Orion Group Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Orion provides specialty marine construction and turnkey concrete services through its marine and concrete segments. Financial amounts below are in U.S. dollars; “$ million” is used for readability.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Contract revenue | $136.8 million | $138.8 million |
| Gross profit / margin | $15.8 million / 11.6% | $13.0 million / 9.4% |
| Operating income (loss) | $7.1 million | $(1.5) million |
| Net income (loss) | $4.1 million | $(1.8) million |
| Diluted EPS | $0.14 | $(0.07) |
| Cash from operations | $10.6 million | $11.0 million |
- Gross margin improved 2.2 percentage points. Management attributed the improvement primarily to strong execution, especially in marine.
- Q1 2018 operating income includes a $5.448 million gain related to settlement of a legal matter; results therefore include a significant unusual item.
- Interest expense was $1.5 million, versus $1.4 million. Income tax expense was $1.5 million, compared with a $1.0 million tax benefit a year earlier; the 2018 effective tax rate was 26.6%.
Financial position and liquidity
- At March 31, 2018, cash was $9.2 million and working capital was $71.2 million. Current assets were $179.3 million and current liabilities were $108.1 million.
- Debt principal was $80.4 million, comprising $5.0 million on the revolver and $75.4 million on the term loan. Debt net of issuance costs was $77.9 million. The weighted-average facility interest rate for the quarter was 4.95%.
- Revolver availability was approximately $44.3 million after $0.7 million of letters of credit. The credit facility matures August 5, 2020; Orion reported compliance with its financial covenants.
- Operating, investing, and financing cash flows were $10.6 million, $(2.9) million, and $(7.6) million, respectively. Capital expenditures were $4.3 million, up from $2.1 million in Q1 2017. Cash increased $0.1 million during the quarter.
- Surety bonding capacity was $500 million, with approximately $319 million of remaining availability.
Segments and changes versus prior year
- Marine: Revenue declined 6.5% to $62.8 million. Operating income was $6.3 million versus a $7.7 million loss; the 2018 figure includes the legal-settlement gain. Revenue mix shifted toward private-sector work.
- Concrete: Revenue rose 3.5% to $74.1 million, partly reflecting the April 2017 TBC acquisition. Operating income fell to $0.8 million from $6.2 million, due primarily to unfavorable weather, project timing and mix, and competitive pressure in Houston.
- Consolidated revenue declined 1.4%, reflecting project timing and mix and concrete weather disruptions, partly offset by the TBC acquisition. Q1 2017 results did not include TBC for the full comparable period.
- Backlog at March 31 was $355.3 million: marine $182.1 million versus $238.4 million a year earlier; concrete $173.2 million versus $156.4 million. Backlog may be canceled and is not necessarily indicative of future results.
- Orion adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-period results were not restated. Adoption increased reported Q1 revenue by $0.330 million and net income by $0.054 million versus amounts that would have been reported without adoption. The opening retained-earnings adjustment was a $0.286 million reduction.
Outlook, risks, and contingencies
- Management said market demand remained solid in both segments and expected 2018 to improve over 2017; no quantified revenue or earnings guidance was provided. Management expected concrete to continue contributing meaningfully to EBITDA during 2018.
- Marine opportunities cited include port and waterway work, energy-related facilities, and coastal restoration; concrete demand was supported by Texas population growth and commercial, education, and distribution construction.
- Management expected operating cash flow and available borrowings to meet liquidity, working-capital, equipment, and debt-service needs for at least the next 12 months.
- Key operating risks include fixed-price contract execution, bid accuracy, materials and fuel costs, weather and customer delays, labor and equipment availability, and changes in government funding. The company depends in part on government projects and does not generally hedge commodity-price exposure.
- Approximately $12.3 million of claims and unapproved change orders was recorded in contract assets. Orion believed collection was probable but cautioned that the full amount might not be collected. Retainage totaled $39.6 million, including $5.2 million expected after March 31, 2019.
- The company reported no material change to previously disclosed risk factors and did not expect other pending legal matters to have a material adverse effect. It reported no environmental liabilities at quarter-end.
Important facts for investors to verify
- How much of Q1 profitability resulted from the one-time legal-settlement gain, and what were the settlement’s final cash and receivable terms?
- Whether concrete margins recover from Q1 weather, project-mix, and competitive pressures, and whether marine operating performance sustains its improvement excluding the settlement gain.
- Backlog conversion, cancellations, and collection of the recorded claims, unapproved change orders, and retainage.
- Capital spending, operating cash conversion, debt reduction, interest-rate exposure, and continued compliance with credit-facility covenants.
- The eventual effects of ASC 606 and the forthcoming lease-accounting standard; the filing said assessment of the lease standard was ongoing.