Orion Group Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted. Orion provides specialty marine construction and dredging services and turnkey concrete construction through its marine and concrete segments.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $182.5 | $194.6 | $341.7 | $369.5 |
| Gross profit | $13.8 | $14.3 | $19.6 | $27.1 |
| Gross margin | 7.6% | 7.4% | 5.7% | 7.3% |
| Operating income (loss) | $2.0 | $(2.8) | $(8.6) | $(5.7) |
| Net income (loss) | $(0.3) | $(3.1) | $(12.9) | $(7.9) |
| Loss per share, basic and diluted | $(0.01) | $(0.10) | $(0.40) | $(0.26) |
- Revenue declined 6.2% in Q2 and 7.5% for the first half. Management attributed the decreases mainly to exiting unprofitable central Texas concrete work, weather and customer delays, partly offset by marine work on the Pearl Harbor drydock project.
- Q2 gross margin improved slightly year over year, reflecting better concrete margins, while lower marine labor and equipment utilization weighed on results. First-half margin fell amid Texas weather impacts, low utilization, and write-downs on completed low-margin projects.
- Q2 operating income included $6.5 million of net gains on asset disposals, including a $5.2 million gain related to the Port Lavaca South Yard sale-leaseback. Thus, reported Q2 operating income benefited materially from asset-sale gains.
- Q2 segment revenue was $100.5 million for marine, up 22.1%, and $82.0 million for concrete, down 27.0%. First-half marine operating results shifted to a $2.6 million loss from $4.4 million of income; concrete operating loss narrowed to $6.0 million from $10.1 million.
Cash flow, debt, and liquidity
- First-half operating cash flow was a use of $12.0 million, versus $11.7 million provided in the prior-year period. Working-capital changes used $7.3 million of cash. Investing activities provided $7.0 million, including $11.3 million of asset-sale proceeds; capital expenditures were $4.3 million. Financing activities provided $11.6 million.
- At June 30, cash and cash equivalents were $8.9 million, plus $1.5 million of restricted cash. Working capital was $60.8 million, compared with $31.1 million at year-end 2022. Revolver availability was approximately $51.2 million.
- On May 15, Orion refinanced its prior facility with a three-year, $103 million senior secured credit facility: a $65 million asset-based revolver and a $38 million term loan, maturing May 15, 2026. The revolver had no balance outstanding at quarter-end. The term loan bears interest at 30-day SOFR plus 8.0%, subject to a 4.0% SOFR floor; the filing reports a 13.29% ending weighted-average rate on $38 million of facility borrowings.
- Total debt carrying value, net of issuance costs, was $36.9 million; principal was $42.6 million. The facility is secured by substantially all company assets. The company reported compliance with financial covenants at June 30, including a minimum liquidity requirement of $15 million. Management said the refinancing and other factors resolved the substantial doubt about going concern previously disclosed in the 2022 Form 10-K, and that it expected adequate liquidity for at least 12 months.
- Interest expense was $2.6 million in Q2 and $4.3 million in the first half, versus $1.0 million and $1.7 million, respectively, a year earlier. Management estimates a 100-basis-point SOFR increase would add about $0.4 million to annual interest expense based on quarter-end borrowings.
Backlog, outlook, and risks
- Backlog was $818.7 million at June 30, up from $603.2 million a year earlier and $448.8 million at December 31, 2022. Marine backlog was $614.9 million and concrete backlog $203.8 million. Orion expected to recognize $560.8 million, or 69%, of remaining performance obligations within 12 months.
- Management cited $2.8 billion in quoted bids outstanding at quarter-end and said contracts totaling more than $84 million had been awarded after quarter-end. It expressed optimism about end markets and opportunities, but did not provide formal earnings or revenue guidance. Backlog is not necessarily indicative of future results.
- Key risks include project execution delays, weather and environmental restrictions, labor and equipment availability, commodity-price exposure on fixed-price contracts, government funding and award timing, and contract changes or cancellations. The company generally does not hedge commodity-price exposure. A federal-government customer represented 13% of current receivables at quarter-end and one such customer generated 14% of Q2 revenue.
- Contract assets included approximately $14.2 million of claims and unapproved change orders, whose collection or negotiation outcomes could affect revenue and liquidity. The filing says legal proceedings are incidental and not expected by management to materially affect results.
- On July 28, 2023, a buyer terminated its contract to purchase two Texas parcels totaling approximately 341 acres previously used as dredge placement areas. This is a subsequent event relevant to any expected land-sale proceeds.
Most important facts for investors to verify
- Whether operating performance improves without reliance on asset-disposal gains, particularly given first-half operating losses and lower gross margin.
- Whether Orion generates sufficient operating cash and maintains at least $15 million of covenant-defined liquidity, while meeting debt service and covenant tests.
- Progress, profitability, and cash conversion of the Pearl Harbor project and the sharply higher marine backlog; also, the conversion and timing of the stated $818.7 million backlog.
- Whether claims and unapproved change orders are collected, and how the terminated Texas land-sale contract affects liquidity plans.
- Exposure to higher floating interest rates, labor and equipment utilization, weather, commodity costs, and customer or government award delays.