Orion Group Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Orion provides specialty marine construction and dredging services and turnkey concrete construction through its Marine and Concrete segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $166.0 | $159.8 | $309.1 | $296.6 |
| Gross profit / margin | $15.0 / 9.0% | $19.5 / 12.2% | $24.1 / 7.8% | $34.2 / 11.5% |
| Operating income (loss) | ($0.4) | $4.6 | ($6.6) | $11.7 |
| Net income (loss) | ($1.6) | $2.2 | ($9.6) | $6.4 |
| Diluted EPS | ($0.06) | $0.08 | ($0.33) | $0.22 |
- Segment results: Q2 Marine revenue was $89.0 million, with operating income below $0.1 million, versus $80.7 million and $3.6 million a year earlier. Concrete revenue was $77.0 million, with an operating loss of $0.4 million, versus $79.1 million and operating income of $0.9 million. First-half Marine revenue was $150.5 million and operating loss $6.4 million; Concrete revenue was $158.6 million and operating loss $0.2 million.
- Cash flow: Operating cash flow was positive $0.8 million in Q2, but negative $1.1 million for the first half, compared with negative $6.1 million and positive $4.5 million, respectively, in 2018. First-half investing cash flow was negative $5.1 million, including $8.1 million of capital expenditures; financing cash flow was positive $0.3 million. Cash declined by $5.9 million to $2.8 million.
- Liquidity and debt: Working capital was $44.6 million, down from $50.8 million at year-end 2018; management attributed $5.7 million of the decline to adoption of the lease standard. Gross borrowings were $83.0 million ($81.3 million net of issuance costs), against $2.8 million cash. The $50 million revolver had $26.0 million drawn, $3.4 million of letters of credit, and $20.6 million available. Debt matures July 2023; the weighted-average credit-facility rate was 5.79%.
- Balance sheet: Total assets were $362.8 million and total liabilities $230.0 million at June 30. Adoption of lease accounting brought operating and finance lease right-of-use assets of $29.7 million and lease liabilities of $29.4 million onto the balance sheet.
Material changes versus the prior comparable period
- Revenue rose 3.9% in Q2 and 4.2% in the first half, mainly from Marine backlog execution. Despite higher revenue, gross margin fell to 9.0% in Q2 and 7.8% for the first half. Management attributed the decline principally to project timing and mix; the prior-year Q2 included a large Marine project with significant cost savings.
- First-half operating results also compare against a $5.4 million legal-settlement gain recorded in 2018. Interest expense increased, including $0.4 million of Q2 expense from debt issuance costs written off following a credit-agreement amendment.
- Backlog reached $661.0 million at June 30, versus $340.7 million a year earlier: Marine $477.0 million and Concrete $184.0 million. The filing states $465.6 million, or 70%, of remaining performance obligations were expected to be recognized over the next 12 months.
- Beginning in Q2 2019, certain project-management costs were reclassified from SG&A to contract costs following an operational realignment. The company also adopted the new lease standard on January 1, 2019; management said adoption did not affect net income.
Outlook, risks and unusual items
- Management described bid-market opportunities and demand in both segments as strong, cited a record win rate and historically high backlog, and expected results to improve as 2019 progressed. It provided no specific full-year revenue or earnings forecast.
- Management said cash, available borrowing capacity and expected operating cash flows should be adequate for general needs and debt service for at least the next 12 months. This outlook depends on generating operating cash and maintaining access to credit.
- Credit covenants include minimum adjusted EBITDA and leverage limits that tighten over 2019–2020. The fixed-charge coverage covenant was waived for Q2 and Q3 2019. The filing does not state the company’s actual covenant ratios; covenant compliance and future headroom warrant attention.
- Risks include fixed-price contract execution, project delays and cost overruns, commodity-price increases, customer cancellation, government funding levels, collection of receivables and claims, and reliance on selected concrete suppliers. Backlog projects may be canceled, and backlog is not necessarily indicative of future results.
- A securities class action filed in April 2019 alleges misleading statements and issues involving goodwill, receivables and internal controls. The company considers the allegations without merit and intends to contest them. It also disclosed two Texas Water Code matters; one was subject to a diversion agreement, and an offer for a diversion agreement in the second case involved a $100,000 payment.
- Approximately $1.1 million of customer claims and unapproved change orders was recognized; management considered collection probable, but noted the full amount might not be collected. A local-government customer represented 18% of current receivables at June 30.
Important facts for investors to verify
- Whether margins and operating performance recover as backlog is executed, especially in Marine and Concrete.
- Cash conversion, receivable and retainage collections, and the quality and collectability of contract claims.
- Actual covenant performance, future covenant headroom, revolver availability and the ability to service debt.
- Backlog conversion, cancellation exposure and the timing and profitability of major projects.
- Developments in the securities litigation and Texas legal matters, and any resulting financial exposure.