Orion Marine Group, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing identifies the registrant as Orion Marine Group, Inc. (not “Orion Group Holdings Inc.”). The company provides marine construction and dredging services and reports one operating segment.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Contract revenue | $70.9 | $87.1 | $150.0 | $162.7 |
| Gross profit / margin | $1.8 / 2.6% | $19.6 / 22.5% | $12.3 / 8.2% | $35.2 / 21.6% |
| Operating income (loss) | $(5.3) | $11.2 | $(2.7) | $16.6 |
| Net income (loss) | $(3.2) | $7.0 | $(1.7) | $11.8 |
| Basic EPS | $(0.12) | $0.26 | $(0.06) | $0.44 |
- Revenue declined 18.6% in Q2 and 7.8% in the first half year over year. The company attributed the reductions to project timing and mix, delayed project lettings and a Mississippi River flooding-related delay.
- Profitability deteriorated sharply. Management cited underused equipment and idle crews between projects, higher depreciation and dredge maintenance, competitive pricing pressure, contract mix, and higher estimated self-insurance claims related to two non-fatal job accidents in the first half.
- SG&A fell $1.3 million in Q2 and $3.5 million in the first half, primarily reflecting cost reductions, including eliminating bonus expense. First-half comparison also benefited from $1.7 million of prior-year acquisition costs. These savings did not offset the gross-profit decline.
- First-half 2010 included a $2.2 million bargain-purchase gain; there was no comparable gain in 2011.
Cash, liquidity and capital
- Cash was $24.7 million at June 30, 2011, versus $23.2 million at year-end 2010. Working capital was $79.0 million, compared with $76.7 million.
- First-half operating cash flow was $13.7 million, versus cash used of $2.7 million in 2010; management said the improvement chiefly reflected timing of customer receipts and vendor payments, not a fundamental operating trend. Investing cash outflow was $9.3 million, including $9.7 million of property and equipment purchases. Financing cash outflow was $2.8 million, including $3.0 million for share repurchases.
- No borrowings were outstanding under the credit facility. It provides $75 million of revolving and swingline capacity, plus up to $25 million at lenders’ discretion; $0.98 million of letters of credit was outstanding. The company reported covenant compliance and $124.7 million of cash plus facility availability, including the discretionary accordion. The facility matures June 30, 2013.
- Total liabilities were $50.2 million and total stockholders’ equity was $243.5 million. The company reported more than $400 million of surety-bonding capacity, with approximately $100 million outstanding.
- The board authorized up to $40 million of repurchases for one year. In Q2, the company repurchased 305,500 shares for $3.0 million, at an average $9.83 per share.
Outlook, risks and contingencies
- Management cited continued margin pressure, increased competition and delays in federal infrastructure funding, including Navy and Corps of Engineers project lettings. Cost-reduction measures and disciplined bidding were underway. Management expected internal liquidity and working-capital needs and fleet maintenance to be funded from operating cash flow for at least 12 months, supported by cash and available credit.
- Management described longer-term potential from dredging needs, ongoing marine infrastructure demand, increased cargo volumes and expected port work associated with larger ships transiting the Panama Canal. No numerical earnings or revenue guidance was provided.
- Backlog was reported as $119.8 million. The comparison is unclear: the filing says “as compared with $218.1 million at June 30, 2011,” repeating the current-period date; it does not clearly identify the comparator date. Management cautioned that backlog may be canceled and is not necessarily indicative of future results.
- Key exposures include government funding and customer concentration, project delays or cancellation, fixed-price contract execution, commodity costs (including fuel, steel and concrete), equipment utilization, weather and environmental restrictions, labor availability, and estimated contract and insurance costs. Three customers generated 45.9% of first-half revenue; one customer represented 19.5% of receivables at June 30.
- The company disclosed ordinary-course litigation and claims, but did not expect them individually or collectively to have a material adverse effect. It reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Confirm the intended prior-year date for the $218.1 million backlog comparison and assess subsequent project awards, cancellations and starts.
- Track gross margins, equipment utilization, project timing, dredge repair costs and whether cost actions can offset competitive pricing pressure.
- Review federal and other public-sector funding exposure, customer concentration and collection of retainage and contract balances.
- Monitor operating cash conversion, capital expenditure and repair requirements, covenant headroom, facility availability and the share-repurchase program.
- Assess the financial impact of the two job-related accidents and the assumptions used for self-insurance and percentage-of-completion contract estimates.