Orion Group Holdings, Inc. — Q3 2018 Form 10-Q
Business context and period. Specialty construction contractor serving infrastructure, industrial and building markets through marine and concrete segments. This unaudited report covers the three and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods unless stated otherwise. Dollar amounts below are in millions except per-share data.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $125.1 | $140.2 | $421.7 | $416.3 |
| Gross profit / margin | $5.9 / 4.7% | $10.8 / 7.7% | $42.5 / 10.1% | $39.1 / 9.4% |
| Operating income (loss) | $(7.4) | $(5.4) | $4.3 | $(9.3) |
| Net income (loss) | $(6.4) | $(5.0) | $(0.006) | $(9.1) |
| Basic and diluted EPS | $(0.22) | $(0.18) | Reported as — | $(0.33) |
- Quarterly performance: Revenue fell 10.8%; gross profit declined and gross margin contracted 3.0 percentage points. SG&A decreased 13.0% to $14.4 million, but did not offset lower gross profit. Operating loss widened to $7.4 million.
- Nine-month performance: Revenue rose 1.3%, gross margin improved 0.7 percentage points, and operating results turned positive. The comparison includes a $5.4 million gain from settlement of a legal matter and $2.5 million in net gains on asset sales; these helped results and are not necessarily recurring. Nine-month net loss was nearly breakeven.
- Segments: Q3 marine revenue was $63.5 million (down 7.2%) and operating loss was $5.6 million, improved from $9.8 million. Concrete revenue was $61.6 million (down 14.2%) and the segment moved from $4.5 million operating income to a $1.8 million loss. For nine months, marine generated $207.0 million revenue and $4.3 million operating income; concrete generated $214.7 million revenue and recorded a small operating loss.
- Cash flow and capital spending: Operating activities used $5.2 million in the first nine months, versus $31.9 million provided in 2017, primarily reflecting working-capital movements, including lower payables and contract billings in excess of costs. Investing activities used $11.7 million; capital expenditures were $15.0 million, versus $7.2 million a year earlier. Financing activities provided $10.5 million.
- Balance sheet and liquidity: Cash was $2.6 million at September 30, down from $9.1 million at year-end 2017. Working capital was $68.0 million, compared with $69.8 million. Current assets were $183.9 million and current liabilities $116.0 million. Principal debt was $97.3 million (carrying value, net of issuance costs, $96.4 million), versus $88.8 million principal at year-end. Revolver borrowings were $38.0 million; reported remaining revolver availability was $61.3 million after letters of credit. Total assets were $424.7 million.
Material changes, outlook and risks
- Management attributed Q3 shortfalls to delays in customer schedules affecting marine work and continuous rain in Texas, particularly September, disrupting concrete production. It also cited ongoing competitive pressure in Houston concrete markets.
- Management said marine and concrete demand remained strong, expressed confidence in the long-term market outlook and strategic plan, and described 2019 prospects as solid. The filing provides no quantitative earnings or revenue guidance.
- Backlog at September 30 was $238.1 million for marine and $187.9 million for concrete, versus $199.0 million and $184.1 million, respectively, a year earlier. Remaining performance obligations were approximately $426.0 million; $352.3 million, or 83%, was expected to be recognized within 12 months. Backlog and obligations are not guarantees: projects may be delayed or canceled.
- A July 2018 credit amendment extended facility maturity to July 31, 2023, and provides a $100 million revolving commitment and $60 million term-loan commitment. The company reported compliance with its financial covenants at quarter-end. It expects operating cash flow and available borrowings to fund needs for at least 12 months, but nine-month operating cash flow was negative and cash on hand was limited.
- Management identified project execution and productivity, weather and environmental restrictions, customer delays or cancellations, labor and equipment availability, fixed-price exposure to concrete, steel and fuel costs, and dependence in part on government funding as risks. Interest rates are also a risk; swaps hedge variability on a portion of term-loan interest.
- Approximately $15.5 million of customer claims and unapproved change orders was included in contract assets; management believes collection is probable but says the full amount may not be collected. Two subsidiaries faced Texas Water Code indictments related to alleged concrete handling; the company disputes the allegations and says they are not expected to be material. Other ordinary-course legal matters were not expected to have a material adverse effect.
- Goodwill and the concrete trade name had potential impairment indicators, including segment operating losses and revised full-year forecasts. Qualitative assessments found impairment was not more likely than not; annual impairment testing was planned for October 31, 2018.
- The company expected adoption of the new lease standard in 2019 to materially increase both reported assets and liabilities, primarily for operating leases.
Most important facts for investors to verify
- Whether weather and customer-schedule delays unwind, and whether concrete segment margins recover amid Houston competition.
- Conversion and collectability of the $426.0 million remaining performance obligations, including the $15.5 million in claims and unapproved change orders.
- Operating cash flow, working-capital trends, cash availability and covenant headroom given higher debt and low cash balances.
- Results of the planned annual goodwill and trade-name impairment tests, and the balance-sheet impact of lease-standard adoption.
- How much of nine-month operating improvement depended on the $5.4 million legal-settlement gain and asset-sale gains, and the outcome of the pending indictments.