Orion Group Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Orion provides specialty marine and concrete construction services. Results are unaudited; dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Contract revenue | $140.2 | $164.0 | $416.3 | $433.9 |
| Gross profit / margin | $10.8 / 7.7% | $24.2 / 14.7% | $39.1 / 9.4% | $55.8 / 12.9% |
| Operating income (loss) | ($5.4) | $9.5 | ($9.3) | $9.4 |
| Net income (loss) | ($5.0) | $4.7 | ($9.1) | $2.7 |
| Diluted earnings (loss) per share | ($0.18) | $0.17 | ($0.33) | $0.10 |
| Operating cash flow | — | $31.9 | $13.4 |
At September 30, cash was $2.7; working capital was $60.0, down from $77.6 at year-end 2016. Debt principal was $82.1 ($79.6 net of issuance costs), versus $104.6 at December 31, 2016. The company had no revolver borrowings and $49.1 of borrowing availability at quarter-end, after letters of credit. It subsequently drew $20.0 on the revolver. Nine-month capital expenditures were $7.2, compared with $16.3 a year earlier. Management said operating cash flow and available borrowing capacity were expected to meet needs for at least 12 months.
Material changes and segment performance
- Q3 revenue fell 14.5% year over year; nine-month revenue declined 4.1%. Management attributed the decreases primarily to project disruption from Hurricanes Harvey, Irma and Maria; nine-month marine revenue was also affected by permitting delays.
- Marine construction generated Q3 revenue of $68.4 and an operating loss of $9.8, compared with revenue of $82.2 and operating income of $3.3 in Q3 2016. For nine months, marine revenue was $197.6 and operating loss was $26.2, versus revenue of $224.6 and operating loss of $1.1.
- Concrete construction generated Q3 revenue of $71.8 and operating income of $4.5, compared with $81.8 and $6.3. Nine-month revenue rose 4.5% to $218.8 and operating income rose to $16.9 from $10.4, reflecting growth in Dallas and improved execution.
- Q3 SG&A increased 8.1% to $16.5; nine-month SG&A increased 2.7% to $49.0. Lower gross profit drove the consolidated operating and net losses.
- Backlog at quarter-end was $199.0 in marine and $184.1 in concrete, compared with $201.9 and $186.3, respectively, a year earlier. The filing cautions that backlog is not necessarily indicative of future results and projects may be cancellable.
Outlook, risks and unusual items
- Management expected Q4 activity to increase and profitability to return to more normal levels, citing higher asset utilization and project execution. It anticipated solid bid opportunities continuing into 2018; no numerical earnings or revenue guidance was provided.
- Management described demand as solid across marine infrastructure and Texas concrete markets. It cited potential opportunities in energy infrastructure, ports, coastal restoration, transportation and commercial construction.
- During Q3, Orion raised concerns with its lead bank about covenant compliance. A third credit-agreement amendment was executed in November, effective September 30, 2017, revising the leverage covenant; the company reported compliance with all financial covenants as of quarter-end. The fixed-charge coverage covenant was unchanged. The filing reports $82.1 of term-loan principal and a 3.80% quarterly weighted-average facility rate.
- Harvey-related asset disposals included a $0.9 loss on assets sold and a $1.0 loss on remaining assets; approximately $1.0 of insurance claims was pending and recorded in other current assets.
- Orion acquired Tony Bagliore Concrete for $6.0 cash, with up to $2.0 additional contingent consideration. Purchase accounting remained preliminary. The acquisition contributed to concrete operations from April 2017.
- The company recorded $12.8 of customer claims as revenue, based on management’s assessment that collection was probable; it cautioned that the full amount may not be recognized or collected. Receivables included $34.8 of retainage, of which $7.7 was expected to be collected after September 30, 2018.
- Risks include weather and project delays, cost and labor availability, fixed-price contract execution, permitting, government funding, customer cancellations, commodity prices and reliance on selected concrete suppliers. The interim goodwill test found no impairment despite consecutive marine-segment losses and revised forecasts. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether marine project execution and margins recover after weather disruption and permitting delays, and whether the Q4 profitability outlook was achieved.
- The terms and ongoing compliance requirements of the amended credit agreement, including the effect of the subsequent $20.0 revolver draw on liquidity and leverage.
- Collection and final resolution of the $12.8 in recorded claims, retainage balances and the pending Hurricane Harvey insurance claim.
- Final acquisition accounting and any contingent payment for TBC, along with the acquired business’s contribution to results.
- Whether backlog converts to revenue and cash as expected, given project timing and cancellation risks.