Orion Group Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Business context
The company changed its name from Orion Marine Group, Inc. in May 2016 following its 2015 acquisition of TAS Commercial Concrete. It now reports two segments: heavy civil marine construction and commercial concrete construction. Because TAS was acquired on August 5, 2015, 2016 consolidated results include concrete operations that are absent from the reported 2015 comparison.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Contract revenue | $140.3 | $86.1 | $269.9 | $167.5 |
| Gross profit / margin | $16.9 / 12.1% | $6.0 / 7.0% | $31.7 / 11.7% | $14.5 / 8.6% |
| Operating income (loss) / margin | $0.3 / 0.2% | ($2.7) / (3.1%) | ($0.2) / (0.1%) | ($2.9) / (1.7%) |
| Net loss | ($0.8) | ($1.8) | ($2.0) | ($2.1) |
| Loss per diluted share | ($0.03) | ($0.07) | ($0.07) | ($0.08) |
| Interest expense | $1.6 | $0.3 | $3.1 | $0.5 |
Q2 revenue rose 63.0%; first-half revenue rose 61.1%, principally because TAS contributed $60.3 million and $127.5 million, respectively. Marine revenue declined year over year, partly from weather-related delays and project timing. Q2 gross margin improved with TAS’s contribution and better marine project efficiency, cost control, and project mix. SG&A also increased substantially with the acquisition and higher payroll, stock compensation, and consulting costs.
For the first half, marine reported revenue of $142.4 million and an operating loss of $4.4 million; commercial concrete reported revenue of $127.5 million and operating income of $4.2 million. Q2 segment operating results were a $1.2 million marine loss and $1.5 million concrete income.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $10.1 million, versus cash use of $3.2 million in 2015. Investing cash use was $12.5 million, including $12.5 million of capital expenditures; financing provided $2.5 million. Cash increased by $0.2 million to $1.5 million. Operating cash generation benefited from working-capital movements and noncash depreciation and financing-cost amortization.
- Working capital was $68.4 million, compared with $60.9 million at year-end 2015; current assets were $175.8 million and current liabilities $107.4 million. Current receivables, including retainage, totaled $103.6 million; costs and estimated earnings in excess of billings were $48.4 million.
- Balance-sheet debt, net of issuance costs, was $109.7 million ($21.4 million current and $88.4 million long-term). The company separately reported $113.6 million of principal borrowings at June 30. The term loan principal was $101.6 million; revolving borrowings were $12.0 million. Borrowing availability was approximately $36.9 million after an outstanding $1.1 million letter of credit. The company drew another $10.0 million on the revolver after quarter-end for working capital.
- The credit facility matures August 5, 2020; the disclosed quarterly weighted-average rate was 3.81%, and term-loan and revolver borrowings were each at 4.00% at June 30. Interest-rate swaps hedge variability on 50% of term-loan principal; the swap liability was approximately $1.2 million on the balance sheet.
- Management reported compliance with all financial covenants at June 30. Substantially all company assets secure the credit facility.
Changes, outlook, and principal risks
- Backlog at June 30 was $166.4 million for marine, down from $223.0 million a year earlier, and $201.2 million for commercial concrete, up from $174.3 million. Management cautions that projects may be canceled and backlog is not necessarily indicative of future results.
- Management said demand and bid opportunities remained strong in both segments, citing port and bridge work, energy-related marine facilities, and Texas commercial construction. It said Tampa marine projects were substantially completed and expressed confidence in improved future performance there. Heavy rainfall slowed productivity in both segments during Q2.
- No numerical revenue or earnings guidance was provided. Management expected operating cash flow and available borrowings to meet liquidity, working-capital, debt-service, and equipment needs for at least the next 12 months; capital spending was described as on track with the fiscal-year budget.
- Key risks include project execution and weather delays, fixed-price exposure to concrete, steel, and fuel costs, labor and material availability, government funding and project timing, and customer cancellation. The company generally does not hedge commodity exposure. Commercial concrete also relies on select concrete suppliers.
- The company recognized an approximately $11.0 million customer claim as contract revenue because collection was considered probable; it cautioned that the full recorded amount may not ultimately be recognized. Legal proceedings were described as arising in the ordinary course, with no other proceeding expected to have a material adverse effect. The company reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the $11.0 million claim is billed, collected, or revised, and how it affects contract assets and earnings.
- Whether marine backlog and segment margins recover, and whether concrete growth translates into sustained operating income.
- Liquidity following the subsequent $10.0 million revolver draw, future working-capital needs, capital spending, and covenant headroom as leverage limits tighten.
- Whether weather, project timing, fixed-price input costs, or customer cancellations affect execution, cash conversion, and backlog realization.
- The acquisition’s effect on comparability: reported 2015 results exclude TAS, so consolidated year-over-year growth is not fully like-for-like.