Orion Group Holdings, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2021; unaudited. Orion provides specialty construction services through its marine segment (infrastructure, dredging and related work) and concrete segment (turnkey concrete construction). Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $145.9 | $183.7 | $299.2 | $350.3 |
| Gross profit / margin | $12.3 / 8.4% | $20.7 / 11.3% | $27.8 / 9.3% | $40.5 / 11.6% |
| Operating income / margin | $5.6 / 3.8% | $4.1 / 2.2% | $7.6 / 2.5% | $8.4 / 2.4% |
| Net income / diluted EPS | $3.5 / $0.11 | $2.0 / $0.07 | $4.5 / $0.15 | $4.8 / $0.16 |
Six-month operating cash flow was $11.3 million, versus $33.1 million a year earlier. Investing activities provided $20.5 million, largely from asset-sale proceeds, while financing activities used $30.9 million. Capital expenditures were $4.7 million. Cash increased $0.8 million to $2.4 million.
At June 30, 2021, working capital was $60.8 million and total assets were $383.2 million. Debt was $6.4 million, down from $33.9 million at year-end 2020, following repayment of the term loan; $6.0 million was drawn on the $50 million revolver. Available revolver capacity was $42.3 million after letters of credit. Total liabilities were $216.2 million. The company reported compliance with its financial covenants.
Material changes versus comparable periods
- Q2 revenue declined 20.6%; first-half revenue declined 14.6%. Management attributed the decreases to lower marine activity and weather-related disruption, including the February Texas winter storm and second-quarter weather impacts on concrete production.
- Gross margin fell in both comparisons as lower volumes and utilization left indirect costs under-recovered. Q2 marine revenue fell 30.3%; concrete revenue fell 10.9%. Concrete reported a Q2 operating loss of $3.0 million, versus $0.3 million operating income a year earlier.
- Reported operating income benefited from a $6.8 million gain on the Tampa property sale. Marine operating income excluding that gain was $1.8 million in Q2, compared with $3.8 million a year earlier. Q2 interest expense included $2.1 million associated with term-loan and swap extinguishment; the company also expensed $0.8 million of unamortized debt issuance costs.
- Backlog was $394.4 million, down from $528.4 million a year earlier but up from $364.8 million at March 31, 2021. Management said the quarter-over-quarter increase was primarily due to weather delaying work progress.
Outlook, risks and unusual items
No specific full-year revenue or earnings guidance was provided. Backlog included $394.4 million of remaining performance obligations; management expected to recognize $374.8 million (95%) within the next 12 months. The company cited approximately $2.0 billion of quoted bids outstanding at quarter-end; about $30 million was subsequently awarded or where Orion was apparent low bidder. Backlog and bid estimates are not guarantees of future revenue.
Management expected operating cash generation to cover internal liquidity and working-capital needs and equipment requirements for at least the next 12 months. It described longer-term opportunities in marine infrastructure, ports, dredging, energy-related work and Texas commercial construction, while noting uncertainty around award timing, COVID-19 effects, cruise-line spending and oil-price volatility. Principal operating risks include weather and project delays, fixed-price contract execution, labor and equipment utilization, commodity-cost increases, government funding and customer cancellations.
The August 2020 Waymon L. Boyd dredge fire resulted in fatalities, injuries, pollution cleanup and litigation. As of June 30, 2021, Orion reported $91.7 million in total liabilities recognized to date for the incident, including approximately $27.5 million paid and $64.2 million accrued. It said it was too early to establish accruals for the balance of claims and believed insurance coverage was adequate; insurers had assumed defense costs. The outcome and recoveries remain uncertain. Separately, insurance-claim receivables were $64.7 million and insurance-claim liabilities were $68.8 million.
Other notable items: the Tampa property sale generated the gain noted above and helped fund term-loan repayment; the related interest-rate swap was terminated. Management corrected immaterial segment-reporting allocation errors for periods presented. It maintained a valuation allowance on net deferred tax assets. The company reported effective disclosure controls and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported profitability depended on the Tampa sale gain and the unusual debt-extinguishment charges, and what recurring margins are achievable at current volumes.
- Whether the $394.4 million backlog converts to revenue on schedule, given weather delays, lower year-over-year backlog and project-award uncertainty.
- The ultimate exposure, insurance coverage, recoveries and cash timing associated with the dredge-fire claims; the filing does not quantify a clear final net cost.
- Liquidity and borrowing availability after working-capital needs, letters of credit, lease obligations and any further project disruption.
- Customer and supplier concentration, including one private customer representing 10.2% of current receivables, and the concrete segment’s reliance on selected suppliers.