Orion Group Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Orion provides specialty marine construction and dredging services and turnkey concrete construction through its marine and concrete segments. Financial amounts below are in U.S. dollars; millions are used unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $183.7m | $166.0m | $350.3m | $309.1m |
| Gross profit / margin | $20.7m / 11.3% | $15.0m / 9.0% | $40.5m / 11.6% | $24.1m / 7.8% |
| Operating income (loss) / margin | $4.1m / 2.2% | $(0.4)m / (0.3)% | $8.4m / 2.4% | $(6.6)m / (2.1)% |
| Net income (loss) | $2.0m | $(1.6)m | $4.8m | $(9.6)m |
| Diluted earnings (loss) per share | $0.07 | $(0.06) | $0.16 | $(0.33) |
Q2 revenue increased 10.7% year over year. Marine revenue was $91.7m, up 3.0%, and concrete revenue was $92.0m, up 19.5%. For the first half, marine revenue rose 18.0% to $177.7m and concrete revenue rose 8.9% to $172.7m. Management attributed improved gross profit and operating results mainly to higher activity and better recovery of labor, equipment, and other project costs; the marine segment also benefited from completing lower-margin projects that weighed on the prior-year period.
- Cash flow: First-half operating cash flow was $33.1m, compared with cash used of $1.1m in 2019. Investing cash outflow was $2.0m and financing cash outflow was $21.8m. Capital expenditures were $5.0m versus $8.1m.
- Liquidity: June 30 cash and cash equivalents were $10.3m, with working capital of $54.0m versus $62.2m at year-end 2019. The company reported approximately $49.9m of available borrowing capacity.
- Debt: Gross principal under the credit arrangements was $53.8m ($35.8m term loan and $18.0m revolving borrowings); balance-sheet debt, net of issuance costs, was $52.1m. The term loan and existing revolver mature under a facility due July 2023. A separate $20m revolving facility matures June 7, 2021 and had no borrowings at quarter-end. The reported weighted-average rate for the credit facility was 3.15% for the quarter; term-loan and revolver balances were designated at 2.69% at June 30.
- Backlog and commitments: Backlog was $528.4m at June 30, down from $645.2m a year earlier and $591.9m at March 31. The company expects to recognize $465.4m, or 88%, of remaining performance obligations within 12 months.
Material changes and notable items
- First-half operating performance improved substantially from 2019’s operating loss, with both segments reporting operating income in 2020. Q2 concrete segment operating income was $3.5m (prior-year loss $0.4m); marine operating income was $0.6m (prior-year income less than $0.1m).
- Cash increased from $0.1m at December 31, 2019 to $10.3m at June 30, 2020, while net balance-sheet debt declined from $71.7m to $52.1m. First-half debt repayments included $23.0m on the existing revolver, partly offset by $5.0m of new borrowings.
- The company corrected a clerical error in prior backlog calculations, reducing reported backlog for the four prior dates shown by $10.0m–$17.6m. The comparative backlog figures in this filing reflect those corrections.
- COVID-19-related credit-loss expense of approximately $0.4m was recorded in the first half. The company said it had not experienced material project stoppages, cancellations, or collection slowdowns through the reporting date.
- A securities class-action complaint was dismissed on June 29, 2020; the ruling became final July 20 after no appeal was filed. The company said other ordinary-course legal proceedings were not expected to have a material adverse effect.
Outlook, risks, and contingencies
No specific revenue or earnings guidance was provided. Management expected to meet liquidity, working-capital, equipment, and debt-service needs for at least 12 months using operating cash generation, cash, and available borrowings, and reported compliance with all financial covenants at June 30. It described continuing bid opportunities in marine infrastructure and Texas concrete markets, while cautioning that COVID-19 could delay project awards and disrupt supply chains, staffing, customer activity, and collections. Cruise-line capital spending and oil-price volatility may affect marine opportunities; concrete project releases could also be delayed.
- Key operating exposures include fixed-price contract execution, cost and availability of labor, concrete, steel and fuel, weather and customer delays, government funding, and contract cancellations. The company generally does not hedge commodity-price exposure.
- One private-company customer represented 10.3% of current trade and retainage receivables. Private companies accounted for 61% of Q2 revenue. Management noted potential credit and collection risk, including from claims and unapproved change orders; $1.7m of contract assets related to such claims at June 30.
- The company maintained a $2.0m interest-rate-swap liability. A new swap was scheduled to begin July 31, 2020, hedging variable interest payments on the term loan through July 2023.
- A valuation allowance on net deferred tax assets remained appropriate, and the final outcome of certain uncertain tax positions was not determinable.
Important facts for investors to verify
- Whether backlog converts to revenue and margin as expected, particularly given the decline from the prior-year level and the disclosed historical-data correction.
- Whether operating cash flow and collections remain strong, and whether receivables, retainage, and contract claims are collectible on expected terms.
- Whether COVID-19, government funding, customer spending, and commodity and labor conditions affect project awards, execution, and profitability.
- Available borrowing capacity, covenant compliance, and the company’s ability to meet debt and lease obligations as they fall due.
- Whether the improved segment margins persist; interim results are not necessarily indicative of full-year results.