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ORN > SEC Filings for ORN > Form 10-K on 27-Mar-2014All Recent SEC Filings

Show all filings for ORION MARINE GROUP INC

Form 10-K for ORION MARINE GROUP INC


27-Mar-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes beginning on page F-1 of this Annual Report on Form 10-K. Certain statements made in our discussion may be forward-looking. Forward-looking statements involve risks and uncertainties and a number of factors could cause actual results or outcomes to differ materially from our expectations. See "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K for additional discussion of some of these risks and uncertainties. Unless the context requires otherwise, when we refer to "we", "us" and "our", we are describing Orion Marine Group, Inc. and its consolidated subsidiaries.

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 presence, but no operations, in Australia. Our customers include federal, state and municipal governments, the combination of which accounted for approximately 43% of our revenue in the year ended December 31, 2013, as well as private commercial and industrial enterprises. We are headquartered in Houston, Texas.

2013 Recap and 2014 Outlook

In 2013, we recorded revenues of $354.4 million, the highest in the Company's history. In addition, we ended 2013 with substantial backlog of $247.3 million. Our revenues in 2013 increased by 21.3% as compared with 2012, and we recorded net income of $0.3 million, as compared with a loss of $11.9 million in the prior year.

As we begin 2014, we continue to see strong market fundamentals and continued steady demand for our heavy civil marine construction services. Our tracking database of future projects of interest remains strong for the foreseeable future. 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. Bridge projects funded by various state departments of transportation, as well as projects led by local port authorities, continue to be let at normal levels. However, current and future lettings from the US Army Corps of Engineers continue to remain inconsistent and uncertain, which puts pressure on the utilization of our dredging assets, particularly in the first half of 2014.

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

The WRDA/WRRDA bills which will authorize expenditures for the conservation and development of the nation's waterways, as well as address funding deficiencies within the Harbor Maintenance Trust Fund;

Renewed focus on coastal rehabilitation along the Gulf Coast, particularly through the use of RESTORE Act funds based on fines collected related to the 2010 Gulf of Mexico oil spill;

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 expand port infrastructure as well as perform additional dredging services and;

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

In late February 2014, we finalized the purchase of approximately 340 acres of land in the upper Houston Ship Channel to be used as a dredge material placement area ("DMPA"). The purchase price was approximately $22 million in cash, funded through the Company's existing credit facility. The purchase of the DMPA will allow the Company to service private customers along the Houston Ship Channel, deploy some of the Company's dredging assets more efficiently, and generate additional revenue from disposal fees. This purchase provides us with one of the only operating private Dredge Material Placements Areas along the upper end of the Houston Ship Channel and should provide enough capacity to meet the needs of the Company's customers in this area for at least the next decade.

Critical Accounting Policies
The consolidated financial statements contained in this report were prepared in accordance with accounting principles generally accepted in the United States ("US GAAP"). The preparation of these financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect both the Company's carrying values of its assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


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Although our significant accounting policies are described in more detail in Note 2 of the Notes to Consolidated Financial Statements; we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition
We enter into construction contracts principally on the basis of competitive bids. Although the terms of our contracts vary considerably, most are made on a fixed price basis. Revenues from construction contracts are recognized on the percentage-of-completion method. The percentage-of-completion method measures the ratio of costs incurred and accrued to date for each contract to the estimated total costs for each contract at completion. This requires us to prepare on-going estimates of the costs to complete each contract as the project progresses. In preparing these estimates, we make significant judgments and assumptions concerning our significant cost drivers of materials, labor and equipment, and we evaluate contingencies based on possible schedule variances, production delays or other productivity factors.

Actual costs may vary from the costs we estimated. Variations from estimated contract costs along with other risks inherent in fixed price contracts (including but not limited to contract performance) may result in actual revenue and gross profits differing from those we estimated and could result in losses on projects. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined, without regard to the percentage of completion. We consider unapproved change orders to be contract variations on which we have customer approval for scope change, but not for price associated with that scope change. These costs are included in the estimated cost to complete the contracts and are expensed as incurred. We recognize revenue equal to cost incurred on unapproved change orders when realization of price approval is probable and the estimated amount is equal to or greater than our cost related to the unapproved change order and the related margin when the change order is formally approved by the customer. Revenue recognized on unapproved change orders is included in contract costs and estimated earnings in excess of billings on uncompleted contracts on the balance sheet. We consider claims to be amounts that we seek or will seek to collect from customers or others for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers on both scope and price changes. Revenue from claims is recognized when agreement is reached with customers as to the value of the claims, which in some instances may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are expensed when incurred. Depending on the size of a particular project, variations from estimated project costs could have a significant impact on our operating results for any fiscal quarter or year. We believe our exposure to losses on fixed price contracts is limited by the relatively short duration of the contracts we undertake and our management's experience in estimating contract costs.

Long-Lived Assets
Our long-lived assets consist primarily of equipment used in our operations. Fixed assets are carried at cost and are depreciated over their estimated useful lives, ranging from one to thirty years, using the straight-line method for financial reporting purposes and accelerated methods for tax reporting purposes. The carrying value of our long-lived assets is evaluated periodically based on utilization of the asset and physical condition of the asset, as well as the useful life of the asset to determine if adjustment to the depreciation period or the carrying value is warranted. If events and circumstances such as poor utilization or deteriorated physical condition indicate that the asset(s) should be reviewed for possible impairment, we use projections to assess whether future cash flows, including disposition, on a non-discounted basis related to the tested assets are likely to exceed the recorded carrying amount of those assets to determine if an impairment exists. If we identify a potential impairment, we will estimate the fair value of the asset through known market transactions of similar equipment and other valuation techniques, which could include the use of similar projections on a discounted basis. We will report a loss to the extent that the carrying value of the impaired assets exceeds their fair values.

Goodwill
We have acquired businesses and assets in purchase transactions that resulted in the recognition of goodwill. In accordance with US GAAP, acquired goodwill is not amortized, but is subject to impairment testing at least annually or more frequently if events or circumstances indicate that the asset more likely than not may be impaired.

Goodwill recorded on our Consolidated Balance Sheets is subject to impairment testing at least annually or more frequently if events or circumstances indicate that the asset more likely than not may be impaired. In 2013, based on our continuing consolidation efforts and changes in our internal management structure, we re-evaluated our operating segments and allocation of goodwill, and determined that we have one operating segment and reporting unit, based on our heavy civil marine construction business. Therefore, in 2013, goodwill was tested based on a single reporting unit as of the testing date. We believe this matches the way our business is managed, which is discussed further in Item 1. Business, above. At December 31, 2013, goodwill totaled $33.8 million.


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We assess the fair value of our reporting unit based on a weighted average of valuations based on market multiples, discounted cash flows, and consideration of our market capitalization. The key assumptions used in the discounted cash flow valuations are discount rates and perpetual growth rates applied to cash flow projections. Also inherent in the discounted cash flow valuation models are past performance, projections and assumptions in current operating plans, and revenue growth rates over the next five years. These assumptions contemplate business, market and overall economic conditions. We also consider assumptions that market participants may use.

As required by the Company's policy, annual impairment assessments and testing of goodwill are performed during the fourth quarter of each year or when circumstances arise that indicate a possible impairment might exist. Based on this testing, we determined that the estimated fair value of our reporting unit exceeded its respective carrying values as of October 31, 2013, goodwill was not impaired, and no events have occurred since that date that would require an interim impairment test. In the future, our estimated fair value could be negatively impacted by extended declines in our stock price, changes in macroeconomic indicators, sustained operating losses, and other factors which may affect our assessment of fair value.

Income Taxes
We account for income taxes using the liability method prescribed by US GAAP. We evaluate valuation allowances for deferred tax assets for which future realization is uncertain. The estimation of required valuation allowance includes estimates of future taxable income. In our assessment of our deferred tax assets at December 31, 2013, we considered that it was more likely than not that all of the deferred tax assets would be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

The Company accounts for uncertain tax positions in accordance with the provisions ASC 740-10, which prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, on our consolidated tax return. We evaluate and record any uncertain tax positions based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the tax jurisdictions in which we operate.

Insurance Coverage, Litigation, Claims and Contingencies We maintain insurance coverage for our business and operations. Insurance related to property, equipment, automobile, general liability and a portion of workers' compensation is provided through traditional policies, subject to a deductible. A portion of our workers' compensation exposure is covered through a mutual association, which is subject to supplemental calls.

The Company maintains two levels of excess loss insurance coverage, totaling $100 million in excess of primary coverage, which excess loss coverage responds to most of the Company's liability policies. The Company's excess loss coverage responds to most of its policies when a primary limit of $1 million has been exhausted; provided that the primary limit for Maritime Employer's Liability is $10 million and the Watercraft Pollution Policy primary limit is $5 million.

We have elected to retain a portion of losses that may occur through the use of various deductibles, limits and retentions under our insurance programs. Losses on these policies up to the deductible amounts are accrued in our consolidated financial statements based on known claims incurred and an estimate of claims incurred but not yet reported. We derive our accruals from known facts, historical trends and industry averages to determine the best estimate of the ultimate expected loss. Actual claims may vary from our estimate. We include any adjustments to such reserves in our consolidated results of operations in the period in which they become known.

Accounting for Stock Issued to Employees and Others We measure the cost of equity compensation to our employees based on the estimated grant-date fair value of the award and recognize the expense over the vesting period. We use the Black-Scholes option pricing model to compute the fair value of the awards of options. The Black-Scholes model requires the use of highly subjective assumptions in the computation. Changes in these assumptions can cause significant fluctuations in the fair value of the option award. Our independent directors receive annual grants of stock, which are measured by the mean price of our stock on the day of grant.

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


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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 December 31, 2013 was $247.3 million, as compared with $184.1 million at December 31, 2012, an increase of 34.3% from the prior year period and reflects the success of our pricing strategies, as well as the continued improvement in the economy.

Current Year -- Year ended December 31, 2013 compared with year ended

December 31, 2012

                                                      Year ended December 31,
                                                2013                          2012
                                        Amount        Percent         Amount        Percent
                                                   (dollar amounts in thousands)
Contract revenues                    $  354,544         100.0  %   $  292,042         100.0  %
Cost of contract revenues               322,540          91.0         277,672          95.0
Gross profit                             32,004           9.0          14,370           5.0
Selling, general and administrative
expenses                                 32,110           9.1          28,573           9.7
Operating loss                             (106 )        (0.1 )       (14,203 )        (4.7 )
Other income (expense)
Loss on sale of assets                     (153 )           -          (1,822 )        (0.6 )
Other income                                165             -             227             -
Interest income                              13             -              35             -
Interest (expense)                         (525 )        (0.1 )          (743 )        (0.3 )
Other expense, net                         (500 )        (0.1 )        (2,303 )        (0.9 )
(Loss) income before income taxes          (606 )        (0.2 )       (16,506 )        (5.6 )
Income tax benefit                         (937 )        (0.3 )        (4,640 )        (1.6 )
Net income (loss) attributable to
common stockholders                  $      331           0.1  %   $  (11,866 )        (4.0 )%

Contract Revenues. Revenues in 2013 increased approximately 21.4% as compared with 2012. Generally, the increase was related to an increased volume of work, including better utilization of assets, as well as the size and scope of projects under contract. Additionally, 2013 revenues benefited from the acceleration of certain project schedules, allowing us to complete some portions of work originally slated for 2014. In 2012, revenues were negatively impacted by gaps between projects, which idled both labor and equipment.

Revenues generated from private customers grew from 51% of our total revenues in 2012 to 57% in 2013. This totaled approximately $203.5 million generated from private customers, or an increase of 27.6% from the prior year. Gradual improvement in the economy resulted in additional capital spending by private customers, including those in the petrochemical industry.

Contract revenue generated from public sector customers represented 43% of total revenue in the year, or approximately $151 million, as compared with 49% during 2012. Continued budget uncertainties by the US Army Corps of Engineers have resulted in uneven project lettings.

Gross Profit. Gross profit was $32.0 million in the twelve month period ended December 31, 2013, an increase of $17.5 million compared with 2012, primarily related to better utilization of our resources, including equipment, as well to pockets of pricing improvement and the realization of certain costs savings on jobs in progress or nearing completion. Gross margin in 2013 was 9.0% as compared to 5.0% in the prior year period. As measured by cost, our self-performance rate was 84% during 2013, as compared with 83% in the prior year period. The increase in self-performance is reflective of the scope and requirements of jobs in progress, and reflected a slight decrease in our reliance on third party subcontractors during the year.

Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses were $32.1 million, an increase of $3.5 million, or 12.6%, as compared with the prior year period. The increase is due to staffing and overhead resulting from expansion into Alaska in 2012, to the recording of bonuses payable to non-executives, to an increase in our estimates for group health insurance, and to an increase in bad debt related to a single job for a small private customer. However, as a percentage of revenues, SG&A expenses declined as compared with the prior year, from 9.7% to 9.1%, resulting from the increased volume of business during 2013.


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Income Tax (Benefit) Expense. We recorded a tax benefit of $937,000 in 2013, as compared with a tax benefit of $4.7 million in 2012. Our effective tax rate in 2013 was 154.6% The variance from our statutory rate resulted from the reconciliation of our 2012 provision to our tax return, and was due to true-ups of deferred timing differences primarily related to depreciation, amortization of intangible assets, as well as a change in the estimate of our net operating loss carryforwards.

Prior Year-Year Ended December 31, 2012 compared with Year Ended December 31, 2011

The following information is derived from our historical results of operations (dollars in thousands):

                                                    Twelve months ended December 31,
                                                      2012                     2011
                                               Amount      Percent      Amount      Percent
Contract revenues                            $ 292,042     100.0  %   $ 259,852     100.0  %
Cost of contract revenues                      277,672      95.0  %     249,614      96.1  %
Gross profit                                    14,370       5.0  %      10,238       3.9  %
Selling, general and administrative expenses    28,573       9.7  %      29,519      11.4  %
Operating loss                                 (14,203 )    (4.7 )%     (19,281 )    (7.5 )%
Other (expense) income
Loss on sale of assets, net                     (1,822 )    (0.6 )%         (60 )       -  %
Other income                                       227         -  %         198       0.1  %
Interest income                                     35         -  %          31         -  %
Interest expense                                  (743 )    (0.3 )%        (349 )    (0.1 )%
Other expense, net                              (2,303 )    (0.9 )%        (180 )       -  %
Loss before income taxes                       (16,506 )    (5.6 )%     (19,461 )    (7.5 )%
Income tax benefit                              (4,640 )    (1.6 )%      (6,347 )    (2.4 )%
Net loss                                     $ (11,866 )    (4.0 )%   $ (13,114 )    (5.1 )%

Contract Revenues. Revenues in 2012 increased approximately 12.4% as compared with 2011. The increase was due in part to commencement on two projects delayed by permitting issues in 2011, as well as the Company's strategic decision to reduce bid margins in order to increase volume. The Company's projects are generally short in duration, and the same project may not be a source of revenue in the periods under comparison. Therefore, changes in the overall size of contracts, the scope of work within each, and the progress schedules of the mix of jobs between periods may result in revenue fluctuations between periods, but may not signify any long-term trends in the business. The Company views such period-to-period fluctuations as normal in its business. In the second half of 2012, we commenced work on several large projects for private sector customers, which is demonstrated by the shift of the source of revenue generated from the public sector to the private sector, and is reflective of the overall improving economy, as well as continuation of choppy lettings by the US Army Corps of Engineers. Revenue generated from private customers was 51% and 24% in 2012 and 2011, respectively. Contract revenue generated from public sector customers represented 49% of total revenue in 2012, as compared with 76% during 2011. We view shifts between customer sectors to be normal in the marine construction business and demonstrates the Company's ability to procure contracts from various sources.

Gross Profit. Gross profit was $14.4 million in the twelve month period ended December 31, 2012, an increase of $4.1 million compared with 2011, primarily related to better utilization of equipment, particularly in the second half of the year, as well as our decision to adjust bid margins to build volume. Gross margin in 2012 was 5.0% as compared to 3.9% in the prior year period, primarily related to the mix of jobs in progress between periods. As measured by cost, our self-performance rate was 83% during 2012, as compared with 85% in the prior year period. The 2% reduction in our self-performance rate indicates an increase in the percent of work that was subcontracted to third parties, and is reflective of the types of jobs in progress at any point in time.

Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses were $28.6 million, a decrease of $0.9 million, or 3.2%, as compared with the prior year period, primarily related to cost containment measures put in place during 2011, and decreases in our estimates related to self-insurance expenses and property taxes.

Income Tax (Benefit) Expense. Our effective tax rate in 2012 was 28.1% and differed from the statutory rate of 35%, due to permanent differences, including incentive stock option expense, and to state income taxes, which reduced our overall tax benefit. Our effective rate for the year ended December 31, 2011 was 32.6%.


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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 December 31, 2013, our working capital was $65.5 million, as compared with $55.8 million at December 31, 2012. As of December 31, 2013, we had cash on hand of $40.9 million. Availability under our revolving credit facility is subject to a borrowing base, which did not affect our ability to fully utilize our facility. Our borrowing availability at December 31, 2013 was 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 by 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 . . .

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