Orion Group Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts below are in millions of dollars unless stated otherwise. The company, formerly Orion Marine Group, added commercial concrete construction through its 2015 TAS acquisition and now reports two segments: heavy civil marine construction and commercial concrete construction.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Contract revenue | $164.0 | $137.1 | $433.9 | $304.6 |
| Gross profit / margin | $24.2 / 14.7% | $8.3 / 6.0% | $55.8 / 12.9% | $22.8 / 7.5% |
| Operating income (loss) / margin | $9.5 / 5.8% | $(8.3) / (6.1)% | $9.4 / 2.2% | $(11.2) / (3.7)% |
| Net income (loss) / diluted EPS | $4.7 / $0.17 | $(7.4) / $(0.27) | $2.7 / $0.10 | $(9.5) / $(0.35) |
- Revenue rose 19.7% in Q3 and 42.5% year to date, principally reflecting a full-period contribution from TAS versus partial-period inclusion in 2015. Segment mix and timing also changed, so the increases are not solely organic growth.
- Q3 heavy civil marine revenue fell 8.8% to $82.2 million, while segment operating income improved to $3.3 million from a $10.7 million loss, principally after completion of troubled Tampa projects. Commercial concrete revenue was $81.8 million and operating income was $6.3 million.
- For the nine months, marine revenue declined 12.8% to $224.6 million and the segment recorded a $1.1 million operating loss, improved from a $13.7 million loss. Commercial concrete revenue was $209.4 million and operating income was $10.4 million.
- Net cash from operations was $13.4 million for the nine months, versus cash used of $2.6 million in 2015. Capital expenditures were $16.3 million; cash used in investing was $15.6 million and financing provided $4.0 million. Cash increased $1.8 million to $3.1 million.
- At September 30, cash was $3.1 million, working capital $76.0 million, and total assets $468.2 million. Debt principal was $115.1 million (carrying amount $111.5 million after issuance costs), compared with $110.6 million principal at year-end 2015. The quarterly weighted-average borrowing rate was 3.81%.
- Revolver availability was $32.7 million after $16.0 million drawn and $1.3 million of letters of credit; the company drew a further $10.0 million after quarter-end. It reported compliance with financial covenants. The company stated that cash, available borrowings and operating cash flow should meet needs for at least 12 months.
Changes, outlook and other material matters
- Management said Q3 productivity was encouraging and that the Tampa marine projects were substantially completed. It cited ongoing marine bid opportunities and strong concrete demand, particularly in Dallas.
- Management expected Q4 results below its initial expectations because Hurricane Matthew delayed East Coast work and customer permit delays pushed some anticipated starts into 2017. It said the delayed activity should benefit 2017 and expressed confidence in a strong 2017, citing backlog, low bids outstanding and future bidding opportunities. This is management’s outlook, not a guarantee.
- Backlog at September 30 was $201.9 million for marine, down from $223.7 million a year earlier, and $186.3 million for concrete, up from $180.3 million. The filing cautions that backlog may be canceled, is not necessarily indicative of future results, and generally reflects only part of expected revenue over a 12-month period.
- The company recognized an approximately $11.0 million customer claim in Q2 2016, recording revenue without profit on the claim. Management considered collection probable but cautioned that the full amount might not be recognized.
- The nine-month 2016 statements include correction of prior-period errors, primarily affecting 2015, that increased current-period after-tax income by approximately $0.4 million. Management concluded the errors were not material to previously issued statements or its 2016 forecast and did not restate those periods.
- Key risks include fixed-price contract execution, estimating and project delays, commodity-cost increases (the company generally does not hedge concrete, steel or fuel), government funding and customer cancellations. Private customers represented 70% of nine-month revenue; no single customer exceeded 10% of revenue. The concrete segment depends on select suppliers. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Investor verification priorities
- Verify collection and final settlement of the $11.0 million claim, and whether any revisions affect contract profitability.
- Track marine and concrete backlog conversion, cancellations, new awards and the timing of projects delayed into 2017.
- Assess whether improved marine profitability persists after Tampa project completion and whether concrete segment margins hold as revenue mix changes.
- Monitor post-quarter revolver borrowing, cash generation, debt reduction and compliance with tightening leverage covenant limits.
- Review the prior-period error correction and management’s materiality conclusion, along with any updates on storm and permitting delays.