Orion Group Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. Orion provides specialty marine construction and dredging services and turnkey concrete construction through its marine and concrete segments.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $189.4m | $199.5m | $539.8m | $508.6m |
| Gross profit / margin | $22.5m / 11.9% | $20.9m / 10.5% | $63.0m / 11.7% | $45.0m / 8.8% |
| Operating income (loss) | $13.1m | $6.1m | $21.5m | $(0.5)m |
| Net income (loss) | $11.8m | $4.0m | $16.6m | $(5.5)m |
| Diluted EPS | $0.39 | $0.14 | $0.55 | $(0.19) |
Q3 revenue declined 5.0%, mainly because Texas tropical weather reduced concrete production late in the quarter. Nine-month revenue rose 6.1%, reflecting greater work volume and execution of larger projects. Gross margin improved in both periods, attributed to better project execution, labor utilization and cost recovery. SG&A was $15.3m in Q3 and $47.7m year to date; the company cited incentive-compensation accruals as a principal reason for increases versus 2019.
Results include net asset-disposal gains of $6.4m in Q3 and $7.7m year to date. Q3 included $3.5m of gains on asset sales and $2.9m of insurance recoveries; year-to-date figures included $4.8m and $2.9m, respectively. These gains materially contributed to reported operating income. Marine segment Q3 operating income was $9.0m, but was $2.7m excluding the increase in disposal gains; the company reported $5.2m of marine operating income for the first nine months excluding disposal gains. Concrete Q3 revenue fell 16.9%, while nine-month revenue was nearly flat; segment operating income improved in both comparisons.
Cash flow, balance sheet and debt
- Operating cash flow was $38.4m for the first nine months, compared with cash used of $1.9m in 2019. Investing activities used $2.2m, including $9.4m of capital expenditures; financing activities used $34.5m, principally reflecting debt repayments.
- September 30 cash was $2.7m, with no restricted cash. Working capital was $56.8m, versus $62.2m at year-end 2019. The company reported approximately $57.9m of borrowing capacity.
- Debt principal was $42.1m ($40.6m net of issuance costs), down from $73.3m at December 31, 2019. The balance included a $32.1m term loan and $10.0m drawn on the revolving facility. The separate $20m 364-day revolver had no borrowings and matures June 7, 2021; the main credit facility matures July 31, 2023.
- The company reported covenant compliance at September 30 and said cash, borrowing availability and operating cash flow should meet its expected needs for at least 12 months. It had $28.5m of operating and finance lease liabilities.
Backlog, outlook and risks
- Backlog was $428.8m at September 30, down from $528.4m at June 30 and $558.5m at December 31, 2019. The filing says historical backlog figures were corrected for a clerical calculation error, reducing reported backlog by $17.6m at March 31, $13.8m at year-end 2019 and $10.0m at September 2019. Management cited pandemic-related headwinds and election uncertainty, while reporting $1.1bn of bids outstanding and $108m on which Orion was apparent low bidder or had received awards after quarter-end.
- Remaining performance obligations were approximately $428.8m; management expected to recognize $386.6m, or 90%, within 12 months. The filing cautions that backlog is not necessarily indicative of future results.
- No numerical earnings or revenue guidance was provided. Management described continued opportunities in marine infrastructure, ports and coastal restoration, and in Texas concrete markets, but noted potential delays or reduced awards. COVID-19, government funding and budget constraints, customer cancellations, project execution, labor and supply-chain disruptions, commodity prices, oil-price volatility and cruise-sector weakness are identified risks. Fixed-price contracts expose margins to cost overruns and price increases.
- On August 21, 2020, the dredge Waymon L. Boyd caught fire: four crewmembers died, others were injured, the vessel was a total loss, and approximately 18,000 gallons of oil, diesel fuel and contaminated water were discharged and cleaned up. Seven lawsuits had been filed, investigations were ongoing, and further claims were anticipated. Management stated it believed insurance was adequate and did not expect a material adverse effect; the ultimate outcome is uncertain. The company also reported insurance-claim liabilities of $24.5m and insurance-claim receivables of $23.5m at quarter-end, compared with $3.7m and $1.1m at year-end 2019.
- A securities class action was dismissed in June 2020; the dismissal became final in July after no appeal. An October 9, 2020 credit-agreement amendment made administrative changes to asset-disposition repayment terms.
Important facts for investors to verify
- How much earnings improvement is repeatable after separating asset-sale and insurance-recovery gains from operating performance.
- Backlog conversion, subsequent awards, and the effect of the disclosed clerical correction on backlog comparisons.
- The development, insurance coverage and financial exposure associated with the dredge accident and related claims.
- Liquidity, covenant headroom and refinancing or repayment plans for the 364-day revolver maturing in June 2021.
- Whether COVID-19, customer-award timing, weather and input costs affect project execution, margins and cash collection.