Orion Group Holdings, Inc. — Q3 2023 Form 10-Q
Business context and period. Specialty construction contractor operating in marine and concrete markets. This unaudited report covers the three and nine months ended September 30, 2023; financial amounts below are in U.S. dollars, millions, unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Contract revenue | $168.5 | $182.6 | $510.2 | $552.1 |
| Gross profit / margin | $19.1 / 11.3% | $13.4 / 7.4% | $38.7 / 7.6% | $40.6 / 7.3% |
| Operating income (loss) | $2.6 | $1.1 | $(6.0) | $(4.6) |
| Net income (loss) | $(0.7) | $0.2 | $(13.5) | $(7.7) |
| Diluted EPS | $(0.02) | $0.01 | $(0.42) | $(0.25) |
| Interest expense | $3.4 | $1.2 | $7.7 | $2.9 |
- Cash flow: Nine-month operating cash flow was $(28.5), versus $9.1 provided in 2022, primarily reflecting working-capital outflows of $31.4. Investing activities provided $5.4, including asset-sale proceeds; financing activities provided $23.2. Capital expenditures were $6.7, down from $10.6.
- Liquidity and balance sheet: At September 30, cash was $3.9; working capital was $67.9, compared with $31.1 at year-end 2022. Total assets were $380.2 and stockholders’ equity was $125.6. Debt carrying value, net of issuance costs, was $50.3 (principal of approximately $56.0); borrowing availability on the revolver was approximately $31.7.
Material changes and business developments
- Q3 revenue declined 7.7% year over year, mainly due to the company’s exit from unprofitable central Texas concrete work; higher marine revenue, including the Pearl Harbor project, partly offset the decline. Nine-month revenue fell 7.6%, reflecting first-quarter weather and customer delays and lower central Texas concrete revenue.
- Q3 gross margin improved to 11.3% from 7.4%, attributed to better project mix and execution in both segments, partly offset by lower dredging equipment and labor utilization. For the nine-month period, gross profit declined 4.6% while margin increased to 7.6% from 7.3%.
- Q3 marine revenue rose 6.3% to $80.9, while marine operating income fell to $2.0 from $5.2, partly because the prior-year period included larger asset-sale gains. Concrete revenue decreased 17.8% to $87.6; the segment returned to operating income of $0.6 from a $4.1 loss. Nine-month marine operating results shifted to a $0.6 loss from $9.6 income; concrete’s operating loss narrowed to $5.5 from $14.1.
- Backlog at quarter-end was $877.5, up from $818.7 at June 30, 2023 and $548.6 a year earlier. Marine backlog was $699.9 and concrete backlog $177.6. The company expected to recognize $610.8, or 70%, of remaining performance obligations over the next 12 months. It also reported $2.8 billion of bids outstanding; more than $43 million resulted in awards after quarter-end.
Debt, outlook, and risks
- In May 2023, Orion refinanced its prior facility with a three-year, $103.0 million White Oak credit agreement: a $65.0 million revolver and $38.0 million term loan, maturing May 15, 2026. The facility is secured by substantially all company assets. Its weighted-average interest rate was 13.06% for the quarter; September 30 ending rate was 12.79%.
- The company reported compliance with financial covenants at September 30. The agreement requires minimum liquidity above $15.0 million. Management said the refinancing and other factors resolved the previously identified substantial doubt about the company’s ability to continue as a going concern, and that it expected adequate liquidity for at least 12 months.
- Subsequent event: on October 25, White Oak agreed to extend the mandatory $15 million term-loan prepayment deadline to the earlier of three days after the East West Jones Placement Area sale or June 30, 2024, and to accelerate the transition from minimum-EBITDA to minimum-FCCR testing to Q2 2024.
- Unusual item: nine-month net gains on asset disposals were $7.9, including a $5.2 gain related to the Port Lavaca South Yard sale-leaseback. The company also recorded sale-leaseback-related financing and lease obligations.
- No formal revenue or earnings guidance is provided in the filing. Management described end-market opportunities positively, while noting that backlog and bid estimates are not assured future results. Key risks include project execution, weather and customer delays, labor and equipment utilization, fixed-price exposure to concrete, steel and fuel costs, government funding, contract changes or cancellations, collection of claims, and interest rates. A 100-basis-point SOFR increase was estimated to raise annual interest expense by approximately $0.5.
- Management said pending legal and other proceedings were incidental and not expected to materially affect financial condition, results or cash flows. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether operating cash flow and working capital improve, given the $28.5 nine-month operating cash outflow and only $3.9 of cash on hand.
- Revolver availability, the $15.0 million minimum-liquidity covenant, covenant compliance and the amended term-loan prepayment deadline and FCCR testing schedule.
- Whether the $877.5 backlog converts as expected, particularly the timing and profitability of the Pearl Harbor work and concrete projects.
- How higher interest costs, project execution, commodity prices and customer or weather delays affect margins and cash generation.
- The sustainability of results excluding asset-sale gains, and collection of retainage and claims/change orders; claims and unapproved change orders included in contract assets were approximately $14.1.