Orion Group Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts below are in millions of dollars unless noted. Orion provides specialty marine construction and concrete construction services through its Marine and Concrete segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $199.5 | $125.1 | $508.6 | $421.7 |
| Gross profit / margin | $20.9 / 10.5% | $4.8 / 3.9% | $45.0 / 8.8% | $39.0 / 9.2% |
| Operating income (loss) | $6.1 | $(7.4) | $(0.5) | $4.3 |
| Net income (loss) | $4.0 | $(6.4) | $(5.5) | $(0.0) |
| Diluted EPS | $0.14 | $(0.22) | $(0.19) | $0.00 |
- Q3 revenue rose 59.5% year over year, driven by higher backlog execution and marine asset utilization, plus stronger concrete production and favorable weather. Gross margin improved on labor efficiency and utilization.
- Nine-month revenue increased 20.6%, but gross margin declined from 9.2% to 8.8%, reflecting project timing and mix; the prior-year period benefited from cost savings on a large marine project. SG&A rose 11.2%, in part due to the Invest, Scale and Grow (ISG) initiative.
- Q3 Marine revenue was $107.4 million and operating income $4.9 million; Concrete revenue was $92.1 million and operating income $1.2 million. For the nine months, Marine recorded a $1.6 million operating loss and Concrete $1.1 million operating income. Marine’s comparison was affected by a $5.4 million prior-year legal-settlement gain and $1.7 million of 2019 ISG costs; Concrete incurred $2.2 million of 2019 ISG costs.
Cash flow, balance sheet and liquidity
- Cash was $1.4 million at September 30, down from $8.7 million at year-end 2018. Operating cash flow used $1.9 million and investing activities used $9.6 million in the first nine months; financing provided $4.2 million. Capital expenditures were $13.0 million.
- Working capital was $55.6 million, compared with $50.8 million at year-end. Current assets were $190.2 million and current liabilities $134.5 million. Management attributed $5.4 million of the working-capital increase to lease accounting.
- Debt principal was $70.0 million ($68.4 million net of issuance costs), versus $80.5 million principal at year-end. The credit facility matures July 2023; the weighted-average rate was 5.86%. Revolver borrowings were $32.0 million, with $17.2 million available after letters of credit. The term loan had $38.0 million outstanding.
- A September sale-leaseback generated $19.1 million, of which $18.2 million was applied to term-loan principal. It was accounted for as a failed sale-leaseback: Orion retains the asset and recorded a liability. The 15-year lease has annual rent of about $1.5 million, increasing 2% annually.
- Operating and finance lease liabilities totaled $26.7 million at quarter-end. Property and equipment, substantially all pledged under the credit agreement, was $134.1 million.
Backlog, outlook and material items
- Backlog was $630.5 million at September 30, including $404.3 million Marine and $226.2 million Concrete; Concrete reported its highest backlog in company history. Backlog was below $661.0 million at June 30 but above $426.0 million a year earlier. Separately, remaining performance obligations were $630.5 million, with $532.4 million expected to be recognized within 12 months.
- Management said demand remained strong in both segments and expected results to improve as 2019 progressed. No numerical earnings or revenue guidance was provided. Backlog is not assured revenue: projects may be canceled, sometimes without penalty, and timing and execution affect results.
- Credit covenants included a waiver of the fixed-charge coverage test for the September 2019 quarter. The company reported compliance with all financial covenants at September 30. Leverage and EBITDA requirements apply, with leverage limits tightening in subsequent quarters. Management expected operating cash generation and available borrowing capacity to fund at least the next 12 months.
- Key business risks include fixed-price contract execution, labor and productivity, weather and customer delays, commodity costs, government funding, contract cancellation and collection of receivables or claims. Interest-rate swaps hedge variability on part of term-loan interest; the swap liability was $1.3 million.
- A securities class action filed in April 2019 alleges misleading statements concerning goodwill, receivables and internal controls; the company disputes the allegations and intends to contest them. Two subsidiaries also faced Texas Water Code matters; one was resolved through a diversion agreement and the second had diversion agreements offered. Management did not expect these matters to materially affect liquidity or financial condition.
- The 2018 annual goodwill impairment test resulted in a $69.5 million charge and fully impaired goodwill; no goodwill remained at September 30, 2019. Management maintained a valuation allowance against net deferred tax assets. Adoption of lease accounting in 2019 added right-of-use assets and lease liabilities without affecting net income.
Important facts for investors to verify
- Whether improved project margins and execution continue, particularly in Marine, and whether backlog converts on schedule and at expected profitability.
- Cash conversion and working-capital requirements: receivables and retainage rose, while cash fell to $1.4 million and operating cash flow remained negative.
- Available revolver capacity, covenant headroom and the effect of tighter future leverage requirements; the filing does not state actual covenant ratios.
- Economics and cash obligations of the failed sale-leaseback, including long-term rent escalators and extension options.
- Progress and potential financial effects of the securities litigation and water-code matters, and the recoverability of contract claims and deferred tax assets.