Orion Group Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Orion provides specialty marine and concrete construction services. Financial amounts below are in U.S. dollars; millions unless otherwise indicated.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $159.8 | $137.4 | $296.6 | $276.2 |
| Gross profit / margin | $20.8 / 13.0% | $15.4 / 11.2% | $36.6 / 12.3% | $28.4 / 10.3% |
| Operating income (loss) | $4.6 | $(2.5) | $11.7 | $(3.9) |
| Net income (loss) | $2.2 | $(2.3) | $6.4 | $(4.1) |
| Diluted earnings (loss) per share | $0.08 | $(0.08) | $0.22 | $(0.15) |
- Segment trends: Q2 marine revenue grew 30.2% to $80.7 million, with $3.6 million operating income versus an $8.6 million loss a year earlier. Concrete revenue rose 4.8% to $79.1 million, but operating income fell to $0.9 million from $6.2 million. For the first half, marine operating income was $9.9 million versus a $16.3 million loss; concrete operating income declined to $1.8 million from $12.4 million.
- Cash flow: First-half operating cash flow was $4.5 million, down from $20.1 million. Investing used $9.9 million, including $11.9 million of capital expenditures; financing provided $2.5 million. Cash declined $2.8 million to $6.3 million.
- Liquidity and debt: Working capital was $72.2 million. Gross borrowings were $90.0 million, comprising $18.0 million on the revolver and $72.0 million on the term loan; available revolver capacity was $31.3 million after letters of credit. The company reported compliance with financial covenants and expected operating cash flow, cash and available borrowing to cover needs for at least 12 months.
- Balance sheet: Total assets were $432.3 million and stockholders’ equity was $240.1 million at June 30, 2018. Cash was down from $9.1 million at year-end 2017; gross debt was up from $88.8 million.
Material changes versus the prior period
- First-half revenue increased 7.4%; gross margin rose to 12.3% from 10.3%, reflecting stronger execution, particularly in marine. Q2 revenue increased 16.3% and gross margin improved to 13.0% from 11.2%.
- First-half net income included a $5.4 million gain from a legal settlement, recorded in operating results. A separate $1.5 million net gain on asset sales also benefited first-half results. The settlement was recorded as a receivable; $0.8 million was current and $4.0 million non-current at quarter-end.
- Concrete profitability weakened despite higher revenue, citing unfavorable weather, project timing and mix, and competitive pressure in Houston. Marine improved substantially, with management citing solid execution.
- Backlog at June 30 was $184.6 million for marine, down from $210.0 million a year earlier, and $156.1 million for concrete, down from $218.1 million.
- Operating cash flow fell substantially, mainly due to working-capital movements, including increased costs and estimated earnings in excess of billings and reduced billings in excess of costs.
Outlook, risks and unusual items
- Outlook: Management expected 2018 results to improve over 2017 and described demand as strong in both segments. Marine opportunities include port, energy, coastal restoration and USACE recovery work; concrete demand is supported by Texas population growth and commercial development. No specific full-year financial guidance was provided.
- Remaining work: Remaining performance obligations were approximately $340.7 million, with $318.1 million expected to be recognized within 12 months. Management cautioned that backlog is not necessarily indicative of future results and some projects may be canceled.
- Credit amendment after quarter-end: Effective July 31, 2018, the company amended its facility, extending maturity to July 31, 2023 and changing commitments to a $60 million term loan and $100 million revolver/swingline facility. The amendment is treated as a debt extinguishment; approximately $2.1 million of unamortized issuance costs was to be expensed, with about $0.9 million in new issuance costs amortized.
- Key risks: Project execution, fixed-price contract estimates, labor and equipment availability, weather and environmental restrictions, commodity-price increases, customer delays or cancellations, and government funding levels. The company does not generally hedge commodity exposure. A private customer represented 16% of Q2 revenue; concrete also relies on select suppliers.
- Claims and estimates: Approximately $15.6 million of customer claims and unapproved change orders was recognized in contract assets. Management believed collection probable but acknowledged the full amount might not be collected. Construction cost estimates and contract claims can affect recognized revenue and profitability.
- Accounting and controls: Topic 606 was adopted January 1, 2018; its reported first-half effect was a $0.2 million increase in net income, with no material adoption impact reported on opening retained earnings. Management said disclosure controls were effective and reported no material change in internal controls beyond adoption-related controls.
Important facts for investors to verify
- Whether the $5.4 million legal settlement receivable is collected as expected and how much of reported earnings it represents.
- Whether the decline in backlog converts into lower future revenue, and whether the stated remaining performance obligations are delivered on schedule.
- Whether concrete margins recover from weather, Houston competition and project-mix pressures.
- Whether operating cash flow improves as contract assets, billings and other working-capital balances fluctuate.
- The final effect of the July 2018 credit amendment, including the debt-cost charge, revised amortization and ongoing covenant compliance.
- Whether the $15.6 million of claims and unapproved change orders is ultimately approved and collected.