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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Cautionary note regarding forward-looking statements
Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (“SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Great Lakes Dredge & Dock Corporation and its subsidiaries (“Great Lakes” or the “Company”), or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions.
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, 2020, in Item 1A. “Risk Factors” of Great Lakes’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, in Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q 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.
General
The Company is the largest provider of dredging services in the United States. In addition, the Company has a long history of performing significant international projects. The mobility of the Company’s fleet enables the Company to move equipment in response to changes in demand for dredging services.
In the fourth quarter of 2020, the Company announced the relocation of its headquarters from Oak Brook, Illinois to Houston, Texas. The Company’s new corporate office in Houston opened in the first quarter of 2021. This relocation places the Company closer to key regional customers and new markets, especially along the Gulf Coast and the Mississippi River.
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 37% over the prior three years, including 49%, 55%, 19% and 34% 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 six months of 2021, the Company’s dredging revenues earned from contracts with federal government agencies, including the Corps as well as other federal entities such as the U.S. Coast Guard and the U.S. Navy, were approximately 74% of dredging revenues, slightly below the Company’s prior three year average of 79%.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread worldwide and to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic and on March 13, 2020 the United States declared a national emergency in response to the coronavirus outbreak. This outbreak has severely impacted global economic activity and many countries and states in the United States have reacted by instituting quarantines, mandating school and business closures and limiting travel at various times throughout the pandemic.
15
On March 28, 2020, dredging was specifically listed in the U.S. Department of Homeland Security’s “Advisory Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response” which federally designates the Company as an essential business or “critical infrastructure” company that can maintain operations during the ongoing pandemic. As mentioned above, the Company’s largest domestic dredging customer is the Corps; the Corps oversees the majority of these critical infrastructure projects and, in this capacity, has continued to follow their bid schedule and prioritize all types of dredging including port maintenance and expansion and coastal protection projects that are necessary to avoid potential storm damage during hurricane season. Despite the uncertainty surrounding COVID-19, to date, the Corps is continuing to advertise new projects. During the first half of 2021 the Company began to experience increased project costs and delays related to COVID-19; currently, all affected projects are back in operation.
Our Executive Leadership team has established a COVID-19 Command Team that meets twice each week to update contingency plans, as necessary, and address the challenges related to maintaining operations in this evolving economic environment. The Company’s primary focus has been the health and safety of its employees. The Company has implemented new paid leave policies and additional sanitary and safety measures to mitigate the risk of infection to employees.
On vessels and job sites, the Company has instituted fewer employee shift changes and increased sanitary and social distancing measures. In the first half of 2021, the Company began to experience more significant operational interruptions and direct costs related to the third wave of the COVID-19 pandemic. Several vessel crews were infected despite extensive testing and isolation protocols. Vessels were required to go to shore for crew changes and the vessels had to be disinfected before returning to work. This impacted the vessels’ scheduling and availability which led to project delays. Currently, those projects and vessels that were impacted are completed and back in operation, respectively. The Company has initiated an extensive vaccination effort of our crews and staff and the Company currently has 71% of its staff either fully vaccinated or partially vaccinated.
Since March 2020, the Company’s corporate employees have effectively transitioned to a remote working environment and have discontinued non-essential travel to follow recommended physical and social distancing guidelines in order to reduce the risk of infection. Beginning in the current quarter, the Company’s Houston employees began transitioning back to working in person at the Houston corporate headquarters. The Company is following the protocols published by the U.S. Centers for Disease Control and Prevention, the World Health Organization and state and local governments. As the Company’s employees, customers and communities are facing significant challenges, the Company cannot predict how COVID-19 will evolve or the impact it, or actions taken to contain it, will have on future results. Due to the uncertainty that surrounds this virus, the Company will be continually evaluating safety and operational contingency plans and the potential future impact that this evolving environment has on the Company’s business, financial condition and results of operations.
The Company plans to participate in the offshore wind market and in March 2021 the Company awarded a contract for the design and development of the first U.S. flagged Jones Act compliant, inclined fall-pipe vessel for subsea rock installation for wind turbine foundations. This vessel would represent a significant critical advancement in building the U.S. logistics infrastructure to support the future of the new U.S. offshore wind industry. Once the contract is fully executed, the Company expects delivery of the vessel in early 2024. As of the current quarter, the Company has begun soliciting bids in the offshore wind market.
The current administration has pushed to accelerate renewable energy developments and has set a target to install 30GW of offshore wind energy generation capacity by 2030 on the U.S. east coast. Additionally, in March, the White House announced new initiatives that will advance the administration’s goals to expand the nation’s offshore wind energy capacity in the coming decade by opening new areas of development, improving environmental permitting and increasing public financing for projects.
In July 2021, the Corps’ 2021 budget was approved by the House of Representatives at a record high proposed budget level of $8.66 billion. In this bill, the Harbor Maintenance Trust Fund (the “HMTF”) would receive $2.05 billion. This record funding is in addition to the annual cap being lifted from the HMTF in 2020 and the 2020 Water Resource Development Act (the “WRDA”). WRDA authorizes new projects and makes policy changes that will make natural infrastructure and beneficial use of dredged material more common and was included in the Consolidated Appropriations Act 2021 signed into law on December 27, 2020. This continues the trend of WRDA legislation in each session of Congress since 2014. The legislation provides access to the $9.3 billion in unspent HMTF tax collections, establishes a funds distribution process for HMTF funding and approves projects to proceed to construction.
The Company has one operating segment which is also the Company’s one reportable segment and reporting unit.
The Company’s vessels are subject to periodic dry dock inspections to verify that the vessels have been maintained in accordance with the rules of the U.S. Coast Guard and the American Bureau of Shipping (“ABS”) and that recommended repairs have been satisfactorily completed. Dry dock frequency is a statutory requirement mandated by the U.S. Coast Guard and the ABS. The Company’s vessels dry-dock every two to three years or every five years, depending on the vessel type and also on an as-needed basis for occasional unscheduled repairs.
16
Results of operations
The following tables set forth the components of net income and Adjusted EBITDA, as defined below, as a percentage of contract revenues for the three and six months ended June 30, 2021 and 2020:
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|
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Three Months Ended
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|
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Six Months Ended
|
|
|
|
|
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June 30,
|
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June 30,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenues
|
|
|
100.0
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%
|
|
|
100.0
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%
|
|
|
100.0
|
|
%
|
|
100.0
|
|
%
|
|
Costs of contract revenues
|
|
|
(86.5
|
)
|
|
|
(80.3
|
)
|
|
|
(83.9
|
)
|
|
|
(73.7
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)
|
|
|
Gross profit
|
|
|
13.5
|
|
|
|
19.7
|
|
|
|
16.1
|
|
|
|
26.3
|
|
|
|
General and administrative expenses
|
|
|
8.4
|
|
|
|
8.8
|
|
|
|
8.8
|
|
|
|
7.9
|
|
|
|
Gain on sale of assets—net
|
|
|
(0.1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Operating income
|
|
|
5.2
|
|
|
|
10.9
|
|
|
|
7.3
|
|
|
|
18.4
|
|
|
|
Interest expense—net
|
|
|
(3.9
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)
|
|
|
(4.0
|
)
|
|
|
(3.8
|
)
|
|
|
(3.5
|
)
|
|
|
Other income (expense)
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
|
|
Income before income taxes
|
|
|
1.7
|
|
|
|
7.2
|
|
|
|
3.8
|
|
|
|
14.8
|
|
|
|
Income tax provision
|
|
|
(0.5
|
)
|
|
|
(1.9
|
)
|
|
|
(0.6
|
)
|
|
|
(3.7
|
)
|
|
|
Net income
|
|
|
1.2
|
|
|
|
5.3
|
|
|
|
3.2
|
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%
|
|
11.1
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
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11.9
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%
|
|
|
16.7
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%
|
|
|
13.5
|
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%
|
|
23.2
|
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%
|
Adjusted EBITDA, as provided herein, represents net income (loss) from continuing operations, adjusted for net interest expense, income taxes, depreciation and amortization expense, debt extinguishment, accelerated maintenance expense for new international deployments, goodwill or asset impairments and gains on bargain purchase acquisitions. Adjusted EBITDA is not a measure derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company presents Adjusted EBITDA as an additional measure by which to evaluate the Company’s operating trends. The Company believes that Adjusted EBITDA 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 to evaluate the Company’s period to period performance. Additionally, management believes that Adjusted EBITDA provides a transparent measure of the Company’s recurring operating performance and allows management and investors to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. For this reason, the Company uses a measure based upon Adjusted EBITDA to assess performance for purposes of determining compensation under the Company’s incentive plan. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, amounts determined in accordance with GAAP including: (a) operating income as an indicator of operating performance; or (b) cash flows from operations as a measure of liquidity. As such, the Company’s use of Adjusted EBITDA, instead of a GAAP measure, has limitations as an analytical tool, including the inability to determine profitability or liquidity due to the exclusion of accelerated maintenance expense for new international deployments, goodwill or asset impairments, gains on bargain purchase acquisitions, interest and income tax expense and the associated significant cash requirements and the exclusion of depreciation and amortization, which represent significant and unavoidable operating costs given the level of indebtedness and capital expenditures needed to maintain the Company’s business. For these reasons, the Company uses operating income to measure the Company’s operating performance and uses Adjusted EBITDA only as a supplement. The following is a reconciliation of Adjusted EBITDA to net income:
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|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
|
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$
|
2,105
|
|
|
$
|
8,960
|
|
|
$
|
10,919
|
|
|
$
|
42,947
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense—net
|
|
|
6,657
|
|
|
|
6,725
|
|
|
|
13,243
|
|
|
|
13,355
|
|
|
Income tax provision
|
|
|
829
|
|
|
|
3,131
|
|
|
|
2,218
|
|
|
|
14,441
|
|
|
Depreciation and amortization
|
|
|
10,628
|
|
|
|
9,256
|
|
|
|
20,681
|
|
|
|
18,707
|
|
|
Adjusted EBITDA
|
|
$
|
20,219
|
|
|
$
|
28,072
|
|
|
$
|
47,061
|
|
|
$
|
89,450
|
|
17
The Company’s contract revenues by type of work, for the periods indicated, were as follows:
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|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Revenues (in thousands)
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
Dredging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital—U.S.
|
|
$
|
79,399
|
|
|
$
|
63,440
|
|
|
|
25.2
|
%
|
|
$
|
157,005
|
|
|
$
|
146,989
|
|
|
|
6.8
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%
|
|
Capital—foreign
|
|
|
1,613
|
|
|
|
3,981
|
|
|
|
(59.5
|
)%
|
|
|
6,322
|
|
|
|
10,843
|
|
|
|
(41.7
|
)%
|
|
Coastal protection
|
|
|
46,631
|
|
|
|
56,038
|
|
|
|
(16.8
|
)%
|
|
|
93,262
|
|
|
|
135,888
|
|
|
|
(31.4
|
)%
|
|
Maintenance
|
|
|
37,278
|
|
|
|
41,968
|
|
|
|
(11.2
|
)%
|
|
|
82,579
|
|
|
|
84,353
|
|
|
|
(2.1
|
)%
|
|
Rivers & lakes
|
|
|
4,993
|
|
|
|
2,493
|
|
|
|
100.3
|
%
|
|
|
8,379
|
|
|
|
7,542
|
|
|
|
11.1
|
%
|
|
Total revenues
|
|
$
|
169,914
|
|
|
$
|
167,920
|
|
|
|
1.2
|
%
|
|
$
|
347,547
|
|
|
$
|
385,615
|
|
|
|
(9.9
|
)%
|
Total revenue was $169.9 million for the three months ended June 30, 2021, up $2.0 million, or 1.2%, from $167.9 million for the same period in the prior year. For the three months ended June 30, 2021, the Company experienced an increase in domestic capital and rivers & lakes revenues as compared to the same period in the prior year. This increase was offset by a decrease in coastal protection, maintenance, and foreign capital revenue during the current period as compared to the same period in the prior year. For the six months ended June 30, 2021, total revenue was $347.5 million, down from revenue of $385.6 million for the same period in the prior year, representing a decrease of $38.1 million or 9.9%. For the six months ended June 30, 2021, the Company experienced a decrease in coastal protection, maintenance and foreign capital revenue as compared to the same period in the prior year. This decrease was slightly offset by an increase in domestic capital and rivers & lakes revenues during the current period as compared to the same period in the prior year.
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 three months ended June 30, 2021, domestic capital dredging revenue was $79.4 million, up $16.0 million, or 25.2%, compared to $63.4 million for the same period in 2020. The increase in capital dredging revenues for the three months ended June 30, 2021 was mostly due to a greater amount of revenue earned on projects in Texas, Massachusetts, and Alabama, in the current year quarter when compared to the prior year quarter. This increase was partially offset by less revenue earned on projects in Florida and Louisiana in the current quarter. For the six months ended June 30, 2021, domestic capital revenue was $157.0 million compared to $147.0 million for the same period in 2020, representing an increase of $10.0 million, or 6.8%. The increase in capital dredging revenues for the six months ended June 30, 2021 was mostly due to a greater amount of revenue earned on projects in Massachusetts, and South Carolina, in the prior year period when compared to the current year. This increase was partially offset by less revenue earned on projects in Texas, Delaware, and Florida in the current year.
Foreign capital projects typically involve land reclamations, channel deepening and port infrastructure development. In the second quarter of 2021, foreign capital revenue was $1.6 million, down $2.4 million, or 59.5%, as compared to $4.0 million in the same quarter in the prior year. Foreign capital revenue for the first half of 2021 was $6.3 million which is $4.5 million, or 41.7%, lower than revenue of $10.8 million for the same period of the prior year. The Company continued to earn revenue in 2021 from a project in Bahrain that is essentially completed as of the current quarter.
Coastal protection projects involve moving sand from the ocean floor to shoreline locations where erosion threatens shoreline assets. Coastal protection revenue for the quarter ended June 30, 2021 was $46.6 million, a decrease of $9.4 million, or 16.8%, compared to $56.0 million in the prior year period. The decrease in coastal protection revenues for the three months ended June 30, 2021 was mostly attributable to a lower amount of revenue earned on projects in Virginia, New Jersey, Florida and South Carolina in the prior year period when compared to the current year. This decrease was slightly offset by revenue earned on two projects in North Carolina in the current year quarter. Coastal protection revenue for the six months ended June 30, 2021 was $93.3 million, representing a decrease of $42.6 million or 31.4%, from $135.9 million for the same period in 2020. The decrease in coastal protection revenues for the six months ended June 30, 2021 was mostly due to a greater amount of revenue earned on projects in Virginia, New Jersey, Florida, South Carolina, and Georgia, in the prior year period when compared to the current year. This decrease was partially offset by more revenue earned on projects in North Carolina and Louisiana in the current year.
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 second quarter of 2021 was $37.3 million, down $4.7 million, or 11.2%, from
18
$42.0 million in the second quarter of 2020. The decrease in maintenance revenues for the three months ended June 30, 2021 was mostly attributable to a greater amount of revenue earned on projects in Maryland, North Carolina, Texas, and Virginia in the prior year quarter, when compared to the current year quarter. This decrease was partially offset by higher revenue earned on projects in Florida, Georgia and Louisiana in the current year quarter. Maintenance revenue for the six months ended June 30, 2021 was $82.6 million, a decrease of $1.8 million, or 2.1%, compared to $84.4 million for the comparable period in prior year. The decrease in maintenance revenues for the six months ended June 30, 2021 was mostly due to a greater amount of revenue earned on projects in Maryland and Virginia in the prior year period when compared to the current year. This decrease was partially offset by more revenue earned on projects in Florida, Georgia and Louisiana in the current year.
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 second quarter of 2021, rivers & lakes revenue was $5.0 million, an increase of $2.5 million, or 100.3%, from $2.5 million during the same period of 2020. The increase in river and lakes revenue for the three month ended June 30, 2021 was mostly attributable to a greater amount of revenue earned on projects in Mississippi and Texas in the current year quarter. Rivers & lakes revenue for the six months ended June 30, 2021 was $8.4 million, up $0.9 million, or 12.0%, from $7.5 million for the same period in the prior year. The increase in rivers & lakes revenues for the six months ended June 30, 2021 was mostly due to a greater amount of revenue earned on projects in Mississippi in the current year period, when compared to the prior year. This increase was partially offset by more revenue earned in the San Jacinto project in Texas in the prior year.
Consolidated gross profit for the quarter ended June 30, 2021 was $22.9 million, down $10.1 million, or 31% compared to $33.0 million in the same quarter of 2020. Gross profit margin for the three months ended June 30, 2021 was 13.5% compared to 19.7% in the second quarter of 2020. The lower gross profit experienced for the three months ended June 30, 2021 was driven by $3.0 million of direct costs related to the third wave of COVID-19 in addition to COVID-19 indirect costs and a decrease in profitability of the Company’s domestic capital and coastal protection dredging projects in the quarter when compared to the same period in the prior year, offset slightly by higher gross profit in the maintenance, rivers & lakes and foreign capital dredging projects in the current quarter. Consolidated gross profit for the six months ended June 30, 2021 was $56.0 million, down $45.5 million, or 45%, compared to $101.5 million in the same period of the prior year. Gross profit margin for the six months ended June 30, 2021 was down to 16.1% from 26.3% in the same period in prior year. The lower gross profit experienced for the six months ended June 30, 2021 was driven by $7.3 million of direct costs related to the third wave of COVID-19 in addition to COVID-19 indirect costs and a decrease in profitability of the Company’s domestic capital, coastal protection and rivers & lakes dredging projects in the quarter when compared to the same period in the prior year, offset slightly by higher gross profit in the maintenance, and foreign capital dredging projects in the current year.
During the three and six months ended June 30, 2021, general and administrative expenses were $14.2 million and $30.5 million, respectively, compared to the same periods in the prior year in which the three and six months totaled $14.8 million and $30.4 million, respectively. For the three and six months ended June 30, 2021, general and administrative expenses include higher technical and consulting expenses related to our engagement with Boston Consulting Group (“BCG”) to assist with evaluating the offshore wind market strategy as well as reviewing other long-term growth strategies for GLDD and higher relocation expense related to the headquarter move to Texas. These increases were offset by lower incentive pay and lower travel expenses.
Operating income for the second quarter of 2021 was $8.8 million, down $9.5 million compared to operating income of $18.3 million for the same quarter in 2020. Operating income for the six months ended June 30, 2021 was $25.5 million, down $45.8 million from operating income of $71.3 million in the same period of prior year period. The decrease in operating income for the three and six months ended June 30, 2021 was a result of lower gross profit in the current year when compared to the same period in the prior year.
For the three months ended June 30, 2021, net interest expense was $6.7 million, relatively flat compared with $6.7 million for the prior year quarter. Net interest expense the six months ended June 30, 2021 was $13.2 million, compared with $13.4 for the same period in the prior year. The net interest expense for the three and six months ended June 30, 2021 includes a $1.0 million write-off to extinguishment of subsidiary debt related to the deferred financing fees of the redeemed 8.000% Senior Notes due 2022 (the “8% Notes”). This expense was offset by the lower interest expense from our newly issued $325 million of unsecured 5.25% Senior Notes (the “2029 Notes”).
Income tax provision for the three months ended June 30, 2021 was $0.8 million compared to an income tax provision of $3.1 million for the same period in the prior year. For the six months ended June 30, 2021 and 2020, the Company had an income tax provision of $2.2 million and $14.4 million, respectively. The effective tax rate for the six months ended June 30, 2021 was 16.9%, down 8.3% from the effective tax rate of 25.2% for the same period of 2020. The decrease in effective tax rate was primarily due to a one-time benefit associated with a stock compensation tax deduction in the current year.
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Net income for the quarter ended June 30, 2021 was $2.1 million, down $6.9 million, or 77%, from $9.0 million in the same quarter in the prior year. Diluted earnings per share was $0.03 for the three months ended June 30, 2021, compared to $0.14 for the three months ended June 30, 2020. The decrease in net income for the three months ended June 30, 2021 was due to the decrease in gross profit in current year quarter. Net income for the six months ended June 30, 2021 was $10.9 million, down $32.0 million, or 75%, from $42.9 million for the same period in the prior year. Diluted earnings per share attributable to continuing operations were $0.16 and $0.65 for the six months ended June 30, 2021 and 2020, respectively. The decrease in net income for the six months ended June 30, 2021 was driven by the decrease to gross profit mostly. This increase was slightly offset by a $1.5 million increase in other income and a $12.2 million decrease in income tax provision during the current year when compared to the same period in the prior year.
Adjusted EBITDA (as defined on page 19) for the quarter ended June 30, 2021 was $20.2 million, down $7.9 million, or 28%, from $28.1 million in the prior year quarter. The decrease in Adjusted EBITDA during the second quarter of 2021 was driven by the decrease in gross profit, excluding depreciation. For the six months ended June 30, 2021, Adjusted EBITDA was $47.1 million, down $42.4 million, or 47%, from $89.5 million during the same period in the prior year.
Bidding activity and backlog
The following table sets forth, by type of work, the Company’s backlog as of the dates indicated:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
Backlog (in thousands)
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
Dredging:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital - U.S.
|
|
$
|
320,820
|
|
|
$
|
320,920
|
|
|
$
|
345,901
|
|
|
Capital - foreign
|
|
|
269
|
|
|
|
6,865
|
|
|
|
19,717
|
|
|
Coastal protection
|
|
|
51,204
|
|
|
|
97,986
|
|
|
|
21,967
|
|
|
Maintenance
|
|
|
67,440
|
|
|
|
125,090
|
|
|
|
25,782
|
|
|
Rivers & lakes
|
|
|
14,669
|
|
|
|
8,515
|
|
|
|
10,036
|
|
|
Total backlog
|
|
$
|
454,402
|
|
|
$
|
559,376
|
|
|
$
|
423,403
|
|
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. These estimates are based primarily upon the time and costs required to mobilize the necessary assets to and from the project site, the amount and type of material to be dredged and the expected production capabilities of the equipment performing the work. 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, 72% of the Company’s June 30, 2021 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. The Company’s backlog includes only those projects for which the Company has obtained a signed contract with the customer. 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 domestic dredging bid market for the quarter ended June 30, 2021 was $532.4 million, a $103.8 million increase compared to the same period in the prior year. Total domestic dredging bid market for the current year period included awards for the third phase of the Mobile Harbor Deepening project, the Golden Triangle Marsh Project, one maintenance project in the gulf region, one rivers & lakes project in Tennessee, one coastal protection project and one maintenance project in Florida. For the contracts awarded in the current year, the Company won 65.9%, or $148.1 million, of domestic capital projects, and 36.3%, or $44.1 million, of the coastal protection projects, through June 30, 2021. The Company won 34.5% of the overall domestic bid market for the six months ended June 30, 2021, which is slightly lower than the Company’s prior three year average of 36.6%. 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. After the end of the quarter, we were awarded the Cape May Beach Renourishment Project for $12.1 million and we were low bidder on the Corpus Christi Phase III Deepening Project for $151.9 million and the Thimble Shoal deepening and renourishment project for $39.5 million.
The Company’s contracted dredging backlog was $454.4 million at June 30, 2021 compared to $559.4 million of backlog at December 31, 2020. These amounts do not reflect approximately $508.6 million of domestic low bids pending formal award and additional phases (“options”) pending on projects currently in backlog at June 30, 2021. At December 31, 2020 the amount of domestic low bids and options pending award was $472.3 million.
Domestic capital dredging backlog at June 30, 2021 was at the same level compared to December 31, 2020. In the six months ended June 30, 2021, the Company was awarded the third phase of the Boston Harbor deepening project. During the six months ended June 30, 2021, the Company continued to earn revenue on deepening projects in Charleston, Jacksonville, and the gulf region, a coastal restoration project in Louisiana, and a liquefied natural gas project in Louisiana. Government funded projects coming into the pipeline include additional phases of the Corpus Christi deepenings, as well as new deepenings for ports in Alabama and the Everglades in Florida. These deepenings continue the trend of ensuring all East Coast and Gulf of Mexico ports will be able to accommodate the deeper draft vessels currently used on several trade routes. In addition, multiple project phases for port deepenings in Norfolk and the Houston ship channel are expected to continue for the next several years. 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, providing record annual budgets for the Corps for port deepening and channel maintenance. In addition to this port work, a greater amount of coastal restoration and rehabilitation projects are being funded in the Gulf Coast region as the states utilize available monies for ecosystem priorities, a portion of which is allocated to dredging.
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Foreign capital dredging backlog at June 30, 2021 was $6.6 million lower than at December 31, 2020. During the six months ended June 30, 2021, the Company continued to earn revenue on a project in the Middle East which was in backlog at December 31, 2020.
Coastal protection dredging backlog decreased $46.8 million from December 31, 2020. In the six months ended June 30, 2021, the Company was awarded two coastal protection projects of $28.5 and $15.6 million in Florida. During the six months ended June 30, 2021, the Company continued to earn revenue on coastal protection projects in New Jersey, North Carolina, and Florida which were in backlog at December 31, 2020. Coastal protection and storm impacts continue to provide the major impetus for coastal project investment at federal and state levels. Strong hurricane and storm seasons have resulted in an increase in beach erosion and other damage which adds to the recurring nature of our business and the need for more frequent coastal protection and port maintenance projects. As a result of the extreme storm systems in prior years involving Hurricanes Harvey, Irma, and Maria, the U.S. Congress 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 expected that approximately $1.8 billion will be allocated to dredging-related work. Most of this work is anticipated to be coastal protection related, but some funding may be provided for channel maintenance. During 2019, an additional $3.3 billion of supplemental appropriations was approved for disaster relief funding as a result of Hurricane Florence and Hurricane Michael.
Maintenance dredging backlog decreased $57.6 million from December 31, 2020. In the six months ended June 30, 2021, the Company was awarded one maintenance project of $38.3 in the Gulf region and another one of $3.3 million Florida. During the six months ended June 30, 2021, the Company continued to earn revenue on projects in Louisiana, North Carolina and Florida which were in backlog at December 31, 2020. Past WRDA bills called 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. On March 27, 2020, the U.S. government enacted the CARES Act which includes a provision that lifts caps on the HMTF, thereby allowing full access to future annual revenues. Through the increased appropriation of HMTF monies, the Company anticipates increased funding for harbor maintenance projects to be let for bid.
Rivers & lakes backlog at June 30, 2021 was up $6.2 million compared to backlog at December 31, 2020. In the six months ended June 30, 2021, the Company was awarded one rivers & lakes project in Tennessee. For the six months ended June 30, 2021, the Company continued to earn revenue on projects in Texas and Mississippi which was in backlog at December 31, 2020.
Liquidity and capital resources
The Company’s principal sources of liquidity are net cash flows provided by operating activities and proceeds from previous issuances of long-term debt. The Company’s principal uses of cash are to meet debt service requirements, finance capital expenditures, provide working capital and other general corporate purposes.
The Company’s cash provided by or used in operating activities for the six months ended June 30, 2021 and 2020 was a use of $35.6 million and a source of $67.5 million in cash, 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 decrease in cash provided by operating activities during the six months ended June 30, 2021 compared to the same period in the prior year was driven by lower net income in current year, offset partially by lower investment in working capital during the current year when compared to the same period in the prior year.
The Company’s cash flows used in investing activities for the six months ended June 30, 2021 and 2020 totaled $64.6 million and $20.1 million, respectively. Investing activities primarily relate to normal course upgrades and capital maintenance of the Company’s dredging fleet. The Company announced a Shipyard Contract for 6,500 cubic yard Trailing Suction Hopper Dredge in June 2020 and, later, in December 2020 the Company announced the design and development of the first U.S. flagged Jones Act compliant, inclined fall-pipe vessel for subsea rock installation for wind turbine foundations to support the new U.S. offshore wind industry. During the six months ended June 30, 2021, the Company has invested $14.0 million towards these new vessels. In addition, the Company spent $16.4 million in the period ended June 30, 2021 to acquire two dredges that had previously been leased and $6.9 million to acquire
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two multifunctional all-purpose vessels (“multicats”). The Company did not receive any proceeds from dispositions of property and equipment in the current year period compared to $0.4 million in the prior year period.
The Company’s cash flows used in financing activities for the six months ended June 30, 2021 and 2020 totaled $6.7 million and $0.8 million, respectively. The increase in cash used in financing activities relates to $4.4 million of deferred financing fees paid related to the newly issued $325 million of the 2029 Notes and changes in the taxes paid on settlement of vested shares awards, offset slightly by increase cash from the Company’s employee stock purchase plan. Of the previously announced $75.0 million share repurchase program, the Company repurchased $3.9 million of common stock in the third quarter of 2020 and none during the period ended June 30, 2021.
The Company maintains a favorable cash on hand position and revolver availability and as a result is well positioned for changes in the current economic environment. In the current year, the Company began to experience more considerable operational interruptions and direct costs related to the third wave of the coronavirus (COVID-19) pandemic. The impacted projects are now back in operation but the Company will continue to assess the potential economic impact that the virus and pandemic could have on the Company’s operations and liquidity.
Senior notes
In May 2021 the Company sold $325 million of 2029 Notes pursuant to a private offering. The 2029 Notes were priced to investors at par and will mature on June 1, 2029. The Company used the net proceeds from the offering, together with cash on hand, to redeem all $325 million aggregate principal amount of its outstanding 8% Notes.
The 2029 Notes are senior unsecured obligations of the Company and are 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 enter 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.
Commitments, contingencies and liquidity matters
Refer to Note 4, Long-term debt, in the Notes to Condensed Consolidated Financial Statements for discussion of the Company’s Amended Credit Agreement. Additionally, refer to Note 8, Commitments and contingencies, in the Notes to Condensed Consolidated Financial Statements for discussion of the Company’s surety agreements.
The Company intends to upgrade its existing domestic fleet by acquiring new vessels, equipment and technology to increase productivity and efficiency and further enhance safety. Existing cash on hand, future net cash flows, debt financing and new leases are all available funding resources from which the Company will evaluate its options when considering these upgrades.
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 Amended Credit Agreement and bonding 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.
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, 2020 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, 2020.