Orion Marine Group, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Unless noted, dollar figures are in millions. The company provides marine construction and dredging services and reports as one operating segment.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $54.6 | $100.0 | $204.5 | $262.7 |
| Gross profit (loss) | $(2.4) | $18.4 | $9.8 | $53.6 |
| Gross margin | (4.5)% | 18.4% | 4.8% | 20.4% |
| Operating income (loss) | $(9.1) | $11.5 | $(11.8) | $28.1 |
| Net income (loss) | $(6.2) | $7.1 | $(7.9) | $18.9 |
| Diluted EPS | $(0.23) | $0.26 | $(0.29) | $0.70 |
- Revenue declined 45% in Q3 and 22% for the first nine months year over year. Q3 weakness reflected project start delays, gaps between projects, and reduced government project lettings.
- Operating cash flow was $26.7 million for the nine months, compared with $18.9 million a year earlier. Cash increased to $35.2 million from $23.2 million at year-end 2010. Cash generation benefited from working-capital movements, including collections of receivables.
- Investing cash outflow was $11.9 million, including $12.7 million of capital expenditures; financing cash outflow was $2.8 million, including $3.0 million spent repurchasing shares.
- At September 30, total assets were $282.9 million and total liabilities were $44.9 million. Working capital was $76.8 million. No revolving-credit borrowings were outstanding; approximately $74.9 million was available, and letters of credit outstanding were approximately $1.0 million.
- The credit facility matures June 30, 2013. The company reported compliance with its financial covenants. It also reported more than $400 million of bonding capacity, with approximately $100 million of bonds outstanding.
Changes, outlook, and risks
- Profitability deteriorated sharply versus 2010. Management cited underused equipment and idle crews, added depreciation and equipment costs following 2010 acquisitions, maintenance and repairs on dredging assets, pricing pressure, and project mix. Nine-month gross profit was also affected by higher estimated self-insurance claims related to two non-fatal job accidents.
- SG&A declined by $0.3 million in Q3 and $3.8 million for the nine months, primarily reflecting cost reductions; nine-month comparison also benefited from prior-year acquisition costs. The prior-year nine-month results included a $2.2 million bargain-purchase gain, absent in 2011.
- Backlog was $146.1 million at September 30, down from $217.3 million a year earlier, but up $26.3 million sequentially from Q2. Management attributed the year-over-year decline mainly to delayed Army Corps of Engineers lettings. Backlog is not a firm revenue forecast: many contracts may be canceled without penalty.
- Management said it was managing costs, maintaining pricing discipline, and expected cash and credit availability to support general needs and equipment investment for at least the next 12 months. No specific earnings or revenue guidance was provided. It cited longer-term demand potential from dredging needs, marine construction, and port expansion.
- Key risks include federal and other government funding delays, competition and margin pressure, fixed-price contract performance, commodity costs, weather and permitting delays, project cancellations, and utilization of equipment and crews. Government customers represented about 85% of Q3 revenue; four customers together represented 64.3%.
- The filing reports ordinary-course lawsuits and claims, but management did not expect them, individually or in aggregate, to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether delayed projects and government contract lettings resumed, and whether the sequential backlog increase converted into revenue.
- Whether equipment utilization and gross margins improved, particularly after the reported Q3 gross loss and nine-month operating loss.
- How customer concentration, federal funding exposure, and cancellable backlog affect revenue visibility and collections.
- Whether working-capital-driven operating cash flow is sustainable and whether capital spending, equipment repairs, or share repurchases change liquidity.
- The impact of self-insurance estimates, project cost revisions, and any further claims or contingencies on results.