Orion Marine Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. The company provides heavy civil marine construction and commercial concrete construction services. The commercial concrete segment was added following the August 2015 acquisition of TAS for approximately $110.3 million.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Contract revenue | $129.6 million | $81.5 million |
| Gross profit / margin | $14.7 million / 11.3% | $8.5 million / 10.4% |
| Operating loss | $0.8 million | $0.2 million |
| Interest expense | $1.5 million | $0.2 million |
| Net loss | $1.2 million; $0.04 per share | $0.3 million; $0.01 per share |
| Cash from operations | $(3.4) million | $5.5 million |
| Capital expenditures | $7.2 million | $5.7 million |
Revenue rose 59.1%, mainly due to $67.2 million from the acquired commercial concrete segment, partly offset by a $19.0 million decline in marine revenue. Gross margin improved, but SG&A rose 78.8% to $15.5 million, including $5.5 million attributable to the added segment and other increases. The company reported $1.1 million of net other expense; the filing does not provide a clear breakdown of this amount in the results discussion.
Marine segment revenue was $62.4 million, with a $1.1 million operating loss; commercial concrete revenue was $67.2 million, with $0.2 million of operating income. Q1 2015 had no commercial concrete segment revenue in the reported segment comparison, so consolidated year-over-year growth includes the acquisition.
Financial position and liquidity
- Cash was $1.6 million at March 31, 2016. Working capital was $73.6 million, versus $75.3 million at year-end 2015.
- Total debt was approximately $121.0 million: $16.0 million outstanding on the revolver and $104.9 million on the term loan. The facility’s weighted average interest rate was 3.50% for the quarter.
- Revolver availability was $32.9 million after a $1.1 million letter of credit. Subsequent to quarter-end, the company drew $10.0 million for working capital and repaid $2.0 million; it also made a $1.6 million unscheduled term-loan payment.
- Operating cash use reflected a net loss and working-capital movements. Investing used $6.7 million, while financing provided $10.3 million, primarily through revolver borrowings.
- Assets were $452.3 million and stockholders’ equity was $226.2 million. Receivables included $37.4 million of retainage, of which $15.0 million was expected to be collected after March 31, 2017.
Material changes, outlook, and risks
Management cited weather-related productivity delays, primarily on East Coast projects, and customer-directed changes and delays on the remaining Tampa projects as factors affecting marine performance and job timing. The commercial concrete segment was described as performing well, particularly in Dallas. Management expressed confidence in long-term demand and expected 2016 to be a positive year for that segment, but provided no numerical earnings or revenue guidance.
Management pointed to demand opportunities in marine infrastructure, energy-related projects, port expansion, coastal restoration and commercial construction. Marine backlog was $199.3 million, down from $208.5 million a year earlier; commercial concrete backlog was $185.5 million, up from $157.5 million. The filing cautions that backlog is not necessarily indicative of future results and that many projects may be canceled without penalty.
In April 2016, the company amended its credit agreement, effective as of March 31, after raising concerns about future covenant compliance. The amendment revised leverage-ratio limits through June 30, 2017; it may increase borrowing costs if leverage exceeds 3.25x and limits certain activities, including acquisitions. The company reported compliance with all financial covenants at quarter-end following the amendment. Management said it expected operating cash flows to meet liquidity, working-capital and equipment needs for at least 12 months.
Key risks include project execution and cost-estimate changes under fixed-price contracts, weather and customer delays, commodity-cost increases, government funding and contract cancellation, and reliance on selected concrete suppliers. The company does not generally hedge concrete, steel or fuel prices. It had $220.0 million of surety bonds outstanding against stated capacity exceeding $400.0 million. Ordinary-course legal proceedings were disclosed; management did not expect them, individually or in aggregate, to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Unusual financial items include a $0.8 million after-tax fair-value loss on the cash-flow hedge recorded in other comprehensive loss and a $0.9 million interest-rate-swap liability at quarter-end. Approximately $6.4 million of assets remained classified as held for sale following prior-period impairment charges; management expected disposal within one year.
Important facts for investors to verify
- How marine project productivity, Tampa project closeout and estimated contract costs affect margins and cash conversion in subsequent quarters.
- Whether the company sustains covenant compliance as leverage thresholds tighten, and the resulting borrowing costs and available liquidity.
- Post-quarter revolver and term-loan activity, and the adequacy of cash flows to fund working capital, capital expenditures and debt service.
- Backlog conversion, cancellation exposure and the durability of commercial concrete growth and marine demand.
- Collection timing for retainage and other contract receivables, and whether claims, change orders or project-estimate revisions affect profitability.