Orion Group Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Orion provides specialty marine construction and concrete services. Financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $194.6 | $145.9 | $369.5 | $299.2 |
| Gross profit / margin | $14.3 / 7.4% | $12.3 / 8.4% | $27.1 / 7.3% | $27.8 / 9.3% |
| Operating income (loss) | $(2.8) | $5.6 | $(5.7) | $7.6 |
| Net income (loss) | $(3.1) | $3.5 | $(7.9) | $4.5 |
| EPS, diluted | $(0.10) | $0.11 | $(0.26) | $0.15 |
Q2 revenue rose 33.4%, driven by higher concrete volume and the ramp-up of marine projects. Gross profit dollars increased in Q2, but margin declined; first-half gross profit and margin also fell. The company attributed pressure principally to concrete project performance, project conditions and mix, including write-downs on several concrete projects and unabsorbed indirect costs. SG&A increased in dollars, including severance, management-transition consulting fees and property-tax true-ups.
For the six months, operating cash flow was $11.7 versus $11.3 in 2021. Investing activities used $7.0, including $8.0 of capital expenditures; financing activities used $8.9. Cash declined to $8.1 from $12.3 at year-end. Working capital was $30.7, down from $36.2 at December 31, 2021. At June 30, total debt was $33.5 principal ($33.0 net of issuance costs), versus $39.4 at year-end; debt includes $32.4 drawn on the revolver. Revolver availability was $8.4 after $1.7 of letters of credit. The facility matures July 31, 2023; weighted average interest rate was approximately 5.2%.
Total assets were $351.5 and total liabilities were $210.2 at June 30, 2022. Current assets of $197.4 compared with current liabilities of $166.7. Retainage receivables were $49.9. Contract assets included $9.3 of claims and unapproved change orders.
Material changes and segment performance
- Marine revenue increased 28.7% in Q2 to $82.3; segment operating income was $2.5, versus $8.6 in the prior-year quarter. The prior-year result included a $6.8 gain on sale of Tampa property; excluding that gain, marine operating income increased from $1.8.
- Concrete revenue increased 37.0% to $112.3, but segment operating loss widened to $5.4 from $3.0. First-half concrete operating loss was $10.1 versus $3.8.
- Consolidated backlog was $603.2 at quarter-end, compared with $590.0 at year-end and $394.4 a year earlier. Remaining performance obligations were approximately $603.2, with management expecting to recognize $487.1 (81%) within 12 months. Backlog is not necessarily indicative of future results.
- The prior-year comparison benefited from asset-sale gains: $7.4 in Q2 2021 and $9.0 in the first half of 2021, including the Tampa property sale.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management described continuing bid opportunities and longer-term demand in marine infrastructure and Texas concrete markets, while noting near-term uncertainty in project timing.
- At quarter-end, quoted bids totaled $2.5 billion; $153 million was either apparent low bidder or awarded subsequent to quarter-end. Management said backlog had increased primarily through new wins.
- Risks cited include inflation and commodity costs (concrete, steel and fuel), labor availability, supply-chain disruption, COVID-related impacts, project execution and customer delays, government funding, contract cancellation, and volatility affecting energy-related marine projects. Many contracts are fixed-price, and the company generally does not hedge commodity exposure.
- On March 1, 2022, a credit amendment waived certain covenant defaults, reduced the revolver commitment to $42.5 million, added an anti-cash-hoarding provision and established temporary covenant requirements. The company reported compliance with financial covenants at June 30. Management stated it expects adequate liquidity for at least 12 months and does not believe substantial doubt exists about going concern.
- Following the CEO’s departure on April 6, the board chair became interim CEO and CFO while the company searches for replacements. The filing cites transition-related severance and consulting costs.
- The 2020 dredge fire caused five crew deaths, injuries and pollution. The company reported that all claims arising from the incident had been settled within insurance limits; insurers had reimbursed $204.9 million of the approximately $206.0 million paid. Outstanding incident claims accruals were approximately $0.3 million.
- A valuation allowance was recorded against net deferred tax assets. The filing also notes the remaining $3.8 million of deferred employer Social Security taxes was due in December 2022.
Important facts for investors to verify
- Whether concrete project margins and write-downs improve, and whether project costs and change-order recoveries develop as estimated.
- Cash conversion, receivable and retainage collections, and the company’s ability to maintain covenant compliance and secure refinancing or replacement liquidity before the July 2023 credit-facility maturity.
- How much of the $603.2 million backlog and $2.5 billion of quoted bids converts to revenue, and on what schedule and margins.
- Progress in appointing permanent CEO and CFO, and the effect of management transition on execution and costs.
- Potential exposure beyond the reported settlements, insurance recoveries and accruals, and the realizability of deferred tax assets.