to reimburse the loss, damage and expense that may arise from the alleged default. The Company estimated its exposure to a surety bond claim, including associated expenses, to be $20,900 and has recorded this amount in discontinued operations during the nine months ended September 30, 2017 as follows:

 

 

Magnus Pacific acquisition

 

 

On November 4, 2014, the Company acquired Magnus Pacific Corporation (“Magnus”), a California corporation, for an aggregate purchase price of approximately $40 million. Under the terms of the acquisition, the aggregate purchase price is satisfied by payment of $25 million paid at closing, the issuance of a promissory note and an earnout payment.

 

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Magnus did not reach the minimum EBITDA threshold for 2015 designated in the secured promissory note; therefore, during 2015, the Company reduced the remaining fair value to zero. Under the terms of the acquisition, as amended, the maximum potential aggregate earnout (the “Earnout Payment”) is $11,400 and will be determined based on the attainment of an average Adjusted EBITDA target of GLEI for the years ending December 31, 2017, December 31, 2018 and December 31, 2019. The Earnout Payment may be paid in cash or shares of the Company’s common stock, at the Company’s option. The Company remeasures the fair value of the contingent Earnout Payment based on projections of the earnings target for the business. Based on the Company’s current projections, GLEI is not expected to reach the minimum Adjusted EBITDA threshold designated in the amended share purchase agreement. During the third quarter of 2016, the Company reduced the remaining fair value of $8,940 to zero and the corresponding change was reflected in general and administrative expenses and interest expense.

 

Other

 

During the fourth quarter of 2016, the Company sold assets associated with certain service lines of the environmental & infrastructure segment’s business, excluding assets supporting the remediation service line.

 

The Company and its subsidiaries currently operate in two reportable segments: dredging and environmental & infrastructure. 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 provided as follows:

 

 

Foreign dredging revenue for the three and nine months ended September 30, 2017 of $5,849 and $37,423, respectively, was mostly attributable to work done in the Middle East. Foreign dredging revenue for the three and nine months ended September 30, 2016 was $21,139 and $34,331, respectively.

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.

 

The Company’s long-term debt at September 30, 2017 includes $325,000 of 8.000% senior notes due May 15, 2022. The Company’s obligations under these senior unsecured notes are guaranteed by certain of the Company’s 100% owned domestic subsidiaries. Such guarantees are full, unconditional and joint and several.

 

In connection with the 8% Senior Notes issued in May 2017, certain of the Company’s 100% owned domestic subsidiaries were released as subsidiary guarantors of the debt. Accordingly, the 2016 financial information included below has been recast to reflect the release of these entities as subsidiary guarantors.

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The following supplemental financial information sets forth for the Company’s subsidiary guarantors (on a combined basis), the Company’s non-guarantor subsidiaries (on a combined basis) and Great Lakes Dredge & Dock Corporation, exclusive of its subsidiaries (“GLDD Corporation”):

 

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Cautionary note regarding forward-looking statements

Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (“SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Great Lakes Dredge & Dock Corporation and its subsidiaries (“Great Lakes” or the “Company”), or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. In addition, these statements include, but are not limited to, our statements regarding the likelihood of realizing, and amount of, expected restructuring charges to be realized in connection with the restructuring activities.

These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. Great Lakes cautions investors that any forward-looking statements made by Great Lakes are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to Great Lakes, include, but are not limited to, risks and uncertainties that are described in Item 1A. “Risk Factors” of Great Lakes’ Annual Report on Form 10-K for the year ended December 31, 2016, and in other securities filings by Great Lakes with the SEC. In addition, the restructuring may not occur to the extent described herein if, among other factors, our lenders do not approve the related asset retirements, sales and certain other restructuring activities.  In addition, numerous other factors may limit the extent to which the anticipated benefits are realized.

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

 

 

General

The Company is the largest provider of dredging services in the United States and a major provider of environmental and infrastructure services. In addition, the Company is the only U.S. dredging service provider with significant international operations. The mobility of the Company’s fleet enables the Company to move equipment in response to changes in demand for dredging services.

Dredging generally involves the enhancement or preservation of navigability of waterways or the protection of shorelines through the removal or replenishment of soil, sand or rock. Domestically, our work generally is performed in coastal waterways and deep water ports. The U.S. dredging market consists of four primary types of work: capital, coastal protection, maintenance and rivers & lakes. The Company’s bid market is defined as the aggregate dollar value of domestic dredging projects on which the Company bid or could have bid if not for capacity constraints (“bid market”). The Company experienced an average combined bid market share in the U.S. of 42% over the prior three years, including 61%, 39%, 27% and 38% of the domestic capital, coastal protection, maintenance and rivers & lakes sectors, respectively.

The Company’s largest domestic dredging customer is the U.S. Army Corps of Engineers (the “Corps”), which has responsibility for federally funded projects related to navigation and flood control of U.S. waterways. In the first nine months of 2017, the Company’s dredging revenues earned from contracts with federal government agencies, including the Corps as well as other federal entities such as the U.S. Coast Guard and the U.S. Navy were approximately 62% of dredging revenues, slightly below the Company’s prior three year average of 66%.

The Company’s environmental & infrastructure segment provides environmental and geotechnical construction as well as soil, water and sediment environmental remediation for the state, local and private party markets. Environmental and geotechnical construction includes the creation, repair or stabilization of environmental barriers including slurry walls, in-situ stabilization, coal combustion

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residuals pond cap and close, dam and levee rehabilitation and other specialty civil construction. Remediation involves the containment, immobilization or removal of contamination from an environment through the use of any combination of isolation, treatment or exhumation techniques, including off-site disposal, based on the quantity and severity of the contamination. The environmental & infrastructure segment, which is comprised of Great Lakes Environmental & Infrastructure, LLC (“GLEI”) and Terra Contracting Services, LLC (“Terra”), accounted for 13% of total revenues in the first nine months of 2017.

The Company has two operating segments: dredging and environmental & infrastructure, which are also the Company’s two reportable segments. The Company has determined that dredging, GLEI and Terra are the Company’s three reporting units.

 

 

Results of operations

The following tables set forth the components of net loss and Adjusted EBITDA from continuing operations, as defined below, as a percentage of contract revenues for the three and nine months ended September 30, 2017 and 2016:

 

 

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Adjusted EBITDA from continuing operations, as provided herein, represents net income, adjusted for net interest expense, income taxes, depreciation and amortization expense, debt extinguishment, accelerated maintenance expense for new international deployments, goodwill or asset impairments and gains on bargain purchase acquisitions. Adjusted EBITDA from continuing operations is not a measure derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company presents Adjusted EBITDA from continuing operations as an additional measure by which to evaluate the Company’s operating trends. The Company believes that Adjusted EBITDA from continuing operations is a measure frequently used to evaluate the performance of companies with substantial leverage and that the Company’s primary stakeholders (i.e., its stockholders, bondholders and banks) use Adjusted EBITDA from continuing operations to evaluate the Company’s period to period performance. Additionally, management believes that Adjusted EBITDA from continuing operations provides a transparent measure of the Company’s recurring operating performance and allows management to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. For this reason, the Company uses a measure based upon Adjusted EBITDA from continuing operations to assess performance for purposes of determining compensation under the Company’s incentive plan. Adjusted EBITDA from continuing operations should not be considered an alternative to, or more meaningful than, amounts determined in accordance with GAAP including: (a) operating income as an indicator of operating performance; or (b) cash flows from operations as a measure of liquidity. As such, the Company’s use of Adjusted EBITDA from continuing operations, instead of a GAAP measure, has limitations as an analytical tool, including the inability to determine profitability or liquidity due to the exclusion of accelerated maintenance expense for new international deployments, goodwill or asset impairments, gains on bargain purchase acquisitions, interest and income tax expense and the associated significant cash requirements and the exclusion of depreciation and amortization, which represent significant and unavoidable operating costs given the level of indebtedness and capital expenditures needed to maintain the Company’s business. For these reasons, the Company uses operating income to measure the Company’s operating performance and uses Adjusted EBITDA from continuing operations only as a supplement. The following is a reconciliation of Adjusted EBITDA from continuing operations to net income (loss):

 

 

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

 

 

Total revenue was $163.3 million for the three months ended September 30, 2017, down $35.6 million, or 18%, from $198.9 million for the same period in the prior year. For the three months ended September 30, 2017, the Company experienced an increase in maintenance revenue. This increase was offset by decreases in all other types of work except for rivers & lakes, which was in line with the prior year period. For the nine months ended September 30, 2017, total revenue was $510.8 million, down from revenue of $554.2 million for the same period in the prior year, representing a decrease of $43.4 million or 8%. For the nine months ended September 30,

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2017, the Company experienced increases in foreign capital and maintenance revenues, which were offset by decreases in domestic capital, coastal protection, and rivers & lakes revenues, in addition to lower revenues in environmental and infrastructure.

Capital dredging consists primarily of port expansion projects, which involve the deepening of channels and berthing basins to allow access by larger, deeper draft ships and the provision of land fill used to expand port facilities. In addition to port work, capital projects also include coastal restoration and land reclamations, trench digging for pipelines, tunnels and cables, and other dredging related to the construction of breakwaters, jetties, canals and other marine structures. For the quarter ended September 30, 2017, domestic capital dredging was $30.6 million, down $29.2 million, or 49%, compared to $59.8 million for the same quarter in 2016. Domestic capital dredging revenues were lower for the quarter ended September 30, 2017 as the prior year period contained work on the Savannah Harbor deepening project and revenue earned on a liquefied natural gas (“LNG”) project in Texas at higher levels than during the quarter in the current year. In addition, we experienced delays associated with Hurricane Harvey, Irma, Maria, and Jose, which caused work stoppage on our projects in the impacted area. Domestic capital dredging for the nine months ended September 30, 2017 was $128.6 million compared to $152.1 million for the same period in 2016, representing a decrease of $23.4 million, or 15%. For the nine months ended September 30, 2017, the lower domestic capital dredging revenues were primarily related to the two multiyear projects mentioned above, for which a greater amount of revenue was earned during the prior year period. Further work on a deepening project on the Delaware River and on coastal restoration projects in Louisiana also contributed to revenue for the nine months ended September 30, 2017.

Foreign capital projects typically involve land reclamations, channel deepening and port infrastructure development. In the third quarter of 2017, foreign capital revenue was $5.8 million, which is $15.3 million, or 72%, below the $21.1 million in the same quarter in the prior year. Foreign capital revenue for the nine months ended September 30, 2017 was $37.4 million, which is $3.1 million, or 9%, higher as compared to the same period in the prior year. The increase in revenue for the nine months ended September 30, 2017 was attributable to a greater amount of revenue earned on a project in Saudi Arabia as well as a sand supply project in Bahrain during the current year period. Additional projects in Bahrain and a project in Brazil also contributed to revenue during the nine months ended September 30, 2017.

Coastal protection projects generally involve moving sand from the ocean floor to shoreline locations where erosion threatens shoreline assets. Coastal protection revenue for the quarter ended September 30, 2017 was $40.7 million, declining $7.3 million, or 15%, compared to $48.0 million in the prior year period. Coastal protection revenue for the nine months ended September 30, 2017 was $141.4 million, down $11.3 million or 7%, from $152.6 million for the first nine months of 2016. The decrease in coastal protection revenue for the three and nine months ended September 30, 2017 was attributable to a lower amount of revenue earned on large projects in New Jersey and New York for the repair of shorelines damaged as a result of Superstorm Sandy and winter storms as compared to the same periods in 2016. In addition, the prior year included a greater amount of revenue from projects in Florida as compared to the current year. This decrease was partially offset by a greater amount of revenue earned on several coastal protection projects in Virginia, South Carolina, North Carolina and Delaware during the first nine months of 2017.

Maintenance dredging consists of the re-dredging of previously deepened waterways and harbors to remove silt, sand and other accumulated sediments. Maintenance revenue for the third quarter of 2017 was $42.3 million, up $31.0 million, or 274%, from $11.3 million in the third quarter of 2016. During the third quarter of 2017, the increase in maintenance dredging revenues was driven by work on several projects including ongoing projects in Florida, California, Oregon, Louisiana and Delaware as well as a new project in Boston Harbor during the current period. Maintenance revenue for the first nine months of 2017 was $98.5 million, an increase of $21.0 million, or 27%, compared to $77.5 million for the comparable period in the prior year. The increase in maintenance dredging revenues for the first nine months of 2017 was mostly attributable to a greater volume of projects. Maintenance projects in Delaware, Maryland, California, Oregon, Florida, North Carolina, Louisiana, Massachusetts, Pennsylvania, and New York contributed to revenue during the first nine months of 2017.

Rivers & lakes dredging and related operations typically consist of lake and river dredging, inland levee and construction dredging, environmental restoration and habitat improvement and other marine construction projects. During the third quarter of 2017, rivers & lakes revenue was $14.4 million, increasing by $0.2 million, or 2%, from $14.2 million during the same period of 2016. Rivers & lakes revenue for the nine months ended September 30, 2017 was $33.5 million, down $3.1 million, or 8%, from $36.5 million in the first nine months of 2016. The decrease in rivers & lakes revenue for the nine months ended September 30, 2017 was driven by a greater amount of revenue earned on a reservoir project in Kansas during the prior year period. This decrease was partially offset by revenue earned on projects in New Jersey, Florida, Mississippi and Illinois during the first nine months of 2017.

The environmental & infrastructure segment’s services include environmental and geotechnical construction, specifically, slurry wall construction, in-situ stabilization, large scale reclamation and habitat restoration. In addition, the segment provides remediation services which involve the containment, immobilization or removal of contamination from an environment through the use of any combination of isolation, treatment or exhumation techniques, including off-site disposal, based on the quantity and severity of the contamination. Environmental & infrastructure segment revenues during the third quarter of 2017 were $29.7 million, down $14.9

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million, or 33%, compared to $44.6 million in the same quarter of the prior year. For the nine months ended September 30, 2017, the environmental & infrastructure segment recorded revenues of $73.6 million, a $29.8 million, or 29%, decrease from $103.4 million for the same prior year period. Environmental & infrastructure revenue for the first nine months of 2017 included work on remediation projects in Florida, New Jersey and Colorado and geotechnical projects in California. Revenue on these projects was offset by a greater amount of revenue earned on a large mine project in Washington and in the environmental & infrastructure segment’s service lines during the first nine months of 2016. During the fourth quarter of 2016, the Company sold assets associated with certain service lines of the environmental & infrastructure segment’s business, excluding assets supporting the remediation service line.

Consolidated gross profit for the quarter ended September 30, 2017 was $16.7 million, a decline of $3.3 million, or 17%, compared to $20.0 million in the same quarter of 2016. Gross profit margin for the three months ended September 30, 2017 was 10.2% compared to 10.1% in the third quarter of 2016. The decrease in gross profit for the third quarter of 2017 was a result of lower margin in the environmental & infrastructure segment primarily due to a project loss encountered in the quarter. Consolidated gross profit for the nine months ended September 30, 2017 was $58.7 million, down $5.6 million, or 9%, compared to $64.3 million in the same period of the prior year. Gross profit margin for the nine months ended September 30, 2017 was effectively unchanged at 11.5% from 11.6% in the first nine months of 2016. The decrease in gross profit for the nine months ended September 30, 2017 was attributable to fewer domestic dredging projects with strong performance than in the comparable period of the prior year. In comparison, the Company experienced strong performance on several coastal protection and maintenance projects during the prior year period. These decreases were partially offset by lower overhead, primarily related to improved absorption of the segment’s downsized fleet of equipment, in the environmental & infrastructure segment during the first nine months of 2017 as compared to the prior year period, which positively contributed to gross profit.

During the three months ended September 30, 2017 and 2016, general and administrative expenses were $17.5 million and $7.2 million, respectively. In the prior year quarter, the Company reduced the remaining fair value of the contingent earnout related to the acquisition of Magnus Pacific Corporation by $8.0 million to zero. The remaining increase in general and administrative expenses for the third quarter of 2017 was primarily driven by a $1.7 million increase in payroll and benefits due to one-time costs of severance incurred in the current year quarter. General and administrative expenses for the nine months ended September 30, 2017 and 2016 totaled $51.6 million and $47.0 million, respectively. The $4.6 million increase in general and administrative expenses for the first nine months of 2017 was mostly attributable to the aforementioned earnout reduction in the prior year and additional severance, partially offset by a $3.9 million decrease in payroll and benefits primarily related to the service lines of the environmental & infrastructure segment’s business sold in the fourth quarter of 2016 and a $2.4 million decrease in legal and professional fees during the first nine months of 2017.

Operating loss for the third quarter of 2017 was $1.0 million, a $13.9 million decrease compared to operating income of $12.9 million for the same quarter in the 2016. The lower operating income for the third quarter of 2017 was a result of higher gross profit and lower general and administrative expenses in the same period in the prior year, as described above. For the nine months ended September 30, 2017, the Company experienced operating income of $6.7 million, a decrease of $9.9 million, from operating income of $16.6 million in the same prior year period. The change in the Company’s operating income for the first nine months of 2017 was attributable to a decrease in gross profit, as described above, partially offset by a decrease  in general and administrative expenses.

For the three months ended September 30, 2017 and 2016, net interest expense was $6.4 million and $4.8 million, respectively. Net interest expense for the nine months ended September 30, 2017 was $18.4 million, up $2.0 million, or 12%, from interest expense of $16.4 million for the same period in the prior year. The increase in interest expense for the quarter and year to date 2017 was primarily attributable to an increase in interest expense related to the higher principal on the Company’s new senior notes and higher interest expense related to the Company’s senior secured revolving credit facility, which had a greater amount outstanding in the current year.

Income tax benefit for the three months ended September 30, 2017 was $2.7 million compared to a $2.9 million income tax expense for the three months ended September 30, 2016. For the nine months ended September 30, 2017 and 2016, the income tax benefit was $6.1 million and $0.6 million, respectively. The effective tax rate for the nine months ended September 30, 2017 was 38.6%, slightly above the effective tax rate of 31.9% for the same period of 2016.

The Company recorded a net loss from continuing operations of $4.9 million and a diluted loss per share attributable to continuing operations of $0.08 for the third quarter of 2017, compared to a net income from continuing operations of $4.6 million and a diluted earnings per share attributable to continuing operations of $0.08 for the third quarter of 2016. The Company experienced a net loss from continuing operations of $9.7 million and a diluted loss per share attributable to continuing operations of $0.16 for the nine months ended September 30, 2017, compared to a net loss from continuing operations of $1.2 million and a diluted loss per share attributable to continuing operations of $0.02 for the same period of 2016. The change in net loss or income from continuing operations for the three and nine months ended September 30, 2017 was driven by the decrease in operating income, as described above, partially offset by an increase in interest expense and loss on extinguishment of debt resulting from the Company’s new senior

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notes during the current year period. Further, the Company recognized a $1.5 million loss associated with the Company’s TerraSea joint venture during the second quarter of 2017.

Adjusted EBITDA from continuing operations (as defined on page 30) for the quarter ended September 30, 2017 was $11.3 million, down $17.8 million, or 61%, from $29.1 million for the third quarter of 2016. The change in EBITDA from continuing operations during the third quarter of 2017 was driven by a decrease in operating income as described above, excluding depreciation. For the nine months ended September 30, 2017, Adjusted EBITDA from continuing operations was $43.1 million, down $17.3 million, or 29%, from Adjusted EBITDA from continuing operations of $60.4 million for the same prior year period. The change in Adjusted EBITDA from continuing operations during the first nine months of 2017 was attributable to lower gross profit, excluding depreciation, higher general and administrative expenses, as described above, and the loss associated with the Company’s TerraSea joint venture recorded during the second quarter of 2017.

 

 

Results by segment

Dredging

Dredging segment revenues for the third quarter of 2017 were $133.9 million, down $20.6 million, or 13%, compared to $154.4 million for the third quarter of 2016. For the quarter ended September 30, 2017, the segment experienced an increase in maintenance revenue. This increase was offset by decreases in all other revenue types of work except for rivers & lakes, which was in line with the prior year period. The prior year period included work on the Savannah Harbor deepening project, on a LNG project in Texas and on large projects in New Jersey and New York for the repair of shorelines damaged as a result of Superstorm Sandy and winter storms at higher levels than during the quarter in the current year. This was partially offset by increases in maintenance dredging revenues driven by work on several projects including ongoing projects in Florida, California, Oregon, Louisiana and Delaware as well as a new project in Boston Harbor during the current year period. Dredging segment revenues for the nine months ended September 30, 2017 were $439.4 million, down $13.7 million, or 3%, compared to revenues of $453.1 million for the same prior year period. For the nine months ended September 30, 2017, the dredging segment experienced increases in foreign capital and maintenance revenues which were offset by decreases in domestic capital, coastal protection and rivers & lakes revenues. This decrease in current year revenues was primarily driven by lower revenue earned during the current year on the Savannah Harbor deepening project, on a LNG project in Texas, on a reservoir project in Kansas and on large projects in New York and New Jersey for the repair of shorelines damaged as a result of Superstorm Sandy and winter storms as compared to the same period in 2016.

Dredging segment gross profit for the quarter ended September 30, 2017 was $16.4 million compared to $16.5 million in the same quarter of the prior year. Gross profit margin for the third quarter of 2017 and 2016 was 12.3% and 10.7%, respectively. For the nine months ended September 30, 2017, the dredging segment gross profit was $52.4 million, down from a gross profit of $63.9 million in the same period of 2016. Further, dredging segment gross profit margin for the nine months ended September 30, 2017 decreased to 11.9% from gross profit margin of 14.1% for the nine months of 2016. The decrease in dredging segment gross profit for the three and nine months ended September 30, 2017 was attributable to fewer domestic dredging projects with strong performance than in the comparable period of the prior year.

Dredging segment operating income for the third quarter of 2017 was $2.7 million, a $2.8 million decrease compared to $5.6 million in the same period of the prior year. For the nine months ended September 30, 2017, operating income was $13.3 million, a $13.4 million decrease from $26.8 million in the first nine months of 2016. The change in operating income for the three and nine months ended September 30, 2017 is primarily the result of lower gross profit, as described above, and higher general and administrative expenses partially due to $1.3 million of one-time costs of severance incurred in the current year quarter and higher labor and benefit costs offset by lower legal and professional fees as compared to the first nine months of 2016.

Environmental & infrastructure

During the three months ended September 30, 2017, environmental & infrastructure revenues were $29.7 million, down $14.9 million, or 33%, from $44.6 million in the same quarter in the prior year. Environmental & infrastructure segment revenues for the nine months ended September 30, 2017 were $73.6 million, down $29.8 million, or 29%, from revenue of $103.4 million for the first nine months of 2016. Environmental & infrastructure revenues for the first nine months of 2017 included work on remediation projects in Florida, New Jersey and Colorado and geotechnical projects in California. Revenue on these projects was offset by a greater amount of revenue earned on a large mine project in Washington and in the environmental & infrastructure segment’s service lines during the first nine months of 2016. During the fourth quarter of 2016, the Company sold assets associated with certain service lines of the environmental & infrastructure segment’s business, excluding assets supporting the remediation service line.

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Environmental & infrastructure gross profit for the third quarter of 2017 was $0.3 million, decreasing $3.3 million compared to $3.5 million in the third quarter of 2016. Gross profit margin in the environmental & infrastructure segment was 0.9% and 7.9% for the three months ended September 30, 2017 and 2016, respectively. The environmental & infrastructure segment experienced a gross profit of $6.3 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively. For the first nine months of 2017, the environmental & infrastructure segment experienced a gross profit margin of 8.5% compared to 0.3% for the same period of the prior year. The change in gross profit during the nine months ended September 30, 2017 was driven by increased margin due to the sale of certain service lines of the environmental & infrastructure segment’s business which experienced losses in the prior year partially offset by a project loss encountered by the remediation line of business in the current year quarter. In addition, lower overhead, primarily related to improved absorption of the segment’s downsized fleet of equipment, during the first nine months of 2017 as compared to the prior year period, positively impacted gross profit.

Environmental & infrastructure segment operating loss for the third quarter of 2017 was $3.7 million, a $11.0 million decline compared to a $7.3 million operating income in the same period in the prior year. For the nine months ended September 30, 2017, the environmental & infrastructure segment experienced an operating loss of $6.6 million, a positive change of $3.6 million compared to an operating loss of $10.2 million for the same period of the prior year. In the prior year quarter, the Company reduced the remaining fair value of the Magnus contingent earnout by $8.0 million to zero. The change in operating loss for the nine months ended September 30, 2017 is mostly attributable to an increase in gross profit partially offset by the increase in general and administrative expenses, with the earnout in the prior year partially offset by a decrease in payroll and benefits primarily related to the service lines of the environmental & infrastructure segment’s business, which was sold in the fourth quarter of 2016.

 

 

Bidding activity and backlog

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

 

 

The Company’s contract backlog represents its estimate of the revenues that will be realized under the portion of the contracts remaining to be performed. For dredging contracts these estimates are based primarily upon the time and costs required to mobilize the necessary assets to and from the project site, the amount and type of material to be dredged and the expected production capabilities of the equipment performing the work. For environmental & infrastructure contracts, these estimates are based on the time and remaining costs required to complete the project relative to total estimated project costs and project revenues agreed to with the customer. However, these estimates are necessarily subject to variances based upon actual circumstances. Because of these factors, as well as factors affecting the time required to complete each job, backlog is not always indicative of future revenues or profitability. Also, 71% of the Company’s September 30, 2017 dredging backlog relates to federal government contracts, which can be canceled at any time without penalty to the government, subject to the Company’s contractual right to recover the Company’s actual committed costs and profit on work performed up to the date of cancellation. The Company’s backlog may fluctuate significantly from quarter to quarter based upon the type and size of the projects the Company is awarded from the bid market. A quarterly increase or decrease of the Company’s backlog does not necessarily result in an improvement or a deterioration of the Company’s business. The Company’s backlog includes only those projects for which the Company has obtained a signed contract with the customer.

The domestic dredging bid market for the 2017 quarter ended September 30, 2017 totaled $386.5 million, a $66.5 million increase from $320.0 million in the same quarter of the prior year. The domestic dredging bid market for the nine months ended September 30, 2017 was $809.3 million, an increase of $141.2 million, compared to the first nine months of 2016. Awards during the current year period include a deepening project in Charleston, South Carolina, four coastal protection projects in Maryland, South Carolina, Florida and Delaware and maintenance projects in Pennsylvania, Virginia, Mississippi and New York. The bid market for the nine months ended September 30, 2017 improved over the prior year due to significantly higher amounts of maintenance and capital projects being bid offset by lower rivers and lakes projects awarded. The coastal protection market was essentially flat year over year. For the contracts awarded in the current year, the Company won 47%, or $89.7 million, of the coastal protection projects, 55%, or $135.7

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million, of the domestic capital projects, 28%, or $99.1 million, of the maintenance projects and 20%, or $2.6 million, of the rivers & lakes projects through September 30, 2017. The Company won 40% of the overall domestic bid market for the first nine months of 2017, which is in line with the Company’s prior three year average of 42%. Variability in contract wins from quarter to quarter is not unusual and one quarter’s win rate is generally not indicative of the win rate the Company is likely to achieve for a full year.

The Company’s contracted dredging backlog was $427.8 million at September 30, 2017 compared to $467.7 million of backlog at December 31, 2016. These amounts do not reflect approximately $263.3 million of domestic low bids pending formal award and additional phases (“options”) pending on projects currently in backlog at September 30, 2017. In September 2017, the Company was the low bidder on the Charleston 2 Deepening project at $278.4 million. The base component of the project was awarded in October 2017 representing $213 million, which is included in the low bids pending formal award. At December 31, 2016 the amount of domestic low bids and options pending award was $24.6 million.

Domestic capital dredging backlog at September 30, 2017 was $22.4 million higher than at December 31, 2016. During the first nine months of 2017, the Company was awarded an $88 million coastal restoration project in the Gulf of Mexico and a $47 million deepening project in South Carolina. For the nine months ended September 30, 2017, the Company continued to earn revenue on several coastal restoration projects in Louisiana, the Savannah Harbor deepening project, a deepening project on the Delaware River and an LNG project in Texas which were in backlog at December 31, 2016. The Company is encouraged by the new administration’s focus on repairing and rebuilding America’s infrastructure, including our nation’s ports and waterways. The Panama Canal expansion was completed during the second quarter of 2016, which continues to put pressure on the ports on the East Coast to continue with their studies and plans to deepen and widen in anticipation of the post-Panamax vessels. The Company anticipates that Boston will likely be the next port that will be let for bid, potentially in the fourth quarter of 2017. Further, additional phases of Jacksonville continue to look promising to potentially bid in 2018. In April 2016, the federal court in New Orleans approved the October 2015 settlement, of approximately $20 billion, between the United States, the five Gulf States and BP for damages from the Deepwater Horizon oil spill. Louisiana will receive a minimum of $6.8 billion for claims related to natural resource damages under the Oil Pollution Act, Clean Water Act as civil penalties, and the State’s various economic claims. Many of the Gulf States previously committed to spending a portion of the fines received to repair the natural resources impacted by the oil spill, including on coastal restoration projects that include dredging. Although the bulk of the fines are to be paid over the next 15 to 18 years, the Company expects several coastal restoration projects envisioned by the States to come to fruition in the next couple of years providing a new source of domestic capital dredging projects on which the Company will bid.

Foreign capital dredging backlog at September 30, 2017 was $9.3 million lower than at December 31, 2016. During the first nine months of 2017, the Company was awarded a sand supply project in the Middle East. During the second quarter of 2017, the Company was the low bidder on a $67 million project in Bahrain which the Company expects to be awarded by year end. During the first nine months of 2017, the Company continued to earn revenue on a project in Saudi Arabia which was in backlog at December 31, 2016.  Upcoming projects expected to be awarded are not being completed under the tight time constraints that were required on prior years’ large infrastructure projects. As a result, anticipated margins in the current year are expected to be lower than margins experienced internationally over the past several years. The world’s need for reclaimed land continues to expand to support global energy consumption, seaborne trade, population growth and tourism, all of which are expected to add nearly 400 viable dredging projects over the next six years.

Coastal protection dredging backlog at September 30, 2017 was $31.2 million lower than at December 31, 2016. In the first nine months of 2017, the Company was awarded a $26 million coastal protection project in South Carolina and four additional coastal protection projects in Maryland, South Carolina, Florida and Pennsylvania as well as an option on a coastal protection project in New Jersey. In comparison, the Company was awarded larger coastal protection projects in North Carolina and Virginia during the prior year period. During the first nine months of 2017, the Company continued to earn revenue on several large coastal protection projects in New Jersey and New York as well as on large projects in Virginia and North Carolina which were in backlog at December 31, 2016. Funding related to Northeastern U.S. beach replenishment continues to be released and the Company is anticipating these new dredging projects along the coast to continue in 2017 and 2018. Federal and state government actions continue to support the repair and improvement of America’s coastline through the completion of protective beaches and berms. Coastal shoreline impacts from Hurricane Harvey in Texas and Hurricanes Irma, Jose, Maria and Nate on the East and Gulf coasts are being assessed and may lead to supplemental funding and future coastal protection projects. Maintenance dredging backlog was down $2.9 million from December 31, 2016. During the first nine months of 2017, the Company was awarded maintenance projects in North Carolina, Louisiana, Maryland and on the Columbia River. During the first nine months of 2017, the Company continued to earn revenue on projects in Maryland, Massachusetts, Pennsylvania, Florida and Delaware which were in backlog at December 31, 2016. The budget for fiscal year 2017 provides for a record budget for the Corps of $6 billion and exceeds the increase in Harbor Maintenance Trust Fund (“HMTF”) spending for maintenance dredging as required by the 2014 Water Resources and Development Act. Further, the water resources development bill, rebranded as the Water Infrastructure Improvements for the Nation Act (“WIIN”) was enacted during the fourth quarter of 2016. WIIN emphasizes previous Water Resources Reform and Development Act (“WRRDA”) language which calls for full use of the HMTF for its intended purpose of maintaining future access to the waterways and ports that support our nation’s

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economy. Further, WIIN ensures that Harbor Maintenance Tax (“HMT”) funding targets will increase by three percent over the prior year, even if the HMT revenue estimates decrease, to continue annual progress towards full use of the HMT by 2025. Through the increased appropriation of HMTF monies, the Company anticipates an increase in harbor projects to be let for bid throughout 2017 and beyond.

Rivers & lakes backlog at September 30, 2017 was down by $18.9 million from backlog at December 31, 2016. During the first nine months of 2017, the Company was awarded a rivers & lakes project in New Jersey. For the nine months ended September 30, 2017, the Company continued to earn revenue on projects in New Jersey, Florida, Mississippi and Illinois which were in backlog at December 31, 2016. The Corps’ work plan for fiscal year 2017 includes several upper Mississippi River projects to open channels that are often clogged by silt and sediment from upstream, in addition to planned levee repair along the Mississippi River. Additionally, the Company’s rivers & lakes dredges are well suited for inland marsh projects in Louisiana that are expected to be let to bid through the Coastal Protection and Restoration Authority over the next year.

Environmental & infrastructure services backlog increased $20.5 million from December 31, 2016. During the first nine months of 2017, the Company was awarded three levee project in California, remediation projects in New Jersey, South Dakota, Colorado and Texas and two geotechnical projects in California. For the nine months ended September 30, 2017, the Company continued to earn revenue on remediation projects in Florida, New Jersey and Colorado which were in backlog at December 31, 2016. As part of the environmental & infrastructure segment’s initiatives, the Company intends to focus on geographical expansion in the geotechnical services business. The Company anticipates an increase in levee work in 2017 due to the recent flooding in the Northwest. Additionally, the Company anticipates additional contracting opportunities arising from the transformation of the U.S. energy infrastructure, specifically related to the remediation requirements as mandated by the Environmental Protection Agency’s rule to regulate the disposal of coal combustion residuals from electric utilities promulgated in June 2015.

 

 

Liquidity and capital resources

The Company’s principal sources of liquidity are net cash flows provided by operating activities and proceeds from previous issuances of long term debt. The Company’s principal uses of cash are to meet debt service requirements, finance capital expenditures, provide working capital and other general corporate purposes.

The Company’s cash provided by operating activities of continuing operations for the nine months ended September 30, 2017 and 2016 totaled $23.0 million and $13.0 million, respectively. Normal increases or decreases in the level of working capital relative to the level of operational activity impact cash flow from operating activities. The increase in cash provided by operating activities of continuing operations in the first nine months of 2017 compared to the same period in the prior year was driven by a greater investment in working capital during the prior year period. During the first nine months of 2017, the Company received $4.5 million in cash distributions from joint ventures compared to $3.2 million in the prior year period.

The Company’s cash flows used in investing activities for the first nine months of 2017 and 2016 totaled $33.1 million and $48.4 million, respectively. Investing activities in both periods primarily relate to normal course upgrades and capital maintenance of the Company’s dredging fleet. During the three months ended September 30, 2017, the Company received $6.5 million in cash proceeds from the restructuring of a dredge lease. During the nine months ended September 30, 2017, the Company spent $26.9 million on the construction of a dual mode articulated tug/barge trailing suction hopper dredge (“ATB”), compared to $38.7 million in the same period in the prior year. In connection with the termination of the Company’s former revolving credit facility, the Company was required to issue cash collateral of $7.0 million related to two letters of credit during the fourth quarter of 2016. During the first quarter of 2017, new letters of credit were issued under the Company’s new credit facility and the cash used to collateralize the previous letters of credit was paid back in full to the Company. Additionally, the Company received the $6.5 million in proceeds from the restructuring of a dredge lease in 2017 in comparison to a receipt of $10.0 million for the sale of an underutilized dredge in 2016.

The Company’s cash flows provided by financing activities for the nine months ended September 30, 2017 and 2016 totaled $30.4 million and $34.8 million, respectively. The decrease in financing activities primarily relates to changes in the Company’s revolving credit facility partially offset by changes in the Company’s senior notes. Net cash flows provided by financing activities increased primarily due to the issuance of the Company’s $325 million of 8% senior notes during the second quarter of 2017. The Company used a portion of the net proceeds to redeem its $275 million of 7 3/8% senior notes and repay a portion of the Company’s revolver during the nine months ended September 30, 2017. The Company also paid $4.5 million in financing fees on the issuance of the senior notes during the current year period. In comparison, net borrowings on the Company’s revolver during the first nine months of 2016 were $25 million higher than net borrowings in 2017. Further, the Company had a $1.5 million payment on the senior secured term loan facility during the prior year period. The senior secured term loan facility was paid in full during the fourth quarter of 2016.

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Credit agreement

On December 30, 2016, the Company, Great Lakes Dredge & Dock Company, LLC, NASDI Holdings, LLC, Great Lakes Dredge & Dock Environmental, Inc., Great Lakes Environmental & Infrastructure Solutions, LLC and Great Lakes Environmental & Infrastructure, LLC (collectively, the “Credit Parties”) entered into a revolving credit and security agreement, as subsequently amended, (the “Credit Agreement”) with certain financial institutions from time to time party thereto as lenders, PNC Bank, National Association, as Agent, PNC Capital Markets, The PrivateBank and Trust Company, Suntrust Robinson Humphrey, Inc., Capital One, National Association and Bank of America, N.A., as Joint Lead Arrangers and Joint Bookrunners, Texas Capital Bank, National Association, as Syndication Agent and Woodforest National Bank, as Documentation Agent. The Credit Agreement, which replaced the Company’s former revolving credit agreement, provides for a senior secured revolving credit facility in an aggregate principal amount of up to $250 million, subfacilities for the issuance of standby letters of credit up to a $250 million sublimit and swingline loans up to a $25 million sublimit. The maximum borrowing capacity under the Credit Agreement is determined by a formula and may fluctuate depending on the value of the collateral included in such formula at the time of determination. The Credit Agreement also includes an increase option that will allow the Company to increase the senior secured revolving credit facility by an aggregate principal amount of up to $100 million. This increase is subject to lenders providing incremental commitments for such increase, the Credit Parties having adequate borrowing capacity and provided that no default or event of default exists both before and after giving effect to such incremental commitment increase.

The Credit Agreement contains customary representations and affirmative and negative covenants, including a springing financial covenant that requires the Credit Parties to maintain a fixed charge coverage ratio (ratio of earnings before income taxes, depreciation and amortization, net interest expenses, non-cash charges and losses and certain other non-recurring charges, minus capital expenditures, income and franchise taxes, to net cash interest expense plus scheduled cash principal payments with respect to debt plus restricted payments paid in cash) of not more than 1.10 to 1.00. The Credit Parties are also restricted in the amount of capital expenditures they may make in each fiscal year. The Credit Agreement also contains customary events of default (including non-payment of principal or interest on any material debt and breaches of covenants) as well as events of default relating to certain actions by the Company’s surety bonding providers. The obligations of the Credit Parties under the Credit Agreement will be unconditionally guaranteed, on a joint and several basis, by each existing and subsequently acquired or formed material direct and indirect domestic subsidiary of the Company. Borrowings under the Credit Agreement were or will be used to refinance existing indebtedness under the Company’s former revolving credit agreement, refinance existing indebtedness under the Company’s former term loan agreement, pay fees and expenses related to the Credit Agreement, finance acquisitions permitted under the Credit Agreement, finance ongoing working capital and for other general corporate purposes. The Credit Agreement matures on December 30, 2019.

The obligations under the Credit Agreement are secured by substantially all of the assets of the Credit Parties. The outstanding obligations thereunder shall be secured by a valid first priority perfected lien on substantially all of the vessels of the Credit Parties and a valid perfected lien on all domestic accounts receivable and substantially all other assets of the Credit Parties, subject to the permitted liens and interests of other parties (including the Company’s surety bonding providers).

Interest on the senior secured revolving credit facility of the Credit Agreement is equal to either a base rate option or LIBOR option, at the Company’s election. The base rate option is (1) the base commercial lending rate of PNC Bank, National Association, as publically announced plus (2)(a) an interest margin of 2.0% or (b) after the date on which a borrowing base certificate is required to be delivered under Section 9.2 of the Credit Agreement (commencing with the fiscal quarter ending December 31, 2017, the “Adjustment Date”), an interest margin ranging between 1.5% and 2.0% depending on the quarterly average undrawn availability on the senior secured revolving credit facility. The LIBOR option is the sum of (1) LIBOR and (2)(a) an interest margin of 3.0% or (b) after the Adjustment Date, an interest rate margin ranging between 2.5% to 3.0% per annum depending on the quarterly average undrawn availability on the senior secured revolving credit facility. The Credit Agreement is subject to an unused fee ranging from 0.25% to 0.375% per annum depending on the amount of average daily outstanding under the senior secured revolving credit facility.

As of September 30, 2017, the Company had $90.0 million of borrowings on the revolver and $33.8 million of letters of credit outstanding, resulting in $101.8 million of availability under the Credit Agreement. Borrowings under the line of credit may be limited based on the Company’s requirements to comply with its covenants.

Surety agreements

Performance and bid bonds are customarily required for dredging and marine construction projects, as well as some environmental & infrastructure projects. The Company has bonding agreements with Argonaut Insurance Company, Berkley Insurance Company, Chubb Surety and Liberty Mutual Insurance Company, under which the Company can obtain performance, bid and payment bonds. The Company also has outstanding bonds with Travelers Casualty, Surety Company of America and Zurich American Insurance Company (“Zurich”). Bid bonds are generally obtained for a percentage of bid value and amounts outstanding typically range from $1 million to $10 million. At September 30, 2017, the Company had outstanding performance bonds totaling approximately

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$1,296.9 million, of which $41.1 million relates to projects from the Company’s historical environmental & infrastructure businesses. The revenue value remaining in backlog related to these projects totaled approximately $456.0 million.

In connection with the sale of our historical demolition business, the Company was obligated to keep in place the surety bonds on pending demolition projects for the period required under the respective contract for a project and issued Zurich a letter of credit related to this exposure. In February 2017, the Company was notified by Zurich of an alleged default triggered on a historical demolition surety performance bond in the aggregate of approximately $20 million for failure of the contractor to perform in accordance with the terms of a project. In May 2017, Zurich drew upon the letter of credit in the amount of $20.9 million. In order to fund the draw on the letter of credit, the Company had to increase the borrowings on its revolving credit facility. As the outstanding letters of credit previously reduced our availability under the revolving credit facility, this draw down on our letter of credit does not impact our liquidity or capital availability.

Pursuant to the terms of sale of our historical demolition business, the Company received an indemnification from the buyer for losses resulting from the bonding arrangement. The Company intends to aggressively pursue enforcement of the indemnification provisions if the buyer of the historical demolition business is found to be in default of its obligations. The Company cannot estimate the amount or range of recoveries related to the indemnification or resolution of the Company’s responsibilities under the surety bond. The surety bond claim impact has been included in discontinued operations and is discussed in Note 11 to the Company’s condensed consolidated financial statements.

Senior notes   

In May 2017, the Company issued $325 million in aggregate principal amount of its 8% senior notes (“8% Senior Notes”) due May 15, 2022. Approximately $283 million of the net proceeds from the issuance of the 8% Senior Notes were used to prepay all of the Company’s 7.375% senior notes due February 2019, including a tender premium and accrued and unpaid interest. Interest on the 8% Senior Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2017. The 8% Senior Notes are senior unsecured obligations of the Company and will be guaranteed on a senior unsecured basis by the guarantors and any other subsidiary guarantors that from time to time become parties to the indenture. The terms of the indenture will, among other things, limit the ability of the Company and its restricted subsidiaries to (i) pay dividends, or make certain other restricted payments or investments; (ii) incur additional indebtedness and issue disqualified stock; (iii) create liens on their assets; (iv) transfer and sell assets; (v) enter into certain business combinations with third parties or into certain other transactions with affiliates; (vi) create restrictions on dividends or other payments by the Company’s restricted subsidiaries; and (vii) create guarantees of indebtedness by restricted subsidiaries. These covenants are subject to a number of important limitations and exceptions that are described in the indenture.

Other

The impact of changes in functional currency exchange rates against the U.S. dollar on non-U.S. dollar cash balances, primarily the Brazilian Real and Australian Dollar, is reflected in the cumulative translation adjustment—net within accumulated other comprehensive loss. Cash held in non-U.S. dollar currencies primarily is used for project-related and other operating costs in those currencies reducing the Company’s exposure to future realized exchange gains and losses.

The Company believes its cash and cash equivalents, its anticipated cash flows from operations and availability under its revolving credit facility will be sufficient to fund the Company’s operations, capital expenditures and the scheduled debt service requirements for the next twelve months. Beyond the next twelve months, the Company’s ability to fund its working capital needs, planned capital expenditures, scheduled debt payments and dividends, if any, and to comply with all the financial covenants under the Credit Agreement and bonding agreement, depends on its future operating performance and cash flows, which in turn, are subject 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 GAAP, which is described in Note 1 to the Company’s December 31, 2016 Consolidated Financial Statements included on Form 10-K. 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 the Company’s critical accounting policies or estimates since December 31, 2016.

 

 

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The market risk of the Company’s financial instruments as of September 30, 2017 has not materially changed since December 31, 2016. The market risk profile of the Company on December 31, 2016 is disclosed in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

 

 

a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as required by Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of September 30, 2017. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act a) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure and b) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017 in providing such a reasonable assurance.

b) Changes in internal control over financial reporting.

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II — Other Information

See Note 9 “Commitments and Contingencies” in the Notes to Condensed Consolidated Financial Statements.

There have been no material changes, except for the following, during the nine months ended September 30, 2017 to the risk factors previously disclosed in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

We may not realize all of the expected benefits from our restructuring activities.

 

In October 2017, we announced that we were executing a restructuring plan that would allow us to focus on reducing debt, improving return on capital and enhancing our fleet (the “Restructuring Plan”). Actual total costs, savings, benefits and timing of the Restructuring Plan may vary from our estimates. We therefore cannot ensure that we will achieve the targeted savings or other benefits. If our lenders do not approve the related asset retirements, sales and certain other restructuring activities, our ability to achieve the anticipated cost reductions of the Restructuring Plan may be adversely impacted, and our business may be disrupted. In addition, numerous other factors may limit the extent to which the anticipated benefits are realized. Unanticipated costs or unrealized savings in connection with the Restructuring Plan could adversely affect our results of operations and financial condition, as well as our likelihood of realizing, and the amount of, expected restructuring charges to be realized in connection with the Restructuring Plan.

None.

None.

Not applicable.

None.

 

 

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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.

 

 

Date:  November 7, 2017

 

 

 

 

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