Business context and reporting period
Orion Marine Group, Inc. (the registrant; despite the request metadata naming Orion Group Holdings, Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2014. It provides heavy civil marine construction and specialty services and reports as one operating segment.
Financial results and position
| Metric | Three months ended June 30, 2014 | Prior-year comparable period | Six months ended June 30, 2014 | Prior-year comparable period |
|---|---|---|---|---|
| Contract revenue | $90.3 million | $84.1 million | $171.5 million | $159.1 million |
| Gross profit / margin | $5.9 million / 6.5% | $7.9 million / 9.4% | $13.5 million / 7.9% | $13.7 million / 8.6% |
| Operating income (loss) | $(2.3) million | $0.1 million | $(2.6) million | $(1.8) million |
| Net income (loss) attributable to common stockholders | $(1.2) million | $0.3 million | $(1.4) million | $(0.8) million |
| Basic earnings (loss) per share | $(0.04) | $0.01 | $(0.05) | $(0.03) |
For the six-month period, operating cash flow was $3.6 million, versus $7.1 million a year earlier. Investing used $32.6 million, including $22.2 million to buy land for a dredge material placement area and $10.7 million in capital expenditures. Financing provided $22.5 million, primarily from credit-facility borrowings. Cash declined to $34.4 million from $40.9 million at year-end 2013.
At June 30, 2014, total assets were $321.0 million and stockholders’ equity was $227.6 million. Working capital was $41.9 million, down from $65.5 million at December 31, 2013. Debt totaled $30.7 million: $22.5 million drawn on the revolver and $8.2 million under the term loan. Revolver availability was approximately $11.8 million after letters of credit. The reported revolver rate was 2.19%.
Material changes versus prior comparable periods
- Second-quarter revenue increased 7%, but gross margin fell to 6.5% from 9.4%. Management attributed the decline to delayed project start dates that left labor and equipment idle, and to project mix.
- Quarterly SG&A rose 3.9% to $8.1 million, primarily due to personnel and related costs, including medical expense. The company moved from modest operating income to an operating loss.
- Six-month revenue increased about 8%, while gross profit edged down. Operating and net losses persisted.
- Property and equipment increased to $163.5 million from $141.9 million, principally reflecting the land acquisition and equipment investment. Revolver borrowings rose after the land purchase.
- Backlog reached a reported record $281.6 million at June 30, up from $247.3 million at December 31, 2013; backlog excludes apparent-low-bid jobs and is not necessarily indicative of future results.
Outlook, risks, contingencies and unusual items
Management expected better asset utilization in the second half of 2014 as project activity improved, anticipated some Army Corps of Engineers lettings before its fiscal year-end, and expected revenue from dredge material placement area fees. The company cited a strong future-project tracking database and demand related to marine infrastructure, petrochemical and energy investment, port expansion, waterway funding and coastal rehabilitation. These are expectations, not formal financial guidance.
Management said cash was adequate for general business needs and debt service and expected operating cash generation to fund liquidity needs and fleet maintenance for at least 12 months. The credit facility matures June 30, 2015. The company reported compliance with its covenants at quarter-end and expected continued compliance. Covenants include fixed-charge coverage of at least 1.50:1, leverage no greater than 2.50:1, and loss limitations, including a four-consecutive-quarter net-loss restriction beginning in Q3 2014.
Key risks include project scheduling and productivity, fixed-price contract cost overruns, commodity-price increases, weather and environmental delays, labor availability, contract cancellation, and dependence in part on government funding. Private customers represented 58% of Q2 revenue; one private customer and a local port authority represented 22.5% and 9.9% of receivables, respectively. The company did not hedge commodity-price exposure. Routine legal proceedings were reported, with no expected material adverse effect; no material risk-factor changes from the 2013 Form 10-K were disclosed.
The company recognized a $0.7 million Q2 income-tax benefit and estimated a 38.8% effective tax rate for the first half. It reported no goodwill impairment indicators. The new revenue-recognition standard was expected to become effective for the company in 2017; its impact had not yet been determined.
Important facts for investors to verify
- Whether delayed project starts and idle labor and equipment continued to weigh on gross margins after Q2.
- Whether the record backlog converted to revenue as expected, and the extent of cancellations or timing changes.
- Utilization and expected fee revenue from the newly acquired dredge material placement area.
- Cash generation, remaining revolver availability, and compliance with covenants as the June 30, 2015 credit-facility maturity approaches.
- Collection and timing of retainage and unbilled contract balances, including the concentrated receivables from major customers.