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ORN > SEC Filings for ORN > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for ORION MARINE GROUP INC

Form 10-Q for ORION MARINE GROUP INC


2-May-2014

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, 2013 ("2013 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 2013 audited consolidated financial statements and notes thereto included in its 2013 Form 10-K, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2013 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. We also have a marketing presence, but no operations, in Australia. Our customers include federal, state and municipal governments, the combination of which accounted for approximately 40% of our revenue in the three months ended March 31, 2014, 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, work stoppages, and other costs due to weather and environmental restrictions;

availability, skill level of workers; and

a change in availability and proximity of equipment and materials.


All of these factors can contribute to inefficiencies in contract performance, which can adversely affect 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.

First quarter 2014 recap and 2014 Outlook

In February 2014, we completed 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 of approximately $22 million in cash was funded through a draw on our existing credit facility. This purchase will allow us to service private customers along the upper Houston Ship Channel, deploy some of our 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 our customers in this area for at least the next decade. We expect to begin receiving dredge material in the second half of 2014.

As expected, we experienced a pull back in revenues in the first quarter, due to some project accelerations late last year. We ended the quarter with a record level backlog of $255.3 million, which does not include jobs in which we are apparent low bidder.

Our tracking database of future projects of interest remains strong for the foreseeable future, with a steady demand for our heavy civil marine construction services. We continue to identify 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 remain inconsistent and uncertain, putting pressure on the utilization of our dredging assets, which is expected to continue 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;

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;

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;

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; and

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.

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 March 31, 2014 was $255.3 million, as compared with $247.3 million at December 31, 2013.


Three months ended March 31, 2014 compared with three months ended March 31,

2013

                                                   Three months ended March 31,
                                                2014                          2013
                                        Amount        Percent         Amount        Percent
                                                   (dollar amounts in thousands)
Contract revenues                    $   81,258         100.0  %   $   75,059         100.0  %
Cost of contract revenues                73,611          90.6          69,232          92.2
Gross profit                              7,647           9.4           5,827           7.8
Selling, general and administrative
expenses                                  7,964           9.8           7,691          10.2
Operating loss                             (317 )        (0.4 )        (1,864 )        (2.4 )
Other income (expense)
 Gain/(loss) on sale of assets               93           0.1               3             -
Other income                                  -             -             298           0.4
Interest income                              10             -              10             -
Interest (expense)                         (130 )        (0.2 )          (184 )        (0.2 )
Other (expense) income, net                 (27 )           -             127           0.2
Loss before income taxes                   (344 )        (0.4 )        (1,737 )        (2.2 )
Income tax expense (benefit)               (134 )        (0.2 )          (640 )        (0.9 )
Net loss                                   (210 )        (0.3 )        (1,097 )        (1.3 )
Net loss attributable to
noncontrolling interest                       -             -              (7 )           -
Net loss attributable to Orion
common stockholders                  $     (210 )        (0.3 )    $   (1,090 )        (1.3 )%

Contract Revenues. Despite some project schedule accelerations into the fourth quarter of 2013, revenues for the three months ended March 31, 2014 increased approximately 8% as compared with the first quarter of 2013. The increase resulted from the volume of work in backlog at the end of 2013, as well as work performed on new project awards during the quarter.

Revenue generated from private sector customers represented 60% of total revenues in the period, as compared with 42% in the prior year period. Revenue from private sector customers totaled approximately $49 million, or an increase of 55% compared with the first quarter of 2013. Improvement in the economy resulted in additional spending by private sector customers on capital infrastructure, particularly those customers in the petrochemical industry.

Contract revenue generated from public sector customers totaled $32.3 million, and represented 40% of total revenues in the first quarter of 2014, as compared with $43.5 million, or 58% of total revenues in the comparable period last year. The change from the prior year reflects continued uncertainty in lettings by the US Army Corps of Engineers. We view these shifts in revenue from one sector to another as normal in our business.

Gross Profit. Gross profit was $7.6 million in the first quarter ended March 31, 2014, as compared with $5.8 million in the first quarter last year. The improvement was primarily related to better utilization of equipment, resulting from the increased volume of work in the quarter, as well as production improvements on jobs nearing completion. Gross margin in the first quarter was 9.4%, as compared with 7.8% last year, reflecting the mix of contracts in progress, which include some pockets of pricing improvement in the current year. As measured by cost, our self performance was 85% in the first quarter of 2014 and 83% in the first 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 3.5% compared with last year. The increase was due generally to additional personnel and related expenses, including group medical expense.

Other income, net of expense. Other expense primarily reflects interest on our borrowings.

Income Tax Expense (Benefit). We have estimated our annual effective tax rate at 39% for 2014. 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 March 31, 2013 was 36.8%.


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 March 31, 2014, our working capital was $46.3 million, as compared with $65.5 million at December 31, 2013. As of March 31, 2014, we had cash on hand of $45.6 million. Availability under our revolving credit facility was subject to a borrowing base, which did not limit our borrowing availability. Due to the purchase of the land in February 2014 through a draw on the credit facility, our borrowing capacity at March 31, 2014 was limited to approximately $11.8 million.

We expect to meet our future internal liquidity and working capital needs, and maintain or replace 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 capital expenditures for the three months ended March 31, 2014 and 2013:

                                                             Three months ended March 31,
                                                              2014                  2013
Cash flows provided by operating activities             $        6,536         $       8,162
Cash flows used in investing activities                 $      (24,030 )       $      (2,678 )
Cash flows (used in) provided by financing activities   $       22,247         $      (2,683 )

Capital expenditures (included in investing activities
above)                                                  $       (2,005 )       $      (2,691 )

Operating Activities. In the first three months of 2014, our operations provided approximately $6.5 million in net cash inflows, as compared with cash provided by operations in the prior year period of $8.2 million. The change in cash between periods was related to:

a decrease in our net loss of approximately $0.9 million;

a decrease in trade account receivable balances, reflecting collections on accounts as well as the timing of billings to customers; however this decrease was more significant in the prior year period, resulting in a net outflow between periods of $6.5 million;

net inflow of cash of $3.6 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;

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 $2.0 million in the first three months of 2014, as compared with $2.7 million in 2013. In addition, in February 2014, we purchased a dredge material placement area along the northern section of the Houston Ship Channel for approximately $22 million.

Financing Activities. In the current year period, we funded the purchase of land in Houston, Texas from our Credit Facility through draws totaling $22.5 million. In addition, we made scheduled installment payments on the term loan which reduced the balance to $8.2 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, 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. The Credit Facility matures on June 30, 2014. The Company is working with its lenders to extend or renew the Credit Facility before the June 30 maturity date.

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 March 31, 2014, our borrowing base reflected no limitation in borrowing availability.

At March 31, 2014, $22.5 million was outstanding under the revolver, reflecting the draw in February 2014 to fund the purchase of the dredge material placement area in Houston, Texas. Outstanding letters of credit, which totaled $742,000 at March 31, 2014, reduced our maximum borrowing availability to approximately $11.8 million.

Provisions of the term loan
At March 31, 2014, the term loan component of the Credit Facility totaled $8.175 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 March 31, 2014, was based on a Eurodollar-option interest rate of 2.19%. For the year ended December 31, 2013, the weighted average interest rate was 2.40%.

At March 31, 2014, the Company was in compliance with its financial covenants and expects to be in compliance through the maturity date.

The Company expects to meet its future internal liquidity and working capital needs, and maintain or replace its equipment fleet through capital expenditure purchases and major repairs, from funds generated by its operating activities for at least the next 12 months. The Company believes its 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 capitalization, working capital, past performance and external factors, including the capacity of the overall surety market. At March 31, 2014, we believe our capacity under our current bonding arrangement was in excess of $400 million, of which we


had approximately $100 million in surety bonds outstanding. We believe our strong balance sheet and working capital position will allow us to continue to access our bonding capacity.

Effect of Inflation

We are subject to the effects of inflation through increases in the cost of raw materials, and other items such as fuel. Due to the relative short-term duration of our projects, we are generally able to include anticipated price increases in the cost of our bids.

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