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ORN > SEC Filings for ORN > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for ORION MARINE GROUP INC

Form 10-Q for ORION MARINE GROUP INC


4-Nov-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Unless the context otherwise indicates, all references in this quarterly report to "Orion," "the company," "we," "our," or "us" are to Orion Marine Group, Inc. and its subsidiaries taken as a whole.

Certain information in this Quarterly Report on Form 10-Q, including but not limited to Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), may constitute forward-looking statements as such term is defined within the meaning of the "safe harbor" provisions of
Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

All statements other than statements of historical facts, including those that express a belief, expectation, or intention are forward-looking statements. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "potential," "plan," "goal" or other words that convey the uncertainty of future events or outcomes.

We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control, including unforeseen productivity delays, levels of government funding or other governmental budgetary constraints, and contract cancellation at the discretion of the customer. These and other important factors, including those described under "Risk Factors" in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Form 10-K") may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements in this quarterly report on Form 10-Q speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly.

MD&A provides a narrative analysis explaining the reasons for material changes in the Company's (i) financial condition since the most recent fiscal year-end, and (ii) results of operations during the current fiscal year-to-date period and current fiscal quarter as compared to the corresponding periods of the preceding fiscal year. In order to better understand such changes, this MD&A should be read in conjunction with the Company's fiscal 2012 audited consolidated financial statements and notes thereto included in its 2012 Form 10-K, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2012 Form 10-K and with our unaudited financial statements and related notes appearing elsewhere in this quarterly report.

Overview
We are a leading marine specialty contractor serving the heavy civil marine infrastructure market. We provide a broad range of marine construction and specialty services on, over and under the water along the Gulf Coast, the Atlantic Seaboard, the West Coast, Canada and the Caribbean Basin, as well as have a marketing, but not an operational presence in Australia and the Middle East. Our customers include federal, state and municipal governments, the combination of which accounted for approximately 40% of our revenue in the three months ended September 30, 2013, as well as private commercial and industrial enterprises. We are headquartered in Houston, Texas.

Our contracts are obtained primarily through competitive bidding in response to "requests for proposals" by federal, state and local agencies and through negotiation with private parties. Our bidding activity and strategies are affected by such factors as our backlog, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. The timing and location of awarded contracts may result in unpredictable fluctuations in the results of our operations.

Most of our revenue is derived from fixed-price contracts. There are a number of factors that can create variability in contract performance and therefore impact the results of our operations. The most significant of these include the following:
completeness and accuracy of the original bid;

increases in commodity prices such as concrete, steel and fuel;

customer delays and work stoppages due to weather and environmental restrictions;

availability and skill level of workers; and

a change in availability and proximity of equipment and materials.


All of these factors can result in inefficiencies in contract performance, which can impact the timing of revenue recognition and ultimate contract profitability. We plan our operations and bidding activity with these factors in mind and they have not had a material adverse impact on the results of our operations in the past.

Third quarter 2013 recap and 2013 Outlook

Demand for marine infrastructure solutions continued to be strong in the third quarter, and provided steady bid opportunities, particularly in the private sector. In addition, we were able to sustain construction equipment utilization throughout the quarter. Revenues increased by 18% as compared with the third quarter last year, and by 6% compared with the second quarter of 2013.

We continue to see new bid opportunities in the private sector, reflecting increases in capital projects, both in new construction and refurbishment of existing infrastructure, driven in part by energy related infrastructure, the cruise industry, and preparation for larger ships transiting the expanded Panama Canal, which is scheduled for completion in 2015. Bridge projects funded by various state departments of transportation, as well as projects led by local port authorities, remain a steady source of bid opportunities. However, current and future lettings from the US Army Corps of Engineers ("USCOE") remain inconsistent and uncertain, until such time as a budget or long-term continuing resolution is passed. The Company continues to monitor the progress of The Water Resources Development Act (WRDA) of 2013, which includes language to correct the funding gap between the Harbor Maintenance Trust Fund receipts and expenditures for dredging projects.
Regarding coastal restoration opportunities, the second portion of the two-part federal trial in New Orleans, which will determine the amount of oil released in the 2010 gulf oil spill, is underway. Once the trial is over, Clean Water Act fines will then be levied against the responsible parties, 80% of which will go towards funding the RESTORE Act, which will fund coastal restoration opportunities in the five Gulf Coast States.

In the long-term, we continue to see positive trends in demands for our services in our end markets, including:
General demand to repair and improve degrading US marine infrastructure;

Renewed focus on coastal rehabilitation along the Gulf Coast

Expected increases in cargo volume and future demands from larger ships transiting the Panama Canal will require ports along the Gulf Coast and Atlantic Seaboard to perform additional dredging services and expand port infrastructure; and

Improving economic conditions and increased activity in the petrochemical industry will necessitate capital expenditures , including larger projects as well as maintenance call-out work.

We continue to concentrate on our core business objectives; to manage our business effectively and efficiently, continue to maintain a strong backlog while maintaining our pricing discipline; to closely monitor the costs of our operations; and to maintain our strong balance sheet.

Consolidated Results of Operations

Backlog Information

Our contract backlog represents our estimate of the revenues we expect to realize under the portion of contracts remaining to be performed. Given the typical duration of our contracts, which is generally less than a year, our backlog at any point in time usually represents only a portion of the revenue that we expect to realize during a twelve month period. Many projects that make up our backlog may be canceled at any time without penalty; however, we can generally recover actual committed costs and profit on work performed up to the date of cancellation. Although we have not been materially adversely affected by contract cancellations or modifications in the past, we may be in the future, especially in economically uncertain periods. Consequently, backlog is not necessarily indicative of future results. In addition to our backlog under contract, we also have a substantial number of projects in negotiation or pending award at any time.

Backlog at September 30, 2013 was $216.4 million, as compared with $184.1 million at December 31, 2012.


Three months ended September 30, 2013 compared with three months ended

September 30, 2012

                                                 Three months ended September 30,
                                                2013                          2012
                                        Amount        Percent         Amount        Percent
                                                   (dollar amounts in thousands)
Contract revenues                    $   88,992         100.0  %   $   75,386         100.0  %
Cost of contract revenues                83,381          93.7          70,493          93.5
Gross profit                              5,611           6.3           4,893           6.5
Selling, general and administrative
expenses                                  7,974           9.0           7,185           9.5
Operating loss                           (2,363 )        (2.7 )        (2,292 )        (3.0 )
Other income (expense)
Other income                                  -             -              44           0.1
Interest income                               -             -               4             -
Interest (expense)                         (111 )        (0.1 )          (235 )        (0.3 )
Other income, (expense) net                (111 )        (0.1 )          (187 )        (0.2 )
Loss before income taxes                 (2,474 )        (2.8 )        (2,479 )        (3.2 )
Income tax benefit                       (1,500 )        (1.7 )          (885 )        (1.2 )
Net loss                                   (974 )        (1.1 )        (1,594 )        (2.0 )
Net loss attributable to
noncontrolling interest                     (31 )           -               -             -
Net loss attributable to Orion
common stockholders                  $     (943 )        (1.1 )    $   (1,594 )        (2.0 )%

Contract Revenues. Revenues for the three months ended September 30, 2013 increased approximately 18% as compared with the third quarter of 2012, as a result of an increased volume of work. During the quarter we mobilized to, and continued work on, several large construction projects particularly for private sector customers. Revenue generated from private sector customers represented 60% of total revenues in the period, as compared with 52% in the prior year period. Contract revenue generated from public sector customers represented 40% of total revenues in the third quarter of 2013, as compared with 48% in the comparable period last year. We view these shifts in revenue from one sector to another as normal in our business.

Gross Profit. Gross profit was $5.6 million in the third quarter ended September 30, 2013, as compared with $4.9 million in the third quarter last year. The improvement was primarily related to better utilization of equipment, resulting from an increased amount of work in the quarter, offset in part by costs incurred for differing site conditions. Gross margin in the third quarter was 6.3%, as compared with 6.5% last year, reflecting the mix of contracts in progress. As measured by cost, our self performance was 85% in the third quarter of 2013 and 84% in the third quarter last year. A higher level of job self-performance typically reflects less reliance on third party subcontractors, and generally results in higher margins.

Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses were $8.0 million, an increase of $0.8 million, or 11.0% as compared with the prior year period, The increase was primarily related to additional overhead expenses related to the acquisition of West Construction in late 2012.

Other income, net of expense. Other expense in the third quarter of 2013 and 2012 was primarily interest on our borrowings.

Income Tax Benefit. We have estimated our annual effective tax rate at 53.8% for 2013. This differs from the statutory rate of 35%, due to permanent differences, including incentive stock option expense, and to state income taxes. Our effective rate for the in the period ended September 30, 2012 was 35.7%. In the third quarter of 2013, the Company recorded a benefit of approximately $0.8 million related to the reconciliation of its 2012 provision to the tax return, which affected the 2013 tax rate.. This benefit was offset by other reconciliations affecting timing differences, such that, overall, the Company's federal net loss carryforward remained essentially unchanged.


Nine months ended September 30, 2013 compared with nine months ended

September 30, 2012

                                                  Nine months ended September 30,
                                                2013                          2012
                                        Amount        Percent         Amount        Percent
                                                   (dollar amounts in thousands)
Contract revenues                    $  248,131         100.0  %      193,408         100.0  %
Cost of contract revenues               228,859          92.2         191,560          99.0
Gross profit (loss)                      19,272           7.8           1,848           1.0
Selling, general and administrative
expenses                                 23,491           9.5          21,754          11.2
Operating loss                           (4,219 )        (1.7 )       (19,906 )       (10.2 )
Other income (expense)
Other income                                614           0.2             228           0.1
Interest income                              13             -              23             -
Interest (expense)                         (427 )        (0.2 )          (638 )        (0.3 )
Other income, (expense) net                 200           0.1            (387 )        (0.2 )
Loss before income taxes                 (4,019 )        (1.6 )       (20,293 )       (10.4 )
Income tax benefit                       (2,161 )        (0.9 )        (6,941 )        (3.6 )
Net loss                                 (1,858 )        (0.7 )       (13,352 )        (6.8 )
Net loss attributable to
noncontrolling interest                     (56 )           -               -             -
Net loss attributable to Orion
common stockholders                  $   (1,802 )        (0.7 )    $  (13,352 )        (6.8 )%

Contract Revenues. Revenues for the nine months ended September 30, 2013 increased approximately 28.3%, resulting from increased volume of work. Revenues in the prior year period were substantially impacted by gaps between projects, as well as a slowdown in lettings of Federal projects, particularly those involving dredging services. In the first nine months of the current year, revenue generated from private customers represented 55% of total revenues in the period, as compared with 47% in the same period last year. Contract revenue generated from public sector customers represented 45% of total revenues in the first nine months of 2013, as compared with 53% in the comparable period last year.

Gross Profit. Gross profit was $19.3 million in the nine months ended September 30, 2013, as compared with a $1.8 million million in the comparable period last year. The improvement was primarily related to better utilization of equipment, and to certain cost savings on jobs in progress or nearing completion. In the prior year, margins were depressed due to underutilization of dredging assets, and to crews idled between projects. Gross margin in the first nine months of 2013 was 7.8% , as compared with 1.0% last year. As measured by cost, our self performance was 84% in the both periods.

Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses were $23.5 million, an increase of $1.7 million, or 8.0%, as compared with the prior year period, The increase was primarily related to additional overhead expenses related to the acquisition of West Construction in late 2012.

Other income, net of expense. For the nine month period ended September 30, 2013, we recorded other income, net of expense of $614,000. During the second quarter of 2013, we determined that parameters necessary for the earnout portion of the purchase price related to the acquisition of West Construction in late 2012 would not be met. Accordingly, we reduced our liability of $271,000 to zero, which is included as a component of other income for the year to date. The balance of other income related to miscellaneous recoveries, net of interest expense. In the first nine months of 2012, we recorded net expense of $400,000, which was primarily interest on our borrowings.

Income Tax Benefit. We have estimated our annual effective tax rate at 34.6% for 2013. This differs from the statutory rate of 35%, due to permanent differences, including incentive stock option expense, and to state income taxes. Our effective rate for the nine month period ended September 30, 2012 was 34.2%. In the third quarter of 2013, the Company recorded a benefit of approximately $0.8 million related to the reconciliation of its 2012 provision to the tax return, which affected the 2013 tax rate.. This benefit was offset by other reconciliations affecting timing differences, such that, overall, the Company's federal net loss carryforward remained essentially unchanged.


Liquidity and Capital Resources

Our primary liquidity needs are to finance our working capital, fund capital expenditures, and pursue strategic acquisitions. Historically, our source of liquidity has been cash provided by our operating activities and borrowings under our Credit Facility (as defined below).

Our working capital position fluctuates from period to period due to normal increases and decreases in operational activity. At September 30, 2013, our working capital was $58.9 million, as compared with $55.8 million at December 31, 2012. As of September 30, 2013, we had cash on hand of $31.2 million. Availability under our revolving credit facility was subject to a borrowing base, which did not limit our borrowing availability of approximately $34.3 million.

We expect to meet our future internal liquidity and working capital needs, and maintain our equipment fleet through capital expenditure purchases and major repairs, from funds generated in our operating activities for at least the next 12 months. We believe our cash position is adequate for our general business requirements discussed above and to service our debt.

The following table provides information regarding our cash flows and our capital expenditures for the nine months ended 'September 30, 2013 and 2012:

                                                             Nine months ended September 30,
                                                               2013                   2012
Cash flows provided by operating activities             $         2,139         $        22,556
Cash flows used in investing activities                 $       (11,560 )       $       (21,995 )
Cash flows (used in) provided by financing activities   $        (2,508 )       $        10,673

Capital expenditures (included in investing activities
above)                                                  $       (11,751 )       $       (22,344 )

Operating Activities. In the first nine months of 2013, our operations provided approximately $2.1 million in net cash inflows, as compared with cash provided by operations in the prior year period of $22.6 million. The change in cash between periods was related to:

a decrease in our net loss of approximately $11.6 million;

a decrease in trade accounts receivable balances, reflecting collections on accounts as well as the timing of billings to customers, as compared with a net increase in receivables in the prior year period, which resulted in a net inflow of cash between periods of $13.2 million;

net outflow of cash of $21.6 million between periods related to billings to and payments from customers for costs that cannot be billed, or receipt of payments for items such as mobilization at project commencement;

receipt in the prior year of $14 million in cash related to prior year tax refunds and the carryback of prior year tax losses;

changes in other working capital components, including trade payables, which are related to the composition of projects in process, and which resulted in a net outflow of cash between 2013 and 2012 of $12.5 million

changes in non-cash components of approximately $2.1 million, primarily related to changes in our net deferred tax liability, resulting from an increase in our net operating loss carryforwards in the current year.

Changes in working capital are normal within our business and are not necessarily indicative of any fundamental change within working capital components or trend in the underlying business.

Investing Activities. Capital asset additions and betterments to our fleet were $11.7 million in the first nine months of 2013, as compared with $22.3 million in 2012, which included the purchase of approximately 18 acres of land and buildings in Tampa, Florida.

Financing Activities. In the prior year period, we funded the purchase of land and buildings in Tampa, Florida from our Credit Facility through draws totaling $13.0 million, of which $10.9 million was converted to a term loan. We have made scheduled installment payments on the term loan which which has reduced the balance to $9.3 million.

Sources of Capital

The Company has a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, and Wells Fargo Securities, LLC.


The Credit Agreement, as amended from time to time, provides for borrowings under a revolving line of credit and swingline loans, an accordian, and a term loan (together, the "Credit Facility"). The Credit Facility is guaranteed by the subsidiaries of the Company, secured by the assets of the Company, including stock held in its subsidiaries, and may be used to finance working capital, repay indebtedness, fund acquisitions, and for other general corporate purposes. Interest is computed based on the designation of the loans, and bear interest at either a prime-based interest rate or a LIBOR-based interest rate. Principal balances drawn under the Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. Amounts repaid under the revolving line of credit may be re-borrowed. All of the components of the Credit Facility mature on June 30, 2013. On April 30, 2013, the Company extended the maturity of its Credit Facility to June 30, 2014.

Provisions of the revolving line of credit and accordian The Company has a maximum borrowing availability under the revolving line of credit and swingline loans (as defined in the Credit Agreement) of $35 million, with a $20 million sublimit for the issuance of letters of credit. An additional $25 million is available subject to the Lender's discretion.

Revolving loans may be designated as prime rate based loans ("ABR Loans") or Eurodollar Loans, at the Company's request, and may be made in an integral multiple of $500,000, in the case of an ABR Loan, or $1 million in the case of a Eurodollar Loan. Swingline loans may only be designated as ABR Loans, and may be made in amounts equal to integral multiples of $100,000. The Company may convert, change or modify such designations from time to time.

Borrowings are subject to a borrowing base, which is calculated as the sum of 80% of eligible accounts receivable, plus 90% of adjusted cash balances, as defined in the Credit Agreement. At September 30, 2013, our borrowing base reflected no limitation in borrowing availability.

At September 30, 2013, no amounts were outstanding under the revolver. Outstanding letters of credit, which totaled $742,000 at September 30, 2013, reduced our maximum borrowing availability to approximately $34.3 million.

Provisions of the term loan
At September 30, 2013, the term loan component of the Credit Facility totaled $9.3 million and is secured by specific dredge assets of the Company. Principal payments on the term loan, in the amount of $389,000, are due quarterly.

Financial covenants
Restrictive financial covenants under the Credit Facility include:
A Tangible Net Worth covenant, with the minimum Tangible Net Worth requirement of a base amount of $180 million as of June 30, 2012, plus 50% of accumulated consolidated quarterly net income (if positive), plus 75% of all issuances of equity interests by Borrower during that quarter;

A Profitability Covenant such that the Company shall not sustain a consolidated net loss for two consecutive fiscal quarters, commencing with the quarter ending September 30, 2012.

In addition, the Credit Facility contains events of default that are usual and customary for similar transactions, including non-payment of principal, interest or fees; inaccuracy of representations and warranties; violation of covenants; bankruptcy and insolvency events; and events constituting a change of control.

The Company is subject to a commitment fee, at a current rate of 0.25% of the unused portion of the maximum available to borrow under the Credit Facility. The commitment fee is payable quarterly in arrears.

Interest at September 30, 2013, was based on a Eurodollar-option interest rate of 2.19%. For the year ended December 31, 2012, the weighted average interest rate was 2.40%.

At September 30, 2013, the Company was in compliance with its financial covenants and expects to be in compliance in 2013.

The Company expects to meet its future internal liquidity and working capital needs, and maintain its equipment fleet through capital expenditure purchases and major repairs, from funds generated by ts operating activities for at least the next 12 months. The Company believes our cash position is adequate for general business requirements and to service its debt.

Bonding Capacity

We are generally required to provide various types of surety bonds that provide additional security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends on our


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