|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
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, 2017, and in other securities filings by Great Lakes with the SEC.
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.
22
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 46% over the prior three years, including 77%, 40%, 28% and 14% 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 2018, the Company’s dredging revenues earned from contracts with federal government agencies, including the Corps as well as other federal entities were approximately 70% of dredging revenues, above the Company’s prior three year average of 64%.
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 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 accounted for 11% of total revenues in the first nine months of 2018.
The Company has two operating segments: dredging and environmental & infrastructure, which are also the Company’s two reportable segments and reporting units.
Results of operations
The following tables set forth the components of net income (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, 2018 and 2017:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Contract revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Costs of contract revenues
|
|
|
(79.4
|
)
|
|
|
(87.9
|
)
|
|
|
(84.2
|
)
|
|
|
(89.2
|
)
|
|
Gross profit
|
|
|
20.6
|
|
|
|
12.1
|
|
|
|
15.8
|
|
|
|
10.8
|
|
|
General and administrative expenses
|
|
|
8.5
|
|
|
|
10.7
|
|
|
|
9.7
|
|
|
|
10.1
|
|
|
Loss on sale of assets—net
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
0.1
|
|
|
Operating income
|
|
|
11.4
|
|
|
|
1.3
|
|
|
|
6.1
|
|
|
|
0.6
|
|
|
Interest expense—net
|
|
|
(3.9
|
)
|
|
|
(3.9
|
)
|
|
|
(5.1
|
)
|
|
|
(3.6
|
)
|
|
Equity in earnings (loss) of joint ventures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.3
|
)
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.5
|
)
|
|
Other income (expense)
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
(0.6
|
)
|
|
|
(0.1
|
)
|
|
Income (loss) from continuing operations before income taxes
|
|
|
7.6
|
|
|
|
(2.8
|
)
|
|
|
0.4
|
|
|
|
(3.9
|
)
|
|
Income tax (provision) benefit
|
|
|
(1.9
|
)
|
|
|
0.8
|
|
|
|
(0.1
|
)
|
|
|
1.5
|
|
|
Income (loss) from continuing operations
|
|
|
5.7
|
|
|
|
(2.0
|
)
|
|
|
0.3
|
|
|
|
(2.4
|
)
|
|
Loss from discontinued operations, net of income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2.5
|
)
|
|
Net income (loss)
|
|
|
5.7
|
|
|
|
(2.0
|
)
|
|
|
0.3
|
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA from continuing operations
|
|
|
17.6
|
%
|
|
|
8.0
|
%
|
|
|
13.8
|
%
|
|
|
7.8
|
%
|
23
Adjusted EBITDA from continuing operations, as provided herein, represents net income (loss), adjusted for net interest expense, income taxes, depreciation and amortization expense, debt ext
inguishment, 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 prin
ciples 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 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 and investors to r
eadily 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 d
etermining 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 ind
icator 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 inabilit
y 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 s
ignificant 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 reaso
ns, 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 (lo
ss):
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,702
|
|
|
$
|
(3,228
|
)
|
|
$
|
1,407
|
|
|
$
|
(24,723
|
)
|
|
Loss from discontinued operations, net of income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,697
|
)
|
|
Income (loss) from continuing operations
|
|
|
11,702
|
|
|
|
(3,228
|
)
|
|
|
1,407
|
|
|
|
(12,026
|
)
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense—net
|
|
|
8,062
|
|
|
|
6,417
|
|
|
|
25,719
|
|
|
|
18,440
|
|
|
Income tax provision (benefit)
|
|
|
3,790
|
|
|
|
(1,308
|
)
|
|
|
549
|
|
|
|
(7,555
|
)
|
|
Depreciation and amortization
|
|
|
12,309
|
|
|
|
11,206
|
|
|
|
41,290
|
|
|
|
38,707
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,330
|
|
|
Adjusted EBITDA from continuing operations
|
|
$
|
35,863
|
|
|
$
|
13,087
|
|
|
$
|
68,965
|
|
|
$
|
39,896
|
|
The following table sets forth, by segment and type of work, the Company’s contract revenues for each of the periods indicated:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
Revenues (in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Dredging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital—U.S.
|
|
$
|
105,934
|
|
|
$
|
30,561
|
|
|
|
246.6
|
%
|
|
$
|
252,537
|
|
|
$
|
128,634
|
|
|
|
96.3
|
%
|
|
Capital—foreign
|
|
|
5,045
|
|
|
|
5,849
|
|
|
|
(13.7
|
)%
|
|
|
13,847
|
|
|
|
37,423
|
|
|
|
(63.0
|
)%
|
|
Coastal protection
|
|
|
42,691
|
|
|
|
40,726
|
|
|
|
4.8
|
%
|
|
|
122,673
|
|
|
|
141,365
|
|
|
|
(13.2
|
)%
|
|
Maintenance
|
|
|
11,581
|
|
|
|
42,282
|
|
|
|
(72.6
|
)%
|
|
|
38,461
|
|
|
|
98,532
|
|
|
|
(61.0
|
)%
|
|
Rivers & lakes
|
|
|
13,420
|
|
|
|
14,444
|
|
|
|
(7.1
|
)%
|
|
|
20,046
|
|
|
|
33,469
|
|
|
|
(40.1
|
)%
|
|
Total dredging revenues
|
|
|
178,671
|
|
|
|
133,862
|
|
|
|
33.5
|
%
|
|
|
447,564
|
|
|
|
439,423
|
|
|
|
1.9
|
%
|
|
Environmental & infrastructure
|
|
|
25,651
|
|
|
|
29,667
|
|
|
|
(13.5
|
)%
|
|
|
53,941
|
|
|
|
73,602
|
|
|
|
(26.7
|
)%
|
|
Intersegment revenue
|
|
|
—
|
|
|
|
(212
|
)
|
|
|
(100.0
|
)%
|
|
|
—
|
|
|
|
(2,263
|
)
|
|
|
(100.0
|
)%
|
|
Total revenues
|
|
$
|
204,322
|
|
|
$
|
163,317
|
|
|
|
25.1
|
%
|
|
$
|
501,505
|
|
|
$
|
510,762
|
|
|
|
(1.8
|
)%
|
Total revenue was $204.3 million for the three months ended September 30, 2018, up $41.0 million, or 25%, from $163.3 million for the same period in the prior year. For the nine months ended September 30, 2018, total revenue was $501.5 million, down slightly from revenue of $510.8 million for the same period in the prior year, representing a decrease of $9.3 million or 2%. For the three months ended September 30, 2018, the Company experienced an increase in domestic capital and coastal protection revenues which were partially offset by decreases in maintenance, foreign, rivers & lakes and environmental & remediation revenues when compared
24
to the prior year period. For the nine months ended September 30, 2018, the Company experienced an increase in dome
stic capital revenues offset by decreases in all other types of work within both segments when compared to the prior year periods.
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, 2018, domestic capital dredging was $105.9 million, up $75.3 million, or 246%, compared to $30.6 million for the same quarter in 2017. The increase in domestic capital dredging revenues for the quarter ended September 30, 2018 was driven by increased revenue related to the Charleston entrance channel deepening project, a channel widening project in Texas and deepening work on the Delaware River as compared to the same period in the prior year. These increases in revenue were partially offset by a greater amount of revenue earned on coastal restoration projects during the same period in the prior year. Domestic capital dredging for the nine months ended September 30, 2018 was $252.5 million compared to $128.6 million for the same period in 2017, representing an increase of $123.9 million, or 96%. For the nine months ended September 30, 2018, the higher domestic capital dredging revenues were primarily related to a greater amount of revenue earned on the Charleston entrance channel deepening project, coastal restoration projects and a channel widening project in Texas during the first nine months of 2018 as compared to the same period in the prior year. This increase was partially offset by a greater amount of revenue earned on a deepening project on the Delaware River
and an LNG project in Texas
for the nine months ended September 30, 2017. The Savannah Harbor deepening project also contributed to revenue for the nine months ended September 30, 2018.
Foreign capital projects typically involve land reclamations, channel deepening and port infrastructure development. In the third quarter of 2018, foreign capital revenue was $5.0 million, a decrease of $0.8 million, or 14%, as compared to $5.8 million in the same quarter in the prior year. Foreign capital revenue for the nine months ended September 30, 2018 was $13.8 million, a decrease of $23.6 million, or 63%, as compared to $37.4 million for the same period in the prior year. For the three and nine months ended September 30, 2018, revenue earned on two projects in Bahrain was offset by revenue earned on a project in Saudi Arabia during 2017 that was not replaced during the current year. Delays in the commencement of a large land reclamation project in Bahrain further contributed to the change in revenue for the three and nine months ended September 30, 2018 compared to the same periods of the prior year. During the first quarter of 2018, the Company substantially completed the closeout of its Brazil operations. The absence of projects in Brazil during the current year contributed to the change in revenue for the nine months ended September 30, 2018.
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, 2018 was $42.7 million, an increase of $2.0 million, or 5%, compared to $40.7 million in the prior year period. The increase in coastal protection revenue for the three months ended September 30, 2018 is mostly attributable to an increase in revenue earned from projects in New York, New Jersey and Delaware. This increase was partially offset by a decrease in revenue from projects in North Carolina, South Carolina and Virginia. Coastal protection revenue for the nine months ended September 30, 2018 was $122.7 million, down $18.7 million or 13%, from $141.4 million for the first nine months of 2017. The change in coastal protection revenue for the nine months ended September 30, 2018 was mostly attributable to prior year revenue earned on projects in New York, New Jersey, Virginia and North Carolina. This decrease was partially offset by revenue earned during the current year on large projects in Florida, Delaware and South Carolina as compared to the same period in 2017.
Maintenance dredging consists of the re-dredging of previously deepened waterways and harbors to remove silt, sand and other accumulated sediments. Due to natural sedimentation, most channels generally require maintenance dredging every one to three years, thus creating a recurring source of dredging work that is typically non-deferrable if optimal navigability is to be maintained. In addition, severe weather such as hurricanes, flooding and droughts can also cause the accumulation of sediments and drive the need for maintenance dredging. Maintenance revenue for the third quarter of 2018 was $11.6 million, down $30.7 million, or 73%, from $42.3 million in the third quarter of 2017. The decrease in maintenance revenues for the three months ended September 30, 2018 was mostly attributable to revenue earned on projects in Maryland, Delaware, Florida, Louisiana and on the West Coast in 2017 that did not repeat in 2018. Maintenance projects in Virginia, Texas and Pennsylvania contributed to revenue during the three months ended September 30, 2018. Maintenance revenue for the first nine months of 2018 was $38.5 million, a decrease of $60.0 million, or 61%, compared to $98.5 million for the comparable period in the prior year. The decrease in maintenance dredging revenues for the nine months ended September 30, 2018 was mostly attributable to a greater volume of projects worked during the same period in the prior year. Maintenance projects in Texas, Virginia, and Maryland contributed to revenue during the nine months ended September 30, 2018.
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 2018, rivers & lakes revenue was $13.4 million, a decrease of $1.0 million, or 7% from $14.4 million during the same period of 2017. Rivers & lakes revenue for the nine months ended September 30, 2018 was $20.0 million, down $13.5 million, or 40%, from $33.5 million in the first
25
nine months of 2017. The decrease in rivers & lakes revenue for
the three and nine months ended September 30, 2018 was driven by a greater amount of revenue earned on a lake project in Illinois in the prior year periods, decreased revenue from projects in Mississippi and New Jersey and a project in Florida that did not
reoccur in the current year. A river dredging project in Texas and a project in Louisiana contributed to revenue for the three and nine months ended September 30, 2018.
The environmental & infrastructure segment provides environmental and geotechnical construction as well as soil, water and sediment environmental remediation. Environmental and geotechnical construction includes the creation, repair or stabilization of environmental barriers including slurry walls, in-situ stabilization, coal combustion residuals pond cap and close, dam and levee rehabilitation, deep soil mixing 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. Environmental & infrastructure segment revenues during the third quarter of 2018 were $25.7 million, a $4.0 million, or 13%, decrease from $29.7 million for the same prior year period. For the nine months ended September 30, 2018, the environmental & infrastructure segment recorded revenues of $53.9 million, a $19.7 million, or 27%, decrease from $73.6 million for the same prior year period. Environmental & infrastructure revenue for the first nine months of 2018 included work on remediation projects in New Jersey, California, Colorado and Texas and geotechnical projects in Colorado and California. Revenue on these projects was offset by greater revenue earned in the prior year on a remediation project in Florida and a geotechnical project in California in addition to emergency geotechnical work that did not repeat during the current year period. The three and nine months ended September 30, 2017 include revenue related to service lines of the environmental & infrastructure segment’s business which did not operate during the current year periods.
Consolidated gross profit for the quarter ended September 30, 2018 was $42.1 million, up $22.3 million, or 113%, compared to $19.8 million in the same quarter of 2017. Gross profit margin for the three months ended September 30, 2018 was 20.6% compared to 12.1% in the third quarter of 2017. Gross profit for the three months ended September 30, 2018 includes $2.1 million of restructuring charges related to asset retirements. For the third quarter of 2018, the increase in gross profit was due to strong performance on domestic capital projects and improved performance on environmental & infrastructure projects. Further, greater fixed cost coverage and lower overhead within the dredging segment contributed to the increase in gross profit compared to the same period in the prior year. Consolidated gross profit for the nine months ended September 30, 2018 was $79.1 million, up $24.2 million, or 44%, compared to $54.9 million in the same period of the prior year. Gross profit margin for the nine months ended September 30, 2018 was 15.8% up from 10.7% in the first nine months of 2017. Gross profit for the nine months ended September 30, 2018 includes $6.0 million of restructuring charges related to asset retirements and the closeout of the Company’s Brazil operations. During the nine months ended September 30, 2018, the increase in gross profit was attributable to strong performance on domestic capital projects and lower plant costs, resulting from the retirement of certain underperforming and underutilized assets, when compared to the same period of the prior year. This change was partially offset by lower margins experienced in all other types of work within both segments. Further, the prior year period includes an approved change order on a project in the environmental & infrastructure segment which positively impacted gross profit for the nine months ended September 30, 2017.
During the three months ended September 30, 2018, general and administrative expenses were $17.3 million, which was in line with the same period in the prior year. During the nine months ended September 30, 2018 and 2017, general and administrative expenses were $48.4 million and $51.6 million, respectively. General and administrative expenses decreased by $3.2 million, or 6%, for the nine months ended September 30, 2018, compared to the same period in the prior year. During the quarter ended September 30, 2018, the Company experienced decreases in technical and consulting fees of $1.9 million and labor expenses of $1.5 million, resulting from restructuring savings initiatives. These decreases were partially offset by a $3.2 million increase in incentive pay as a result of improved operations as compared to the prior year period. Similar to the third quarter of 2018, the company experienced decreases in technical and consulting fees of $3.0 million and labor expenses of $3.1 million, resulting from restructuring savings initiatives, for the nine months ended September 30, 2018. These decreases during the first nine months of 2018 were partially offset by a $3.0 million increase in incentive pay when compared to the same prior year period. The nine months ended September 30, 2018 and 2017 include $0.8 million and $1.7 million, respectively, of general and administrative charges associated with restructuring.
Operating income for the third quarter of 2018 was $23.4 million, up $21.3 million compared to operating income of $2.1 million for the same quarter in 2017. The increase in operating income for the third quarter of 2018 was a result of higher gross profit compared to the same period in the prior year, as described above. This increase in operating income was partially offset by a $1.3 million change in loss on sale of assets. For the nine months ended September 30, 2018, the Company experienced operating income of $30.5 million, a change of $27.5 million, from operating income of $3.0 million in the same prior year period. The change in operating income for the third quarter of 2018 was a result of higher gross profit and lower general and administrative expenses compared to the same period in the prior year, as described above. Further, for the nine months ended September 30, 2018 and 2017, the Company incurred a loss on sale of assets of $0.2 million and $0.4 million, respectively.
For the three months ended September 30, 2018 and 2017, net interest expense was $8.1 million and $6.4 million, respectively. Net interest expense for the nine months ended September 30, 2018 was $25.7 million, up $7.3 million, or 40%, from interest expense of
26
$18.4 million for the same period in the prior
year. The increase in interest expense for the nine months ended September 30, 2018 was primarily attributable to a decrease in the amount of interest expense that was being capitalized during the construction of the Company’s dual mode articulated tug/ba
rge trailing suction hopper dredge, the
Ellis Island
, and an increase in interest expense related to the higher principal on the Company’s new senior notes as compared to the same periods in the prior year.
Income tax provision for the three months ended September 30, 2018 was $3.8 million compared to an income tax benefit of $1.3 million, for the same period in the prior year. For the nine months ended September 30, 2018 and 2017, the income tax provision was $0.5 million and a benefit of $7.6 million, respectively. The effective tax rate for the nine months ended September 30, 2018 was 28.1%, lower than the effective tax rate of 38.6% for the same period of 2017. The change in effective tax rate is attributable to the recent Tax Cuts and Jobs Act enacted in the fourth quarter of 2017.
The Company experienced net income from continuing operations of $11.7 million and a diluted income per share attributable to continuing operations of $0.18 for the three months ended September 30, 2018, compared to a net loss from continuing operations of $3.2 million and diluted loss per share attributable to continuing operations of $0.05 for the three months ended September 30, 2017. The Company experienced net income from continuing operations of $1.4 million and diluted income per share attributable to continuing operations of $0.02 for the nine months ended September 30, 2018, compared to a net loss from continuing operations of $12.0 million and a diluted loss per share attributable to continuing operations of $0.19 for the same period of 2017. The change in net income from continuing operations for the three and nine months ended September 30, 2018 was driven by an increase in operating income, as described above. Further contributing to the change for the nine months ended September 30, 2018 were a $2.3 million loss on extinguishment of debt resulting from the Company’s senior notes and a $1.5 million loss associated with the Company’s TerraSea joint venture that were incurred in the same period in the prior year, which negatively impacted net income from continuing operations. The increase in net income from continuing operations for the nine months ended September 30, 2018 was partially offset by an increase in interest expense, as described above, and a $2.0 million charge to other expense for the reversal of a currency translation adjustment related to the closeout of the Company’s Brazil operations during the current year.
Adjusted EBITDA from continuing operations (as defined on page 24) for the quarter ended September 30, 2018 was $35.9 million, up $22.8 million, or 174%, from $13.1 million in the same quarter in the prior year. The change in Adjusted EBITDA from continuing operations during the third quarter of 2018 was driven by higher gross profit, excluding depreciation. For the nine months ended September 30, 2018, Adjusted EBITDA from continuing operations was $69.0 million, up $29.1 million, or 73% compared to $39.9 million for the same prior year period. The change in Adjusted EBITDA from continuing operations during the first nine months of 2018 was attributable to higher gross profit, excluding depreciation, slightly offset by the $2.0 million charge to other expense, as described above. Further, the nine months ended September 30, 2017 included a $1.5 million loss associated with the Company’s TerraSea joint venture which negatively impacted Adjusted EBITDA from continuing operations.
Results by segment
Dredging
Dredging segment revenues for the third quarter of 2018 were $178.7 million, an increase of $44.8 million, or 33%, as compared to revenues of $133.9 million for the third quarter of 2017. Dredging revenues for the nine months ended September 30, 2018 were $447.6 million, up $8.2 million, or 2%, compared to revenues of $439.4 million for the same prior year period. For the three and nine months ended September 30, 2018, the dredging segment experienced an increase in domestic capital revenues, which was slightly offset by decreases in revenue from all other types of work. This increase in current year revenue was driven by revenue earned on the Charleston entrance channel deepening project, coastal restoration projects and a channel widening project in Texas during the three and nine months ended September 30, 2018. These positive impacts to revenue were partially offset by a greater volume of maintenance projects worked during the three and nine months ended September 30, 2017 as compared to the current year periods as well as revenue earned on a project in Saudi Arabia during the nine months ended of September 30, 2017 that did not repeat in 2018. Further, the Company earned a greater amount of revenue on a lake project in Illinois and on coastal protection projects in New York, New Jersey, Virginia and North Carolina during the first nine months of 2017 as compared to the current year period.
Dredging segment gross profit for the third quarter of 2018 was $39.6 million, an increase of $20.0 million, or 102%, from a gross profit of $19.6 million in the same period of the prior year. For the nine months ended September 30, 2018, the dredging segment gross profit was $75.8 million, up $27.2 million, or 56%, from a gross profit of $48.6 million in the same period of 2017. Dredging segment gross profit margin for the third quarter of 2018 was 22.2% compared to 14.6% for the third quarter of 2017. Further, dredging segment gross profit margin for the nine months ended September 30, 2018 increased to 16.9% from gross profit margin of 11.1% for the nine months of 2017. Gross profit for the three and nine months ended September 30, 2018 includes $2.1 million and $6.0 million, respectively, of restructuring charges related to asset retirements and the closeout of the Company’s Brazil operations. The increase in dredging segment gross profit for the three months ended September 30, 2018 was attributable to strong performance on domestic capital projects, greater fixed cost coverage and lower overhead compared to the same period in the prior year. The increase in dredging segment gross profit for the nine months ended September 30, 2018 was attributable to strong performance on
27
domestic capital projects and lower plant costs, resulting from the retirement of certain underperforming and underutilized assets, when compared to the same period of the prior year. Thi
s increase was partially offset by lower margins experienced in all other types of work within the dredging segment.
For the quarter ended September 30, 2018, the dredging segment recorded operating income of $25.1 million, up $19.3 million, or 333%, from $5.8 million for the same period of the prior year. Dredging segment operating income for the nine months ended September 30, 2018 was $38.8 million, a $29.2 million, or 304%, increase from $9.6 million in the first nine months of 2017. The change in operating income for the three and nine months ended September 30, 2018 is primarily attributable to higher gross profit, as described above. General and administrative expenses within the dredging segment declined by $0.8 million and $2.1 million, respectively, during the three and nine months ended September 30, 2018, mostly related to decreases in payroll and benefits expense, resulting from restructuring savings initiatives, slightly offset by increases in legal and professional fees compared to the same periods in 2017. The Company recorded a loss on sale of assets of $1.5 million and $0.3 million for the three and nine months ended September 30, 2018, respectively.
Environmental & infrastructure
For the quarter ended September 30, 2018, environmental & infrastructure revenues were $25.7 million, down $4.0 million, or 13%, from revenues of $29.7 million in the same quarter of the previous year. Environmental & infrastructure segment revenues for the nine months ended September 30, 2018 were $53.9 million, down $19.7 million, or 27%, from revenue of $73.6 million for the first nine months of 2017. Environmental & infrastructure revenues for the first nine months of 2018 included work on remediation projects in New Jersey, California, Colorado and Texas and geotechnical projects in Texas and California. Revenue on these projects was offset by greater revenue earned in the prior year on a remediation project in Florida and a geotechnical project in California in addition to emergency geotechnical work that did not repeat during the current year. Additionally, the three and nine months ended September 30, 2017 includes revenue related to service lines of the environmental & infrastructure segment’s business which did not operate during the current year.
Environmental & infrastructure segment gross profit for the third quarter of 2018 was $2.5 million, up $2.2 million, from gross profit of $0.3 million in the third quarter of 2017. The environmental & infrastructure segment experienced a gross profit of $3.2 million and $6.3 million for the nine months ended September 30, 2018 and 2017, respectively. Environmental & infrastructure gross profit margin was 9.9% and 1.0% for the three months ended September 30, 2018 and 2017, respectively. For the first nine months of 2018, the environmental & infrastructure segment experienced a gross profit margin of 5.9% compared to 8.5% for the same period of the prior year. The change in gross profit was driven by higher margins on projects in the third quarter of 2018 when compared to the same period in the prior year. The change in gross profit during the nine months ended September 30, 2018 was attributable to an approved change order on a project which positively impacted the environmental & infrastructure segment’s gross profit during the prior year period and lower fixed cost coverage on plant due to lower volume of work during the first nine months of 2018.
The environmental & infrastructure segment experienced an operating loss of $1.7 million for the quarter ended September 30, 2018, a $2.0 million change from an operating loss of $3.7 million for the same quarter in 2017. For the nine months ended September 30, 2018, the environmental & infrastructure segment experienced an operating loss of $8.3 million, a change of $1.7 million compared to an operating loss of $6.6 million for the same period of the prior year. The positive change in operating loss for the three months ended September 30, 2018 is mostly attributable to higher gross profit, as described above. This positive change was partially offset by an increase to general and administrative and overhead costs when compared to the same period in 2017. The change in operating loss for the nine months ended September 30, 2018 is mostly attributable to the decrease in gross profit, as described above, partially offset by a decrease in general and administrative expenses. For the nine months ended September 30, 2018, the environmental & infrastructure segment experienced decreases in payroll and benefits expenses resulting from restructuring savings initiatives and a slight decline in technical and consulting fees and legal and professional fees when compared to the same period in 2017.
28
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:
|
|
|
September 30,
|
|
|
December
31,
|
|
|
September 30,
|
|
|
Backlog (in thousands)
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
Dredging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital - U.S.
|
|
$
|
415,291
|
|
|
$
|
383,577
|
|
|
$
|
256,940
|
|
|
Capital - foreign
|
|
|
—
|
|
|
|
8,575
|
|
|
|
12,720
|
|
|
Coastal protection
|
|
|
121,672
|
|
|
|
76,460
|
|
|
|
78,670
|
|
|
Maintenance
|
|
|
41,313
|
|
|
|
23,662
|
|
|
|
54,068
|
|
|
Rivers & lakes
|
|
|
75,886
|
|
|
|
19,046
|
|
|
|
25,444
|
|
|
Dredging Backlog
|
|
|
654,162
|
|
|
|
511,320
|
|
|
|
427,843
|
|
|
Environmental & infrastructure
|
|
|
34,996
|
|
|
|
35,357
|
|
|
|
58,191
|
|
|
Total Backlog
|
|
$
|
689,158
|
|
|
$
|
546,677
|
|
|
$
|
486,034
|
|
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 and 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, 91% of the Company’s September 30, 2018 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 quarter ended September 30, 2018 was $889.3 million, a $500.8 million increase compared to the same period in the prior year. For the nine months ended September 30, 2018, the domestic dredging bid market was $1,581.5 million, an increase of $765.7 million, compared to the first nine months of 2017. Domestic capital projects awarded during the current year period include harbor deepening projects in Tampa, Jacksonville and Boston, a coastal restoration project in Mississippi, a terminal deepening project in Massachusetts, the option on the Charleston entrance channel deepening project and a channel widening project in Texas. Additional domestic projects awarded during the current period include maintenance work in Louisiana and on the West Coast, an LNG project in Texas, coastal protection projects in New York, Florida, South Carolina and North Carolina and rivers & lakes projects in Texas, Louisiana and on the Mississippi River. The bid market for the nine months ended September 30, 2018 increased significantly from the prior year due to the award of several large harbor deepening projects during the current year, as noted above. Further, a greater volume of coastal protection and rivers & lakes projects and higher dollar value maintenance projects were awarded during the nine months ending September 30, 2018 as compared to the same prior year period. For the contracts awarded during the first nine months of the current year, the Company won 65%, or $162.0 million, of the coastal protection projects, 57%, or $383.6 million, of the domestic capital projects, 10%, or $51.4 million, of the maintenance projects and 66%, or $82.2 million, of rivers & lakes projects. The Company won 43% of the overall domestic bid market for the first nine months of 2018, which is below the Company’s prior three year average of 46%. 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 $654.2 million at September 30, 2018 compared to $511.3 million of backlog at December 31, 2017. These amounts do not reflect approximately $132.0 million of domestic low bids pending formal award and additional phases (“options”) pending on projects currently in backlog at September 30, 2018. At December 31, 2017 the amount of domestic low bids and options pending award was $69.9 million.
Domestic capital dredging backlog at September 30, 2018 was $31.7 million higher than at December 31, 2017. During the first nine months of 2018, the Company was awarded harbor deepening projects in Jacksonville and Tampa totaling over $280 million, including options not yet formally awarded. Further, the Company was awarded the option on the Charleston entrance channel deepening project, a channel widening project in Texas and a variation order for deepening work on the Delaware River during the nine months ended September 30, 2018. During the first nine months of 2018, the Company completed work on multi-year projects including the Savannah Harbor deepening project and a coastal restoration project in Louisiana and continued to earn revenue on the Charleston entrance channel deepening projects, a coastal restoration project in Mississippi and an LNG project in Texas which were in backlog at December 31, 2017. Successful expansion of the Panama Canal in recent years continues to put pressure on ports on the
29
East and Gulf Coasts
to deepen and widen in anticipation of the neo-Panamax vessels. With several port expansions underway, several other
port expansions are entering new phases and several additional projects are being expedited. Deepening projects in Jacksonville and Tampa were recently awarded and the request for proposals for the Corpus Christi project has been issued. Further, projects
to deepen the Mississippi River and Port of Virginia are being expedited. The nation’s governors continue to show commitment to their respective ports through engagement and funding. Finally, Congress has also shown a commitment to ports and waterways, p
roviding record annual budgets for the Corps for port deepening and channel maintenance.
Foreign capital dredging backlog at September 30, 2018 was $8.6 million lower than at December 31, 2017. During the second quarter of 2017, the Company was the low bidder on a $68 million project in Bahrain which the Company expects to be awarded by the end of the year. During the first nine months of 2018, the Company completed work on projects in the Middle East which were in backlog at December 31, 2017. 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 several years. The Company expects the additional global opportunities to provide a continued source of future international dredging revenue.
Coastal protection dredging backlog at September 30, 2018 was $45.2 million higher than at December 31, 2017. In the first nine months of 2018, the Company was awarded coastal protection projects in Georgia, New York, Virginia, North Carolina and South Carolina totaling approximately $160 million. During the first nine months of 2018, the Company completed coastal protection projects in New Jersey, Delaware, South Carolina and Florida which were in backlog at December 31, 2017. Coastal protection and storm impacts continue to provide the major impetus for coastal project investment at federal and state levels. With continued funding available for projects in the Northeast from the Sandy supplemental appropriations, the Company expects to continue to see an increase in projects let for bid in the coastal protection market. As a result of the extreme storm systems last year involving Hurricanes Harvey, Irma, and Maria, the U.S. Senate Committee on Appropriations passed supplemental appropriations for disaster relief and recovery which includes $17.4 billion for the Corps to fund projects that will reduce the risk of future damage from flood and storm events. The Corps is beginning to provide visibility on its plans for this money, and it is currently believed that over $1 billion is expected to be added to its dredging related budget over the next few years. Most of this work is anticipated to be coastal protection related, but some funding may be provided for channel maintenance. Subsequent to the end of the quarter, Congress passed an additional $1.7 billion of supplemental appropriations for disaster relief funding as a result of Hurricane Florence.
Maintenance dredging backlog was up $17.7 million from December 31, 2017. During the first nine months of 2018, the Company was awarded maintenance projects in the South Atlantic, Florida, Maryland, New York and Texas. During the first nine months of 2018, the Company completed work on projects in Virginia, Maryland, Mississippi and Delaware which were in backlog at December 31, 2017. In March 2018, Congress approved and the President signed an omnibus spending bill through fiscal year 2018. The spending bill continues the increases in the budget for the Corps and exceeds the increase in Harbor Maintenance Trust Fund (“HMTF”) spending for maintenance dredging as required by the 2014 Water Resources and Development Act. Subsequent to the end of the third quarter of 2018, the President signed America’s Water Infrastructure Act of 2018/Water Resources Development Act (“WRDA 2018”) into law. Similar to past versions of the bill, WRDA 2018 language 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 economy. Further, WRDA 2018 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 2018 and beyond. In line with their commitment, Congress has improved spending from the HMTF by providing the Corps with record annual budgets including 91% utilization of the HMTF in FY 2018 and 95% proposed in the FY 2019 budget.
Rivers & lakes backlog at September 30, 2018 increased by $56.8 million from backlog at December 31, 2017. During the first nine months of 2018, the Company was awarded a $12 million project in Louisiana as well as a $70 million project in Texas which is the first major Houston-area flood-control project after Hurricane Harvey. For the nine months ended September 30, 2018, the Company continued to earn revenue on projects in New Jersey and Mississippi and on a lake project in Illinois which were in backlog at December 31, 2017.
Environmental & infrastructure services backlog of $35.0 million was mostly in line with backlog of $35.4 million at December 31, 2017. For the first nine months of 2018, the Company’s awards included eleven remediation projects and four geotechnical projects. During the nine months ended September 30, 2018, the Company worked and completed several of the projects awarded during the current year period. Further, the Company completed work on remediation projects in California and New Jersey which were in backlog at December 31, 2017. Environmental & infrastructure continues to hold focus on geographical expansion of geotechnical service offerings. Additionally, the Company is pursuing remediation opportunities arising from the transformation of the U.S. infrastructure, specifically related to the remediation requirements as mandated by the Environmental Protection Agency’s rule to
30
regulate the disposal of coal combustion residuals from electric utilities promulgated in June 2015. The Company has implemented an aggressive
initiative targeting project work in the water management and infrastructure sector, including embankment (dam and levee) rehabilitation, channel maintenance, wetlands and habitat restoration, reservoir construction and maintenance, and shoreline stabiliz
ation and reinforcement.
Liquidity and capital resources
The Company’s principal sources of liquidity are net cash flows provided by operating activities, borrowings under the Company’s revolving credit facility 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, 2018 and 2017 totaled $88.9 million and $23.5 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 2018 compared to the same period in the prior year was driven by a higher cash generation from improved operations. Further, the Company had a greater investment in working capital during the same period in the prior year which also contributed to the change in cash provided by operating activities for the nine months ended September 30, 2018.
The Company’s cash flows used in investing activities for the first nine months of 2018 and 2017 totaled $17.4 million and $40.2 million, respectively. Investing activities primarily relate to normal course upgrades and capital maintenance of the Company’s dredging fleet. During the first quarter of 2018, the Company received $4.5
million in cash proceeds from a sale-leaseback of a dredge. Additionally, during the first nine months of 2018, the Company received $7.7 million in proceeds from the sale of underperforming and underutilized assets identified through the Company’s strategic review. During the nine months ended September 30, 2018, the Company spent $2.3 million on the Company’s dual mode articulated tug/barge trailing suction hopper dredge, the
Ellis Island
, compared to $26.9 million in the same period in the prior year. During the third quarter of 2018, the Company bought out two leases for $14.3 million in relation to the restructuring initiative of disposing underperforming assets.
The Company’s cash flows provided by (used in) financing activities for the nine months ended September 30, 2018 and 2017 totaled $(65.8) million and $30.4 million, respectively. The decrease in cash provided by financing activities primarily relates to the Company’s net repayments on its revolving credit facility of $64.1 million during the first nine months of 2018 compared to net repayments of $14.1 million during the same period of the prior year. Further, the Company issued $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 7.375% 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 prior year period.
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, CIBC Bank USA, 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 that no default or event of default exists both before and after giving effect to such incremental commitment increase.
The Credit Agreement also provides for certain actions contemplated in the plan of restructuring with respect to the Company’s 2017 and 2018 fiscal years including allowing up to an aggregate of $20 million of expenses related to the buy-out of operating leases and allowing capital expenditures planned but not incurred by all Credit Parties in fiscal year 2017 to be carried forward to fiscal year 2018; provided that, the aggregate amount of all capital expenditures incurred by all Credit Parties in fiscal years 2017 and 2018 does
31
not exceed $135 million. Additionally, the Credit Agreement contains acknowledgments and agreements from the Agent and the required lenders with respect to certain EBITDA add-backs for fiscal years 2017 and 2018 described th
erein. Refer to Note 8, Restructuring charges,
in
the company’s financial statements.
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 Company is required to maintain this ratio if its availability under the Credit Agreement falls below $31.3 million for five consecutive days or $25.0 million for one day. 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 and 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, 2018, the Company had $30.9 million of borrowings on the revolver and $31.6 million of letters of credit outstanding, resulting in $161.3 million of availability under the Credit Agreement. The availability under the Credit Agreement is suppressed by $26.2 million as of September 30, 2018 as a result of certain additional limitations set forth in the Credit Agreement.
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, 2018, the Company had outstanding performance bonds totaling approximately $1,294.6 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 $661.0 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.
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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 recove
ries 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, Business dispositions, to the Company’s conden
sed 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, 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 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, Basis of presentation, to the Company’s December 31, 2017 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. Except as noted in Note 1, Basis of presentation, of the company’s financial statements, there have been no material changes in the Company’s critical accounting policies or estimates since December 31, 2017.