Orion Group Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Orion provides specialty marine construction and dredging services and turnkey concrete construction, reported through its marine and concrete segments.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Contract revenue | $143.1 million | $136.8 million |
| Gross profit / margin | $10.2 million / 7.1% | $15.8 million / 11.6% |
| Operating income (loss) | $(6.2) million | $7.1 million |
| Net income (loss) | $(7.9) million | $4.1 million |
| Diluted EPS | $(0.27) | $0.14 |
| Operating cash flow | $(1.9) million | $10.6 million |
| Capital expenditures | $3.9 million | $4.3 million |
| Cash and cash equivalents | $2.6 million | $8.7 million at Dec. 31, 2018 |
| Debt principal | $80.8 million | $80.5 million at Dec. 31, 2018 |
| Working capital | $41.4 million | $50.8 million at Dec. 31, 2018 |
Gross margin fell as project timing and mix left labor and equipment costs unrecovered, particularly in marine. SG&A increased 11.7% to $16.8 million, primarily due to the Invest, Scale, and Grow initiative. The quarter’s $0.6 million tax expense included a valuation allowance on net operating loss carryforwards; the reported effective tax rate was negative 8.1%.
Marine revenue was $61.5 million, down 2.1%, and the segment recorded a $6.5 million operating loss versus $6.3 million operating income a year earlier. Concrete revenue grew 10.2% to $81.6 million, while operating income declined to $0.3 million from $0.8 million, reflecting project mix and cost overruns.
Material changes and operating position
- Revenue rose 4.6%, but the company swung to an operating and net loss as gross margin contracted and the prior-year period included a $5.4 million legal-settlement gain.
- Operating cash flow deteriorated by $12.5 million year over year, primarily due to working-capital movements, including increased receivables. Cash declined by $6.1 million during the quarter.
- At March 31, reported debt availability was approximately $41.2 million; the revolver had $23.0 million drawn and $0.8 million of letters of credit. Borrowings were subject to financial covenants.
- Remaining performance obligations were approximately $411.5 million, with $396.4 million (96%) expected to be recognized within 12 months. Backlog was $219.4 million in marine and $192.1 million in concrete. The filing cautions that backlog is not necessarily indicative of future results and some projects may be canceled.
- Adoption of the lease standard added approximately $22.0 million of operating lease right-of-use assets and $22.7 million of operating lease liabilities; adoption did not affect net income.
Outlook, risks, and unusual items
Management reported strong bid opportunities and said it expected improved results as 2019 progressed, while noting unrecovered labor and equipment costs from project timing and mix and weather impacts in concrete. It described marine and concrete end-market demand as solid, but gave no quantified earnings or revenue guidance. Management expected operating cash generation to support liquidity, working capital, equipment needs, and debt service for at least the next 12 months.
In May 2019, after expressing concern about covenant compliance, Orion obtained a waiver for the March 31 covenants through a Sixth Amendment. The amendment raised leverage limits for the second through fourth quarters of 2019, waived fixed-charge coverage tests for the second and third quarters, and reduced the revolver commitment to $50 million, with a possible additional $5 million reduction if specified conditions were not met. Orion said the amendment would be treated as a debt extinguishment and approximately $1.3 million of unamortized debt issuance costs would be expensed in May.
A securities class action filed April 11, 2019 names the company and three current or former officers and alleges, among other matters, overstatement of goodwill and receivables and weaknesses in related internal controls. The company considers the allegations without merit and intends to contest them. The filing also describes pending Texas Water Code indictments involving two subsidiaries; the company disputes the allegations and does not expect a material balance-sheet or liquidity impact. Approximately $1.1 million of customer claims and unapproved change orders was recognized; collection may be less than the recorded amount.
Other risks include fixed-price contract execution, cost inflation in materials and fuel, weather and customer delays, labor and equipment availability, government funding, and potential contract cancellations. The filing states that there were no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Whether the Sixth Amendment’s covenant relief and reduced revolver commitment provide adequate headroom, and whether any further commitment reduction was triggered.
- Whether the company converts its backlog and remaining performance obligations into revenue at acceptable margins, particularly given the marine loss and concrete cost overruns.
- Whether receivables, retainage, contract assets, and recognized claims are collected as expected and operating cash flow improves.
- Potential financial, legal, and reputational consequences of the securities class action and the pending environmental cases.
- Whether management’s expectation of improved 2019 results and adequate 12-month liquidity is supported by subsequent operating results and cash flows.