Orion Marine Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing reports the marine construction business; the subsequent TAS acquisition is discussed separately below.
Business context and operating results
Orion provides heavy civil marine construction and specialty services, primarily in the United States, Alaska, Canada, and the Caribbean. It reported one operating segment during the period. Government customers generated 63% of Q2 revenue, compared with 42% a year earlier, reflecting a shift in project mix.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Contract revenue | $86.1 million | $90.3 million | $167.5 million | $171.5 million |
| Gross profit / margin | $6.0 million / 7.0% | $5.9 million / 6.5% | $14.5 million / 8.6% | $13.5 million / 7.9% |
| Operating loss | $2.8 million | $2.3 million | $3.0 million | $2.6 million |
| Net loss | $1.8 million | $1.2 million | $2.1 million | $1.4 million |
| Loss per diluted share | $0.07 | $0.04 | $0.08 | $0.05 |
Financial position and liquidity
- At June 30, cash was $20.7 million, working capital was $59.0 million, and total debt was approximately $32.5 million. Debt comprised $22.5 million outstanding on the revolver and $10.0 million of term loans. Revolver availability, after letters of credit, was approximately $11.4 million.
- Six-month operating cash flow was negative $3.2 million, versus positive $3.6 million in 2014. Investing cash outflow was $7.4 million, including $7.5 million of capital expenditures; financing cash outflow was $7.6 million. Cash declined $18.2 million from year-end 2014.
- Backlog was $223.0 million at June 30, up from $215.9 million at December 31, 2014. Management cautioned that backlog is not necessarily indicative of future results and projects may be canceled.
Changes, outlook, risks, and unusual items
- Q2 revenue fell 4.6% year over year; six-month revenue declined 2.3%. Management attributed weaker revenue primarily to delayed project starts and significant Texas rainfall. It cited underutilized assets as an additional Q2 factor.
- Gross margin improved year over year in both periods, which management attributed to incremental bid-margin improvement. SG&A rose 8.2% in Q2 and 8.7% for the half, partly due to stock compensation, recruitment, and TAS acquisition-related costs.
- Management described the bid market and project pipeline as healthy, noted strong Q2 bookings, and anticipated improvement as backlog projects are executed. It cited port expansion, energy-related work, infrastructure maintenance, and potential government-funded projects as opportunities. No quantified revenue or earnings guidance was provided. The company expected 2015 capital expenditures of approximately $18 million.
- Key risks include weather and productivity delays, project cancellations, government funding and budget decisions, fixed-price contract cost overruns, and fluctuations in fuel, concrete, and steel costs. Receivables and contract estimates are subject to collection, claims, and cost-estimate risk. A private customer represented 12.9% of trade receivables at June 30.
- The Wells Fargo facility included financial covenants, including a restriction against net losses in any four consecutive fiscal quarters beginning in Q3 2014. Orion reported covenant compliance at June 30 and expected continued compliance through maturity.
- Subsequent event: On August 5, 2015, Orion acquired TAS Commercial Concrete for approximately $115 million in cash. It entered a new five-year, $185 million syndicated facility, with $149 million of debt outstanding and about $36 million of revolver availability after the transaction; it repaid approximately $32.7 million owed to Wells Fargo and terminated that facility. TAS was expected to be reported as a separate segment. These acquisition and financing amounts post-date the June 30 balance sheet.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether delayed starts, weather effects, and asset utilization improve, and whether bookings convert into revenue and cash.
- Cash conversion and receivables, retainage, and unbilled contract balances, given negative operating cash flow and increased receivables.
- Post-acquisition leverage, debt-service capacity, covenant headroom, and the terms and availability of the new credit facility.
- TAS’s actual contribution to revenue, margins, cash flow, and integration costs; the filing provides no post-acquisition operating results.
- Whether cost estimates, claims, commodity prices, and government funding affect contract profitability or the reported backlog.