Orion Group Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Orion provides specialty marine and concrete construction services. Amounts below are in U.S. dollars; financial statement figures are generally shown in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Contract revenue | $137.4m | $140.3m | $276.2m | $269.9m |
| Gross profit / margin | $15.4m / 11.2% | $16.9m / 12.1% | $28.4m / 10.3% | $31.7m / 11.7% |
| Operating income (loss) | $(2.5)m | $0.3m | $(3.9)m | $(0.2)m |
| Net loss | $(2.3)m | $(0.8)m | $(4.1)m | $(2.0)m |
| Loss per share, diluted | $(0.08) | $(0.03) | $(0.15) | $(0.07) |
| Operating cash flow | — | $20.1m | $10.1m |
- At June 30, cash was $0.9m, working capital was $70.6m, and total assets were $426.5m. Current liabilities were $108.3m.
- Debt principal was $88.5m ($85.8m net of issuance costs), compared with $104.6m principal at year-end 2016. The term loan’s weighted-average interest rate was 3.57%; no revolving balance was outstanding at June 30. Revolver availability, net of letters of credit, was about $49.1m.
- Six-month investing cash outflow was $4.4m, including $3.7m of capital expenditures and $6.0m for the TBC acquisition, partially offset by asset-sale proceeds. Financing cash outflow was $15.1m, principally reflecting debt repayments.
Material changes and segment results
- Q2 revenue declined 2.1% year over year; six-month revenue rose 2.3%. Despite higher first-half revenue, gross profit and margins fell, and the net loss widened.
- Marine construction: Q2 revenue fell 22.5% to $62.0m and the operating loss widened to $8.6m from $1.2m. First-half revenue declined 9.3% to $129.2m, with an operating loss of $16.3m versus $4.4m. Management attributed the deterioration chiefly to customer permitting delays, work resequencing, and idle crew and equipment costs.
- Concrete construction: Q2 revenue increased 25.0% to $75.4m, and operating income rose to $6.2m from $1.5m. First-half revenue increased 15.3% to $147.0m, with operating income of $12.4m versus $4.2m. Management cited Dallas growth and improved execution.
- Backlog at June 30 was $210.0m in marine construction and $218.1m in concrete construction, up from $166.4m and $201.2m, respectively, a year earlier. The filing cautions that backlog is not necessarily indicative of future results and projects may be canceled.
- Orion acquired Tony Bagliore Concrete, Inc. on April 10 for $6.0m cash, with up to $2.0m additional contingent consideration. Purchase accounting remained preliminary; TBC contributed results from the acquisition date.
Outlook, risks and unusual items
- Management expected strong financial improvement in the second half of 2017, citing peak quarter-end backlog, continued demand, solid bid opportunities, and expected stronger operating performance. No quantified revenue or earnings guidance was provided.
- A July 2017 credit-agreement amendment, effective June 30, followed management’s concern about meeting leverage covenants. It revised the leverage-ratio limits through September 2017; Orion reported compliance at June 30. The amendment may raise borrowing costs if leverage exceeds 2.75:1 and restrict certain activities, including acquisitions. The leverage limit steps down to 2.50:1 for quarters beginning December 31, 2017.
- Marine construction goodwill impairment indicators included three consecutive quarters of segment losses and revised forecasts. The interim test found no impairment. Management’s liquidity assessment stated it expected operating cash flow and available borrowings to cover internal needs and debt service for at least the next 12 months.
- Key exposures include project execution and permitting delays, fixed-price contract cost inflation (including fuel, concrete, and steel), labor and equipment availability, government funding, customer cancellations, claims collection, and covenant compliance. Government customers represented 39% of first-half revenue; private customers represented 61%. No individual customer exceeded 10% of revenue or current receivables.
- Ordinary-course legal claims were disclosed; management did not expect other proceedings, individually or in aggregate, to materially affect results, cash flows, or financial condition. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether marine project permits were obtained and delayed work resumed, and whether the expected second-half improvement materialized.
- Subsequent marine segment profitability, project cost estimates, and any changes to contract claims or loss provisions.
- Compliance with the amended leverage and fixed-charge covenants, borrowing costs, and remaining revolver availability.
- Conversion of backlog into revenue and cash, including the cancellation terms and execution risks associated with projects.
- Final TBC purchase-price allocation and any earn-out obligation of up to $2.0m.