GREAT LAKES DREDGE & DOCK CORP
10-Q, 2000-08-14
HEAVY CONSTRUCTION OTHER THAN BLDG CONST - CONTRACTORS
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended June 30, 2000

OR

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

For the transition period from               

Commission File Number 333-64687


GREAT LAKES DREDGE & DOCK CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)
  13-3634726
(IRS Employer Identification No.)
 
2122 York Road, Oak Brook, Illinois
(Address of principal executive offices)
 
 
 
60523
(Zip Code)

Registrant's telephone number, including area code: (630) 574-3000


    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

    As of August 10, 2000, there were outstanding 1,538,800 shares of Class A Common Stock, 3,363,900 shares of Class B Common Stock and 44,675 shares of Preferred Stock.




GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the Quarterly Period ended June 30, 2000

INDEX

 
 
   
  Page
PART I Financial Information    
 
 
 
Item 1
 
 
 
Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets at June 30, 2000 and December 31, 1999
 
 
 
2
 
 
 
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months ended June 30, 2000 and 1999
 
 
 
3
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2000 and 1999
 
 
 
4
 
 
 
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
5
 
 
 
Item 2
 
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
15
 
 
 
Item 3
 
 
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
22
 
PART II
 
Other Information
 
 
 
 
 
 
 
Item 1
 
 
 
Legal Proceedings
 
 
 
23
 
 
 
Item 6
 
 
 
Exhibits and Reports on Form 8-K
 
 
 
23
 
SIGNATURE
 
 
 
24
 
EXHIBIT INDEX
 
 
 
25
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I—Financial Information

GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
(in thousands, except share and per share amounts)

 
  June 30,
2000

  December 31,
1999

 
ASSETS  
Current assets:              
Cash and equivalents   $ 518   $ 1,533  
Accounts receivable, net     49,971     33,392  
Contract revenues in excess of billings     25,323     20,536  
Inventories     13,707     14,714  
Prepaid expenses and other current assets     12,309     11,968  
   
 
 
    Total current assets     101,828     82,143  
Property and equipment, net     136,886     136,883  
Inventories     8,925     8,838  
Investments in joint ventures     7,059     7,101  
Other assets     5,742     6,429  
   
 
 
    Total assets   $ 260,440   $ 241,394  
       
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT  
Current liabilities:              
Accounts payable   $ 38,216   $ 25,227  
Accrued expenses     24,630     28,458  
Billings in excess of contract revenues     12,403     8,548  
Current maturities of long-term debt     8,200     6,700  
   
 
 
    Total current liabilities     83,449     68,933  
Long-term debt     155,000     152,500  
Deferred income taxes     43,205     44,286  
Foreign income taxes     1,525     1,525  
Other     9,892     11,332  
   
 
 
    Total liabilities     293,071     278,576  
Minority interests     3,105     2,373  
Commitments and contingencies (Note 9)          
Stockholders' deficit:              
  Preferred stock, $.01 par value; 250,000 shares authorized: 45,000 issued; 44,675 outstanding in 2000 and 1999     1     1  
  Common stock, $.01 par value; 50,000,000 shares authorized: 5,000,000 issued; 4,905,700 outstanding in 2000 and 1999     50     50  
  Additional paid-in capital     50,457     50,457  
  Accumulated deficit     (85,724 )   (89,519 )
  Treasury stock, at cost (2000 and 1999: 325 preferred shares, 94,300 common shares)     (419 )   (419 )
  Notes receivable from stockholders     (101 )   (125 )
   
 
 
    Total stockholders' deficit     (35,736 )   (39,555 )
   
 
 
  Total liabilities and stockholders' deficit   $ 260,440   $ 241,394  
       
 
 

See notes to unaudited condensed consolidated financial statements.

2


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)
(in thousands)

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2000
  1999
  2000
  1999
 
Contract revenues   $ 85,474   $ 77,941   $ 174,370   $ 150,260  
Costs of contract revenues     73,335     63,879     146,270     122,984  
   
 
 
 
 
  Gross profit     12,139     14,062     28,100     27,276  
General and administrative expenses     5,303     4,821     10,646     9,760  
   
 
 
 
 
  Operating income     6,836     9,241     17,454     17,516  
Interest expense, net     (4,621 )   (4,591 )   (9,089 )   (8,954 )
Equity in earnings (loss) of joint ventures     68     9     (126 )   (315 )
   
 
 
 
 
  Income before income taxes and minority interests     2,283     4,659     8,239     8,247  
Income tax expense     (1,011 )   (2,517 )   (3,712 )   (4,035 )
Minority interests     (28 )   375     (732 )   547  
   
 
 
 
 
  Net income   $ 1,244   $ 2,517   $ 3,795   $ 4,759  
       
 
 
 
 

See notes to unaudited condensed consolidated financial statements.

3


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(in thousands)

 
  Six Months Ended
June 30,

 
 
  2000
  1999
 
Operating Activities              
Net income   $ 3,795   $ 4,759  
Adjustments to reconcile net income to net cash flows from operating activities:              
  Depreciation     6,373     5,857  
  Loss of joint ventures     126     315  
  Minority interests     732     (547 )
  Deferred income taxes     (972 )   (1,414 )
  Loss (gain) on dispositions of property and equipment     384     (94 )
  Other, net     677     441  
  Changes in assets and liabilities:              
    Accounts receivable, net     (16,579 )   (2,618 )
    Contract revenues in excess of billings     (4,787 )   (2,900 )
    Inventories     920     (2,525 )
    Prepaid expenses and other current assets     (450 )   402  
    Accounts payable and accrued expenses     9,161     2,236  
    Billings in excess of contract revenues     2,425     1,854  
   
 
 
      Net cash flows from operating activities     1,805     5,766  
 
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment     (7,021 )   (6,683 )
Dispositions of property and equipment     261     189  
Distributions from and investments in joint ventures, net     (84 )   2,732  
Distributions to minority interests         (1,730 )
   
 
 
      Net cash flows from investing activities     (6,844 )   (5,492 )
 
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Repayments of long-term debt     (2,500 )    
Borrowings (repayments) of revolving loans, net     6,500      
Repayment on notes receivable from stockholders     24      
   
 
 
      Net cash flows from financing activities     4,024      
Net change in cash and equivalents     (1,015 )   274  
Cash and equivalents at beginning of period     1,533     758  
   
 
 
Cash and equivalents at end of period   $ 518   $ 1,032  
       
 
 
Supplemental Cash Flow Information              
  Cash paid for interest   $ 8,729   $ 8,695  
       
 
 
  Cash paid for taxes   $ 8,478   $ 1,261  
       
 
 

See notes to unaudited condensed consolidated financial statements.

4


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
(in thousands)

1.  Basis of presentation

    The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, these financial statements do not include all the information in the notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations and cash flows as of and for the dates presented. The unaudited condensed consolidated financial statements and notes herein should be read in conjunction with the audited consolidated financial statements of Great Lakes Dredge & Dock Corporation and Subsidiaries (the Company) and the notes thereto, included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 1999.

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

2.  Allocation of equipment cost

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

3.  Fair value of financial instruments

    The carrying value of financial instruments included in current assets and current liabilities approximates fair values due to the short-term maturities of these instruments. The carrying value of long-term bank debt is a reasonable estimate of its fair value as interest rates are variable, based on the prevailing market rates. The fair value of the Company's $115,000 long-term subordinated notes was $115,431 and $120,175 at June 30, 2000 and December 31, 1999, respectively, based on quoted market prices. The Company is contingently liable under letters of credit and other financial guarantees. It is not practicable to estimate the fair value of these financial instruments; however, the Company does not expect any material losses to result from these financial instruments since performance is not likely to be required.

    The Company uses derivative instruments to manage commodity price and foreign currency exchange risks. Such instruments are not used for trading purposes. Gains and losses on these hedges are deferred and are recognized in income as part of the related transaction. In June 1999, the Company entered into two foreign exchange forward contracts with a notional amount of $4,293 to hedge payments related to its foreign tax liabilities; at June 30, 2000, one contract was outstanding with a notional amount of $2,165. At June 30, 2000 and December 31, 1999, the unrealized loss on the outstanding foreign currency contracts was estimated to be $233 and $189, respectively, based on quoted market prices.

    In May 1999, the Company entered into an arrangement to hedge the price of diesel fuel purchase requirements in its backlog covering the period from May 1999 to September 2000. The Company entered into an additional contract in March 2000 to hedge the price of additional diesel fuel purchase requirements in its backlog covering the period from April 2000 to December 2000. At June 30, 2000 and

5


December 31, 1999, the unrealized gain on these contracts was estimated to be $768 and $540, respectively, based on quoted market prices.

4.  Accounts receivable

    Accounts receivable at June 30, 2000 and December 31, 1999 are as follows:

 
  June 30,
2000

  December 31,
1999

 
Completed contracts   $ 10,066   $ 5,317  
Contracts in progress     37,894     25,213  
Retainage     2,865     3,716  
   
 
 
      50,825     34,246  
Allowance for doubtful accounts     (854 )   (854 )
   
 
 
    $ 49,971   $ 33,392  
     
 
 

5.  Contracts in progress

    The components of contracts in progress at June 30, 2000 and December 31, 1999 are as follows:

 
  June 30,
2000

  December 31,
1999

 
Costs and earnings in excess of billings:              
  Costs and earnings for contracts in progress   $ 273,110   $ 230,014  
  Prepaid contract costs     (691 )   (1,170 )
  Amounts billed     (247,842 )   (209,978 )
   
 
 
Costs and earnings in excess of billings for contracts in progress     24,577     18,866  
Costs and earnings in excess of billings for completed contracts     746     1,670  
   
 
 
    $ 25,323   $ 20,536  
       
 
 
Billings in excess of costs and earnings:              
  Amounts billed   $ (110,187 ) $ (64,085 )
  Costs and earnings for contracts in progress     95,076     51,399  
   
 
 
    $ (15,111 ) $ (12,686 )
       
 
 

    The Company received advanced payments related to a long-term foreign contract that are considered billings in excess of costs and earnings. These amounts will be earned as the work is performed over the duration of the contract, which is expected to be approximately four years. The amounts of $2,708 and $4,138 related to contract performance anticipated to be beyond one year are included in other long-term liabilities at June 30, 2000 and December 31, 1999, respectively.

6


6.  Investments in joint ventures

    The Company has a 50% ownership interest in Amboy Aggregates (Amboy), whose primary business is the dredge mining and sale of fine aggregate. The Company's share of earnings in this joint venture is included in income as earned using the equity method. The Company also has a 20% ownership interest in Riovia S.A. (Riovia), a venture whose sole business is the performance of a dredging contract in Argentina and Uruguay. The Company accounts for its investment in Riovia at cost.

    The following presents summarized income statement information for Amboy:

 
  Three Months Ended
June 30,

  Six Months
Ended
June 30,

 
 
  2000
  1999
  2000
  1999
 
Revenues   $ 4,483   $ 4,376   $ 6,872   $ 6,850  
Costs and expenses     (4,353 )   (4,361 )   (7,135 )   (7,526 )
   
 
 
 
 
  Net income (loss)   $ 130   $ 15   $ (263 ) $ (676 )
       
 
 
 
 

    Amboy has a mortgage loan with a bank, which contains certain restrictive covenants, including limitations on the amount of distributions to its joint venture partners. The Company has guaranteed 50% of the outstanding mortgage principal and accrued interest, which totaled $3,552 at June 30, 2000.

7.  Accrued expenses

    Accrued expenses at June 30, 2000 and December 31, 1999 are as follows:

 
  June 30,
2000

  December 31,
1999

Foreign income taxes   $ 5,628   $ 6,575
Interest     5,226     5,276
Insurance     4,058     4,228
Fixed equipment costs     3,736    
Payroll and employee benefits     3,335     6,469
U.S. income and other taxes     1,732     4,591
Other     915     1,319
   
 
    $ 24,630   $ 28,458
     
 

7


8.  Segment information

    The Company and its subsidiaries operate in one reportable segment of providing dredging services, which includes three primary types of work:capital, maintenance and beach nourishment. Revenues by type of work for the three and six-month periods ended June 30, 2000 and 1999 are as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2000
  1999
  2000
  1999
Capital   $ 66,009   $ 44,202   $ 122,139   $ 80,403
Maintenance     16,148     19,502     40,780     44,901
Beach nourishment     3,317     14,237     11,451     24,956
   
 
 
 
    $ 85,474   $ 77,941   $ 174,370   $ 150,260
     
 
 
 

9.  Commitments and contingencies

    In November 1999, the Company entered into a construction agency agreement to manage the construction of a 5,000 cubic meter hopper dredge. The dredge is expected to cost approximately $50 million and be delivered by the end of 2001. The Company has indemnified the owner up to 85% of the costs during construction and has entered into a long-term operating lease to operate the dredge upon completion.

    At June 30, 2000, the Company is contingently liable, in the normal course of business, for $14,586 in letters of credit related primarily to contract performance guarantees.

    As is customary with negotiated contracts with the federal government, the government has the right to audit the books and records of the Company to ensure compliance with such contracts and applicable federal laws. The government has the ability to seek a price adjustment based on the results of such audit. Any such audits have not had and are not expected to have a material impact on the financial position or operations of the Company.

    In the normal course of business, the Company is a defendant in various legal proceedings. Resolution of these claims is not expected to have a material impact on the financial position or operations of the Company.

10.  Supplemental condensed consolidating financial information

    Included in the Company's long-term debt is $115,000 of 111/4% senior subordinated notes which will mature on August 15,2008. The payment obligations of the Company under the senior subordinated notes are guaranteed by certain of the Company's wholly owned domestic subsidiaries ("Subsidiary Guarantors"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Subsidiary Guarantors are not presented because the Company's management has determined that they would not be material to investors. The following supplemental financial information sets forth, on a combined basis, the balance sheets, statements of operations and statements of cash flows for the Subsidiary Guarantors, the Company's non-guarantor subsidiaries and for the Company (GLD Corporation).

8


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
(in thousands)

10.  Supplemental condensed consolidating financial information (Continued)

Condensed Consolidating Balance Sheet at June 30, 2000

 
  Guarantor
Subsidiaries

  Other
Subsidiaries

  GLD
Corporation

  Eliminations
  Consolidated
Totals

 
 
ASSETS
 
 
Current assets:                                
  Cash and equivalents   $ (59 ) $ 577   $   $   $ 518  
  Accounts receivable, net     48,569     1,402             49,971  
  Receivables from affiliates     5,848     6,672         (12,520 )    
  Current portion of net investment in direct financing leases         3,328     1,746     (5,074 )    
  Contract revenues in excess of billings     24,895     428             25,323  
  Inventories     9,762     3,945             13,707  
  Prepaid expenses and other current assets     11,127     484     799     (101 )   12,309  
   
 
 
 
 
 
    Total current assets     100,142     16,836     2,545     (17,695 )   101,828  
Property and equipment, net     76,012     16,752     44,122         136,886  
Net investment in direct financing leases         2,840     2,598     (5,438 )    
Investments in subsidiaries     14,021         128,910     (142,931 )    
Notes receivable from affiliate     27,078     172         (27,250 )    
Inventories     8,925                 8,925  
Investments in joint ventures     7,059                 7,059  
Other assets     1,710         4,032         5,742  
   
 
 
 
 
 
    $ 234,947   $ 36,600   $ 182,207   $ (193,314 ) $ 260,440  
       
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
 
Current liabilities:                                
  Accounts payable   $ 35,814   $ 2,393         9   $ 38,216  
  Payables to affiliates     7,332     4,461     727     (12,520 )    
  Accrued expenses     13,797     1,265     9,669     (101 )   24,630  
  Current portion of obligations under capital leases         5,074         (5,074 )    
  Billings in excess of contract revenues     12,382     21             12,403  
  Current maturities of long-term debt     200         8,000         8,200  
   
 
 
 
 
 
    Total current liabilities     69,525     13,214     18,396     (17,686 )   83,449  
Long-term debt             155,000         155,000  
Obligations under capital leases         5,438         (5,438 )    
Notes payable to affiliates             27,250     (27,250 )    
Deferred income taxes     26,929     1,859     14,417         43,205  
Foreign income taxes             1,525         1,525  
Other     7,798     739     1,355         9,892  
   
 
 
 
 
 
    Total liabilities     104,252     21,250     217,943     (50,374 )   293,071  
Minority interests                 3,105     3,105  
Stockholders' equity (deficit)     130,695     15,350     (35,736 )   (146,045 )   (35,736 )
   
 
 
 
 
 
    $ 234,947   $ 36,600   $ 182,207   $ (193,314 ) $ 260,440  
       
 
 
 
 
 

9


Condensed Consolidating Balance Sheet at December 31, 1999

 
  Guarantor
Subsidiaries

  Other
Subsidiaries

  GLD
Corporation

  Eliminations
  Consolidated
Totals

 
 
ASSETS
 
 
Current assets:                                
  Cash and equivalents   $ 284   $ 1,249   $   $   $ 1,533  
  Accounts receivable, net     29,989     3,403             33,392  
  Receivables from affiliates     5,313     6,087         (11,400 )    
  Current portion of net investment in direct financing leases         5,168     2,275     (7,443 )    
  Contract revenues in excess of billings     19,400     1,136             20,536  
  Inventories     10,797     3,917             14,714  
  Prepaid expenses and other current assets     11,084     403     797     (316 )   11,968  
   
 
 
 
 
 
    Total current assets     76,867     21,363     3,072     (19,159 )   82,143  
Property and equipment, net     75,411     16,373     45,099         136,883  
Net investment in direct financing leases         3,660     3,491     (7,151 )    
Investments in subsidiaries     13,036         119,708     (132,744 )    
Notes receivable from affiliates     20,334     516         (20,850 )    
Inventories     8,838                 8,838  
Investments in joint ventures     7,101                 7,101  
Other assets     1,828         4,601         6,429  
   
 
 
 
 
 
    $ 203,415   $ 41,912   $ 175,971   $ (179,904 ) $ 241,394  
       
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
 
Current liabilities:                                
  Accounts payable   $ 22,430   $ 2,787   $   $ 10   $ 25,227  
  Payables to affiliates     4,053     4,916     2,431     (11,400 )    
  Accrued expenses     12,240     1,327     14,891         28,458  
  Current portion of obligations under capital leases         7,443         (7,443 )    
  Billings in excess of contract revenues     6,571     1,977             8,548  
  Current maturities of long-term debt     200         6,826     (326 )   6,700  
       
 
 
 
 
 
    Total current liabilities     45,494     18,450     24,148     (19,159 )   68,933  
Long-term debt             152,500         152,500  
Obligations under capital leases         7,151         (7,151 )    
Notes payable to affiliates             20,850     (20,850 )    
Deferred income taxes     27,109     1,964     15,213         44,286  
Foreign income taxes             1,525         1,525  
Other     9,133     909     1,290         11,332  
       
 
 
 
 
 
    Total liabilities     81,736     28,474     215,526     (47,160 )   278,576  
Minority interests                 2,373     2,373  
Stockholders' equity (deficit)     121,679     13,438     (39,555 )   (135,117 )   (39,555 )
   
 
 
 
 
 
    $ 203,415   $ 41,912   $ 175,971   $ (179,904 ) $ 241,394  
       
 
 
 
 
 

10


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
(in thousands)

10.  Supplemental condensed consolidating financial information (Continued)

Condensed Consolidating Statement of Income for the three months ended June 30, 2000

 
  Guarantor
Subsidiaries

  Other
Subsidiaries

  GLD
Corporation

  Eliminations
  Consolidated
Totals

 
Contract revenues   $ 88,802   $ 6,459   $   $ (9,787 ) $ 85,474  
Costs of contract revenues     (77,815 )   (5,221 )   (86 )   9,787     (73,335 )
   
 
 
 
 
 
  Gross profit     10,987     1,238     (86 )       12,139  
General and administrative expenses     (4,598 )   (811 )   106         (5,303 )
   
 
 
 
 
 
  Operating income     6,389     427     20         6,836  
Interest, net     (359 )   (140 )   (4,122 )       (4,621 )
Equity in earnings of subsidiaries     586         3,602     (4,188 )    
Equity in earnings of joint ventures     68                 68  
   
 
 
 
 
 
  Income before income taxes and minority interests     6,684     287     (500 )   (4,188 )   2,283  
Income tax (expense) benefit     (2,508 )   (247 )   1,744         (1,011 )
Minority interests                 (28 )   (28 )
   
 
 
 
 
 
  Net income   $ 4,176   $ 40   $ 1,244   $ (4,216 ) $ 1,244  
       
 
 
 
 
 

Condensed Consolidating Statement of Income for the three months ended June 30, 1999

 
  Guarantor
Subsidiaries

  Other
Subsidiaries

  GLD
Corporation

  Eliminations
  Consolidated
Totals

 
Contract revenues   $ 64,132   $ 13,809   $   $   $ 77,941  
Costs of contract revenues     (50,351 )   (13,240 )   (288 )       (63,879 )
   
 
 
 
 
 
  Gross profit     13,781     569     (288 )       14,062  
General and administrative expenses     (3,522 )   (1,276 )   (23 )       (4,821 )
   
 
 
 
 
 
  Operating income (loss)     10,259     (707 )   (311 )       9,241  
Interest, net     (38 )   (142 )   (4,411 )       (4,591 )
Equity in earnings (loss) of subsidiaries     (680 )       6,139     (5,459 )    
Equity in earnings of joint ventures     9                 9  
   
 
 
 
 
 
  Income (loss) before income taxes and minority interests     9,550     (849 )   1,417     (5,459 )   4,659  
Income tax (expense) benefit     (3,396 )   (221 )   1,100         (2,517 )
Minority interests                 375     375  
   
 
 
 
 
 
  Net income (loss)   $ 6,154   $ (1,070 ) $ 2,517   $ (5,084 ) $ 2,517  
       
 
 
 
 
 

11


Condensed Consolidating Statement of Income for the six months ended June 30, 2000

 
  Guarantor
Subsidiaries

  Other
Subsidiaries

  GLD
Corporation

  Eliminations
  Consolidated
Totals

 
Contract revenues   $ 169,411   $ 20,409   $   $ (15,450 ) $ 174,370  
Costs of contract revenues     (145,749 )   (15,666 )   (305 )   15,450     (146,270 )
   
 
 
 
 
 
  Gross profit     23,662     4,743     (305 )       28,100  
General and administrative expenses     (8,864 )   (1,782 )           (10,646 )
   
 
 
 
 
 
  Operating income (loss)     14,798     2,961     (305 )       17,454  
Interest, net     (302 )   (117 )   (8,670 )       (9,089 )
Equity in earnings of subsidiaries     2,396         9,148     (11,544 )    
Equity in earnings (loss) of joint ventures     (126 )               (126 )
   
 
 
 
 
 
  Income before income taxes and minority interests     16,766     2,844     173     (11,544 )   8,239  
Income tax (expense) benefit     (6,763 )   (571 )   3,622         (3,712 )
Minority interests                 (732 )   (732 )
   
 
 
 
 
 
  Net income   $ 10,003   $ 2,273   $ 3,795   $ (12,276 ) $ 3,795  
       
 
 
 
 
 

Condensed Consolidating Statement of Income for the six months ended June 30, 1999

 
  Guarantor
Subsidiaries

  Other
Subsidiaries

  GLD
Corporation

  Eliminations
  Consolidated
Totals

 
Contract revenues   $ 127,449   $ 23,578   $   $ (767 ) $ 150,260  
Costs of contract revenues     (101,514 )   (22,059 )   (178 )   767     (122,984 )
   
 
 
 
 
 
  Gross profit     25,935     1,519     (178 )       27,276  
General and administrative expenses     (7,092 )   (2,589 )   (79 )       (9,760 )
   
 
 
 
 
 
  Operating income (loss)     18,843     (1,070 )   (257 )       17,516  
Interest, net     (145 )   (144 )   (8,665 )       (8,954 )
Equity in earnings of subsidiaries     (1,243 )       11,191     (9,948 )    
Equity in earnings (loss) of joint ventures     (315 )               (315 )
   
 
 
 
 
 
  Income (loss) before income taxes and minority interests     17,140     (1,214 )   2,269     (9,948 )   8,247  
Income tax (expense) benefit     (6,084 )   (441 )   2,490         (4,035 )
Minority interests                 547     547  
   
 
 
 
 
 
  Net income (loss)   $ 11,056   $ (1,655 ) $ 4,759   $ (9,401 ) $ 4,759  
       
 
 
 
 
 

12


GREAT LAKES DREDGE & DOCK CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
(in thousands)

10.  Supplemental condensed consolidating financial information (Continued)

Condensed Consolidating Cash Flows for the six months ended June 30, 2000

 
  Guarantor
Subsidiaries

  Other
Subsidiaries

  GLD
Corporation

  Eliminations
  Consolidated
Totals

 
Operating Activities                                
Net income   $ 10,003   $ 2,273   $ 3,795   $ (12,276 ) $ 3,795  
Adjustments to reconcile net income to net cash flows from operating activities:                                
  Depreciation     3,360     1,642     1,371         6,373  
  Earnings of subsidiaries and joint
ventures
    (2,270 )       (9,148 )   11,544     126  
  Minority interests                 732     732  
  Deferred income taxes     (71 )   (105 )   (796 )       (972 )
  Loss on dispositions of property and equipment     97         287         384  
  Other, net     (1,097 )   (170 )   1,944         677  
  Changes in assets and liabilities:                            
    Accounts receivable     (18,580 )   2,001             (16,579 )
    Contract revenues in excess of billings     (5,495 )   708             (4,787 )
    Inventories     948     (28 )           920  
    Prepaid expenses and other current assets     (43 )   (81 )   (326 )       (450 )
    Accounts payable and accrued
expenses
    14,941     (457 )   (5,323 )       9,161  
    Billings in excess of contract revenues     4,381     (1,956 )           2,425  
   
 
 
 
 
 
  Net cash flows from operating activities     6,174     3,827     (8,196 )       1,805  
 
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment     (5,000 )   (2,021 )           (7,021 )
Dispositions of property and equipment     261                 261  
Distributions from and investments in joint ventures, net     (84 )               (84 )
Principal payments (receipts) on direct financing leases         2,660     (2,660 )        
Payments (receipts) on note with affiliate         344     (344 )        
   
 
 
 
 
 
  Net cash flows from investing activities     (4,823 )   983     (3,004 )       (6,844 )
 
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Repayments of long-term debt             (2,500 )       (2,500 )
Borrowing (repayments) of revolving loans, net             6,500         6,500  
Principal receipts (payments) on capital leases     2,660     (4,082 )   1,422          
Net change in accounts with affiliates     (4,714 )   (1,040 )   5,754          
Repayment on notes receivable from stockholders             24         24  
Dividends     1,440     (1,800 )         360      
Contributions     (1,080 )   1,440           (360 )    
   
 
 
 
 
 
  Net cash flows from financing activities     (1,694 )   (5,482 )   11,200         4,024  
   
 
 
 
 
 
  Net change in cash and equivalents     (343 )   (672 )           (1,015 )
  Cash and equivalents at beginning of
year
    284     1,249             1,533  
   
 
 
 
 
 
  Cash and equivalents at end of year   $ (59 ) $ 577   $   $   $ 518  
       
 
 
 
 
 

13


Condensed Consolidating Statement of Cash Flows for the six months ended June 30, 1999

 
  Guarantor
Subsidiaries

  Other
Subsidiaries

  GLD
Corporation

  Eliminations
  Consolidated
Totals

 
Operating Activities                                
Net income   $ 11,056   $ (1,655 ) $ 4,759   $ (9,401 ) $ 4,759  
Adjustments to reconcile net income to net cash flows from operating activities:                                
  Depreciation     4,076     1,578     203         5,857  
  Earnings of subsidiaries and joint ventures     1,558         (11,191 )   9,948     315  
  Minority interests                 (547 )   (547 )
  Deferred income taxes     (777 )   (172 )   (465 )       (1,414 )
  Gain (loss) on dispositions of property and equipment     (188 )   94             (94 )
  Other, net     476     (8 )   (27 )       441  
  Changes in assets and liabilities:                                
    Accounts receivable     780     (3,398 )           (2,618 )
    Contract revenues in excess of
billings
    (4,142 )   1,242             (2,900 )
    Inventories     (2,557 )   32             (2,525 )
    Prepaid expenses and other current assets     (1,426 )   754     1,074         402  
    Accounts payable and accrued expenses     (446 )   (245 )   2,927         2,236  
    Billings in excess of contract revenues     1,883     (29 )           1,854  
   
 
 
 
 
 
  Net cash flows from operating activities     10,293     (1,807 )   (2,720 )       5,766  
 
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment     (5,103 )   (1,580 )           (6,683 )
Dispositions of property and equipment     189                 189  
Distributions from joint ventures     2,732                 2,732  
Distributions to minority interests                 (1,730 )   (1,730 )
Principal payments (receipts) on direct financing leases         2,296     (2,296 )        
Payments (receipts) on note with affiliate         345     (345 )        
   
 
 
 
 
 
  Net cash flows from investing activities     (2,182 )   1,061     (2,641 )   (1,730 )   (5,492 )
 
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal receipts (payments) on capital leases         (3,872 )   3,872          
Net change in accounts with affiliates     (13,310 )   11,821     1,489          
Dividends     5,670     (7,400 )       1,730      
   
 
 
 
 
 
  Net cash flows from financing activities     (7,640 )   549     5,361     1,730      
   
 
 
 
 
 
  Net increase (decrease) in cash and equivalents     471     (197 )           274  
  Cash and equivalents at beginning of period     490     268             758  
   
 
 
 
 
 
  Cash and equivalents at end of period   $ 961   $ 71   $   $   $ 1,032  
       
 
 
 
 
 

14


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

Statement Under the Private Securities Litigation Reform Act

    Certain information in this quarterly report on Form 10-Q, including but not limited to the Management's Discussion and Analysis of Financial Condition and Results of Operations, may constitute forward-looking statements as such term is defined in Section 27A of the Securities Exchange Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934. Certain forward-looking statements can be identified by the use of forward-looking terminology such as, "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "anticipates," or "hopeful," or the negative thereof or other comparable terminology, or by discussions of strategy, plans or intentions. Forward-looking statements involve risks and uncertainties, including sales initiatives and those described in the Risk Factors section of Item 1 of the Company's Form S-4 Registration Statement (Registration No. 333-64687), which could cause actual results to be materially different than those in the forward-looking statements, which speak only as of the date hereof. The Company assumes no obligation to update such information.

General

    The Company is the largest provider of dredging services in the United States. Dredging generally involves the enhancement or preservation of navigability of waterways or the protection of shorelines through the removal or replenishment of soil, sand or rock. The U.S. dredging market consists of three primary types of work: Capital, Maintenance (including controlled disposal dredging) and Beach Nourishment, in which the Company experienced a combined U.S. market share of the projects on which it bids ("bid market") of 44% in 1999. In addition, the Company has continued its role as the only U.S. dredging contractor with significant international operations, which averaged 17% of its contract revenues over the last three years.

    Most dredging contracts are obtained through competitive bidding on terms specified by the party inviting the bid. The nature of the specified services dictates the types of equipment, material and labor involved, all of which affect the cost of performing the contract and the price that dredging contractors will bid.

    Substantially all of the Company's contracts for dredging services are fixed-price contracts, which provide for remeasurement based on actual quantities dredged. The Company recognizes contract revenues under the percentage-of-completion method, based on the Company's engineering estimates of the physical percentage completed of each project. Costs of contract revenues are adjusted to reflect the gross profit percentage expected to be achieved upon ultimate completion of each project. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Claims for additional compensation due the Company are not recognized in contract revenues until such claims are settled. Billings on contracts are generally submitted after verification with the customers of physical quantities completed and may not match the timing of revenue recognition. The difference between amounts billed and recognized as revenue is reflected in the balance sheet as either contract revenues in excess of billings or billings in excess of contract revenues. Significant expenditures incurred incidental to major contracts are deferred and recognized as costs of contracts based on contract performance over the duration of the related project. These expenditures are reported as prepaid expenses.

    The components of costs of contract revenues are labor, equipment (including depreciation, insurance, fuel, maintenance and supplies), subcontracts, rentals, lease expense and project overhead. Hourly labor is generally hired on a project basis and laid-off upon completion of the project. Costs of contract revenues vary significantly depending on the type and location of work performed and assets utilized. Generally, Capital projects have the lowest costs of contract revenues as a percent of contract revenues and Beach Nourishment have the highest.

15


    The Company's cost structure includes significant fixed costs, averaging approximately 20% to 22% of total costs of contract revenues. The Company can have significant fluctuations in equipment utilization throughout the year. Accordingly, for interim reporting, the Company prepays or accrues fixed equipment costs and amortizes the expenses in proportion to revenues recognized over the year to better match revenues and expenses. Costs of contract revenues also include the net gain or loss on dispositions of property and equipment.

    In 2000, the Company's equity in earnings of joint ventures relates to the Company's 50% ownership interest in Amboy, which is accounted for using the equity method. In 1999, equity in earnings of joint ventures also included the Company's share of earnings in Riovia, a venture in which the Company made an initial investment in 1996 for the purpose of performing a dredging contract in Argentina and Uruguay. During 1999, Riovia entered into the maintenance phase of the dredging contract upon completion of the capital works portion. The Company has less involvement in the project operations going forward, and therefore, in the fourth quarter of 1999, the Company began accounting for its investment in Riovia at cost. The Company conducts certain hopper dredging activities, primarily maintenance and beach nourishment projects, through the operations of NATCO Limited Partnership ("NATCO") and North American Trailing Company ("North American"). Minority interests reflects Ballast Nedam Group N.V.'s respective 25% and 20% interest in NATCO and North American.

Results of Operations

    The following table sets forth the components of net income and EBITDA as a percentage of contract revenues for the three and six-month periods ended June 30, 2000 and 1999:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2000
  1999
  2000
  1999
 
Contract revenues   100.0 % 100.0 % 100.0 % 100.0 %
Costs of contract revenues   (85.8 ) (82.0 ) (83.9 ) (81.8 )
   
 
 
 
 
  Gross profit   14.2   18.0   16.1   18.2  
General and administrative expenses   (6.2 ) (6.2 ) (6.1 ) (6.5 )
   
 
 
 
 
  Operating income   8.0   11.8   10.0   11.7  
Interest expense, net   (5.4 ) (5.9 ) (5.2 ) (6.0 )
Equity in earnings of joint ventures   0.1     (0.1 ) (0.2 )
   
 
 
 
 
  Income before income taxes and minority interests   2.7   5.9   4.7   5.5  
Provision for income tax   (1.2 ) (3.2 ) (2.1 ) (2.7 )
Minority interests     0.5   (0.4 ) 0.4  
   
 
 
 
 
  Net income   1.5 % 3.2 % 2.2 % 3.2 %
   
 
 
 
 
EBITDA   11.8 % 15.6 % 13.7 % 15.6 %
   
 
 
 
 

    "EBITDA," as provided herein, represents earnings from continuing operations before net interest expense, income taxes and depreciation expense and excludes equity earnings of joint ventures and minority interests. EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles. The Company's EBITDA is included as it is a basis upon which the Company assesses its financial performance, and certain covenants in the Company's borrowing arrangements are tied to similar measures. EBITDA should not be considered in isolation or as an alternative to net income, cash flows from continuing operations, or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles as measures of the Company's profitability or liquidity. EBITDA as defined herein may differ from similarly titled measures presented by other companies.

16


Components of Contract Revenues

    The following table sets forth, by type of work, the Company's contract revenues for the six and three-month periods ended and backlog as of the periods indicated:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2000
  1999
  2000
  1999
Revenues (in thousands)                        
Capital—U.S.   $ 40,641   $ 36,274   $ 81,260   $ 61,433
Capital—foreign     25,368     7,928     40,879     18,970
Maintenance     16,148     19,502     40,780     44,901
Beach     3,317     14,237     11,451     24,956
   
 
 
 
    $ 85,474   $ 77,941   $ 174,370   $ 150,260
     
 
 
 
 
  June 30,
 
  2000
  1999
Backlog (in thousands)            
Capital—U.S.   $ 75,254   $ 195,274
Capital—foreign     85,291     13,842
Maintenance     12,065     25,175
Beach         7,549
   
 
    $ 172,610   $ 241,840
     
 

    The Company again demonstrated strong performance during the second quarter of 2000, as a result of continuing to perform successfully on projects from the record-level 1999 year-end backlog. Additionally, the first half of 2000 benefited from favorable weather conditions in the first quarter coupled with improved equipment efficiency throughout the period. Second quarter 2000 revenues were $85.5 million, which was slightly lower than the first quarter of $88.9 million, but exceeded the 1999 second quarter revenues of $77.9 million. Revenues for the first half of 2000 were $174.4 million compared to $150.3 million for the first half of 1999. Gross profit of $12.1 million for the second quarter of 2000 was down 13.7% from the second quarter of 1999, while gross profit for the first six months of 2000 exceeded the 1999 level by 3%. Although revenues have increased in 2000, gross profit has been impacted by the higher level of revenues from foreign projects, which are traditionally performed at lower margins, and the establishment of a loss reserve in the first quarter for the Company's joint venture project in Egypt, which has experienced problems due to the existence of harder materials than contemplated by the contract estimate. This project is expected to be completed in the third quarter of 2000.

    The growth in 2000 revenues is attributable to both domestic and foreign capital dredging projects. Revenues from domestic capital projects increased for the three and six month periods of 2000 by $4.4 million and $19.8 million, respectively, over the same periods of 1999. Revenues from foreign capital projects increased significantly by $17.4 million and $21.9 million, respectively, over the same periods of 1999, due primarily to foreign projects in India and Ghana.

    Capital projects include large port deepenings and other infrastructure projects. The domestic capital dredging market has been expanding since 1998, with the announcement by the Army Corps of Engineers ("Corps") of Deep Port work to be completed through 2005, with a value in excess of $2.0 billion. Since this announcement, seventeen projects, with a total revenue value of $435.1 million, have been let for bid through the first half of 2000. The Company was the low bidder on seven of these projects, with a value of $221.1 million, representing 51% of the total let for bid. The Company's cumulative market share of deep

17


port projects let for bid over the last five years was 66%. The Company's bid market share of total U.S. capital projects (including deep port projects) was 47% in 1999.

    During this quarter, significant contract revenues from domestic capital projects included $10.5 million, $6.5 million and $6.4 million from channel deepening projects in Houston, New York, and San Juan, respectively. Additionally, foreign capital projects in Ghana, India and Egypt contributed $8.7 million, $6.2 million, and $6.8 million, respectively, to second quarter revenues.

    Maintenance projects include routine dredging of ports, rivers and channels to remove the regular build up of sediment. Revenues from maintenance projects for the three and six month periods ended June 30, 2000 decreased $3.4 million and $4.1 million, respectively, over the same periods of 1999. Maintenance revenues through the second quarter continued to be lower than 1999 levels, as a result of reduced Mississippi River dredging requirements, due to lower than normal precipitation in the Midwest.

    Beach nourishment projects include rebuilding of shoreline areas which have been damaged by storm activity or ongoing erosion. Second quarter and year to date 2000 revenues from beach projects decreased $10.9 million and $13.5 million, respectively, compared to the same periods of 1999. This continues to be the result of postponement of some key projects by the project owners, resulting in fewer projects being let for bid in 2000.

    Second quarter 2000 and year to date revenues of the Company's NATCO hopper dredging subsidiary decreased $7.4 million and $3.2 million, respectively, in comparison to 1999, due primarily to the reduction in maintenance and beach work. However, NATCO's operating margins for the first half of 2000 have increased substantially over the same 1999 period, due to changes in requirements on two Corps projects in 1999 which adversely impacted their profitability. Claims have subsequently been submitted to the Corps based on the changed conditions of these projects, and we expect to reach agreement on at least a portion of these claims in the second half of 2000.

    As mentioned previously, contract revenues from foreign operations for the three and six months ended June 30, 2000 increased $17.4 million and $21.9 million, respectively, compared to the same periods of 1999, due to the performance on key projects in Egypt; Ghana, West Africa; and Dabhol, India.

Backlog

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

    As of June 30, 2000, the Company had backlog of $172.6 million, which represents a decrease of $69.2 million, or 28.6% compared to backlog as of June 30, 1999. The decrease results from a slowdown in the domestic bidding market. The bidding market for domestic projects in the first quarter was $120 million, which compared to $202 million in the first quarter of 1999. The trend continued in the second quarter with a total domestic bid market of only $62 million versus $120 million in 1999. This has resulted from the continuing postponement of beach and deep port projects and from a decrease in maintenance work due to lower precipitation levels, primarily in the Midwest. Margin levels in backlog have also declined due to the competitive dynamics of a slowing market.

    Domestic capital projects make up $75.3 million or 43.6% of the June 30, 2000 backlog. This includes work remaining on significant deep port capital projects in San Juan, Charleston, Long Beach, Houston

18


and Los Angeles with combined remaining revenue in excess of $57.0 million. The majority of foreign capital project backlog is attributable to the projects in Ghana and India.

    Despite the recent domestic bid market slow down in the first and second quarters of this year, the legislation and funding for the deep port work announced by the Corps is up to date, so that projects deferred during the current period are still forthcoming. Subsequent to June 30, 2000, the Company bid and won two deep port projects in Wilmington with a combined revenue value of $70 million. Additionally, although a number of beach nourishment projects were postponed during the first half of the year due to administrative and funding delays, the Corps has provided an updated schedule of beach work which the Company believes will result in up to $120 million being let for bid during the second half of 2000. Subsequent to June 30, 2000, the Company bid and won a beach project in New Jersey valued at approximately $10 million.

Results of Operations

    Contract Revenues.  Contract revenues were $85.5 million in the second quarter of 2000, an increase of 9.7%, from revenues of $77.9 million in the second quarter of 1999. In the first half of 2000, revenues increased 16.0% to $174.4 million from $150.3 million in the first half of 1999. The increase in 2000 second quarter and six-month revenues continues to be due to the high volume of domestic and foreign capital dredging projects, as well as high levels of equipment utilization due to favorable weather in the first quarter and improved mechanical equipment efficiency throughout the period.

    Costs of Contract Revenues.  Costs of contract revenues for the three months ended June 30, 2000 increased $9.5 million, or 14.8%, over the three months ended June 30, 1999. For the first half of 2000, costs of contract revenues increased $23.3 million, or 18.9%, over the same period of 1999. The increase in costs of contract revenues for the 2000 periods is a result of increased revenues. As a percentage of contract revenues, costs of contract revenues were 83.9% for the first half of 2000 compared to 81.8% in the same 1999 period. Generally, contract margins continued to be strong through the first half of 2000 due to the favorable mix of higher margin domestic capital projects; however, this was offset by poor performance on the foreign joint venture project in Egypt, as well as anticipated lower margins on an increasing volume of foreign work in Ghana and India.

    Gross Profit.  Gross profit was $12.1 million for the three months ended June 30, 2000, a decrease of $1.9 million or 13.7% over the three months ended June 30, 1999. For the six months ended June 30, 2000, gross profit increased only $0.8 million or 3.0% over gross profit for the same period of 1999. The decline in the second quarter of 2000, which also impacts the year to date results, was attributable to project mix and the poor performance on the joint venture project in Egypt.

    General and Administrative Expenses.  General and administrative expenses increased $0.5 million and $0.9 million for the three and six month periods ended June 30, 2000, consistent with the overall growth in operations.

    Operating Income.  Operating income was $6.8 million for the three months ended June 30, 2000, a decrease of $2.4 million compared to the three months ended June 30, 1999. For the first half of 2000, operating income remained relatively consistent when compared to the first half of 1999, which was primarily a result of the project mix, with an increasing volume of foreign work with lower margins.

    EBITDA.  EBITDA decreased $2.1 million or 17.0% to $10.1 million for the three months ended June 30, 2000 from $12.2 million for the three months ended June 30, 1999. EBITDA for the six months ended June 30, 2000 was $23.8 million, an increase of $0.5 million over the same period of 1999. The decrease in the second quarter was due to the increased volume of lower margin foreign work performed during the period.

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    Interest Expense, Net.  Net interest expense remained consistent for both the three and six month periods ended June 30, 2000 compared to the same periods for 1999. The Company has reduced senior debt to $48.0 million at June 30, 2000 from $55.0 million at June 30, 1999; however, this has been offset by increasing interest rates, resulting in similar levels of interest expense for the periods.

    Equity in Earnings (Loss) of Joint Ventures.  Equity in earnings of joint ventures was a loss of $0.1 million and $0.3 million for the six months ended June 30, 2000 and 1999, respectively. The loss in both years is attributable to a seasonal reduction in demand for Amboy's products.

    Income Tax Expense.  Income tax expense for the three and six month periods ended June 30, 2000 decreased $1.5 million and $0.3 million, respectively, due to decreased earnings for the periods. The effective tax rate for the first half of 2000 decreased to 45.0% compared to 48.9% for the first half of 1999, which was primarily a result of the mix and timing of foreign activity in relation to domestic activity.

    Minority Interests.  For the three months ended June 30, 2000, income attributable to minority interests was approximately break-even, compared to a loss of $0.4 million for the three months ended June 30, 1999. For the six months ended June 30, 2000, earnings attributable to minority interests was $0.7 million compared to a loss of $0.5 million for the same 1999 period. The increase in the 2000 periods was due to increased earnings from the NATCO hopper dredging operations, as compared to the same periods of 1999.

    Net Income.  Net income was $1.2 million for the three months ended June 30, 2000 compared to $2.5 million for the three months ended June 30, 1999, a decrease of 50.6%.For the first half of 2000, net income was $3.8 million, compared to $4.8 million for the first half of 1999. The 2000 decrease reflects the reduced margins resulting from the mix of projects and the poor performance on the Egypt project.

Liquidity and Capital Resources

    The Company's primary sources of liquidity are cash flows from operations and borrowings under the revolving line of credit with the Company's senior lenders. The Company's primary uses of cash are funding working capital, capital expenditures and debt service.

    The Company generated net cash flows from operating activities for the six months ended June 30, 2000 and 1999 of $1.8 million and $5.8 million, respectively. The reduction in cash flows from operating activities for the first half of 2000 was due to an increase in working capital related to the high level of operating activity, along with significant short-term increases in accounts receivable and contract revenues in excess of billings resulting from certain foreign projects.

    The Company's net cash used in investing activities for the six months ended June 30, 2000 and 1999, totaled $6.8 million and $5.5 million, respectively. The use of cash for investing activities generally relates to capital expenditures. In the first half of 1999, capital expenditures were offset by distributions of $1.9 million received from Riovia and a distribution of earnings from Amboy of $0.8 million. Additionally, funds were used in 1999 to make distributions of $1.7 million to minority interests related to 1998 earnings.In the first quarter of 2000, a distribution of $0.4 million was due to the minority interests, relating to the 1999 earnings of North American. However, this distribution was retained and reinvested in NATCO; therefore, no cash has been paid out for distributions to minority interests in 2000.

    The Company generated net cash flows from financing activities for the six months ended June 30, 2000 of $4.0 million, due primarily to additional net borrowings on the revolver of $6.5 million, necessary to fund the increase in working capital, offset by scheduled repayments of the term debt totaling $2.5 million.

    On July 13, 2000, the Company's backhoe dredge New York, one of 25 dredges the Company operates, suffered a fire. The fire was rapidly extinguished but is expected to disable the dredge for approximately four to six months for the procurement of parts and completion of repairs. Although the

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dredge will be out of service during this period, the damage is fully insured and the Company expects to be able to substitute alternative equipment for a portion of the dredge's scheduled work throughout the remainder of 2000. However, some portion of the dredge's scheduled work may be deferred to 2001.

    Management believes cash flows from operations and available credit will be sufficient to finance operations, planned capital expenditures and debt service requirements for the foreseeable future. The Company's ability to fund its working capital needs, planned capital expenditures, scheduled debt payments and to comply with all of the financial covenants under its debt agreements, 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.

Effect of Recently Issued Accounting Standard

    In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. SFAS 133 additionally requires changes in the fair value of derivatives be recorded in current earnings or comprehensive income based on the intended use of the derivatives. Management does not expect the adoption of SFAS 133 to have a material impact on the Company's financial position, results of operations or cash flows.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

    A portion of the Company's current operations are conducted outside of the U.S. In the first half of 2000, approximately 23.4% of contract revenues was attributable to overseas operations. It is the Company's policy to hedge foreign currency exchange risk on contracts denominated in currencies other than the U.S. dollar, if available. Forward currency exchange contracts, typically with durations of less than one year, are used to minimize the impact of foreign currency fluctuations on operations. The Company does not purchase forward exchange contracts for trading purposes. At June 30, 2000, the Company had outstanding foreign currency forward contracts with a notional value of $2.2 million, designated as a hedge of its foreign currency denominated tax liability. The Company expects that gains or losses on the foreign currency forward contracts should offset gains or losses on the underlying tax liability being hedged, such that the impact of a change in the exchange rate would be immaterial to the Company's earnings.

    A significant operating cost for the Company is diesel fuel. The Company uses fuel commodity forward contracts, typically with durations of less than one year, to reduce the impacts of changing fuel prices on operations. The Company does not purchase fuel hedges for trading purposes. At June 30, 2000, the Company had outstanding arrangements to hedge the price of a portion of its fuel purchases related to work in backlog. If the market price of fuel were to increase or decrease, the Company anticipates that the resulting gain or loss in respect of fuel purchases related to work in backlog would be offset by the fuel arrangement. Therefore, changes in the market price of fuel would not have a material impact on future earnings.

    Changes in market interest rates from December 31, 1999 did not have a significant impact on the fair value of the Company's term and revolving bank debt or fixed rate debt at June 30, 2000.

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PART II

Item 1. Legal Proceedings

The Company is not involved in any pending legal proceedings other than legal proceedings occurring in the normal course of business, which resolution of are not expected to have a material adverse effect on the financial position or results of operations of the Company.

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits
 
27.01
 
 
 
Financial Data Schedule
 
(b)
 
 
 
Reports on Form 8-K
 
 
 
 
 
No reports on Form 8-K were filed during the second quarter of 2000.
 
 
 
 
 
 

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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.

        Great Lakes Dredge & Dock Corporation
 
Date:
 
 
 
August 14, 2000
 
 
 
By: /s/ Deborah A. Wensel
 
 
 
 
   
 
   
        Deborah A. Wensel
Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
(Principal Financial and Accounting Officer and Duly Authorized Officer)

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EXHIBIT INDEX

Number

  Document Description

2.01   Plan and Agreement of Merger dated as of August 19, 1998 between the Company and Great Lakes Dredge & Dock Acquisition, Inc.(1)
3.01   Restated Certificate of Incorporation of the Company.(1)
3.02   Bylaws of the Company.(1)
4.01   Indenture dated as of August 19, 1998 among the Company, the Subsidiary Guarantors and the Bank of New York, as Trustee.(1)
4.02   Form of 111/4% Senior Subordinated Note due 2008 (included in Exhibit 4.01).(1)
10.01   Credit Agreement dated as of August 19, 1998 among the Company and the other loan parties thereto, as Borrowers, the financial institutions from time to time party thereto, as Lenders, Bank of Montreal, Chicago Branch, as Documentation Agent, Bank of America National Trust and Savings Association, as Issuing Lender and Administrative Agent and BancAmerica Robertson Stephens, as Lead Arranger.(1)
10.02   Second Amended and Restated Underwriting and Continuing Indemnity Agreement dated August 19, 1998 among the Company, certain of its Subsidiaries, Reliance Insurance Company, United Pacific Insurance Company, Reliance National Insurance Company and Reliance Surety Company.(1)
10.05   Employment Agreement between the Company and Douglas B. Mackie.(2)
10.06   Great Lakes Annual Cash Bonus Plan.(2)
10.07   Securities Purchase and Holders Agreement dated August 19, 1998 among the Company, Vectura and the Management Investors.(2)
10.08   Registration Rights Agreement dated August 19, 1998 among the Company, Vectura, and the Management Investors.(2)
10.09   Employment Agreement between the Company and Richard Lowry.(2)
10.10   Amendment No. 1 dated October 8, 1999 to the Credit Agreement.(3)
10.11   Great Lakes Non-Union Hourly Employees 401(k) Savings Plan.(3)
27.01   Financial Data Schedule (filed only electronically with the SEC).(4)

(1)
Incorporated by reference to Form S-4 Registration Statement of the Company (File No. 333-64687) filed with the Commission on September 29, 1998.

(2)
Incorporated by reference to Amendment No. 1 to Form S-4 Registration Statement of the Company (File No. 333-64687) filed with the Commission on December 14, 1998.

(3)
Incorporated by reference to the Company's Annual Report on Form 10-K for the Year Ended December 31, 1999 filed with the Commission on March 29, 2000.

(4)
Filed herewith.

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