Orion Group Holdings Inc - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[√] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2008
OR
[ ]
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ________
to_______
Commission
file number: 333-145588
ORION
MARINE GROUP, INC.
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Delaware
State
of Incorporation
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26-0097459
IRS
Employer Identification Number
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12550
Fuqua Street
Houston,
Texas 77034
Address
of Principal Executive Office
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(713)
852-6500
Telephone
number (including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
stock, $0.01 par value per share
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The
Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act: [ ] Yes [√]
No
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act: [ ] Yes[√] No
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days:[√] Yes[ ] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act (Check One):
Large
Accelerated Filer
[ ] Accelerated
Filer
[√] Non-accelerated
filer
[ ] Smaller
reporting company [ ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act) [ ] Yes[√] No
There
were 21,565,720 shares of common stock outstanding as of March 5,
2009. The aggregate market value of the Registrant’s common equity
held by non-affiliates was approximately $300.1 million as of June 30, 2008,
based upon the last reported sales price on the NASDAQ Global Market on that
date.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III
– Portions of the Registrant’s definitive Proxy Statement to be issued on
connection with the 2009 Annual Meeting of Stockholders
ORION
MARINE GROUP, INC.
2008
Annual Report on Form 10-K
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FORWARD-LOOKING
STATEMENTS
In
addition to historical information, this Annual Report on Form 10-K and the
documents incorporated by reference herein may contain forward-looking
statements that are not based on historical fact. When used in this
report, words such as “expects”, “anticipates”, “believes”, “seeks”,
“estimates”, “plans”, “intends” and similar words identify forward-looking
statements. You should not place undue reliance on these
forward-looking statements. Although such statements are based on
management’s current estimates and expectations and currently available
competitive, financial and economic data, forward-looking statements are
inherently uncertain and involve risks and uncertainties that could cause our
actual results to differ materially from what may be inferred from the
forward-looking statements. Some of the factors that could cause or
contribute to such differences are listed and discussed in Item 1A “Risk Factors”, below and
elsewhere in this Annual Report on Form 10-K. We undertake no
obligation to release publicly any revisions or updates to any forward-looking
statements that are contained in this document.
General
We are a
leading marine specialty contractor serving the heavy civil marine
infrastructure market. We provide a broad range of marine
construction services on, over and under the water along the Gulf Coast, the
Atlantic Seaboard and in the Caribbean Basin. Our customers are
federal, state and municipal governments as well as private commercial and
industrial enterprises.
History
We were
founded in 1994 as a marine construction project management
business. Initially, we performed work along the continental Unites
States coastline, as well as in Alaska, Hawaii and the Caribbean
Basin. In 1997 we expanded beyond the project management business,
established fixed geographic operating bases and made four acquisitions between
1997 and 2003. In 2004, we were acquired by Orion Marine Group, Inc.
(formerly known as Hunter Acquisition Corp., a corporation formed and controlled
by our former principal stockholders) and we incorporated under the laws of the
State of Delaware. In March and April 2007, we revised our subsidiary
and holding company structure and completed a Rule 144A Private Placement common
stock offering. In August 2007, we filed a Registration Statement on
Form S-1 seeking registration of shares of common stock held by the selling
shareholders therein identified, which became effective in December
2007. The common stock of Orion Marine Group, Inc. commenced trading
publicly on December 20, 2007 and is currently listed on the NASDAQ Global
Select Market under the symbol OMGI. On February 29, 2008, a
newly-formed, wholly-owned subsidiary of the Company entered into an Asset
Purchase Agreement to purchase substantially all of the assets (excepting
certain current assets) of Orlando, Florida-based Subaqueous Services, Inc.
(“SSI”), for a purchase price of $35 million (the “SSI Transaction”), which is
discussed in further detail in Note 4 in the Notes to Consolidated Financial
Statements. Unless the context otherwise requires, all
references herein to “Orion”, the “Company”, the “Registrant”, “we”, “us” or
“our” refer to Orion Marine Group, Inc. and its consolidated
subsidiaries.
Business
Strategy
General
We pursue
the following business strategies in order to improve our business and
prospects, increase our revenue and profitability and, ultimately, enhance
stockholder value:
Expand
and Fill in Our Service Territory
We grow
our business by seeking opportunities in other geographic markets by
establishing a physical presence in new areas through selective acquisitions or
greenfield expansions.
Pursue
Strategic Acquisitions
We
evaluate acquisition opportunities in parallel with our greenfield
expansion. Our strategy will include timely and efficient integration
of such acquisitions into our culture, bidding process and internal
controls. We believe that attractive acquisition candidates are
available due to the highly fragmented and regional nature of the industry, high
cost of capital for equipment and the desire for liquidity among an aging group
of existing business owners. We believe our financial strength,
industry expertise and experienced management team will be attractive to
acquisition candidates.
Continue
to Capitalize on Favorable Long-Term Industry Trends
Our
growth has been driven by our ability to capitalize on increased infrastructure
spending across multiple end-markets we serve including port infrastructure,
government funded projects, transportation, oil and gas, and environmental
restoration markets.
Continue
to Reinvest in our Core Business
Since our
inception, we have focused on pursuing technically complex projects where our
specialized services and equipment differentiate us from our
competitors. We intend to continue to grow our fleet through the
purchase and development of equipment.
Financial
Information About Segments
Although
we describe our business in this report in terms of the services we provide, our
base of customers and the geographic areas in which we operate, we have
concluded that our operations comprise one reportable segment pursuant to
Statement of Financial Accounting Standards No. 131 – Disclosures about Segments of an
Enterprise and Related Information. In making this
determination, we considered that each project has similar characteristics,
includes similar services, has similar types of customers and is subject to the
same regulatory environment. We organize, evaluate and manage our
financial information around each project when making operating decisions and
assessing our overall performance.
Services
Provided
We act as
a single-source, turnkey solution for our customers’ marine contracting
needs. We provide a broad range of heavy civil marine construction
services. In addition, we provide dredging, repair and maintenance,
and other specialty services. Many of our contracts encompass
multiple services within a single project.
Marine
Construction Services
These
services include construction of marine transportation facilities, marine
pipelines, bridges and causeways, and marine environmental
structures. We generally serve as the prime contractor for many of
these types of projects and we have the capability of providing design-build
services.
Marine
transportation facility construction projects include public port facilities for
container ship loading and unloading; cruise ship port facilities; private
terminals; special-use Navy terminals, recreational use marinas and docks, and
other marine-based facilities. These projects typically consist of
steel or concrete fabrication dock or mooring structures designed for durability
and longevity, and involve driving piles of concrete, pipe or sheet pile up to
90 feet below the surface to provide a foundation for the port facility that we
subsequently construct on the piles. We also provide on-going
maintenance and repair, as well as inspection services and emergency repair, and
demolition and salvage to such facilities.
Our
marine pipeline service projects generally include the installation and removal
of underwater buried pipeline transmission lines; installation of pipeline
intakes and outfalls for industrial facilities; construction of pipeline
outfalls for wastewater and industrial discharges; river crossing and
directional drilling; creation of hot taps and tie-ins; and inspection,
maintenance and repair services.
Our
bridge and causeway projects include the construction, repair and maintenance of
all types of bridges and causeways, as well as the development of fendering
systems over marine environments, and we serve as the prime contractor for many
of these projects, some of which may be design-build contracts. These
projects involve fabricating steel or concrete structures designed for
durability and longevity, and involve driving piles of concrete, pipe or sheet
pile to create support for the concrete deck roadways that we subsequently
construct on the piles. These piles can exceed 50 inches in diameter,
can range up to 170 feet in overall length, and are often driven 90 feet into
the sea floor. We also provide ongoing maintenance and repair, as
well as emergency repair, to bridges, pile supports, and fendering systems for
bridges.
Marine
environmental structure projects may include the installation of concrete
mattresses to ensure erosion protection; construction of levees to contain
environmental mitigation projects, and the installation of geotubes for wetlands
and island creation. Such structures are used for erosion control,
wetlands creation and environmental remediation.
Dredging
services
Projects
involving dredging generally enhance or preserve the navigability of waterways
or the protection of shorelines through the removal or replenishment of soil,
sand or rock. Dredging involves removing mud and silt from the
channel floor by means of a mechanical backhoe, crane and bucket or cutter
suction dredge and pipeline systems. Dredging is integral to capital and
maintenance projects, including: maintenance for previously deepened waterways
and harbors to remove silt, sand and other accumulated sediments; construction
of breakwaters, jetties, canals and other marine structures; deepening ship
channels and wharves to accommodate larger and deeper draft ships; containing
erosion of wetlands and coastal marshes; land reclamation; and beach nourishment
and creation of wildlife refuges. Maintenance dredging projects
provide a source of recurring revenue as active channels typically require
dredging every one to three years due to natural sedimentation. The
frequency of maintenance dredging may be accelerated by rainfall and major
weather events such as hurricanes. Areas where no natural deep water
ports exist, such as the Texas Gulf Coast, require substantial maintenance
dredging. We maintain multiple specialty dredges of various sizes and
specifications to meet customer needs.
Specialty
Services
Our
specialty services include salvage, demolition, surveying, towing, diving and
underwater inspection, excavation and repair. Our diving services are
largely performed in shallow water with little to no visibility and include
inspections, salvage and pile restoration and encapsulation. Our
survey services include surveying pipelines and performing hydrographic surveys
which determine the configuration of the floors of bodies of water and detect
and identify wrecks and obstructions. Most of these specialty
services support our other construction services and provide an incremental
touch-point with our customers.
Industry
Overview
Our
services are provided to customers in diverse end markets, including port
expansion and maintenance, bridges, causeways and other marine infrastructure,
the cruise industry, the Department of Defense, the oil and gas industry,
coastal protection and reclamation, along with hurricane restoration and repair
and environmental remediation. We believe that this diversity in our
customer base will enable us to utilize our resources to lessen the negative
effects of any downturn in a specific end market.
Port
Expansion and Maintenance
Ports and
harbors are vital to trade for the U.S. economy, help position the
U.S. as a leader in global trade and are essential to national security. We
anticipate that U.S. ports will need to build larger dock space and deepen
their channels to accommodate larger container, dry bulk and liquid cargo ships
in order to remain globally competitive.
Ports
located on the Gulf Coast can also expect greater volume growth as the Panama
Canal expansion projects should contribute to increased traffic of larger
container ships from the Pacific Ocean bypassing Long Beach, California. As a
part of our existing operations, we service most major ports across the Gulf
Coast and Florida. We are also targeting growth along the Atlantic Seaboard
where additional major ports, such as Savannah, Charleston and Norfolk, are
located.
Bridge
and Causeways
According
to the American Society of Civil Engineers, as of their 2009 report, 26% of the
nation’s bridges are structurally deficient or functionally obsolete. As the
system ages, the infrastructure cannot support the growing traffic loads,
resulting in frequent delays for repairs. At the same time, the repairs become
more expensive due to long-deferred maintenance. Legislation such as
the American Recovery and Reinvestment Act of 2009 demonstrates the growing
federal commitment to build, reconstruct and repair the U.S. transportation
infrastructure and we expect that our core markets of the Gulf Coast and
Atlantic Seaboard will benefit by higher transportation infrastructure
spending.
Marine
Infrastructure
The
U.S. Marine Transportation System (“MTS”) consists of waterways, ports and
their intermodal connections, vessels, vehicles, and system users, as well as
shipyards and repair facilities crucial to maritime activity. Forty-one states,
including all states east of the Mississippi River, and 16 state capitals
are served by commercially navigable waterways. More than 1,000 harbor channels
and 25,000 miles of inland, intracoastal and coastal waterways in the
U.S. serve over 300 ports, with more than 3,700 terminals that support
passenger and cargo movements. More than 95% of the overseas trade that comes in
or out of the U.S. arrives by ship through the MTS. The MTS is primarily an
aggregation of federal, state, local and privately owned facilities and private
companies.
U.S. inland
and intracoastal waterways require substantial maintenance and improvement.
While waterway usage is increasing, the facilities and supporting systems are
aging. In addition, channels and waterways must maintain certain
depths to accommodate ship and barge traffic. Natural sedimentation
in these channels and waterways require maintenance dredging to maintain
navigability.
Cruise
Industry
An
expected increase in ship size has generated a need for substantial port
infrastructure development, including planning and construction of new terminals
and facilities, as well as on-going maintenance and repair
services. These larger vessels require development of new piers and
additional dredging services to accommodate deeper drafts. Our
service area includes the ports of Miami, Galveston, Tampa, New Orleans,
Everglades and Canaveral, and the Caribbean Basin, which includes numerous
cruise facilities and is the most popular cruise destination in the North
American market.
The
Department of Defense
The US
Navy has the responsibility for the maintenance of 39 facilities in the United
States, which includes a significant amount of marine
infrastructure. In recent years, Department of Defense funding
shifted away from naval base expansion, repair and maintenance. We
believe that the US Navy is poised to resume a more normal flow of maintenance
and upgrades to its infrastructure, including its marine
facilities.
The US
Coast Guard maintains more than 50,000 federal aids to navigation, which include
buoys, lighthouses, day beacons and radio-navigation signals, and additionally
has oversight responsibility for over 18,000 highway and railroad bridges that
span navigable waterways throughout the country. As part of the
Department of Homeland Security, we anticipate that US Coast Guard needs for
varied marine construction services will provide opportunities for us in the
future.
We
anticipate that the continued implementation of the U.S. Base Realignment
and Closure Program (“BRAC”), will shift emphasis towards improving domestic
military infrastructure, including port and other facilities located on, or
near, the water. This should result in the need for increased
infrastructure at the realigned facilities where personnel and equipment will be
moved from facilities targeted for closure.
Oil
and Gas Industry
We
construct, repair and remove underwater pipelines, and provide marine
construction and on-going maintenance services for private refineries, terminal
facilities and docks, and other critical near shore oil and gas
infrastructure.
U.S. Coastal
and Wetland Restoration and Reclamation
We
believe that increases in coastal population density and demographic trends will
lead to an increase in the number of coastal restoration and reclamation
projects, and, as the value of waterside assets rises from a residential and
recreational standpoint, citizens and municipalities will do more to protect
these assets via restoration and reclamation projects.
Hurricane
Restoration and Repair
Hurricanes
can be very destructive to the existing marine infrastructure and natural
protection barriers of the prime storm territories of the Gulf Coast, the
Atlantic Seaboard and the Caribbean Basin, including bridges, ports, underwater
channels and sensitive coastal areas. Typically, restoration and repair
opportunities continue for several years after a major hurricane event. These
events provide incremental projects to our industry that contribute to a
favorable bidding environment and high capacity utilization in our
markets.
Environmental
Remediation
We
believe there will be contingency funding for the protection of natural
habitats, environmental preservation, wetlands creation and
remediation for high priority projects in Louisiana and other areas
in the markets we serve that will protect and restore sensitive marine and
coastal areas, advance ocean science and research, and ensure sustainable use of
ocean resources.
Competitive
Strengths
We
believe we have the following competitive strengths:
Breadth
of Capabilities
Unlike
many of our competitors, we provide a broad range of marine construction
services for our customers. These services include marine transportation
facility construction, dredging, repair and maintenance, bridge building and
marine pipeline construction, as well as specialty services. Our specialty
services include salvage, demolition, diving and underwater inspection,
excavation and repair. By offering a breadth of services, we act as a
single-source provider with a turnkey solution for our customers’ marine
contracting needs. We believe this distinguishes us from smaller, local
competitors, giving us an advantage in competitive bidding for certain projects.
Furthermore, we believe our broad service offering and ability to complete
smaller projects strengthens our relationships with our customers.
Experienced
Management Team
Our
executive officers and senior project managers have an average of 29 years
of experience in the heavy civil construction industry, an average of
27 years of experience in the heavy civil marine infrastructure industry,
and an average of 19 years of experience with us and our predecessor
companies. Our strong management team has driven operational excellence for us,
as demonstrated by our high organic growth, disciplined bidding process, and
what we believe to be leading industry margins. We believe our management has
fostered a culture of loyalty, resulting in high employee retention
rates.
High
Quality Fleet and Marine Maintenance Facilities
We are
capable of building, and have built, much of our highly specialized equipment
and we provide maintenance and repair service to our entire fleet. During 2006
we manufactured a dredge, which can operate on either diesel fuel or electric
power, allowing us to complete projects with specified limits on nitrogen oxide
(NOX) emissions. Because some of our equipment operates 24 hours a day,
seven days a week, it is essential that we are able to minimize equipment
downtime. We achieve this by operating our own electrical and machine shops,
stocking long-lead spares, and staffing maintenance teams on-call 24 hours
a day, seven days a week to handle repair emergencies. We also own and maintain
dry dock facilities, which reduce our equipment downtime and dependence on third
party facilities. Our primary field offices in Channelview, Texas, Port Lavaca,
Texas, Tampa, Florida, and Jacksonville, Florida, are all located on waterfront
properties and allow us to perform repair and maintenance activities on our
equipment and to mobilize and demobilize equipment to and from our projects in a
cost efficient manner.
Financial
Strength /Conservative Balance Sheet
Financial
strength is often an important consideration for many customers in selecting
infrastructure contractors and directly affects our bonding capacity. In 2008,
approximately 38% of our projects, measured by revenue, required some form of
bonding. Most of our competitors are smaller, local companies with limited
bonding capacity. As of December 31, 2008, we had cash on hand of
$25.7 million. Our revenue increased by 24.5% from $210.4 million in 2007
to $261.8 million in 2008. We believe our financial strength and
bonding capacity allow us to bid multiple projects and larger projects that most
of our smaller competitors may not be able to bond.
Self-Performance
of Contracts
In 2008,
we self-performed approximately 88% of our marine construction and dredging
projects, measured by cost, meaning that we performed the projects using our own
employees and equipment instead of using external subcontractors. By
self-performing our contracts, we believe we can more effectively manage the
costs and quality of each of our projects, thereby better serving our customers
and increasing our profitability. Our breadth of capabilities and our high
quality fleet give us the ability to self-perform our contracts, which we
believe distinguishes us from many of our competitors, who often subcontract
significant portions of their projects.
Project
Selection and Bidding Expertise
Our roots
as a project management business have served us well, creating a project
management culture that is pervasive throughout our organization. We focus on
selecting the right projects on which to bid, controlling the critical path
items of a contract by self-performing the work, managing the contract
profitably by appropriately structuring rewards for project managers, and
recognizing change order opportunities, which generally allow us to increase
revenue and realize higher margins on a project. Our intense focus on profitably
executing contracts has resulted in only a small number of unprofitable
contracts since our founding. We use state-of-the-art, scalable, enterprise-wide
project management software to integrate functions such as estimating project
costs, managing financial reporting and forecasting profitability.
Strong
Regional Presence
We
believe we are a market leader in most of our primary markets. We believe our
operations are strategically located to benefit from favorable industry trends,
including increasing port expansion and maintenance, highway funding, coastal
restoration, and hurricane restoration and repair activity. For example, the
Port of Houston, one of the largest ports in the U.S., and the Port of Tampa and
their adjacent private industry customers generate both new marine construction
and annual maintenance of existing dock facilities. In addition, the Texas Gulf
Coast does not have any natural deep water ports, requiring all of its channels
and ports to depend significantly on maintenance dredging, which is a
significant source of recurring revenue. Our strong regional presence allows us
to more efficiently deploy and mobilize our equipment throughout the areas in
which we operate.
Customers
Our
customers include federal, state and local governmental agencies in the Unites
States, as well as private commercial and industrial enterprises in the US and
the Caribbean Basin. Most projects are competitively bid, with the award going
to the lowest qualified bidder. Our top 20 customers accounted for
approximately 67%, 70% and 83% of our total revenues during the years ended
December 31, 2008, 2007, and 2006, respectively. Revenues earned directly
or indirectly from agencies of the U.S. federal government, including the Corps
of Engineers, totaled 11% in 2008 and 18% in 2007. Our customer base
shifts from time to time depending on the mix of contracts in
progress.
Management
at each of our operating locations is responsible for developing and maintaining
successful long-term relationships with customers. They build upon existing
customer relationships to secure additional projects and increase revenue from
our current customer base. Many of these customer relationships originated
decades ago and are maintained through a partnering approach to account
management, which includes project evaluation and consulting, quality
performance, performance measurement, and direct customer contact. At each of
our operating locations, management maintains a parallel focus on pursuing
growth opportunities with prospective customers.
Backlog
Our
contract backlog represents our estimate of the revenues we expect to realize
under the portion of the contracts remaining to be performed. Given the typical
duration of our contracts, which ranges from three to nine months, 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. We include projects in our
backlog only when the customer has provided an executed contract, purchase order
or change order. Our backlog under contract as of December 31, 2008 was
approximately $159.4 million and at December 31, 2007 was approximately
$129.3 million. These estimates are subject to fluctuations based upon the
scope of services to be provided, as well as factors affecting the time required
to complete the project. In addition, 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, 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
given time.
Competition
We
compete in our service areas of the Gulf Coast, Atlantic Seaboard and Caribbean
Basin with several regional marine construction services companies and a few
national marine construction services companies. From time to time, we compete
with certain national land-based heavy civil contractors that have greater
resources than we do. Our industry is highly fragmented with competitors
generally varying within the markets we serve and with few competitors competing
in all of the markets we serve or for all of the services that we provide. We
believe that our turnkey capability, expertise, experience and reputation for
providing safe and timely quality services, safety record and programs,
equipment fleet, financial strength, surety bonding capacity, knowledge of local
markets and conditions, and project management and estimating abilities allow us
to compete effectively. We believe significant barriers to entry exist in the
markets in which we operate, including the ability to bond large projects,
maritime laws, specialized marine equipment and technical experience; however, a
U.S. company that has adequate financial resources, access to technical
expertise and specialized equipment may become a competitor.
Bonding
In
connection with our business, we generally are required to provide various types
of surety bonds that provide an additional measure of security for our
performance under certain government and private sector contracts. Our ability
to obtain surety bonds depends upon our capitalization, working capital, past
performance, management expertise, and external factors, including the capacity
of the overall surety market. Surety companies consider such factors in light of
the amount of our backlog that we have currently bonded and their current
underwriting standards, which may change from time to time. The capacity of the
surety market is subject to market-driven fluctuations driven primarily by the
level of surety industry losses and the degree of surety market consolidation.
When surety market capacity shrinks it results in higher premiums and increased
difficulty in obtaining bonding, in particular for larger, more complex projects
throughout the market. The bonds we provide typically are for the amount of the
project and have face amounts ranging from $1.0 to $50.0 million. As of
December 31, 2008, we had approximately $100.0 million in surety bonds
outstanding. On December 31, 2008, we believe our capacity under our
current bonding arrangement was in excess of $400.0 million in aggregate
surety bonds.
Trade
Names
We
operate under a number of trade names, including Orion Marine Group, King Fisher
Marine Service, Orion Construction, Orion Diving & Salvage, Misener
Marine Construction and Misener Diving & Salvage, F. Miller
Construction, and Subaqueous Services. We do not generally register our
trademarks with the U.S. Patent & Trademark Office, but instead rely on
state and common law protections. While we consider our trade names to be
valuable assets, we do not consider any single trademark or trade name to be of
such material importance that its absence would cause a material disruption of
our business.
Equipment
We
operate and maintain a large and diverse equipment fleet, substantially all of
which we own, that includes the following:
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Barges — Spud
barges, material barges, deck barges, anchor barges and fuel barges are
used to provide work platforms for cranes and other equipment, to
transport materials to the project site and to provide support for the
project at the project site.
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Dayboats — Small
pushboats, dredge tenders and skiffs are used to shift barges at the
project site, to move personnel and to provide general support to the
project site.
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Tugs — Larger
pushboats and tug boats are used to transport barges and other support
equipment to and from project site.
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Dredges — 24”
cutter head suction dredge (diesel), 20” cutter head suction dredge
(diesel/electric), 20” cutter head suction dredges (diesel), 16” cutter
head suction dredges, and 12” portable cutter head suction dredges are
used to provide dredging services at project
sites.
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Cranes — Crawler
lattice boom cranes with lift capability from 50 tons to 250 tons and
hydraulic rough terrain cranes with lift capability from 15 tons to 60
tons are used to provide lifting and pile driving capabilities
on project sites, and to provide bucket work, including mechanical
dredging and dragline work, to project
sites.
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We
believe that our equipment generally is well maintained and suitable for our
current operations. We have the ability to extend the useful life of our
equipment through capital refurbishment at periodic intervals. Most of our fleet
is serviced by our own mechanics who work at various maintenance sites and
facilities, including our dry dock facilities. We are also capable of building,
and have built, much of our highly specialized equipment, and have invested
approximately $57.8 million in our fleet over the past five years ended December
31, 2008. Our strategy is to move our fleet from region to region as
our projects require. We have pledged our owned equipment as collateral under
our credit facility.
Equipment
Certification
Some of
our equipment requires certification by the U.S. Coast Guard and, where
required, our vessels’ permissible loading capacities require certification by
the American Bureau of Shipping (“ABS”). ABS is an independent classification
society which certifies that certain of our larger, seagoing vessels are
“in-class,” signifying that the vessels have been built and maintained in
accordance with ABS rules and applicable U.S. Coast Guard rules
and regulations. Many projects, such as beach nourishment projects with offshore
sand requirements, dredging projects in exposed entrance channels, and dredging
projects with offshore disposal areas, are restricted by federal regulations to
be performed only by dredges or scows that have U.S. Coast Guard
certification and a load line established by the ABS. All of our vessels that
are required to be certified by ABS have been certified as “in-class.” These
certifications indicate that the vessels are structurally capable of operating
in open waters, which enhances the mobility of our fleet.
Government
Regulations
Our
operations are subject to compliance with regulatory requirements of federal,
state and local governmental agencies and authorities including the
following:
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regulations
concerning workplace safety, labor relations and disadvantaged
businesses;
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licensing
requirements applicable to shipping and
dredging; and
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permitting
and inspection requirements applicable to marine construction
projects.
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We are
also subject to government regulations pursuant to the Dredging Act, the Jones
Act, the Shipping Act and the Vessel Documentation Act. These statutes require
vessels engaged in the transport of merchandise or passengers between two points
in the U.S. or dredging in the navigable waters of the U.S. to be
documented with a coastwise endorsement, to be owned and controlled by
U.S. citizens, to be manned by U.S. crews, and to be built in the
U.S. The U.S. citizenship ownership and control standards require the
vessel-owning entity to be at least 75% U.S.-citizen owned, and prohibit the
demise or bareboat chartering of the vessel to any entity that does not meet the
75% U.S. citizen ownership test. These statutes, together with similar
requirements for other sectors of the maritime industry, are collectively
referred to as “cabotage” laws.
In
October 2008, the US Occupational Safety and Health Administration (“OSHA”)
published for comment a proposed rule regarding safety hazards associated with
the use of hoisting equipment, such as cranes, in construction
activities. The Company uses hoisting equipment, including
cranes. The proposed rule, which includes additional training,
inspection, certification, and operating requirements, has not been finalized
and is subject to public comment. The Company is actively assessing
potential impacts of the proposed rule to its operations, but, at this time,
does not expect any material adverse impact to its business or results of
operations. Our failure to comply with applicable regulations could result
in substantial fines and/or revocation of our operating licenses.
We
believe that we are in material compliance with applicable regulatory
requirements and have all material licenses required to conduct our operations.
Environmental
Matters
General
Our
marine infrastructure construction, salvage, demolition, dredging and dredge
material disposal activities are subject to stringent and complex federal,
state, and local laws and regulations governing environmental protection,
including air emissions, water quality, solid waste management, marine and bird
species and their habitats, and wetlands. Such laws and regulations may require
that we or our customers obtain, and that we comply with, various environmental
permits, registrations, licenses and other approvals. These laws and regulations
also can restrict or impact our business activities in many ways, such as
delaying the appropriation and performance of particular projects; restricting
the way we handle or dispose of wastes; requiring remedial action to mitigate
pollution conditions that may be caused by our operations or that are
attributable to others; and enjoining some or all of our operations deemed in
non-compliance with environmental laws and regulations. Failure to comply with
these laws and regulations may result in the assessment of administrative, civil
and/or criminal penalties, the imposition of remedial obligations and the
issuance of orders enjoining future operations.
We
believe that compliance with existing federal, state and local environmental
laws and regulations will not have a material adverse effect on our business,
results of operations, or financial condition. Nevertheless, the trend in
environmental regulation is to place more restrictions and limitations on
activities that may affect the environment. As a result, there can be no
assurance as to the amount or timing of future expenditures for environmental
compliance or remediation, and actual future expenditures may be different from
the amounts we currently anticipate. The following is a discussion of the
environmental laws and regulations that could have a material effect on our
marine construction and other activities.
Waste
Management
Our
operations could be subject to the federal Resource Conservation and Recovery
Act (“RCRA”) and comparable state laws, which impose detailed requirements for
the handling, storage, treatment and disposal of hazardous and non-hazardous
solid wastes. Under the auspices of the U.S. Environmental Protection
Agency (“EPA”), the individual states administer some or all of the provisions
of RCRA, sometimes in conjunction with their own more stringent requirements.
Generators of hazardous wastes must comply with certain standards for the
accumulation and storage of hazardous wastes, as well as recordkeeping and
reporting requirements applicable to hazardous waste storage and disposal
activities.
Site
Remediation
The
Comprehensive, Environmental Response, Compensation and Liability Act
(“CERCLA”), also known as “Superfund,” and comparable state laws and regulations
impose liability, without regard to fault or the legality of the original
conduct, on certain classes of persons responsible for the release of hazardous
substances into the environment. Such classes of persons include the current and
past owners or operators of sites where a hazardous substance was released, and
companies that disposed or arranged for the disposal of hazardous substances at
offsite locations, such as landfills. CERCLA authorizes the EPA, and in some
cases third parties, to take actions in response to threats to the public health
or the environment and to seek to recover from the responsible classes of
persons the costs they incur. Under CERCLA, such persons may be subject to joint
and several liability for the costs of cleaning up the hazardous substances that
have been released into the environment, for damages to natural resources and
for the costs of certain health studies. In addition, neighboring landowners and
other third parties often file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the
environment.
We
currently own or lease properties that have been used by other industries for a
number of years. Although we typically have used operating and disposal
practices that were standard in the industry at the time, wastes may have been
disposed of or released on or under the properties owned or leased by us, on or
under other locations where such substances have been taken for disposal, or on
or under project sites where we perform work. In addition, some of the
properties may have been operated by third parties or by previous owners whose
treatment and disposal or release of wastes was not under our control. These
properties and the substances disposed or released on them may be subject to
CERCLA, RCRA and analogous state laws. Under such laws, we could be required to
remove or remediate previously disposed wastes or property contamination, or to
perform remedial activities to prevent future contamination.
Water
Discharges
The
Federal Water Pollution Control Act, also known as the Clean Water Act (“CWA”),
and analogous state laws impose strict controls with respect to the discharge of
pollutants, including spills and leaks of oil and other substances, into waters
of the U.S., including wetlands. The discharge of pollutants into regulated
waters is prohibited, except in accordance with the terms of a permit issued by
the EPA or an analogous state agency. The CWA also regulates the discharge of
dredged or fill material into waters of the U.S., and activities that result in
such discharge generally require permits issued by the Corps of Engineers.
Moreover, above ground storage of petroleum products is strictly regulated under
the CWA. Under the CWA, federal and state regulatory agencies may
impose administrative, civil and/or criminal penalties for non-compliance with
discharge permits or other requirements of the CWA and analogous state laws and
regulations.
The Oil
Pollution Act of 1990 (“OPA”), which amends and augments the CWA, establishes
strict liability for owners and operators of facilities that are sites of
releases of oil into waters of the U.S. OPA and its associated regulations
impose a variety of requirements on responsible parties related to the
prevention of oil spills and liability for damages resulting from such spills.
For instance, OPA requires vessel owners and operators to establish and maintain
evidence of financial responsibility sufficient to cover liabilities related to
an oil spill for which such parties are statutorily responsible. We believe we
are in compliance with all applicable OPA financial responsibility
obligations. In addition, while OPA requires that certain vessels be
outfitted with double hulls by 2015, given the make up and expected make up of
our fleet of vessels, we do not expect to incur material expenditures to meet
these requirements.
In
February 2009, regulations promulgated by the EPA covering certain previously
exempt discharges to water from certain marine vessels became
effective. The regulations provide for a general permit to cover such
discharges and impose on marine vessel operators, including the Company, certain
discharge, permitting, recordkeeping, reporting, monitoring, maintenance, and
operating restrictions and requirements with respect to materials that are or
may be discharged from certain vessels. Applicability of these
restrictions and requirements is based on size and type of vessel, and they
apply only to a minority of the Company’s vessels. The Company,
nevertheless, is in the process of implementing such restrictions and
requirements with respect to its vessels which are subject thereto, and the
Company does not anticipate that such regulations or the associated permit
terms, restrictions and requirements will adversely impact the Company’s
business or results of operations.
Air
Emissions
The Clean
Air Act (“CAA”) and comparable state laws restrict the emission of air
pollutants from many sources, including paint booths, and may require
pre-approval for the construction or modification of certain facilities expected
to produce air emissions, impose stringent air permit requirements, or require
the utilization of specific equipment or technologies to control emissions. We
believe that our operations are in substantial compliance with the
CAA.
The
U.S. Congress is actively considering legislation to reduce emissions of
greenhouse gases. In addition, several states have declined to wait on Congress
to develop and implement climate control legislation and have already taken
legal measures to reduce emissions of greenhouse gases. Passage of climate
control legislation or other regulatory initiatives by Congress or various
states of the U.S., or the adoption of regulations by the EPA and analogous
state agencies that restrict emissions of greenhouse gases in areas in which we
conduct business could have an adverse affect on our operations and demand for
our services.
Endangered
Species
The
Endangered Species Act (“ESA”) restricts activities that may affect endangered
species or their habitats. We conduct activities in or near areas that may be
designated as habitat for endangered or threatened species. For instance,
seasonal observation of endangered or threatened West Indian Manatees adjacent
to work areas may impact construction operations within our Florida market.
Manatees generally congregate near warm water sources during the cooler winter
months. Additionally, our dredging operations in the Florida market are impacted
by limitations for placement of dredge spoil materials on designated spoil
disposal islands, from April through August of each year, when the islands are
inhabited by nesting colonies of protected bird species. Further, restrictions
on work during the Whooping Crane nesting period in the Aransas Pass National
Wildlife Refuge from October 1 through April 15 each year and during the
non-dormant grass season for sea grass in the Laguna Madre from March 1 through
November 30 each year impact our construction operations in the Texas Gulf Coast
market. We plan our operations and bidding activity with these restrictions and
limitations in mind, and they have not materially hindered our business in the
past. However, these and other restrictions may affect our ability to obtain
work or to complete our projects on time in the future. In addition, while we
believe that we are in material compliance with the ESA, the discovery of
previously unidentified endangered species could cause us to incur additional
costs or become subject to operating restrictions or bans in the affected
area.
Employees
At
December 31, 2008, we had approximately 1,100 employees, 227 of whom were
full-time salaried personnel and most of the remainder of whom were hourly
personnel. We will hire additional employees for certain large
projects and, subject to local market conditions, additional crew members are
generally available for hire on relatively short notice. Our
employees are not represented by any labor unions. We consider our
relations with our employees to be good.
Financial
Information About Geographic Areas
The
Company primarily operates in the Gulf Coast and Atlantic Seaboard areas of the
United States. Revenues generated outside the United States,
primarily in the Caribbean Basin, totaled 7.0%, 3.9% and 7.0% of total revenues
for the years ended December 31, 2008, 2007 and 2006,
respectively. Our long-lived assets are substantially located in the
United States.
Access
to the Company’s Filings
The
Company maintains a website at www.orionmarinegroup.com
on which we make available, free of charge, access to the various reports we
file with, or furnish to, the Securities and Exchange Commission
(“SEC”). The website is made available for information purposes
only. It should not be relied upon for investment purposes, and none
of the information on our website is incorporated into this Annual Report on
Form 10-K by reference. In addition, the public may read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Room 1580, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-732-0330. The SEC also maintains an Internet site at www.sec.gov that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.
Risk
Factors Relating to Our Business
We may be unable
to obtain sufficient bonding capacity for our contracts and the need
for
performance and surety bonds may adversely affect our
business.
We are
generally required to post bonds in connection with our contracts to ensure job
completion if we were to fail to finish a project. During the year ended
December 31, 2008, approximately 38% of our projects, measured by revenue,
required us to post a bond. We have entered into a bonding agreement with
Liberty Mutual Surety of America (“Liberty”) pursuant to which Liberty acts as
surety, issues bid bonds, performance bonds and payment bonds, and obligates
itself upon other contracts of guaranty required by us in the day-to-day
operations of our business. However, Liberty is not obligated under the bonding
agreement to issue bonds for us. We may not be able to maintain a sufficient
level of bonding capacity in the future, which could preclude us from being able
to bid for certain contracts and successfully contract with certain customers,
or increase our letter of credit utilization in lieu of bonds, thereby reducing
availability under our credit facility. In addition, the conditions of the
bonding market may change, increasing our costs of bonding or restricting our
ability to get new bonding which could have a material adverse effect on our
business, operating results and financial condition.
Our business
depends on key customer relationships and our reputation in the heavy
civil
marine infrastructure market, which is developed and maintained by our chief
executives and key project managers.
Loss of any of our relationships, reputation or executives or key project
managers
would materially reduce our revenues and profits.
Our
contracts are typically entered into on a project-by-project basis, so we do not
have continuing contractual commitments with our customers beyond the terms of
the current contract. We benefit from key customer relationships built over time
and with both public and private entities that are a part of or use the MTS. We
also benefit from our reputation in the heavy civil marine infrastructure market
developed over years of successfully performing on projects. Both of these
aspects of our business were developed and are maintained through our executives
and key project managers. We do not maintain key person life insurance policies
on any of our employees. Our inability to retain our executives and key project
managers would have a material adverse affect on our current customer
relationships and reputation. The inability to maintain relationships with these
customers or obtain new customers based on our reputation could have a material
adverse effect on our business, operating results and financial
condition.
To be successful,
we need to attract and retain qualified personnel, and any inability to do
so would adversely affect our business.
Our
future success depends on our ability to attract, retain and motivate highly
skilled personnel in various areas, including engineering, project management,
procurement, project controls, finance, and senior management. If we do not
succeed in retaining and motivating our current employees and attracting new
high quality employees, our business could be adversely affected. Accordingly,
our ability to increase our productivity and profitability will be limited by
our ability to employ, train and retain skilled personnel necessary to meet our
requirements. Many companies in our industry are currently experiencing
shortages of qualified personnel, and we may not be able to maintain an adequate
skilled labor force necessary to operate efficiently. Our labor expenses may
also increase as a result of a shortage in the supply of skilled personnel, or
we may have to curtail our planned internal growth as a result of labor
shortages. We may also spend considerable resources training employees who may
then be hired by our competitors, forcing us to spend additional funds to
attract personnel to fill those positions. In addition, certain of our employees
hold licenses and permits under which we operate. The loss of any such employees
could result in our inability to operate under such licenses and permits, which
could adversely affect our operations until replacement licenses or permits are
obtained. If we are unable to hire and retain qualified personnel in the future,
there could be a material adverse effect on our business, operating results or
financial condition.
We could lose
money if we fail to accurately estimate our costs or fail to execute
within our
cost estimates on fixed-price, lump-sum contracts.
Most of
our net revenue is derived from fixed-price, lump-sum contracts. Under these
contracts, we perform our services and execute our projects at a fixed price
and, as a result, benefit from cost savings, but we may be unable to recover any
cost overruns. Fixed-price contracts carry inherent risks, including risks of
losses from underestimating costs, operational difficulties and other changes
that may occur over the contract period. If our cost estimates for a contract
are inaccurate, or if we do not execute the contract within our cost estimates,
we may incur losses or the project may not be as profitable as we expected. In
addition, we are sometimes required to incur costs in connection with
modifications to a contract (change orders) that may be unapproved by the
customer as to scope and/or price, or to incur unanticipated costs, including
costs for customer-caused delays, errors in specifications or designs, or
contract suspension or termination, that we may not be able to recover. These,
in turn, could have a material adverse effect on our business, operating results
and financial condition. The revenue, cost and gross profit realized on such
contracts can vary, sometimes substantially, from the original projections due
to changes in a variety of factors, such as:
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failure
to properly estimate costs of engineering, design, material, equipment or
labor;
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unanticipated
technical problems with the structures or services being supplied by us,
which may require that we spend our own money to remedy the
problem;
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project
modifications creating unanticipated
costs;
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changes
in the costs of equipment, materials, labor or
subcontractors;
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our
suppliers’ or subcontractors’ failure to
perform;
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difficulties
in our customers obtaining required governmental permits or
approvals;
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changes
in local laws and regulations;
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delays
caused by local weather
conditions; and
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exacerbation
of any one or more of these factors as projects grow in size and
complexity.
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These
risks increase if the duration of the project is long-term because there is an
elevated risk that the circumstances upon which we based our original bid will
change in a manner that increases costs. In addition, we sometimes bear the risk
of delays caused by unexpected conditions or events.
We may incur
higher costs to acquire, manufacture and maintain equipment necessary
for our
operations.
We have
traditionally owned most of the equipment used in our projects, and we do not
bid on contracts for which we do not have, or cannot quickly procure, whether
through construction, acquisition or lease, the necessary equipment. We are
capable of building much of the specialized equipment used in our projects,
including dayboats, tenders and dredges. To the extent that we are unable to buy
or build equipment necessary for our needs, either due to a lack of available
funding or equipment shortages in the marketplace, we may be forced to rent
equipment on a short-term basis, which could increase the costs of completing
contracts. In addition, our equipment requires continuous maintenance, which we
provide through our own repair facilities and dry docks, as well as
certification by the U.S. Coast Guard. If we are unable to continue to
maintain the equipment in our fleet or are unable to obtain the requisite
certifications, we may be forced to obtain third-party repair services, be
unable to use our uncertified equipment or be unable to bid on contracts, which
could have a material adverse effect on our business, operating results and
financial condition.
In
addition, our vessels may be subject to arrest/seizure by claimants as security
for maritime torts committed by the vessel or us or the failure by us to pay for
necessaries, including fuel and repair services, which were furnished to the
vessel. Such arrest/seizure could preclude the vessel from working, thereby
causing delays in marine construction projects.
The timing of new
contracts may result in unpredictable fluctuations in our cash flow and
profitability. These factors as well as others that may cause our actual
financial
results to vary from any publicly disclosed earnings guidance and
forecasts are outside of
our control.
A
substantial portion of our revenues is derived from project-based work. It is
generally very difficult to predict the timing and location of awarded
contracts. The selection of, timing of or failure to obtain projects, delays in
awards of projects, the rebidding or termination of projects due to budget
overruns, cancellations of projects or delays in completion of contracts could
result in the under-utilization of our assets and reduce our cash flows. Even if
we are awarded contracts, we face additional risks that could affect whether, or
when, work will begin. For example, some of our contracts are subject to
financing and other contingencies that may delay or result in termination of
projects. This can present difficulty in matching workforce size and equipment
location with contract needs. In some cases, we may be required to bear the cost
of a ready workforce and equipment that is larger than necessary, resulting in
unpredictability in our cash flow, expenses and profitability. If an expected
contract award or the related work release is delayed or not received, we could
incur substantial costs without receipt of any corresponding revenues. Delays by
our customers in obtaining required approvals for their infrastructure projects
may delay their awarding contracts for those projects and, once awarded, the
ability to commence construction under those contracts. Moreover, construction
projects for which our services are contracted may require significant
expenditures by us prior to receipt of relevant payments by a customer and may
expose us to potential credit risk if such customer should encounter financial
difficulties. Such expenditures could reduce our cash flows and necessitate
increased borrowings under our credit facilities. Finally, the winding down or
completion of work on significant projects that were active in previous periods
will reduce our revenue and earnings if such significant projects have not been
replaced in the current period. From time-to-time we may publicly provide
earnings or other forms of guidance, which reflect our predictions about future
revenue, operating costs and capital structure, among other factors. Any such
predictions may be impacted by these factors as well as others that are beyond
our control and might not turn out to be correct.
We depend on
continued federal, state and local government funding for marine infrastructure. A
reduction in government funding for marine construction or maintenance
contracts can materially reduce our results of operations.
For the
year ended December 31, 2008, approximately 50% of our revenue was
attributable to contracts with federal, state or local agencies or with
companies operating under contracts with federal, state or local agencies. Our
operations depend on project funding by various government agencies and are
adversely affected by decreased levels of, or delays in, government funding. A
future decrease in government funding in any of our geographic markets could
result in intense competition and pricing pressures for projects that we bid on
in the future. As a result of competitive bidding and pricing pressures, we may
be awarded fewer projects, which could have a material adverse effect on our
business, operating results and financial condition.
A significant
portion of our business is based on government contracts. Our operating
results may
be adversely affected by the terms of the government contracts or our
failure to
comply with applicable terms.
Government
contracts are subject to specific procurement regulations, contract provisions
and a variety of socioeconomic requirements relating to their formation,
administration, performance and accounting. Many of these contracts include
express or implied certifications of compliance with applicable laws and
contract provisions. As a result of our government contracting and
subcontracting, claims for civil or criminal fraud may be brought by the
government for violations of these regulations, requirements or statutes. We may
also be subject to qui tam litigation brought by private individuals on behalf
of the government under the Federal Civil False Claims Act, which could include
claims for up to treble damages. Further, if we fail to comply with any of these
regulations, requirements or statutes, our existing government contracts could
be terminated, we could be suspended or debarred from government contracting or
subcontracting, including federally funded projects at the state level. In
addition, government customers typically can terminate or modify any of their
contracts with us at their convenience, and certain government agencies may
claim immunity from suit to recover disputed contract amounts. If our government
contracts are
terminated
for any reason, or if we are suspended or debarred from government work, we
could suffer a significant reduction in expected revenue which could have a
material adverse effect on our business, operating results and financial
condition.
We derive a
significant portion of our revenues from a small group of customers. The
loss of one
or more of these customers could negatively impact our business, operating results
and financial condition.
Our
customer base is highly concentrated. Our top five customers accounted for
approximately 30%, 39%, and 59% of our revenues for fiscal 2008, 2007 and 2006,
respectively. In 2008, one customer accounted for approximately 10% of revenues
in 2008, two customers generated revenues in excess of 10% of revenues in fiscal
2007, and three customers generated revenues in excess of 10% in fiscal
2006.
We
believe that we will continue to rely on a relatively small group of customers
for a substantial portion of our revenues for the foreseeable future. We may not
be able to maintain our relationships with our significant customers. The loss
of, or reduction of our sales to, any of our major customers could have a
material adverse effect on our business, operating results and financial
condition. See “Business — Customers” for a description of our largest
customers.
We
may not be able to fully realize the revenue value reported in our
backlog.
We had a
backlog of work to be completed on contracts totaling approximately
$159.4 million as of December 31, 2008. Backlog develops as a result of new
awards, which represent the revenue value of new project commitments received by
us during a given period. Backlog consists of projects which have either
(a) not yet been started or (b) are in progress but are not yet
complete. In the latter case, the revenue value reported in backlog is the
remaining value associated with work that has not yet been completed. We cannot
guarantee that the revenue projected in our backlog will be realized, or if
realized, will result in earnings. From time-to-time, projects are cancelled
that appeared to have a high certainty of going forward at the time they were
recorded as new awards. In the event of a project cancellation, we may be
reimbursed for certain costs but typically have no contractual right to the
total revenue reflected in our backlog. In addition to being unable to recover
certain direct costs, cancelled projects may also result in additional
unrecoverable costs due to the resulting under-utilization of our
assets.
Our business is
subject to significant operating risks and hazards that could result
in damage
or destruction to persons or property, which could result in losses or
liabilities
to us.
The
businesses of marine infrastructure construction, port maintenance, dredging and
salvage are generally subject to a number of risks and hazards, including
environmental hazards, industrial accidents, adverse weather conditions,
collisions with fixed objects, cave-ins, encountering unusual or unexpected
geological formations, disruption of transportation services and flooding. These
risks could result in damage to or destruction of, dredges, transportation
vessels, other maritime structures and buildings, and could also result in
personal injury or death, environmental damage, performance delays, monetary
losses or legal liability.
Our
safety record is an important consideration for our customers. If serious
accidents or fatalities occur or our safety record was to deteriorate, we may be
ineligible to bid on certain work, and existing service arrangements could be
terminated. Further, regulatory changes implemented by OSHA or the
U.S. Coast Guard could impose additional costs on us. Adverse experience
with hazards and claims could have a negative effect on our reputation with our
existing or potential new customers and our prospects for future
work.
Our current
insurance coverage may not be adequate, and we may not be able to obtain
insurance
at acceptable rates, or at all.
We
maintain various insurance policies, including general liability and workers’
compensation. We are partially self-insured under some of our policies, and our
insurance does not cover all types or amounts of liabilities. We are not
required to, and do not, specifically set aside funds for our self-insurance
programs.
At any
given time, we are subject to multiple workers’ compensation and personal injury
claims. We maintain substantial loss accruals for workers’ compensation claims,
and our workers’ compensation and insurance costs have been rising for several
years notwithstanding our emphasis on safety. Our insurance policies may not be
adequate to protect us from liabilities that we incur in our business. In
addition, some of the projects that we bid on require us to maintain builder’s
risk insurance at high levels. We may not be able to obtain similar levels of
insurance on reasonable terms, or at all. Our inability to obtain such insurance
coverage at acceptable rates or at all could have a material adverse effect on
our business, operating results and financial condition.
Furthermore,
due to a variety of factors such as increases in claims and projected
significant increases in medical costs and wages, our insurance premiums may
increase in the future and we may not be able to obtain similar levels of
insurance on reasonable terms, or at all. Any such inadequacy of, or inability
to obtain, insurance coverage at acceptable rates, or at all, could have a
material adverse effect on our business, operating results and financial
condition.
Our employees are
covered by federal laws that provide seagoing employees remedies for
job-related claims in addition to those provided by state
laws.
Many of
our employees are covered by federal maritime law, including provisions of the
Jones Act (“Jones Act”), the Longshore and Harbor Workers Act, (“USL&H”) and
the Seaman’s Wage Act. Jones Act laws typically operate to make liability limits
established by USL&H and state workers’ compensation laws inapplicable to
these employees and to permit these employees and their representatives to
pursue actions against employers for job-related injuries in federal courts.
Because we are not generally protected by the limits imposed by state workers’
compensation statutes, we have greater exposure for claims made by these
employees as compared to employers whose employees are not covered by these
provisions.
For
example, in the normal course of business, we are party to various personal
injury lawsuits. We maintain insurance to cover claims that arise from injuries
to our hourly workforce subject to a deductible. Over the last several years,
there has been an increase in suits filed in Texas due in large part to two
Texas law firms aggressively pursuing personal injury claims on behalf of
dredging workers residing in Texas. Aggressive medical advice is increasing the
seriousness of claimed injuries and the amount demanded in settlement. During
fiscal 2008, we recorded approximately $1.0 million of expense for our
self-insured portion of these liabilities. We believe our recorded self
insurance reserves represent our best estimate of the outcomes of these
claims. Should these trends persist; we could continue to be
negatively impacted in the future. See Note 15, Commitments and
Contingencies in the Notes to
the Consolidated Financial Statements.
Many
of our contracts have penalties for late completion.
In many
instances, including in our fixed-price contracts, we guarantee that we will
complete a project by a scheduled date. If we subsequently fail to complete the
project as scheduled, we may be held responsible for cost impacts resulting from
any delay, generally in the form of contractually agreed-upon liquidated
damages. In addition, failure to maintain a required schedule could cause us to
default on our government contracts, giving rise to a variety of potential
damages. To the extent that these events occur, the total costs of the project
could exceed our original estimates, and we could experience reduced profits or,
in some cases, a loss for that project.
We may choose, or
be required, to pay our suppliers and subcontractors even if our customers do not
pay, or delay paying, us for the related services.
We use
suppliers to obtain necessary materials and subcontractors to perform portions
of our services and to manage work flow. In some cases, we pay our suppliers and
subcontractors before our customers pay us for the related services. If we
choose, or are required, to pay our suppliers and subcontractors for materials
purchased and work performed for customers who fail to pay, or delay paying, us
for the related work, we could experience a material adverse effect on our
business, operating results and financial condition.
We extend credit
to customers for purchases of our services, and in the past we have had, and in the
future we may have, difficulty collecting receivables from major customers that
have filed bankruptcy or are otherwise experiencing financial difficulties.
We
generally perform services in advance of payment for our customers, which
include governmental entities, general contractors, and builders, owners and
managers of marine and port facilities located primarily in the Gulf Coast, the
Atlantic Seaboard and the Caribbean Basin. Consequently, we are subject to
potential credit risk related to changes in business and economic factors. On
occasion, we have had difficulty collecting from governmental entities or
customers with financial difficulties. If we cannot collect receivables for
present or future services, we could experience reduced cash flows and losses
beyond our established reserves.
Our
strategy of growing through strategic acquisitions may not be
successful.
We may
pursue growth through the acquisition of companies or assets that will enable us
to broaden the types of projects we execute and also expand into new markets. We
have completed several acquisitions and plan to consider strategic acquisitions
in the future. We may be unable to implement this growth strategy if we cannot
identify suitable companies or assets or reach agreement on potential strategic
acquisitions on acceptable terms. Moreover, an acquisition involves certain
risks, including:
|
|
•
|
difficulties
in the integration of operations, systems, policies and
procedures;
|
|
|
•
|
enhancements
in our controls and procedures including those necessary for a public
company may make it more difficult to integrate operations and
systems;
|
|
|
•
|
failure
to implement proper overall business controls, including those required to
support our growth, resulting in inconsistent operating and financial
practices at companies we acquire or have
acquired;
|
|
|
•
|
termination
of relationships with the key personnel and customers of an acquired
company;
|
|
|
•
|
additional
financial and accounting challenges and complexities in areas such as tax
planning, treasury management, financial reporting and internal
controls;
|
|
|
•
|
the
incurrence of environmental and other liabilities, including liabilities
arising from the operation of an acquired business or asset prior to our
acquisition for which we are not indemnified or for which the indemnity is
inadequate;
|
|
|
•
|
disruption
of our ongoing business or receipt of insufficient management
attention; and
|
|
|
•
|
inability
to realize the cost savings or other financial benefits that we
anticipate.
|
Future
acquisitions may require us to obtain additional equity or debt financing, which
may not be available on attractive terms. Moreover, to the extent an acquisition
transaction financed by non-equity consideration results in additional goodwill,
it will reduce our tangible net worth, which might have an adverse effect on our
credit and bonding capacity.
The anticipated
investment in port and marine infrastructure may not be as large as expected, which
may result in periods of low demand for our services.
The
demand for port construction, maintenance infrastructure services and dredging
may be vulnerable to downturns in the economy generally and in the marine
transportation industry specifically. The amount of capital expenditures on port
facilities and marine infrastructure in our markets is affected by the actual
and anticipated shipping and vessel needs of the economy in general and in our
geographic markets in particular. If the general level of economic activity
deteriorates, our customers may delay or cancel expansions, upgrades,
maintenance and repairs to their infrastructure. A number of other factors,
including the financial condition of the industry, could adversely affect our
customers and their ability or willingness to fund capital expenditures in the
future. During downturns in the U.S. or world economies, the anticipated
port usage in our geographic markets may decline, resulting in less port
construction, upgrading and maintenance. As a result, demand for our services
could substantially decline for extended periods.
Any adverse
change to the economy or business environment in the regions in which we
operate
could significantly affect our operations, which would lead to lower
revenues and reduced
profitability.
Our
operations are currently concentrated in the Gulf Coast, the Atlantic Seaboard
and the Caribbean Basin. Because of this concentration in a specific geographic
location, we are susceptible to fluctuations in our business caused by adverse
economic or other conditions in this region, including natural or other
disasters.
During the
ordinary course of our business, we may become subject to lawsuits or
indemnity
claims, which could materially and adversely affect our business,
operating results and
financial condition.
We have
been and may from time to time be named as a defendant in legal actions claiming
damages in connection with marine infrastructure projects and other matters.
These are typically claims that arise in the normal course of business,
including employment-related claims and contractual disputes or claims for
personal injury (including asbestos-related lawsuits) or property damage which
occurs in connection with services performed relating to project or construction
sites. These actions may seek, among other things, compensation for alleged
personal injury, workers’ compensation, employment discrimination, breach of
contract, property damage, environmental damage, punitive damages, civil
penalties or other losses, consequential damages or injunctive or declaratory
relief. Contractual disputes normally involve claims relating to the timely
completion of projects, performance of equipment, design or other engineering
services or project services. We may incur liabilities that may not be covered
by insurance policies, or, if covered, the dollar amount of such liabilities may
exceed our policy limits or fall below applicable deductibles. A partially or
completely uninsured claim, if successful and of significant magnitude, could
cause us to suffer a significant loss and reduce cash available for our
operations.
Furthermore,
our services are integral to the operation and performance of the marine
infrastructure. As a result, we may become subject to lawsuits or claims for any
failure of the infrastructure that we work on, even if our services are not the
cause for such failures. In addition, we may incur civil and criminal
liabilities to the extent that our services contributed to any property damage
or personal injury. With respect to such lawsuits, claims, proceedings and
indemnities, we have and will accrue reserves in accordance with generally
accepted accounting principles (“GAAP”). In the event that such actions or
indemnities are ultimately resolved unfavorably at amounts exceeding our accrued
reserves, or at material amounts, the outcome could materially and adversely
affect our reputation, business, operating results and financial condition. In
addition, payments of significant amounts, even if reserved, could adversely
affect our liquidity position.
We are
currently engaged in litigation related to claims arising from Hurricane
Katrina. See “Business — Legal Proceedings.”
Our operations
are subject to environmental laws and regulations that may expose us
to
significant costs and liabilities.
Our
marine infrastructure construction, salvage, demolition, dredging and dredge
material disposal activities are subject to stringent and complex federal, state
and local environmental laws and regulations, including those concerning air
emissions, water quality, solid waste management, and protection of certain
marine and bird species, their habitats, and wetlands. We may incur substantial
costs in order to conduct our operations in compliance with these laws and
regulations. For instance, we may be required to obtain, maintain and comply
with permits and other approvals (as well as those obtained for projects by our
customers) issued by various federal, state and local governmental authorities;
limit or prevent releases of materials from our operations in accordance with
these permits and approvals; and install pollution control equipment. In
addition, compliance with environmental laws and regulations can delay or
prevent our performance of a particular project and increase related project
costs. Moreover, new, stricter environmental laws, regulations or enforcement
policies could be implemented that significantly increase our compliance costs,
or require us to adopt more costly methods of operation.
Failure
to comply with environmental laws and regulations, or the permits issued under
them, may result in the assessment of administrative, civil and criminal
penalties, the imposition of remedial obligations and the issuance of
injunctions limiting or preventing some or all of our operations. In addition,
strict joint and several liability may be imposed under certain environmental
laws, which could cause us to become liable for the investigation or remediation
of environmental contamination that resulted from the conduct of others or from
our own actions that were in compliance with all applicable laws at the time
those actions were taken. Further, it is possible that we may be exposed to
liability due to releases of pollutants, or other environmental impacts that may
arise in the course of our operations. For instance, some of the work we perform
is in underground and water environments, and if the field location maps or
waterway charts supplied to us are not accurate, or if objects are present in
the soil or water that are not indicated on the field location maps or waterway
charts, our underground and underwater work could strike objects in the soil or
the waterway bottom containing pollutants and result in a rupture and discharge
of pollutants. In addition, we sometimes perform directional drilling operations
below certain environmentally sensitive terrains and water bodies, and due to
the inconsistent nature of the terrain and water bodies, it is possible that
such directional drilling may cause a surface fracture releasing subsurface
materials. These releases may contain contaminants in excess of amounts
permitted by law, may expose us to remediation costs and fines and legal actions
by private parties seeking damages for non-compliance with environmental laws
and regulations or for personal injury or property damage. We may not be able to
recover some or any of these costs through insurance or increased revenues,
which may have a material adverse effect on our business, operating results and
financial condition. See “Business — Environmental Matters” for more
information.
Our operations
are susceptible to adverse weather conditions in our regions of
operation.
Our
business, operating results and financial condition could be materially and
adversely affected by severe weather, particularly along the Gulf Coast, the
Atlantic Seaboard and Caribbean Basin where we have concentrated operations.
Repercussions of severe weather conditions may include:
|
|
•
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evacuation
of personnel and curtailment of
services;
|
|
|
•
|
weather-related
damage to our equipment, facilities and project work sites resulting in
suspension of operations;
|
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•
|
inability
to deliver materials to jobsites in accordance with contract
schedules; and
|
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•
|
loss
of productivity.
|
Our dependence on
petroleum-based products increases our costs as the prices of such products
increase, which could adversely
affect our business, operating results and financial
condition.
We use
diesel fuel and other petroleum-based products to operate our equipment used in
our construction contracts. Decreased supplies of those products relative to
demand and other factors can cause an increase in their cost. Future increases
in the costs of fuel and other petroleum-based products used in our business,
particularly if a bid has been submitted for a contract and the costs of those
products have been estimated at amounts less than the actual costs thereof,
could result in a lower profit, or a loss, on one or more
contracts.
Terrorist attacks
at port facilities could negatively impact the markets in which we
operate.
Terrorist
attacks, like those that occurred on September 11, 2001, targeted at ports,
marine facilities or shipping could affect the markets in which we operate our
business and our expectations. Increased armed hostilities, terrorist attacks or
responses from the U.S. may lead to further acts of terrorism and civil
disturbances in the U.S. or elsewhere, which may further contribute to
economic instability in the U.S. These attacks or armed conflicts may
affect our operations or those of our customers or suppliers and could impact
our revenues, our production capability and our ability to complete contracts in
a timely manner.
We may be subject
to unionization, work stoppages, slowdowns or increased labor costs.
We have a
non-union workforce. If our employees unionize, it could result in demands that
may increase our operating expenses and adversely affect our profitability. Each
of our different employee groups could unionize at any time and would require
separate collective bargaining agreements. If any group of our employees were to
unionize and we were unable to agree on the terms of their collective bargaining
agreement or we were to experience widespread employee dissatisfaction, we could
be subject to work slowdowns or stoppages. In addition, we may be subject to
disruptions by organized labor groups protesting our non-union status. Any of
these events would be disruptive to our operations and could have a material
adverse effect on our business, operating results and financial
condition.
We
may be unable to sustain our historical revenue growth rate.
Our
revenue has grown rapidly in recent years. Our revenue increased by 24.5%
from $210.4 million in 2007 to $261.8 million in 2008. However, we may
be unable to sustain our recent revenue growth rate for a variety of reasons,
including limits on additional growth in our current markets, less success in
competitive bidding for contracts, limitations on access to necessary working
capital and investment capital to sustain growth, limitations on access to
bonding to support increased contracts and operations, the inability to hire and
retain essential personnel and to acquire equipment to support growth, and the
inability to identify acquisition candidates and successfully integrate them
into our business. A decline in our revenue growth could have a material adverse
effect on our business, operating results and financial condition if we are
unable to reduce the growth of our operating expenses at the same
rate.
We
are subject to risks related to our international operations.
Approximately
7% of our revenue in 2008 was derived from international markets. We presently
conduct projects in the Caribbean Basin. International operations subject us to
additional risks, including:
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•
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uncertainties
concerning import and export license requirements, tariffs and other trade
barriers;
|
|
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•
|
restrictions
on repatriating foreign profits back to the
U.S.;
|
|
|
•
|
changes
in foreign policies and regulatory
requirements;
|
|
|
•
|
difficulties
in staffing and managing international
operations;
|
|
|
•
|
taxation
issues;
|
|
|
•
|
currency
fluctuations; and
|
|
|
•
|
political,
cultural and economic
uncertainties.
|
These
risks could restrict our ability to provide services to international customers
and could have a material adverse effect on our business, operating results and
financial condition.
Restrictions on
foreign ownership of our vessels could limit our ability to sell off any
portion of our business or result in the forfeiture of our vessels or
in our
inability to continue our operations in U.S. navigable
waters.
The
Dredging Act, the Jones Act, the Shipping Act and the Vessel Documentation Act
require vessels engaged in the transport of merchandise or passengers between
two points in the U.S. or dredging in the navigable waters of the
U.S. to be owned and controlled by U.S. citizens. The
U.S. citizen ownership and control standards require the vessel-owning
entity to be at least 75% U.S. citizen-owned, thus restricting foreign
ownership interests in the entities that directly or indirectly own the vessels
which we operate. If we were to seek to sell any portion of our business unit
that owns any of these vessels, we may have fewer potential purchasers, since
some potential purchasers might be unable or unwilling to satisfy the foreign
ownership restrictions described above; additionally, any sales of certain of
our larger vessels to foreign buyers would be subject to approval by the
U.S. Maritime Administration. As a result, the sales price for that portion
of our business may not attain the amount that could be obtained in an
unregulated market. Furthermore, although our certificate of incorporation
contains provisions limiting ownership of our capital stock by
non-U.S. citizens, foreign ownership is difficult to track and if we or any
operating subsidiaries
cease to
be 75% controlled and owned by U.S. citizens, we would become ineligible to
continue our operations in U.S. navigable waters and may become subject to
penalties and risk forfeiture of our vessels.
The
recent worldwide financial and credit crisis could lead to an extended worldwide
economic recession and have a material adverse affect on our revenue and
profitability.
Concerns
over slower or declining economic growth is affecting numerous industries and
companies and many states are facing difficult budget decisions which could
result in reduced demand for general construction projects. This
reduced demand may increase the number of potential bidders in our markets and
could increase the competitive environment through pressure on
pricing. Budgeting decisions and constraints due to the tight credit
markets may result in diversion of governmental funding from projects we perform
to other uses. A weak economy may also produce less tax revenue,
thereby decreasing funds for public sector projects. Lower levels of
activity may result in a corresponding decline in the demand for our services,
which could have a material adverse effect on our revenue and
profitability.
The
global financial crisis may have impacts on our business and financial condition
that we currently cannot predict.
General
worldwide economic conditions have deteriorated due to credit conditions
impacted by the sub-prime mortgage turmoil and other factors. We may
face challenges if conditions in the financial markets do not
improve. While these conditions have not impaired the Company’s
ability to access credit markets and finance operations, at this time, there can
be no assurance that there will not be a further deterioration in financial
markets and confidence in major economies. A continuing shortage of
liquidity could have an impact on the lenders under our credit facility or on
our customers.
Risk
Factors Related to our Accounting, Financial Results and Financing
Plans
Actual results
could differ from the estimates and assumptions that we use to prepare our
financial statements.
To
prepare financial statements in conformity with GAAP, management is required to
make estimates and assumptions as of the date of the financial statements, which
affect the reported values of assets and liabilities, revenues and expenses, and
disclosures of contingent assets and liabilities. Areas requiring significant
estimates by our management include: contract costs and profits, application of
percentage-of-completion accounting, and revenue recognition of contract change
order claims; provisions for uncollectible receivables and customer claims and
recoveries of costs from subcontractors, suppliers and others; valuation of
assets acquired and liabilities assumed in connection with business
combinations; accruals for estimated liabilities, including litigation and
insurance reserves; and the value of our deferred tax assets. Our actual results
could differ from those estimates.
Our use of the
percentage-of-completion method of accounting could result in a reduction or
reversal of previously recorded revenue and profit.
In
particular, as is more fully discussed in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Critical Accounting
Policies,” we recognize contract revenue using the percentage-of-completion
method. A significant portion of our work is performed on a fixed-price or
lump-sum basis. The balance of our work is performed on variations of cost
reimbursable and target price approaches. Contract revenue is accrued based on
the percentage that actual costs-to-date bear to total estimated costs. We
utilize this cost-to-cost approach as we believe this method is less subjective
than relying on assessments of physical progress. We follow the guidance of the
American Institute of Certified Public Accountants (“AICPA”) Statement of
Position 81-1, Accounting for
Performance of Construction-Type and Certain
Production-Type Contracts, for accounting policies relating to our use of
the percentage-of-completion method, estimating costs, revenue recognition,
combining and segmenting contracts and unapproved change order/claim
recognition. Under the cost-to-cost approach, while the most widely recognized
method used for percentage-of-completion accounting, the use of estimated cost
to complete each contract is a significant variable in the process of
determining income earned and is a significant factor in the accounting for
contracts.
The
cumulative impact of revisions in total cost estimates during the progress of
work is reflected in the period in which these changes become known. Due to the
various estimates inherent in our contract accounting, actual results could
differ from those estimates, which may result in a reduction or reversal of
previously recorded revenue and profit.
Failure to
establish and maintain effective internal control over financial reporting could
have a material adverse effect on our business, operating results and stock
value.
Maintaining
effective internal control over financial reporting is necessary for us to
produce reliable financial reports and is important in helping to prevent
financial fraud. If we are unable to achieve and maintain adequate internal
controls, our business, operating results and financial condition could be
harmed. We are required under Section 404 of the Sarbanes-Oxley Act of 2002
(“SOX”) and the related rules of the SEC to annually assess the effectiveness of
our internal controls over financial reporting and our independent registered
public accounting firm is required to issue a report on that assessment. During
the course of the related documentation and testing, we may identify significant
deficiencies or material weaknesses that we may be unable to remediate before
the requisite deadline for those reports. If our management or our independent
registered public accounting firm were to conclude in their reports that our
internal control over financial reporting was not effective, this could have a
material adverse effect on our ability to process and report financial
information and the value of our common stock could significantly
decline.
Our
bonding requirements may limit our ability to incur indebtedness.
We
generally are required to provide various types of surety bonds that provide an
additional measure of security for our performance under certain government and
private sector contracts. Our ability to obtain surety bonds depends upon
various factors including our capitalization, working capital and amount of our
indebtedness. In order to help ensure that we can obtain required bonds, we may
be limited in our ability to incur additional indebtedness that may be needed
for potential acquisitions and operations. Our inability to incur additional
indebtedness could have a material adverse effect on our business, operating
results and financial condition.
The
downturn in economic conditions may impact our customers’ ability to pay for
services and finance projects.
Our
primary customers are governmental agencies in the United States, as well as a
wide variety of private customers in diverse industries. It is
possible that the credit crisis and current economic conditions may affect some
of our customers’ ability to access sufficient capital to finance or complete
projects. Our cash flows may be adversely impacted through customer
delays in payment or non-payment of our accounts receivable, or through delays
or cancellations of projects awarded to us. We monitor our accounts
receivable balances closely and maintain contact with our customers to assess
the economic viability of projects in process.
Our
corporate headquarters is located at 12550 Fuqua, Houston, Texas 77034, with
16,440 square feet of office space that we lease, with an initial term expiring
July 12, 2015 and with two five year extensions at our option. Our
finance, human resources, and executive offices are located at this facility,
along with certain operating personnel. As of December 31, 2008, we
owned or leased the following additional facilities:
|
Location
|
Type of Facility
|
Size
|
Leased or Owned
|
Expiration of Lease
|
|
159
Highway 316
Port
Lavaca, Texas
|
Waterfront
maintenance and dock facilities, equipment yard and dry dock; regional
office
|
17.5
acres
|
Owned
|
N/A
|
|
17140
Market Street
Channelview,
Texas
|
Waterfront
maintenance and dock facilities and equipment yard
|
23.7
acres
|
Owned
|
N/A
|
|
5600
West Commerce Street
Tampa,
FL
|
Waterfront
maintenance and dock facilities; equipment yard and dry
dock
|
9.1
acres
|
Owned
|
N/A
|
|
5121
Highway 90 East
Lake
Charles, Louisiana
|
Land
based equipment yard and maintenance facility; regional
office
|
8.9
acres
|
Leased
|
August
31, 2009, with 3 one-year extensions at our option
|
|
6821
Southpoint Drive North Suite 221
Jacksonville,
Florida
|
Regional
office
|
1,152
square feet
|
Leased
|
March
31, 2009, renewable for 6-month intervals
|
|
City
of Port Lavaca Port Commission
Port
Lavaca, Texas
|
Safe
harbor
|
6.6
acres
|
Leased
|
March
12, 2012
|
|
1500
Main Street
Ingleside,
Texas
|
Regional
office
|
4
acres
|
Leased
|
May
1, 2009
|
|
5440
W. Tyson Avenue
Tampa,
Florida
|
Regional
office
|
6,160
square feet
|
Leased
|
May
31, 2010
|
|
1901
Hill Street
Jacksonville,
Florida
|
Waterfront
maintenance and dock facilities and equipment yard
|
Estimated
less than 5 acres
|
Leased
|
December
31, 2010
|
We
believe that our existing facilities are adequate for our
operations. We do not believe that any single facility is material to
our operations and, if necessary, we could readily obtain a replacement
facility. Our real estate assets are pledged to secure our credit
facility.
Although
we are subject to various claims and legal actions that arise in the ordinary
course of business, except as described below, we are not currently a party to
any material legal proceedings or environmental claims.
We have
been named as one of numerous defendants in various individual claims and
lawsuits brought in the United States District Court of the Eastern District of
Louisiana by or on behalf of the residents and landowners of New Orleans,
Louisiana and surrounding areas. These suits have been classified as a
subcategory of suits under the more expansive proceeding, In re Canal Breaches Consolidation
Litigation, Civil Action No. 05-4182 IE.D. La), which was instituted in
late 2005. While not technically class actions, the individual claims
and lawsuits are being prosecuted in a manner similar to that employed for
federal class actions. The claims are based on flooding and related
damage from Hurricane Katrina. In general, the claimants state that the flooding
and related damage resulted from the failure of certain aspects of the levee
system constructed by the Corps of Engineers, and the claimants seek recovery of
alleged general and special damages.
The Corps
of Engineers has contracted with various private dredging companies, including
us, to perform maintenance dredging of the waterways. In accordance with a
recent decision of the trial court (In re Canal Breaches Consolidation
Litigation, Civil Action No: 05-4182, “Order and Reasons,”
March 9, 2007 (E.D. La, 2007)), we believe that we will not have
liability under these claims unless we deviated from our contracted scope of
work on a project. In June of 2007, however, the plaintiffs appealed
this decision to the United States Court of Appeals for the Fifth Circuit, where
the appeal is currently pending. Substantive proceedings in the
appeals case have yet to commence. Additionally, plaintiffs in other
cases included in this subcategory of suits continue to seek trial court
determinations contrary to those reached in the “Order and Reasons” described
above.
The
plaintiffs in the pending lawsuit have not specified the amount of damages
claimed. Furthermore, as a matter arising in admiralty, which is
subject to statutory limitations provided under the Limitation of Liability Act
(46 U.S.C. section 30505), we believe that our liability is limited to the value
of our vessels involved in the dredging work. In addition, we
maintain insurance which should cover any liability that may be incurred,
further limiting our potential exposure. Therefore, we believe our
exposure is limited to our deductible under this insurance policy, which is
$100,000.
From time
to time, we are a party to various other lawsuits, claims and other legal
proceedings that arise in the ordinary course of our business. These actions
typically seek, among other things, compensation for alleged personal injury,
breach of contract, property damage, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to such lawsuits,
claims and proceedings, we accrue reserves when it is probable a liability has
been incurred and the amount of loss can be reasonably estimated. We do not
believe any of these proceedings, individually or in the aggregate, would be
expected to have a material adverse effect on our results of operations, cash
flows, or on our financial condition.
None
|
Item
5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
|
|
Market
Information
|
Our
common stock is listed on the NASDAQ Global Select Market and we commenced
trading under the symbol “OMGI” on December 20, 2007. From July 2,
2007 to September 28, 2007, our shares traded on the PORTAL market, which is
operated by the NASDAQ Stock Market, LLC. Prior to that time, there
was no market for our common stock. We have provided to NASDAQ,
without qualification, the required certification regarding compliance with
NASDAQ corporate governance listing standards.
The
following table sets for the low and high prices of a share of our common stock
during each of the fiscal quarters presented, based on NASDAQ
reports:
|
Low
|
High
|
|||||||
|
2008
|
||||||||
|
First
quarter
|
$ | 10.01 | $ | 15.00 | ||||
|
Second
quarter
|
$ | 11.89 | $ | 15.41 | ||||
|
Third
quarter
|
$ | 9.01 | $ | 14.50 | ||||
|
Fourth
quarter
|
$ | 3.55 | $ | 10.40 | ||||
|
2007
|
||||||||
|
First
quarter
|
* | * | ||||||
|
Second
quarter
|
* | * | ||||||
|
Third
quarter
|
$ | 13.50 | $ | 15.00 | ||||
|
Fourth
quarter
|
$ | 14.25 | $ | 16.50 | ||||
*Our
common stock commenced trading on the NASDAQ PORTAL on July 2,
2007.
Holders
According
to the records of our transfer agent, there were approximately 912 holders of
record of our common stock, as of December 31, 2008.
Dividends
For the
foreseeable future, we intend to retain earnings to grow our business and do not
intend to pay dividends on our common stock. We have not historically paid
dividends and payments of future dividends, if any, will be at the discretion of
our board of directors and will depend on many factors, including general
economic and business conditions, our strategic plans, our financial results and
condition, legal requirements, and other factors that our board of directors
deems relevant. Our existing credit facility restricts our ability to pay cash
dividends on our common stock, and we may also enter into credit agreements or
other borrowing arrangements in the future that will restrict our ability to
declare or pay cash dividends on our common stock.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table presents certain information about our equity compensation plans
as of December 31, 2008:
|
Plan
category
|
Column A
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Column B
Weighted
average exercise price of outstanding options, warrants and
rights
|
Column C
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in Column
A)
|
|||||||||
|
Equity
compensation plans approved by shareholders
|
2,303,608 | $ | 5.04 | 640,338 | ||||||||
|
Equity
compensation plans not approved by shareholders
|
-- | -- | -- | |||||||||
|
Total
|
2,303,608 | $ | 5.04 | 640,338 | ||||||||
Unregistered
Sales of Equity Securities and Use of Proceeds
In May
2007, we completed the sale of 20,949,216 shares of our common stock at a
sale price of $13.50 per share to qualified institutional buyers,
non-U.S. persons and accredited investors. This transaction
included the repurchase and retirement of all of our outstanding preferred stock
and 16,053,816 shares of our common stock from our former principal
stockholders using approximately $242.0 million of the net proceeds,
resulting in a net increase in shares outstanding of 4,895,400 shares (the
“2007 Private Placement”).
Performance
Graph*
The
following graph shows the changes, since our common stock began trading on the
NASDAQ Global Market on December 20, 2007 over the past five-year period in
the value of $100 invested in (1) the common stock of Orion Marine Group, Inc.,
(2) the Standard & Poor’s 500 Index and (3) the Dow Jones Heavy Construction
Group Index. The values of each investment are based on share price
appreciation, with reinvestment of all dividends, assuming any were
paid. For each graph, the investments are assumed to have occurred at
the beginning of each period.
Note: The
above information was provided by Research Data Group, Inc.
*This
table and the information therein is being furnished but not filed.
Item
6. SELECTED
FINANCIAL DATA
The
following table presents selected financial data for each of the last five
fiscal years. This selected financial data should be read in conjunction with
the Consolidated Financial Statements and related notes beginning on page F-1 of
this Annual Report on Form 10-K and Item 7 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”. These historical
results are not necessarily indicative of the results of operations to be
expected for any future period.
In
October 2004, we were acquired by Orion Marine Group, Inc., formerly known as
Hunter Acquisition Corp., a corporation formed and controlled by our former
principal stockholders. For accounting purposes, our company as it existed until
the time we were acquired by Hunter Acquisition Corp. is referred to as our
“Predecessor” and our company as it has existed since the acquisition is
referred to as our “Successor.” Concurrent with the acquisition and in
accordance with GAAP, we wrote up the value of our assets to their current
market value (as determined by appraisals for certain of our assets, such as
equipment and land) at the time of the transaction. The result of this write up
increased the book value of our assets and the associated depreciation expense.
Therefore, depreciation expense for our Predecessor was less than depreciation
expense for our Successor.
In
February 2008, we acquired substantially all of the assets, consisting primarily
of equipment and excluding working capital, and related business, (principally
consisting of contracts in progress) of Orlando, Florida based Subaqueous
Services, Inc. (“SSI”) for $35 million in cash.
The table
below includes the non-GAAP financial measure of EBITDA. For a
definition of EBITDA and a reconciliation to net income calculated and presented
in accordance with GAAP, please see “Non-GAAP Financial Measures”
immediately below.
|
Successor
|
Predecessor
|
|
||||||||||||||||||||||
|
Year
ended December 31,
|
October
14 to December 31,
|
January
1 to October 13
|
|
|||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
2004
|
|||||||||||||||||||
|
(in
thousands, except for per share data)
|
||||||||||||||||||||||||
|
Contract
revenues
|
$ | 261,802 | $ | 210,360 | $ | 183,278 | $ | 167,315 | $ | 32,570 | $ | 97,989 | ||||||||||||
|
Gross
profit
|
50,451 | 50,433 | 38,537 | 21,575 | 2,505 | 18,804 | ||||||||||||||||||
|
Selling,
general and administrative expenses
|
27,978 | 22,946 | 17,425 | 10,685 | 1,611 | 7,752 | ||||||||||||||||||
|
Net
income
|
14,475 | 17,399 | 12,403 | 5,311 | 419 | 6,702 | ||||||||||||||||||
|
Preferred
dividends
|
-- | 782 | 2,100 | 2,100 | 460 | -- | ||||||||||||||||||
|
Income
(loss) available to common shareholders
|
$ | 14,475 | $ | 16,617 | $ | 10,303 | $ | 3,211 | $ | (41 | ) | $ | 6,702 | |||||||||||
|
Adjusted
Per Common Share Data:
|
||||||||||||||||||||||||
|
Net
income per share
|
||||||||||||||||||||||||
|
Basic
|
$ | 0.67 | $ | 0.86 | $ | 0.65 | $ | 0.20 | -- | $ | 69.02 | |||||||||||||
|
Diluted
|
$ | 0.66 | $ | 0.83 | $ | 0.63 | $ | 0.20 | -- | $ | 69.02 | |||||||||||||
|
Weighted
average shares outstanding
|
||||||||||||||||||||||||
|
Basic
|
21,483 | 19,401 | 15,872 | 15,707 | 15,695 | 97 | ||||||||||||||||||
|
Diluted
|
21,979 | 19,976 | 16,407 | 16,135 | 15,695 | 97 | ||||||||||||||||||
|
Other
Financial Data
|
||||||||||||||||||||||||
|
EBITDA
|
$ | 41,321 | $ | 40,079 | $ | 33,003 | $ | 22,331 | $ | 3,091 | $ | 16,544 | ||||||||||||
|
Capital
expenditures
|
14,485 | 11,433 | 11,931 | 9,149 | 2,383 | 8,407 | ||||||||||||||||||
|
Cash
interest expense
|
1,234 | 927 | 2,848 | 2,146 | 263 | 150 | ||||||||||||||||||
|
Depreciation
and amortization*
|
18,848 | 12,592 | 11,805 | 11,036 | 1,960 | 5,440 | ||||||||||||||||||
|
Net
cash provided by (used in):
Operating
activities
|
26,471 | 10,092 | 32,475 | 11,618 | 3,262 | 8,193 | ||||||||||||||||||
|
Investing
activities
|
(47,337 | ) | (9,463 | ) | (11,987 | ) | (5,431 | ) | (61,654 | ) | (6,634 | ) | ||||||||||||
|
Financing
activities
|
33,994 | (6,606 | ) | (9,572 | ) | (6,244 | ) | 66,094 | (1,055 | ) | ||||||||||||||
*includes depreciation, amortization
and amortization of deferred financing costs
|
As of December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 25,712 | $ | 12,584 | $ | 18,561 | $ | 7,645 | $ | 7,701 | ||||||||||
|
Working
capital
|
47,021 | 32,452 | 12,970 | 14,729 | 11,475 | |||||||||||||||
|
Total
assets
|
186,322 | 133,534 | 125,072 | 114,626 | 113,739 | |||||||||||||||
|
Total
debt
|
34,125 | -- | 25,000 | 34,548 | 40,489 | |||||||||||||||
|
Total
stockholders’ equity
|
105,611 | 90,084 | 53,239 | 40,730 | 35,419 | |||||||||||||||
Non-GAAP Financial
Measures
We
include in this Annual Report on Form 10-K the non-GAAP financial measure of
EBITDA. We define EBITDA as income before interest, income taxes, depreciation
and amortization. EBITDA is used as a supplemental financial measure by our
management and by external users of our financial statements such as investors,
commercial banks and others, to assess:
|
|
•
|
the
financial performance of our assets without regard to financing methods,
capital structure or historical cost
basis;
|
|
|
•
|
the
ability of our assets to generate cash sufficient to pay interest costs
and support our indebtedness;
|
|
|
•
|
our
operating performance and return on capital as compared to those of other
companies in our industry, without regard to financing or capital
structure; and
|
|
|
•
|
the
viability of acquisitions and capital expenditure projects and the overall
rates of return on alternative investment
opportunities.
|
EBITDA is
not a presentation made in accordance with GAAP. EBITDA should not be considered
an alternative to, or more meaningful than, net income, operating income, cash
flows from operating activities or any other measure of financial performance
presented in accordance with GAAP as measures of operating performance,
liquidity or ability to service debt obligations. Because EBITDA excludes some,
but not all, items that affect net income and is defined differently by
different companies in our industry, our definition of EBITDA may not be
comparable to similarly titled measures of other companies. EBITDA has important
limitations as an analytical tool, and you should not consider it in
isolation.
The
following table provides a reconciliation of EBITDA to our net income for the
periods indicated as calculated and presented in accordance with
GAAP:
|
Successor
|
Predecessor
|
|||||||||||||||||||||||
|
Year
ended December 31,
|
October
14 to December 31,
|
January
1 to October 13
|
||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
2004
|
|||||||||||||||||||
|
(in
thousands, except for per share data)
|
||||||||||||||||||||||||
|
Net
income
|
$ | 14,475 | $ | 17,399 | $ | 12,403 | $ | 5,311 | $ | 419 | $ | 6,702 | ||||||||||||
|
Income
tax expense
|
7,282 | 10,178 | 7,040 | 3,805 | 266 | 4,378 | ||||||||||||||||||
|
Interest
expense, net
|
716 | (90 | ) | 1,755 | 2,179 | 446 | 24 | |||||||||||||||||
|
Depreciation
and amortization*
|
18,848 | 12,592 | 11,805 | 11,036 | 1,960 | 5,440 | ||||||||||||||||||
|
EBITDA
|
$ | 41,321 | $ | 40,079 | $ | 33,003 | $ | 22,331 | $ | 3,091 | $ | 16,544 | ||||||||||||
*includes depreciation, amortization
and amortization of deferred financing costs
Selected
Quarterly Financial Data
The
following table sets forth selected unaudited financial information for the
eight quarters in the two-year period ended December 31, 2008. This
information has been prepared on the same basis as the audited financial
statements and, in the opinion of management, contains all adjustments necessary
for a fair statement thereof.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
Year
|
||||||||||||||||
|
2008
|
||||||||||||||||||||
|
Revenues
|
$ | 52,591 | $ | 67,070 | $ | 62,897 | $ | 79,244 | $ | 261,802 | ||||||||||
|
Operating
profit(a)
|
4,245 | 4,135 | 5,243 | 8,850 | 22,473 | |||||||||||||||
|
Income
before tax
|
4,268 | 3,890 | 4,985 | 8,614 | 21,757 | |||||||||||||||
|
Net
income
|
2,846 | 2,401 | 3,764 | 5,464 | 14,475 | |||||||||||||||
|
Preferred
dividends
|
-- | -- | -- | -- | -- | |||||||||||||||
|
Income
available to common shareholders
|
$ | 2,846 | $ | 2,401 | $ | 3,764 | $ | 5,464 | $ | 14,475 | ||||||||||
|
Earnings
per share
|
||||||||||||||||||||
|
Basic
|
$ | 0.13 | $ | 0.11 | $ | 0.18 | $ | 0.25 | $ | 0.67 | ||||||||||
|
Diluted
|
$ | 0.13 | $ | 0.11 | $ | 0.17 | $ | 0.25 | $ | 0.66 | ||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
Year
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Revenues
|
$ | 38,293 | $ | 51,479 | $ | 59,999 | $ | 60,589 | $ | 210,360 | ||||||||||
|
Operating
profit(a)
|
5,397 | 3,845 | 9,057 | 9,188 | 27,487 | |||||||||||||||
|
Income
before tax
|
5,217 | 3,746 | 9,200 | 9,414 | 27,577 | |||||||||||||||
|
Net
income
|
3,286 | 2,280 | 5,763 | 6,070 | 17,399 | |||||||||||||||
|
Preferred
dividends
|
518 | 264 | - | - | 782 | |||||||||||||||
|
Income
available to common shareholders
|
$ | 2,768 | $ | 2,016 | $ | 5,763 | $ | 6,070 | $ | 16,617 | ||||||||||
|
Earnings
per share
|
||||||||||||||||||||
|
Basic
|
$ | 0.18 | $ | 0.12 | $ | 0.28 | $ | 0.28 | $ | 0.86 | ||||||||||
|
Diluted
|
$ | 0.18 | $ | 0.12 | $ | 0.26 | $ | 0.27 | $ | 0.83 | ||||||||||
(a)
Operating profit represents revenues, less cost of contracts and selling,
general and administrative expenses
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Management’s
Discussion and Analysis (MD&A) provides an overview of our consolidated
financial condition and results of operations as well as an analysis of the
factors that caused certain key elements of our financial statements to change
from one year to the next.
In this
MD&A, we use certain terms and abbreviations that are defined as
follows:
|
|
AICPA
|
The
American Institute of Certified Public Accountants; accounting guidance
promulgated by the AICPA is part of the authoritative literature
comprising United States GAAP.
|
APB
Accounting Principles Board
GAAP
Generally accepted accounting principles in the United States
|
|
SFAS
|
Statement
of Financial Accounting Standards, which accounting standards are adopted
by the Financial Accounting Standard Board
(FASB)
|
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 and the Caribbean Basin. Our customers include federal, state
and municipal governments, the combination of which accounted for approximately
50% of our revenue in the year ended December 31, 2008, 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 is affected by such
factors as backlog, current utilization of equipment and other resources,
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 impose inefficiencies on contract performance, which can
impact the timing of revenue recognition and 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.
Business
Drivers and Measures
Industry
trends impact our results of operations. In operating our business and
monitoring its performance, we also pay attention to a number of performance
measures and operational factors.
Industry
Trends
Our
performance is impacted by overall spending in the heavy civil marine
infrastructure market. Spending by our customers, both government and private,
is impacted by several important trends affecting our industry, including the
following:
|
|
•
|
port
and channel expansion and
maintenance;
|
|
|
•
|
deteriorating
condition of intracoastal waterways and
bridges;
|
|
|
•
|
continued
demand in the cruise industry;
|
|
|
•
|
the
continuing U.S. base realignment and closure program
(BRAC);
|
|
|
•
|
infrastructure
spending by the United States Navy and Coast
Guard;
|
|
|
•
|
near-shore
oil and gas capital expenditures
|
|
|
•
|
ongoing
U.S. coastal wetlands restoration and
reclamation;
|
|
|
•
|
recurring
hurricane restoration and
repair;
|
|
|
•
|
the
$23 billion Federal Water Resources Development Act of 2007 (WRDA);
and
|
|
|
•
|
the
$787 billion American Recovery and Reinvestment Act of 2009 (not
trends)
|
In the
aggregate, these industry trends drive marine transportation facility
construction, dredging, bridge building, repair and maintenance, as well as
specialty services that we perform in our markets.
Bidding
Most of
our contracts are obtained through competitive bidding on terms specified by the
party inviting the bid. The nature of the contract specifications dictates the
type of equipment, material and labor involved, all of which affect the cost of
performing the contract and the price that our competitors will bid. Contracts
for projects are generally awarded to the lowest qualified bidder, provided the
bid is no greater than the amount of funds that are budgeted and available for
the project. If all bids are greater than the available funds, then projects may
be subject to rebid or cancellation as a result of budget
constraints.
Utilization
An
important factor that we take into consideration when we manage our business is
the current and projected utilization of our equipment and personnel. We do not
measure utilization of equipment or personnel in the aggregate, but rather track
utilization by our major pieces of equipment, such as barges, cranes, dredges,
tugs, etc., and the associated personnel required to operate the
equipment.
Backlog
Once we
have successfully bid on a project and executed a contract to perform the work,
we record the value of the contract as backlog. Our backlog is the financial
representation of the revenue associated with the future commitments of our
equipment and personnel tracked in our project management software system.
Backlog consists of projects that have either (a) not yet started, or
(b) are in progress but are not yet complete. Consequently, backlog is also
an important factor we use to monitor our business. The typical duration of our
contracts is three to nine months, so 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.
As our
business continues to grow, we expect that our backlog will increase over time.
However, our backlog may fluctuate significantly from quarter to quarter, and a
quarterly decrease of our backlog might not necessarily translate into a
deterioration of our business. For example, in anticipation of bidding on a
large project for which we believe we will be the successful bidder, we may
choose not to bid on near-term projects so that our schedule can accommodate a
large job. Even though this management decision would result in a near-term
decline in our backlog, it is not inconsistent with our dual goals of
maintaining high utilization rates of our equipment and personnel and long-term
growth in our backlog.
Revenue
We
recognize our revenue using the percentage-of-completion methodology.
Percentage-of-completion for construction contracts is measured principally by
the costs incurred and accrued to date for each contract to the estimated total
costs for each contract at completion. We generally consider contracts
substantially complete upon acceptance by the customer and departure from the
construction site. A significant portion of our revenue depends on project
funding by various government agencies and is adversely affected by decreased
level of, or delays in, government funding.
Cost
of Revenue
The
components of costs of contract revenues include labor, equipment (including
depreciation, insurance, fuel, maintenance and supplies), materials, lease
expense and project overhead. Costs of contract revenues vary significantly
depending on the type and location of work performed and assets utilized. Since
the realization of our revenue is driven primarily by the cost of our revenues
in relation to our estimated total costs to complete a contract, we monitor the
costs realized to date and the estimated costs required to complete a project
very closely, on a project-by-project basis, using our project management
software system. By closely monitoring our jobs, we are able to quickly identify
potential issues and respond accordingly. We believe that our ability to
effectively manage the cost of revenue is a competitive strength of our
organization and is indicative of the depth of our management team.
Another
important aspect of managing our cost of revenue is to recognize opportunities
for change orders, which is a change to the original specifications of the
contract, and occurs once a project has begun. In doing so, we are able to
(a) recognize additional revenue from a project on a negotiated basis,
rather than a competitive bidding situation, at generally higher margins, and
(b) avoid potential disputes with our customers regarding required
deviations from the original terms of the contract.
Selling,
General and Administrative Expenses
Our
selling, general and administrative costs include non-contract related salaries
and expenses, incentive compensation, discretionary profit sharing and other
variable compensation, as well as other overhead costs to support our overall
business. In general, these costs will increase in response to our growth and
the related increased complexity of our business.
Other
Factors
Other
factors that will influence our operations in future periods include the
following:
Seasonality. Substantially
all of our services are performed on, over and under the water, causing our
results to be subject to seasonal variations due to weather conditions. The core
markets in which we operate — the Gulf Coast, the Atlantic Seaboard and the
Caribbean Basin — are affected by hurricanes and tropical storms during
hurricane season, which occurs annually in the Gulf of Mexico and Atlantic Ocean
from June through November. Over 97% of the hurricanes and tropical storms occur
during hurricane season, and 78% occur from August through October. Generally,
wet conditions do not affect our operations, but major hurricanes and tropical
storms may temporarily delay our operations, and we monitor all named storm
systems to determine which projects, if any, will be affected. Because
hurricanes and tropical storms move slowly, we usually have ample time to
prepare appropriately for the storm, which typically includes demobilizing much
of our equipment and removing our employees from the job site. Once the storm
has passed, we must then mobilize our personnel and equipment back to the job
site, which results in delays in the completion of our work and may result in an
increase in the costs associated with performing our work.
Generally,
in our fixed-price contracts we bear the risks of increased costs, delays to
completion of work, damage to our equipment, and damage to the work already
completed at a job site, related to severe weather conditions, such as
hurricanes and tropical storms. Consequently, our cost estimates to complete a
job in a hurricane prone area during hurricane season include costs related to
mobilizing and demobilizing personnel and equipment, and our schedule assumes
there will be delays associated with hurricanes and tropical storms. In 2008,
seven named storms affected the Atlantic and Gulf coastal regions of the United
State. At least one storm during this time affected all of our job
sites, and several projects experienced delays due to the impact of as many as
three storms, utilizing the contingencies in place and resulting in higher
project costs than if we had not used the contingency. In years where the
hurricane activity is less than expected or does not significantly impact our
job sites, as was the case in 2006 and 2007, we are able to release certain
contingencies within our jobs as they are completed.
Surety Bonding. In
connection with our business, we generally are required to provide various types
of surety bonds that provide an additional measure of security to our customers
for our performance under certain government and private sector contracts. Our
ability to obtain surety bonds depends upon our capitalization, working capital,
past performance, management expertise and external factors, including the
capacity of the overall surety market. Surety companies consider such factors in
light of the amount of our backlog that we have currently bonded and their
current underwriting standards, which may change from time-to-time. During the
year ended December 31, 2008, approximately 38% of our projects, measured by
revenue, required us to post a bond. The bonds we provide typically have face
amounts ranging from $1.0 to $50.0 million. As of December 31, 2008, we had
approximately $100.0 million in surety bonds outstanding and we believe our
capacity under our current bonding arrangement was in excess of
$400.0 million in aggregate surety bonds. We believe that our bonding
capacity provides us with a significant competitive advantage relative to many
of our local competitors, as many of these competitors are sole proprietors and
are often required to personally guarantee their surety bonds, which frequently
limits their bonding capacity.
Outlook. Global
economic conditions have worsened due to the effects of continuing tight credit
conditions, reduced consumer and capital spending and other recessionary
factors. Concerns over the economic downturn are affecting numerous
companies and industries, and many states are facing difficult budget decisions
which could result in reduced demand for general construction
projects. This reduced demand may increase the number of potential
bidders in our markets and could increase the competitive environment through
pressure on pricing. Budgeting decisions and constraints due to the
tight credit markets or other recessionary factors may result in the diversion
of funds from projects we perform to other uses; project bids may be postponed
or otherwise delayed, and existing projects may be cancelled or reduced in
scope. A weak economy may also produce less tax revenue, thereby
decreasing funds for public sector projects.
To date,
we have not seen a general, significant decline in our end market bidding
activity, including port development projects, cruise ship pier development, and
general infrastructure maintenance and improvements. However, in this
uncertain economic climate, deterioration or delays in certain end markets may
develop, while bidding opportunities in other end markets, such as
infrastructure spending and hurricane protection may
increase. Additionally, supplemental emergency funding legislation
signed into law in 2008 provides $740 million to the Corp of Engineers allocated
for emergency dredging and construction projects in areas affected by the 2008
storms, which include the markets in which we operate. The $787
billion American Recovery and Reinvestment Act was recently signed into law and
provides $90 billion of infrastructure spending, including $27.5 billion toward
highway construction, $4.6 billion to the US Army Corps of Engineers, and $240
million for US Coast Guard bridge alterations and construction
improvements.
The cost
of certain commodities used in our business, such as concrete, steel and fuel,
continued to fluctuate significantly in recent months. Because our
projects are normally short-term in nature, we are generally able to include
price increases in the costs of our bids, and, in certain circumstances, may be
able to negotiate for price escalations during the execution of a
contract. However, certain projects may be negatively impacted
by substantial cost increases.
We
continue to evaluate our credit exposure as the global credit market crises
continues. During the year ended December 31, 2008, our operations
provided cash from operations in excess of $26.0 million and our cash position
at December 31, 2008 was in excess of $25.0 million. Our operations
are not currently dependent on external short-term funding and we have not
utilized the $7.6 million available to us under our revolving credit
facility.
Our focus
in 2009 will be to concentrate on our core objectives; to manage our business
effectively and efficiently in this recessionary economic environment; to pursue
rational growth strategies while closely monitoring the costs of our operations;
and to maintain our strong balance sheet.
Significant
Changes in Ownership
2007
Private Placement
In May
2007, we completed the sale of 20,949,216 shares of our common stock at a
sale price of $13.50 per share to qualified institutional buyers,
non-U.S. persons and accredited investors. In addition, we
repurchased and retired all of our outstanding preferred stock and
16,053,816 shares of our common stock from our former principal
stockholders using approximately $242.0 million of the net proceeds, which
resulted in a net increase in shares outstanding of
4,895,400 shares.
The 2007
Private Placement is more fully described in Note 3 of the Notes to Consolidated Financial
Statements.
Critical
Accounting Policies
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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 in accordance with the AICPA Statement of
Position 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.
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 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. 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 changed 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. We provide for contract losses in their entirety in
the period they become known, without regard to the percentage of
completion.
Long-Lived
Assets
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 all long-lived assets is evaluated periodically in
accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived
Assets, to determine if adjustment to the depreciation period or the
carrying value is warranted. If events and circumstances indicate that the
long-lived assets should be reviewed for possible impairment, we use projections
to assess whether future cash flows on a non-discounted basis related to the
tested assets are likely to exceed the recorded carrying amount of those assets
to determine if write-down is appropriate. If we identify impairment, we will
report a loss to the extent that the carrying value of the impaired assets
exceeds their fair values as determined by valuation techniques appropriate in
the circumstances that could include the use of similar projections on a
discounted basis.
Goodwill
We
evaluate goodwill annually for potential impairment in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets
and more frequently if an event or circumstance indicates that impairment
may have occurred. We
perform our required annual impairment test for goodwill using a discounted cash
flow analysis supported by comparative market multiples to determine the fair
values of our reporting units versus their book values. When a possible
impairment for a reporting unit is indicated, the implied fair value of goodwill
is tested by comparing the carrying amount of net assets of the reporting unit
excluding goodwill to the total fair value. When the carrying amount of goodwill
exceeds its implied fair value, an impairment charge is recorded. . Included in this evaluation
are certain assumptions and estimates to determine fair value of reporting units
such as estimates of future cash flows, discount rates as well as assumptions
and estimates related to valuation of other identifiable intangible assets.
Changes in these assumptions and estimates or significant changes to the market
value of our company could materially impact our results of operations or
financial position. As of December 31, 2008, goodwill was $12.1 million and
no impairment loss was recorded during the year.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109 “Accounting for Income Taxes”
and other applicable authoritative pronouncements. We evaluate
valuation allowances for deferred tax assets for which future realization is
uncertain. We perform this evaluation at least annually at the end of each
fiscal year. The estimation of required valuation allowance includes estimates
of future taxable income. In our assessment of our deferred tax assets at
December 31, 2008, 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.
We
account for uncertain tax positions in accordance with the provisions of FASB
Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). The implementation of FIN 48 required
us to make subjective assumptions and judgments regarding income tax exposure.
Interpretations of and guidance surrounding income tax laws and regulations
change over time, and these may change our subjective assumptions, which in
turn, may affect amounts recognized in the condensed consolidated balance sheets
and statements of income.
Insurance
Matters, 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.
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. In
accordance with SFAS No. 5 “Accounting for Contingencies”,
losses on these policies up to the deductible amounts are accrued in our
Consolidated Balance Sheets based on known claims incurred and an estimate of
claims incurred but not yet reported. We derive our accruals from
actuarial studies, known facts, historical trends and industry averages
utilizing the assistance of an actuary 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.
Accounting
for Stock Issued to Employees and Others
We
account for equity awards issued to employees and others under the provisions of
SFAS No. 123(R), Share-Based
Payment. Among its provisions, SFAS No. 123(R)
requires the Company to recognize compensation expense for equity awards over
the vesting period based on the fair value of these awards at the date of
grant. We use the Black-Scholes option-pricing model to compute the
fair value of option awards on the date of grant. 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 assigned to the option award. The fair value of
restricted stock grants is equivalent to the fair value of the stock issued on
the date of grant.
Acquisition
of Assets
As
discussed in Note 4 in the Notes to Consolidated Financial
Services, on February 29, 2008, Subaqueous Services, LLC ("SSLLC"), a
wholly-owned subsidiary of the Company purchased substantially all of the assets
and related business of Subaqueous Services, Inc. (“SSI”). Since
the date of acquisition, we have integrated these assets into our operations,
and stand-alone information is not provided.
Consolidated
Results of Operations
Current
Year—Year Ended December 31, 2008 compared with Year Ended December 31,
2007
The
following information is derived from our historical results of operations
(dollars in thousands):
|
Twelve
months ended December 31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Contract
revenues
|
$ | 261,802 | 100.0 | % | $ | 210,360 | 100.0 | % | ||||||||
|
Cost
of contract revenues
|
211,351 | 80.7 | % | 159,927 | 76.0 | % | ||||||||||
|
Gross
profit
|
50,451 | 19.3 | % | 50,433 | 24.0 | % | ||||||||||
|
Selling,
general and administrative expenses
|
27,978 | 10.5 | % | 22,946 | 10.9 | % | ||||||||||
|
Operating
income
|
22,473 | 8.8 | % | 27,487 | 13.1 | % | ||||||||||
|
Interest
(income) expense
|
||||||||||||||||
|
Interest
(income)
|
(530 | ) | -0.2 | % | (1,000 | ) | -0.5 | % | ||||||||
|
Interest
expense
|
1,246 | 0.5 | % | 910 | 0.5 | % | ||||||||||
|
Interest
(income) expense, net
|
716 | 0.3 | % | (90 | ) | 0.0 | % | |||||||||
|
Income
before income taxes
|
21,757 | 8.5 | % | 27,577 | 13.1 | % | ||||||||||
|
Income
tax expense
|
7,282 | 2.9 | % | 10,178 | 4.8 | % | ||||||||||
|
Net
income
|
$ | 14,475 | 5.6 | % | $ | 17,399 | 8.3 | % | ||||||||
Contract
Revenues. Total revenue increased $51.4 million or 24.5%,
from $210.4 million for the year ended December 31, 2007 to
$261.8 million for the year ended December 31,
2008. The increase in revenue was due to geographic expansion
of our dredging capabilities along the eastern coast of the United States and to
the progress schedules and rate of completion of the contracts in progress in
2008, despite an active hurricane season in the year with seven named storms
that affected our entire operations at various times. Revenues
generated by the private sector increased by a substantial 45% in 2008 as
compared with 2007. However, revenues generated from federal agencies
decreased by 22.4% in 2008 as compared with 2007 due to a slow volume of bid
opportunities by the Corps of Engineers.
Gross
Profit. Gross profit was comparable to the prior year,
however, gross margin decreased from 24.0% in 2007 to 19.3% in
2008. The downward pressure on margin was due primarily to the use of
outside subcontractors resulting from the scope of work in the mix of contracts
in progress during 2008, which reduced our self-performance rate (as measured by
cost) from 90.3% in 2007 to 88.2% in 2008. Significant production
delays which resulted from unexpected amounts of trash and unforeseen site
conditions on two projects involving dredging services, negatively affected
gross margins. In addition, we achieved higher margins on certain
projects in 2007, due to productivity gains on labor and other
factors.
Selling, General
and Administrative Expense. As compared with the prior year,
selling, general and administrative expenses (“SG&A”) increased
$5.0 million or 21.9% in 2008. Current year expenses include amortization
related to intangible assets; additional overheads to support the business
growth we experienced in 2008; and a full complement of annual public company
expenses. In addition, we increased our bad debt reserve to $0.8
million, related to receivables on two projects, and our property taxes
increased as compared with 2007, due in part to property taxes related to our
geographic expansion. In the prior year, we incurred one-time
payments of bonuses and incentives to key employees upon the successful
consummation of the common stock offering in May 2007, which totaled
approximately $2.6 million. As a percentage of revenues, however,
SG&A expenses decreased slightly, from 10.9% of revenues to 10.5%,
reflecting our continued focus on the management of costs.
Interest Expense,
net of Interest Income. The increase in interest expense in
2008 directly resulted from debt incurred to purchase the assets of SSI in
February 2008. In 2007, upon closing of the private placement
transaction, we repaid all debt outstanding at that time. We
earn interest income on the cash balances we maintain throughout the
year.
Income Tax
Expense. Our effective tax rate of 33.5% differed from our
statutory rate of 35%, primarily due to the benefit of the domestic production
activities deduction on the Company’s tax return and true-ups of federal and
state deferred taxes. Excluding these true-ups, which should not
reoccur, our effective tax rate was 36.4% and differed from the statutory rate
due to our estimate of the impact of certain permanent deductions available on
our federal tax return, offset by increases in state income
taxes. The effective rate of 36.9% in 2007 differed from the
statutory rate primarily due to permanent non-deductible differences and to
state income taxes.
Prior
Year—Year Ended December 31, 2007 compared with Year Ended December 31,
2006
The
following information is derived from our historical results of operations
(dollars in thousands):
|
Twelve
months ended December 31,
|
||||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Contract
revenues
|
$ | 210,360 | 100.0 | % | $ | 183,278 | 100.0 | % | ||||||||
|
Cost
of contract revenues
|
159,927 | 76.0 | % | 144,741 | 79.0 | % | ||||||||||
|
Gross
profit
|
50,433 | 24.0 | % | 38,537 | 21.0 | % | ||||||||||
|
Selling,
general and administrative expenses
|
22,946 | 10.9 | % | 17,425 | 9.5 | % | ||||||||||
|
Operating
income
|
27,487 | 13.1 | % | 21,112 | 11.5 | % | ||||||||||
|
Interest
(income) expense
|
||||||||||||||||
|
Interest
(income)
|
(1,000 | ) | 0.0 | % | (86 | ) | 1.0 | % | ||||||||
|
Interest
expense
|
910 | 0.0 | % | 1,755 | 0.0 | % | ||||||||||
|
Interest
(income) expense, net
|
(90 | ) | -0.0 | % | 1,669 | 1.0 | % | |||||||||
|
Income
before income taxes
|
27,577 | 13.1 | % | 19,443 | 10.5 | % | ||||||||||
|
Income
tax expense
|
10,178 | 4.8 | % | 7,040 | 3.8 | % | ||||||||||
|
Net
income
|
$ | 17,399 | 8.3 | % | $ | 12,403 | 6.7 | % | ||||||||
Contract
Revenues. Total revenue increased $27.1 million or 14.8%,
from $183.3 million for the year ended December 31, 2006 to
$210.4 million for the year ended December 31,
2007. The increase in revenue was due to the progress schedules
and rate of completion of the contracts in progress in 2007, which is driven by
the size, composition and scope of the projects during the
year. Revenues generated by local government agencies and
the private sector increased by a substantial 44% in 2007 as compared with
2006. However, revenues generated from federal agencies decreased by
14% in 2007 as compared with 2006 due to funding constraints on the Corps of
Engineers, which reduced the availability of work in that
sector. During 2007, we began construction of a causeway in Florida,
and we completed a cruise dock terminal facility in Texas. Other
projects of significance in 2007 included work on container terminals in Texas
and Louisiana, a shoreline protection project in Louisiana and a bridge
replacement in Florida.
.
Gross
Profit. Gross profit increased $11.9 million or 30.9% in 2007
as compared with 2006, and gross margin improved from 21.0% to
24%. We achieved these increases in profit and margin through
productivity gains on labor and a reduction in subcontracting costs to 9.7% of
total costs compared with 14% of total costs in the same period last year,
reflecting our self-performance of more of the work on contracts during the
year.
Selling, General
and Administrative Expense. Selling, general and
administrative expenses increased $5.5 million or 31.9% in 2007 compared
with 2006. The increase was due to one-time payments of bonuses and incentives
to key employees upon the successful consummation of the common stock offering
in May 2007, which totaled approximately $2.6 million. In addition,
salaries and benefits increased by $1.1 million driven by increases in
headcount, realignment of our incentive programs, increases in our current
estimate under our self-insurance plans and to increases in our stock-based
compensation expense.
Interest
(Income), Expense, Net. The decrease was primarily due to a reduction in
interest expense in 2007, resulting from the repayment of debt in the current
year. In addition, we generated interest income from cash received on
the proceeds of our sale of common stock in May 2007.
Income Tax
Expense. Our effective tax rate of 36.9% was comparable to the
prior year rate of 36.2%.
Liquidity
and Capital Resources
Our
primary liquidity needs are for financing working capital, investment in capital
expenditures and strategic acquisitions. Historically, our source of liquidity
has been cash provided by our operating activities and borrowings under our
credit facility. As of December 31, 2008, we had available cash of $25.7 million
and $34.1 million in debt, which matures in 2010. At December 31, 2007, we had
available cash of $12.6 million, with no debt outstanding. During 2008, we
efficiently managed our working capital components of accounts receivable and
payable; completed the purchase of the assets of SSI; and enhanced our equipment
fleet through $14.5 million in capital expenditures. In 2007, we
completed an offering of our common stock to investors, and increased our
operating margins, which factors generated sufficient funds to support our cash
demands and reduce our debt.
As of
December 31, 2008, our working capital was $47.0 million compared to
$32.5 million at December 31, 2007. The increase of $14.5 million
in working capital was primarily due to:
|
·
|
An
increase in trade accounts receivable of $4.6 million, resulting from the
higher revenues generated in 2008;
|
|
·
|
Increases
in income tax receivables and prepaid
items;
|
|
·
|
Increase
in billings in excess of costs and estimated earnings on uncompleted
contracts, net of costs and estimated earnings on uncompleted contracts,
reflecting the timing of billings to customers and the utilization of
funds we receive in advance for such contract items as
mobilization.
|
Fluctuations
in working capital result from normal increases and decreases relative to our
operational activity. As of December 31, 2008, we had cash on hand and
availability under our revolving credit facility of
$33.3 million.
We
continue to evaluate our credit exposure in response to the current global
credit market crises. At December 31, 2008, our operations provided
cash from operations in excess of $26.4 million and our cash position was in
excess of $25.7 million. Our operations are not currently dependent
on external short-term funding and we have not utilized our available borrowing
of $7.8 million under our revolving credit facility. However, we have
identified the following risks to our liquidity and capital
resources. These are included and discussed in detail in Item 1A – Risk Factors,
elsewhere in this Annual Report on Form 10-K:
The
global financial crisis may have impacts on our business and financial condition
that we currently cannot predict.
The
downturn in economic conditions may impact our customers’ ability to pay for
services and finance projects.
We expect
to meet our future internal liquidity and working capital needs, service our
debt, 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. At December 31, 2008, we had $25.7 million in
cash, an increase of $13.1 million compared with our cash balances at December
31, 2007, and we increased our working capital position by $14.5 million in the
comparable periods. We believe our cash position, combined with the
capacity available under our revolving credit facility is adequate for our
general business requirements.
The
following table provides information regarding our cash flows and our capital
expenditures for the years ended December 31, 2008, 2007 and
2006:
|
Year
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Cash
provided by (used in):
|
||||||||||||
|
Operating
activites
|
$ | 26,471 | $ | 10,092 | $ | 32,475 | ||||||
|
Investing
activities
|
(47,337 | ) | (9,463 | ) | (11,987 | ) | ||||||
|
Financing
activities
|
33,994 | (6,606 | ) | (9,572 | ) | |||||||
|
Capital
expenditures (included in investing activities above)
|
14,485 | 11,433 | 11,931 | |||||||||
Operating
Activities. Fluctuations in cash generated by
operating activities are generally the result of timing differences related to
the nature and volume of contracts in any given year. In 2008, we
sold a vessel no longer considered integral to our fleet and recognized a gain
of $0.8 million upon the sale. Our accounts receivable balances
increased approximately $4.6 million compared with 2007 levels, of which $3.5
million is attributable to retentions held until project completion beyond
2009. In addition, accounts payable balances increased by $1.8
million in 2008 as compared with 2007, generally related to the timing of
payments to vendors. In 2008, we increased our liability
related to the receipt of progress payment on certain projects, net of amounts
remaining unbilled to customers by $4.7 million as compared with
2007. Operating activities in 2007 generated cash of $10.1 million,
due to increases in trade accounts receivable, reflecting the increased revenues
in that year compared with 2006. In 2006, cash generated from
operations totaled $32.5 million, as we benefitted from the collection of
receivable balances and we increased our liability related to the receipt of
progress payment on certain projects.
Investing
Activities. We purchase capital equipment to support our
construction activities as well as perform major maintenance and upgrades of our
existing fleet and construction equipment. Capital expenditures
supporting our operations totaled $14.5 million in 2008, an increase of $3.1
million as compared with 2007. In 2006, we upgraded a dredge to
enhance our dredging capabilities. Also in 2008, we purchased
substantially all of the assets of SSI for a total purchase price of $35
million, plus $1.7 million related to the acquisition of projects under contract
by SSI, for total cash related to the acquisition of $36.7
million. In addition, proceeds from the sale of property and
equipment in 2008 include $2.8 million received from the sale of a vessel no
longer considered integral to our fleet.
Financing
Activities. Our financing activities in 2008
include borrowings from our available credit facility to purchase the assets of
SSI. In 2006, cash used in financing activities reflected the
principal reductions on debt incurred in 2004 resulting from the acquisition of
Orion Marine Group, Inc. by our former principal stockholders. In
2007, net proceeds from the sale of our common stock totaled approximately $18.5
million, which we used to repay our debt facility.
Sources
of Capital
In
addition to our cash balances and cash provided by operations, we have a credit
facility available to us to finance capital expenditures and working capital
needs.
The
Company has maintained a credit agreement with several participating banks since
October 2004. In July 2007, the Company restated its credit agreement
with its existing lenders. Debt under the new credit facility
included the balance of the old credit facility of $3.1 million, which was paid
in full in December 2007. In addition, the terms of the credit
facility provided for the Company to borrow up to $25 million under an
acquisition term loan facility and up to $8.5 million under a revolving line of
credit. At the discretion of the Company’s lenders, either the
acquisition term loan facility or the revolving line of credit may be increased
by $15 million.
The
revolving line of credit is subject to a borrowing base and availability on the
revolving line of credit is reduced by any outstanding letters of
credit. At December 31, 2008, the Company had outstanding letters of
credit of $910,000, thus reducing the balance available to the Company on the
revolving line of credit to approximately $7.6 million. The Company
is subject to a monthly commitment fee on the unused portion of the revolving
line of credit at a rate of 0.20% of the unused balance. As of
December 31, 2008, we had not utilized our revolving line of
credit.
As
referenced in Note 4 in the Notes to the consolidated financial statements
included herein, the Company borrowed $35 million to fund the purchase of the
assets of SSI in February 2008 and amended its credit facility to reflect the
borrowing. Payments of interest are due
quarterly. Payments of principal commenced December 31, 2008 in seven
equal quarterly installments of $875,000, plus an annual principal payment based
on year-end results, beginning December 31, 2008, with the remaining balance due
September 30, 2010. All provisions under the credit facility mature
on September 30, 2010.
Interest
on the Company’s borrowings is based on the prime rate, less an applicable
margin, or LIBOR rate, plus an applicable margin, then in effect, at the
Company’s discretion. For each prime rate loan drawn under the credit
facility, interest is due quarterly at the then prime rate minus a margin that
is adjusted quarterly based on total leverage ratios, as
applicable. For each LIBOR loan, interest is due at the end of each
interest period at a rate of the then LIBOR rate for such period plus the LIBOR
margin based on total leverage ratios, as applicable. At December 31,
2008, interest was based on LIBOR. The LIBOR interest rate, plus the
applicable margin, at December 31, 2008 was in two tranches, with rates of 1.96%
and 2.97%.
The
credit facility requires the Company to maintain certain financial ratios,
including net worth, fixed charge and leverage ratios, and places other
restrictions on the Company as to its ability to incur additional debt, pay
dividends, advance loans and other actions. The credit facility is
secured by the bank accounts, accounts receivable, inventory, equipment and
other assets of the Company and its subsidiaries. As of December 31,
2008, the Company was in compliance with all debt covenants.
Bonding
Capacity
At
December 31, 2008, we had approximately $100.0 million in surety bonds
outstanding with Liberty and our capacity under our current bonding arrangement
was in excess of $400.0 million. Our ability to access this bonding capacity is
at the sole discretion of our surety provider and is subject to certain other
limitations such as limits on the size of any individual bond and restrictions
on the total amount of bonds that can be issued in a given month. We believe we
have adequate remaining available bonding capacity to meet our current needs,
subject to the sole discretion of our surety provider. In addition, to access
the remaining available bonding capacity, Liberty may require us to post
additional collateral.
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. Because the typical duration of a
project is between three to nine months we do not believe inflation has had a
material impact on our operations.
Off
Balance Sheet Arrangements
We
currently have no off balance sheet arrangements.
Contractual
Obligations
The
following table sets forth information about our contractual obligations and
commercial commitments as of December 31, 2008:
|
Payment
Due by Period
|
||||||||||||||||||||
|
Total
|
< 1 year
|
1-3 years
|
3-5 years
|
> 5 years
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Long-term
debt obligations(1)
|
$ | 35,349 | $ | 6,646 | $ | 28,703 | $ | --- | $ | --- | ||||||||||
|
Operating
lease obligations
|
5,274 | 2,102 | 2,432 | 459 | 281 | |||||||||||||||
|
Purchase
obligations (2)
|
67 | 67 | --- | --- | --- | |||||||||||||||
|
Total
|
$ | 40,690 | $ | 8,815 | $ | 31,135 | $ | 459 | $ | 281 | ||||||||||
(1) Includes
scheduled principal and interest payments. Our obligations for
interest on our floating-rate debt are estimates based on December 31, 2008
rates.
|
(2)
|
Purchase
obligations include future cash payments pursuant to an outstanding
licensing agreement for certain software. Commitments pursuant to other
purchase orders and subcontracts related to construction contracts are not
included since such amounts are expected to be funded under contract
billings.
|
To manage
risks of changes in the material prices and subcontracting costs used in
tendering bids for construction contracts, we obtain firm quotations from our
suppliers and subcontractors before submitting a bid. These quotations do not
include any quantity guarantees, and we have no obligation for materials or
subcontract services beyond those required to complete the contracts that we are
awarded for which quotations have been provided.
New
Accounting Pronouncements
SFAS 157. In September 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS No. 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. We adopted SFAS No. 157 on January 1, 2008 as it relates
to our financial assets. In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2 “Effective Date
of FASB Statement No. 157”, which deferred the effective date for us to
January 1, 2009 for all nonfinancial assets and liabilities, except those that
are recognized or disclosed at fair value on a recurring
basis. Adoption of SFAS No. 157 on January 1, 2009 did not have a
material effect on our consolidated financial statements.
SFAS 141(R). In
December 2007, the FASB issued Statement No. 141(R), “Business
Combinations”. SFAS No. 141(R) improves consistency and
comparability of information about the nature and effect of a business
combination by establishing principles and requirements for how an acquirer is
to (1) recognize and measure in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree; (2) recognize and measure the goodwill acquired in the business
combination or a gain from a bargain purchase; and (3) determine what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business
combination. SFAS141(R) applies prospectively to all business
combination transactions for which the acquisition date is on or after January
1, 2009. The impact of our adoption of SFAS 141(R) will depend upon
the nature and terms of business combinations, if any, that we consummate on or
after January 1, 2009.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
We do not
enter into derivative financial instruments for trading, speculation or other
purposes that would expose the Company to market risk. In the normal
course of business, our results of operations are subject to risks related to
fluctuation in commodity prices and fluctuations in interest rates.
Commodity
price risk
We are
subject to fluctuations in commodity prices for concrete, steel products and
fuel. Although we attempt to secure firm quotes from our suppliers,
we generally do not hedge against increases in prices for concrete, steel and
fuel. Commodity price risks may have an impact on our results of
operations due to the fixed-price nature of many of our contracts, although the
short-term duration of our projects may allow us to include price increases in
the costs of our bids.
Interest
rate risk
At
December 31, 2008, we had $34.1 million outstanding under our credit agreement
and there were no borrowings under our revolving credit facility. Our
credit facility expires in September 2010. Our objectives in managing
interest rate risk are to lower our overall borrowing costs and limit interest
rate changes on our earnings and cash flows. To achieve this, we
closely monitor changes in interest rates and we utilize cash from operations to
reduce our debt position. An increase of 1% in our interest rate
during 2008 would have increased our interest expense by approximately
$300,000.
Item
8. CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
information required by this Item 8 is submitted as a separate section beginning
on page F-1 of this Annual Report on Form 10-K and is incorporated herein by
reference.
Additionally,
a two-year Summary of Selected Quarterly Financial Data (unaudited) is included
in “Selected Quarterly
Financial Data” under Item 6Selected Financial Data.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
|
|
None
|
|
CONTROLS
AND PROCEDURES
|
Management’s
Report on Internal Control Over Financial Reporting
We are
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Management (with the participation of our Chief Executive Officer and Chief
Financial Officer) conducted an evaluation of the effectiveness of internal
control over financial reporting based on the framework in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that the
Company’s internal control over financial reporting was effective as of December
31, 2008.
Grant
Thornton LLP, an independent registered accounting firm, has issued an
attestation report on the effectiveness of the Company’s internal control over
financial reporting and issued an audit report thereon, which is included in
this Annual Report on Form 10-K.
|
OTHER
INFORMATION
|
|
|
None
|
Certain
information required by Part III is omitted from this Report. We will
file our definitive proxy statement for our Annual Meeting of Stockholders to be
held on May 14, 2009 (the “Proxy Statement”) pursuant to regulation 14A not
later than 120 days after the end of the fiscal year covered by this Annual
Report, and certain information included therein is incorporated by reference
herein.
Item
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors,
Executive Officers, Promoters and Control Persons
The
information required by Paragraph (a), and Paragraphs (c) through
(g) of Item 401 of Regulation S-K (except for information required by
Paragraph (e) of that Item to the extent the required information pertains
to our executive officers) is hereby incorporated by reference from our
definitive proxy statement to be filed with the SEC pursuant to Regulation 14A
within 120 days after the close of our fiscal year.
The
following table presents the information required by Paragraph (b) of
Item 401 of Regulation S-K.
|
Name
|
Age
|
Position with the Company
|
Year Joined the
Registrant
|
|
Richard
L. Daerr, Jr.
|
64
|
Chairman
of the Board
|
2007
|
|
J.
Michael Pearson
|
61
|
President,
Chief Executive Officer and Director
|
2006
|
|
Thomas
N. Amonett
|
65
|
Director
|
2007
|
|
Austin
J. Shanfelter
|
51
|
Director
|
2007
|
|
Gene
Stoever
|
70
|
Director
|
2007
|
|
Mark
R. Stauffer
|
46
|
Executive
Vice President and Chief Financial Officer
|
1999
|
|
Elliott
J. Kennedy
|
54
|
Executive
Vice President
|
1994
|
|
James
L. Rose
|
44
|
Executive
Vice President
|
2005
|
|
J.
Cabell Acree, III
|
49
|
Vice
President, General Counsel and Secretary
|
2007
|
Code
of Ethics
We have
adopted a code of ethics for our chief executive, chief financial and principal
accounting officers; a code of business conduct and ethics for members of our
Board of Directors; and corporate governance guidelines. The full text of the
codes of ethics and corporate governance guidelines is available at our website
www.orionmarinegroup.com. Although we have never done so, in the event we make
any amendment to, or grant any waiver from, a provision of the code of ethics
that applies to the principal executive officer, principal financial officer or
principal accounting officer that requires disclosure under applicable
Commission rules, we will disclose such amendment or waiver and the reasons
therefore on our website. We will provide any person without charge a copy of
any of the aforementioned codes of ethics upon receipt of a written request.
Requests should be addressed to: Orion Marine Group, Inc. 12550 Fuqua, Houston,
Texas 77034, Attention: Corporate Secretary.
Corporate
Governance
The
information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is
hereby incorporated by reference from our definitive proxy statement to be filed
with the SEC pursuant to Regulation 14A within 120 days after the close of our
fiscal year.
Item
11. EXECUTIVE
COMPENSATION
|
Item
12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER
MATTERS
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Item
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The
information required by this Item is hereby incorporated by reference from our
definitive proxy statement to be filed with the SEC pursuant to Regulation 14A
within 120 days after the close of our fiscal year.
PART
IV
Item
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
The
following documents are filed as part of this Report:
1. Financial
Statements
The Company’s Consolidated Financial
Statements at December 31, 2008 and 2007 and for each of the three years in the
period ended December 31, 2008 and the notes thereto, together with the Report
of the Independent Registered Public Accounting Firm on those Consolidated
Financial Statements are hereby filed as part of this Report, beginning on page
F-1.
2. Financial
Statement Schedule
The following financial statement
schedule of the Company for each of the three years in the period ended December
31, 2008 is filed as part of this Report and should be read in conjunction with
the Consolidated Financial Statements of the Company.
Schedule
II – Schedule of Valuation and Qualifying Accounts
3. Exhibits
The exhibits listed in the accompanying
Exhibit Index are filed or incorporated by reference as part of this
Report.
Except as noted below, all incorporate
exhibits are incorporated by reference to the Company’s Registration Statement
on Form S-1 filed on August 20, 2007, as subsequently amended.
|
Exhibit
|
||||
|
Number
|
Description
|
|||
|
1
|
.01
|
Form
of Indemnity Agreement for Directors and Certain Officers dated November
24, 2008 (filed as Exhibit 1.01 to Form 8-K filed on November 25,
2008)
|
||
|
**
|
2
|
.1
|
Asset
Purchase Agreement dated February 29, 2008, by and between OMGI Sub, LLC
and
Orion
Marine Group, Inc., on the one hand, and Subaqueous Services, Inc. and
Lance Young, on the other hand
|
|
|
3
|
.1
|
Amended
and Restated Certificate of Incorporation of Orion Marine Group,
Inc.
|
||
|
3
|
.2
|
Amended
and Restated Bylaws of Orion Marine Group, Inc.
|
||
|
4
|
.1
|
Registration
Rights Agreement between Friedman, Billings, Ramsey & Co., Inc.
and Orion Marine Group, Inc. dated May 17, 2007
|
||
|
10
|
.1
|
Loan
Agreement, dated as of July 10, 2007, between Orion Marine Group,
Inc. and Amegy Bank National Association
|
||
|
**
|
10
|
.1.1
|
First
Amendment to Loan Agreement dated February 29, 2008, among Orion Marine
Group, Inc., and Amegy Bank National Association, a national banking
association, as agent
|
|
|
10
|
.2
|
Purchase/Placement
Agreement dated May 9, 2007 between Orion Marine Group, Inc. and
Friedman, Billings, Ramsey & Co., Inc.
|
||
|
10
|
.3
|
Amended &
Restated Redemption Agreement dated May 7,
2007
|
||
|
10
|
.4
|
Lease
dated September 13, 2006, by and between F. Miller Construction,
LLC and Joe T. Miller Sr.
|
||
|
10
|
.5
|
Lease
dated September 28, 2006, by and between Southpoint Square I,
Ltd. and Misener Marine Construction, Inc.
|
||
|
10
|
.6
|
Lease
dated June 23, 1997, by and between the City of Port Lavaca, Texas
and King Fisher Marine Service, Inc.
|
||
|
10
|
.7
|
Land
Sublease Agreement dated May 1, 2007, by and between Signet Maritime
Corporation and Orion Construction, L.P.
|
||
| + |
10
|
.8
|
2005
Stock Incentive Plan
|
|
| + |
10
|
.9
|
Form
of Stock Option Agreement Under the 2005 Stock Incentive Plan &
Notice of Grant of Stock Option
|
|
| + |
10
|
.10
|
Form
of Restricted Stock Agreement Under the 2005 Stock Incentive
Plan & Notice of Grant of Restricted Stock
|
|
| + |
10
|
.11
|
Orion
Marine Group, Inc. Long Term Incentive Plan
|
|
| + |
10
|
.12
|
Form
of Stock Option Agreement Under the 2007 Long Term Incentive
Plan
|
|
| + |
10
|
.13
|
Form
of Restricted Stock Agreement and Notice of Grant of Restricted
Stock
|
|
| + |
10
|
.14
|
Executive
Incentive Plan (filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2008)
|
|
| + |
10
|
.15
|
Subsidiary
Incentive Plan (filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2008)
|
|
| + |
10
|
.16
|
Employment
Agreement, dated as of April 2, 2007, by and between Orion Marine
Group, Inc. and J. Michael Pearson
|
|
| + |
10
|
.17
|
Employment
Agreement, dated as of April 2, 2007, by and between Orion Marine
Group, Inc. and Mark Stauffer
|
|
| + |
10
|
.18
|
Employment
Agreement , dated as of April 2, 2007, by and between Orion Marine
Group, Inc. and Elliott Kennedy
|
|
| + |
10
|
.19
|
Employment
Agreement, dated as of April 2, 2007, by and between Orion Marine
Group, Inc. and Jim Rose
|
|
| + |
10
|
.20
|
Employment
Agreement, dated as of August 13, 2007, by and between Orion Marine
Group, Inc. and J. Cabell Acree, III
|
|
|
**
|
10
|
.21
|
Lease
Agreement dated February 29, 2008, between OMGI Sub, LLC and Hill Street,
LLC
|
|
| + |
10
|
.22
|
Amendment
No. 1 to the Employment Agreement, effective as of April 11, 2008, by
and between Orion Marine Group, Inc. and J. Michael Pearson (filed as an
exhibit to the Current Report on Form 8-K/A filed April 25,
2008)
|
|
| + |
10
|
.23
|
Schedule
of Changes to Compensation of Non-employee Directors, effective for 2008
(filed as an exhibit to the Quarterly Report on Form 1-Q for the quarterly
period ended June 30, 2008)
|
|
|
*
|
21
|
.1
|
||
|
*
|
23
|
.1
|
||
|
24
|
.1
|
Power
of Attorney (included on signature page of this filing)
|
||
|
*
|
31
|
.1
|
||
|
*
|
31
|
.2
|
||
|
*
|
32
|
.1
|
||
|
*
|
Filed
herewith
|
|
|
**
|
Incorporated
by reference to the Company’s report on Form 8K filed with the SEC on
March 4, 2008
|
|
| + | Management contract or compensatory plan or arrangement | |
|
(b)
|
Financial
Statement Schedules
|
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
ORION
MARINE GROUP, INC.
|
||
|
Date: March
16, 2009
|
By:
|
/s/
J. Michael Pearson
|
|
J.
Michael Pearson
President
and Chief Executive Officer and
Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
|
Signature
|
Title
|
Date
|
|
President
and Chief
|
||
|
/s/
J. Michael Pearson
|
Executive
Officer and
|
March
16, 2009
|
|
J.
Michael Pearson
|
Director
|
|
|
/s/
Mark R. Stauffer
|
Chief
Financial Officer
|
March
16, 2009
|
|
Mark
R. Stauffer
|
Chief
Accounting Officer
|
|
|
/s/ Richard
L. Daerr, Jr.
|
Chairman
of the Board
|
March
16, 2009
|
|
Richard
L. Daerr, Jr.
|
||
|
/s/ Thomas
N. Amonett
|
Director
|
March
16, 2009
|
|
Thomas
N. Amonett
|
||
|
/s/ Austin
J. Shanfelter
|
Director
|
March
16, 2009
|
|
Austin
J. Shanfelter
|
||
|
/s/ Gene
Stoever
|
Director
|
March
16, 2009
|
|
Gene
Stoever
|
ORION
MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
WITH
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
December
31, 2008
ORION
MARINE GROUP, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
|
Report
of Independent Registered Public Accounting Firm
|
F3
|
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
F5
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2008, 2007 and
2006
|
F6
|
|
Consolidated
Statement of Stockholders’ Equity for the Year Ended December 31,
2008
|
F7
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
F8
|
|
Notes
to Consolidated Financial Statements
|
F9
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Orion
Marine Group, Inc.
We have
audited the accompanying consolidated balance sheets of Orion Marine Group, Inc.
and subsidiaries at December 31, 2008 and 2007, and the related consolidated
statements of income, stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2008. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Orion Marine Group, Inc. and
subsidiaries at December 31, 2008 and 2007 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2008, in conformity with accounting principles generally accepted in the
United States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Orion Marine Group, Inc.’s internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO ) and our report
dated March 16, 2009 expressed an unqualified opinion.
/s/ Grant
Thornton LLP
Houston,
Texas
March 16,
2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Orion
Marine Group, Inc.
We have
audited Orion Marine Group, Inc.’s internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Orion Marine Group
Inc.’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management’s Report on Internal
Control Over Financial Reporting (included in Item 9A). Our responsibility is to
express an opinion on Orion Marine Group Inc.s’ internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Orion Marine Group, Inc. has maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Orion Marine Group, Inc’s consolidated balance
sheets as of December 31, 2008 and 2007 and the related statements of income,
stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2008, and our report dated March 16, 2009 expressed an
unqualified opinion on those financial statements.
/s/ GRANT
THORNTON LLP
Houston,
Texas
March 16,
2009
ORION
MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2008 AND 2007
(In
thousands, except share and per share amounts)
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 25,712 | $ | 12,584 | ||||
|
Accounts
receivable:
|
||||||||
|
Trade,
net of allowance of $800 and $500, respectively
|
37,806 | 30,832 | ||||||
|
Retainage
|
5,719 | 7,620 | ||||||
|
Other
|
691 | 899 | ||||||
|
Income
taxes receivable
|
4,017 | -- | ||||||
|
Inventory
|
738 | 646 | ||||||
|
Deferred
tax asset
|
1,319 | 551 | ||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
7,228 | 7,676 | ||||||
|
Prepaid
expenses and other
|
3,207 | 739 | ||||||
|
Total
current assets
|
86,437 | 61,547 | ||||||
|
Property
and equipment, net
|
84,154 | 68,746 | ||||||
|
Goodwill
|
12,096 | 2,481 | ||||||
|
Intangible
assets, net of accumulated amortization
|
3,556 | 653 | ||||||
|
Other
assets
|
79 | 107 | ||||||
|
Total
assets
|
$ | 186,322 | $ | 133,534 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of long-term debt
|
$ | 5,909 | $ | -- | ||||
|
Accounts
payable:
|
||||||||
|
Trade
|
13,276 | 11,139 | ||||||
|
Retainage
|
389 | 678 | ||||||
|
Accrued
liabilities
|
8,176 | 7,910 | ||||||
|
Taxes
payable
|
-- | 1,960 | ||||||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
11,666 | 7,408 | ||||||
|
Total
current liabilities
|
39,416 | 29,095 | ||||||
|
Long-term
debt, less current portion
|
28,216 | -- | ||||||
|
Other
long-term liabilities
|
422 | -- | ||||||
|
Deferred
income taxes
|
12,286 | 13,928 | ||||||
|
Deferred
revenue
|
371 | 427 | ||||||
|
Total
liabilities
|
80,711 | 43,450 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Common
stock -- $0.01 par value, 50,000,000 authorized,
21,577,366
|
||||||||
|
and
21,565,324 issued; 21,565,720 and 21,565,324 outstanding
|
216 | 216 | ||||||
|
Treasury
stock, 11,646 and 0 shares, at cost
|
-- | -- | ||||||
|
Additional
paid-in capital
|
55,388 | 54,336 | ||||||
|
Retained
earnings
|
50,007 | 35,532 | ||||||
|
Total
stockholders’ equity
|
105,611 | 90,084 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 186,322 | $ | 133,534 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
ORION
MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except share and per share amounts)
|
Year
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Contract
revenues
|
$ | 261,802 | $ | 210,360 | $ | 183,278 | ||||||
|
Costs
of contract revenues
|
211,351 | 159,927 | 144,741 | |||||||||
|
Gross
profit
|
50,451 | 50,433 | 38,537 | |||||||||
|
Selling,
general and administrative expenses
|
27,978 | 22,946 | 17,425 | |||||||||
| 22,473 | 27,487 | 21,112 | ||||||||||
|
Interest
(income) expense
|
||||||||||||
|
Interest
(income)
|
(530 | ) | (1,000 | ) | (86 | ) | ||||||
|
Interest
expense
|
1,246 | 910 | 1,755 | |||||||||
|
Interest
(income) expense, net
|
716 | (90 | ) | 1,669 | ||||||||
|
Income
before income taxes
|
21,757 | 27,577 | 19,443 | |||||||||
|
Income
tax expense
|
7,282 | 10,178 | 7,040 | |||||||||
|
Net
income
|
$ | 14,475 | $ | 17,399 | $ | 12,403 | ||||||
|
Net
income
|
$ | 14,475 | $ | 17,399 | $ | 12,403 | ||||||
|
Preferred
dividends
|
-- | 782 | 2,100 | |||||||||
|
Earnings
available to common stockholders
|
$ | 14,475 | $ | 16,617 | $ | 10,303 | ||||||
|
Basic
earnings per share
|
$ | 0.67 | $ | 0.86 | $ | 0.65 | ||||||
|
Diluted
earnings per share
|
$ | 0.66 | $ | 0.83 | $ | 0.63 | ||||||
|
Shares
used to compute earnings per share
|
||||||||||||
|
Basic
|
21,482,900 | 19,400,942 | 15,872,360 | |||||||||
|
Diluted
|
21,979,317 | 19,976,317 | 16,407,250 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
ORION
MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
(In
thousands, except share information)
|
Additional
|
||||||||||||||||||||||||||||||||||||
|
Preferred
stock
Shares
Amount
|
Common
stock
Shares
Amount
|
Treasury
stock
Shares
Amount
|
Paid-in
capital
|
Retained
earnings
|
Total
|
|||||||||||||||||||||||||||||||
|
Balance,
January 1, 2006
|
35,000 | -- | 16,730,942 | 167 | -- | -- | $ | 34,833 | 5,730 | $ | 40,730 | |||||||||||||||||||||||||
|
Purchase
of treasury stock
|
(100,897 | ) | (24 | ) | (24 | ) | ||||||||||||||||||||||||||||||
|
Stock-based
compensation
|
130 | 130 | ||||||||||||||||||||||||||||||||||
|
Net
income
|
-- | -- | -- | -- | -- | -- | -- | 12,403 | 12,403 | |||||||||||||||||||||||||||
|
Balance,
December 31, 2006
|
35,000 | -- | 16,730,942 | 167 | (100,897 | ) | (24 | ) | 34,963 | 18,133 | 53,239 | |||||||||||||||||||||||||
|
Forfeit
unvested restricted stock
|
(8,969 | ) | -- | -- | ||||||||||||||||||||||||||||||||
|
Stock-based
compensation
|
501 | 501 | ||||||||||||||||||||||||||||||||||
|
Liquidation
of preferred stock
|
(35,000 | ) | -- | (40,431 | ) | (40,431 | ) | |||||||||||||||||||||||||||||
|
Exercise
of stock options
|
22,422 | -- | 48 | 48 | ||||||||||||||||||||||||||||||||
|
Proceeds
from sale of common stock, net of expenses
|
20,839,350 | 210 | 109,866 | 24 | 260,292 | 260,526 | ||||||||||||||||||||||||||||||
|
Redemption
and cancellation of common shares
|
(16,053,816 | ) | (161 | ) | (201,394 | ) | (201,555 | ) | ||||||||||||||||||||||||||||
|
Issuance
of restricted stock
|
26,426 | -- | 357 | 357 | ||||||||||||||||||||||||||||||||
|
Net
income
|
-- | - | -- | -- | -- | -- | -- | 17,399 | 17,399 | |||||||||||||||||||||||||||
|
Balance,
December 31, 2007
|
-- | $ | - | 21,565,324 | $ | 216 | -- | $ | -- | $ | 54,336 | $ | 35,532 | $ | 90,084 | |||||||||||||||||||||
|
Forfeit
unvested restricted stock
|
-- | (11,646 | ) | -- | -- | |||||||||||||||||||||||||||||||
|
Stock-based
compensation
|
1,103 | 1,103 | ||||||||||||||||||||||||||||||||||
|
Expenses
related to the sale of common stock
|
(51 | ) | (51 | ) | ||||||||||||||||||||||||||||||||
|
Issuance
of restricted stock
|
12,042 | -- | -- | -- | ||||||||||||||||||||||||||||||||
|
Net
income
|
-- | - | -- | -- | -- | -- | -- | 14,475 | 14,475 | |||||||||||||||||||||||||||
|
Balance,
December 31, 2008
|
-- | $ | - | 21,577,366 | $ | 216 | (11,646 | ) | $ | -- | $ | 55,388 | $ | 50,007 | $ | 105,611 | ||||||||||||||||||||
The
accompanying notes are an integral part of this consolidated financial
statement
ORION
MARINE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands, except share information)
|
Year
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
income
|
$ | 14,475 | $ | 17,399 | $ | 12,403 | ||||||
|
Adjustments
to reconcile net income to net cash provided
|
||||||||||||
|
by
operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
18,599 | 12,384 | 11,634 | |||||||||
|
Deferred
financing cost amortization
|
249 | 208 | 171 | |||||||||
|
Non-cash
interest expense
|
22 | 86 | 87 | |||||||||
|
Bad
debt expense
|
300 | -- | 500 | |||||||||
|
Deferred
income taxes
|
(2,410 | ) | (1,998 | ) | (1,333 | ) | ||||||
|
Stock-based
compensation
|
1,103 | 858 | 130 | |||||||||
|
Gain
on sale of property and equipment
|
(1,075 | ) | (333 | ) | (69 | ) | ||||||
|
Change
in operating assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(4,550 | ) | (11,292 | ) | 1,339 | |||||||
|
Income
tax receivable
|
(4,017 | ) | -- | 914 | ||||||||
|
Inventory
|
(92 | ) | (120 | ) | 32 | |||||||
|
Prepaid
expenses and other
|
(2,380 | ) | (183 | ) | (24 | ) | ||||||
|
Costs
and estimated earnings in excess of billings
|
||||||||||||
|
on
uncompleted contracts
|
1,678 | (5,540 | ) | 2,261 | ||||||||
|
Accounts
payable
|
1,848 | 4,559 | (5,248 | ) | ||||||||
|
Accrued
liabilities
|
661 | (3,086 | ) | 5,077 | ||||||||
|
Income
tax payable
|
(1,960 | ) | 1,994 | 330 | ||||||||
|
Billings
in excess of costs and estimated earnings
|
||||||||||||
|
on
uncompleted contracts
|
4,076 | (4,790 | ) | 4,325 | ||||||||
|
Deferred
revenue
|
(56 | ) | (54 | ) | (54 | ) | ||||||
|
Net
cash provided by operating activities
|
26,471 | 10,092 | 32,475 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Proceeds
from sale of property and equipment
|
3,861 | 1,970 | 438 | |||||||||
|
Purchase
of property and equipment
|
(14,485 | ) | (11,433 | ) | (11,931 | ) | ||||||
|
Acquisition
of business (net of cash acquired)
|
(36,713 | ) | -- | (494 | ) | |||||||
|
Net
cash used in investing activities
|
(47,337 | ) | (9,463 | ) | (11,987 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Increase
in loan costs
|
(80 | ) | (194 | ) | -- | |||||||
|
Borrowings
on long-term debt
|
35,000 | -- | -- | |||||||||
|
Payments
on long-term debt
|
(875 | ) | (25,000 | ) | (9,548 | ) | ||||||
|
Purchase
of treasury stock
|
-- | -- | (24 | ) | ||||||||
|
Exercise
of stock options
|
-- | 48 | -- | |||||||||
|
Payment
of accumulated preferred dividends and liquidation of preferred
stock
|
-- | (40,431 | ) | -- | ||||||||
|
Proceeds
from the sale of common stock, net of offering costs
|
(51 | ) | 260,526 | -- | ||||||||
|
Redemption
of common stock
|
-- | (201,555 | ) | -- | ||||||||
|
Net
cash provided by (used in) financing activities
|
33,994 | (6,606 | ) | (9,572 | ) | |||||||
|
Net
change in cash and cash equivalents
|
13,128 | (5,977 | ) | 10,916 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
12,584 | 18,561 | 7,645 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 25,712 | $ | 12,584 | $ | 18,561 | ||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash
paid during the period for:
|
||||||||||||
|
Interest
|
$ | 1,234 | $ | 927 | $ | 2,848 | ||||||
|
Taxes,
net of refunds
|
$ | 14,476 | $ | 9,835 | $ | 7,127 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements
ORION
MARINE GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
(Tabular
Amounts in 000’s, Except for Share and per Share Amounts)
1. Description
of Business and Basis of Presentation
Description
of Business
Orion
Marine Group, Inc. and its subsidiaries (hereafter collectively referred to as
“Orion” or the “Company”) provide a broad range of marine construction services
on, over and under the water along the Gulf Coast, the Atlantic Seaboard and the
Caribbean Basin. Our heavy civil marine projects include marine
transportation facilities; bridges and causeways; marine pipelines; mechanical
and hydraulic dredging and specialty projects. We are headquartered
in Houston, Texas.
Although
we describe our business in this report in terms of the services we provide, our
base of customers and the geographic areas in which we operate, we have
concluded that our operations comprise one reportable segment pursuant to
Statement of Financial Accounting Standards No. 131 – Disclosures about Segments of an
Enterprise and Related Information. In making this
determination, we considered that each project has similar characteristics,
includes similar services, has similar types of customers and is subject to the
same regulatory environment. We organize, evaluate and manage our
financial information around each project when making operating decisions and
assessing our overall performance.
Basis
of Presentation
These
consolidated financial statements include the accounts of the parent company,
Orion Marine Group, Inc. and its wholly-owned subsidiaries and have been
prepared in accordance with accounting principles generally accepted in the
United States of America. All significant intercompany balances and
transactions have been eliminated in consolidation.
In the
opinion of management, all adjustments considered necessary for a fair and
comparable statement of the Company’s financial position, results of operations
and cash flows for the periods presented have been included and are of a normal
recurring nature.
In May,
2007, the Company completed the sale of 20,949,216 shares of its common stock
(the “Transaction’). See Note 3 to the Consolidated Financial
Statements for further discussion of the Transaction. In April, 2007,
the Company authorized a 2.23 for one reverse split of its then Class B common
shares, which became effective upon the closing of the Transaction, when all of
its then Class A shares were redeemed and retired, with the result that the
Company’s certificate of incorporation was modified to change Class A shares to
preferred and Class B shares to common. All references to the number
of shares and per share amounts in the Consolidated Financial Statements have
been adjusted retroactively for all periods presented to reflect the common
share stock split.
Reclassifications
Certain
items on the prior period balance sheet related to taxes payable have been
reclassified to conform to current year presentation. In addition,
other income in the prior year income statement has been reclassified to conform
to current year presentation in selling, general and administrative
expenses. These amounts were immaterial in nature and
amounts.
2. Summary
of Accounting Principles
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Management’s
estimates, judgments and assumptions are continually evaluated based on
available information and experience; however, actual amounts could differ from
those estimates.
The
Company’s significant accounting policies that rely on the application of
estimates and assumptions include:
|
·
|
Revenue
recognition from construction
contracts;
|
|
·
|
Allowance
for doubtful accounts;
|
|
·
|
Testing
of goodwill and other long-lived assets for possible
impairment;
|
|
·
|
Income
taxes;
|
|
·
|
Self-insurance;
and
|
|
·
|
Stock-based
compensation
|
Revenue
Recognition
The
Company records revenue on construction contracts for financial statement
purposes on the percentage-of-completion method, measured by the percentage of
contract costs incurred to date to total estimated costs for each contract. This
method is used because management considers contract costs incurred to be the
best available measure of progress on these contracts. The Company follows the
guidance of American Institute of Certified Public Accountants (AICPA) Statement
of Position (SOP) 81-1, Accounting for Performance of
Construction—Type and Certain Production—Type Contracts,
for its accounting policy relating to the use of the
percentage-of-completion method, estimated costs and claim recognition for
construction contracts. Contract revenue reflects the original contract price
adjusted for agreed upon change orders and unapproved claims. Contract costs
include all direct costs, such as material and labor, and those indirect costs
related to contract performance such as payroll taxes and insurance. General and
administrative costs are charged to expense as incurred. Unapproved claims are
recognized only when the collection is deemed probable and if the amount can be
reasonably estimated for purposes of calculating total profit or loss on
long-term contracts. Incentive fees, if available, are billed to the customer
based on the terms and conditions of the contract. The Company
records revenue and the unbilled receivable for claims to the extent of costs
incurred and to the extent we believe related collection is probable and
includes no profit on claims recorded. Changes in job performance, job
conditions and estimated profitability, including those arising from final
contract settlements, may result in revisions to costs and revenues and are
recognized in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Revenue is recorded net of any sales taxes collected and
paid on behalf of the customer, if applicable.
The
current asset “costs and estimated earnings in excess of billings on uncompleted
contracts” represents revenues recognized in excess of amounts billed to the
customer, which management believes will be billed and collected within one year
of the completion of the contract. The liability “billings in excess of costs
and estimated earnings on uncompleted contracts” represents billings in excess
of revenues recognized.
The
Company’s projects are typically short in duration, and usually span a period of
three to nine months. Historically, we have not combined or segmented
contracts.
Classification
of Current Assets and Liabilities
The
Company includes in current assets and liabilities amounts realizable and
payable in the normal course of contract completion.
Cash
Equivalents
The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. At times, cash held by
financial institutions may exceed federally insured limits.
Foreign
Currencies
Historically,
the Company’s exposure to foreign currency fluctuations has not been material
and has been limited to temporary field accounts, which did not exceed $100 in
2008 and $10,625 in 2007.
Risk
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit
risk principally consist of cash and cash equivalents and accounts
receivable.
The
Company depends on its ability to continue to obtain federal, state and local
governmental contracts, and indirectly, on the amount of funding available to
these agencies for new and current governmental projects. Therefore, the
Company’s operations can be influenced by the level and timing of government
funding. Statutory mechanics liens provide the Company high priority
in the event of lien foreclosures following financial difficulties of private
owners, thus minimizing credit risk with private customers.
The
following table represents concentrations of receivables (trade and retainage)
at December 31, 2008 and 2007:
|
December 31, 2008
|
December 31, 2007
|
|||||||||||||||
|
A/R
|
%
|
A/R |
%
|
|||||||||||||
|
Federal
Government
|
$ | 1,593 | 4 | % | $ | 4,522 | 12 | % | ||||||||
|
State
Governments
|
3,866 | 9 | % | 1,936 | 5 | % | ||||||||||
|
Local
Municipalities
|
7,750 | 18 | % | 10,592 | 27 | % | ||||||||||
|
Private
Companies
|
30,316 | 69 | % | 21,402 | 56 | % | ||||||||||
| $ | 43,525 | 100 | % | $ | 38,452 | 100 | % | |||||||||
At
December 31, 2008 and 2007, no single customer accounted for more than 10% of
total receivables.
Accounts
Receivable
Accounts
receivable are stated at the historical carrying value, less write-offs and
allowances for doubtful accounts. The Company has significant investments in
billed and unbilled receivables as of December 31, 2008 and 2007. Billed
receivables represent amounts billed upon the completion of small contracts and
progress billings on large contracts in accordance with contract terms and
milestones. Unbilled receivables on fixed-price contracts, which are included in
costs in excess of billings, arise as revenues are recognized under the
percentage-of-completion method. Unbilled amounts on cost-reimbursement
contracts represent recoverable costs and accrued profits not yet billed.
Revenue associated with these billings is recorded net of any sales tax, if
applicable. In establishing an allowance for doubtful accounts, the Company
evaluates its contract receivables and costs in excess of billings and
thoroughly reviews historical collection experience, the financial condition of
its customers, billing disputes and other factors. The Company writes off
uncollectible accounts receivable against the allowance for doubtful accounts if
it is determined that the amounts will not be collected or if a settlement is
reached for an amount that is less than the carrying value.
At
December 31, 2008 and 2007, the Company had an allowance for doubtful accounts
of $800,000 and $500,000, respectively. The increase in the allowance
is related to receivables on two projects.
Balances
billed to customers but not paid pursuant to retainage provisions in
construction contracts generally become payable upon contract completion and
acceptance by the owner. Retention at December 31, 2008 totaled $5.7
million, of which $3.7 million is expected to be collected beyond
2009. Retention at December 31, 2007 totaled $7.6
million.
The
Company negotiates change orders and unapproved claims with its customers. In
particular, unsuccessful negotiations of unapproved claims could result in the
settlement or collection of a receivable at an amount that is less than its
carrying value, which would result in the recording of a loss. Successful claims
negotiations could result in the recovery of previously recorded losses.
Significant losses on receivables would adversely affect the Company’s financial
position, results of operations and overall liquidity.
Inventory
Inventory
consists of parts and small equipment held for use in the ordinary course of
business and is valued at the lower of cost or market using historical average
cost. Where shipping and handling costs are incurred by us, these charges are
included in inventory and charged to cost of contract revenue upon
use.
Property
and Equipment
Property
and equipment are recorded at cost. Ordinary maintenance and repairs that do not
improve or extend the useful life of the asset are expensed as
incurred. Major renewals and betterments of equipment are capitalized
and depreciated generally over three to seven years until the next scheduled
maintenance.
Depreciation
is computed using the straight-line method over the estimated useful lives of
the related assets as follows:
|
Automobiles
and trucks
|
3
to 5 years
|
|
Buildings
and improvements
|
5
to 30 years
|
|
Construction
equipment
|
3
to 15 years
|
|
Vessels
and dredges
|
1
to 15 years
|
|
Office
equipment
|
1
to 5 years
|
Dry-docking
activities and costs are capitalized and amortized on the straight-line method
over a period
ranging
from three to 15 years until the next scheduled
dry-docking. Dry-docking activities include, but are not limited to,
the inspection, refurbishment and replacement of steel, engine components,
tailshafts, mooring equipment and other parts of the
vessel. Amortization related to dry-docking activities is included as
a component of depreciation. These activities and the related
amortization periods are periodically reviewed to determine if the estimates are
accurate. If warranted, a significant upgrade of equipment may result
in a revision to the useful life of the asset, in which case, the change is
accounted for prospectively.
In
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-lived
Assets, property and equipment are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are separately presented in
the balance sheet and reported at the lower of the carrying amount or the fair
value, less the costs to sell, and are no longer depreciated. No property and
equipment were held for sale at December 31, 2008 and December 31,
2007.
Goodwill
and Other Intangible Assets
Goodwill
Goodwill
represents the excess of costs over the fair value of the net tangible and
intangible assets acquired. Goodwill and the cost of intangible
assets with indefinite lives are not amortized, but are instead tested annually
for possible impairment (or more frequently if events occur or circumstances
change that would more likely than not reduce the fair value of the reporting
unit below its carrying value). The Company accounts for goodwill in
accordance with SFAS 142, Goodwill and Other Intangible
Assets.
Goodwill
impairment is tested during the last quarter of each calendar year using a two
step process. The first step compares the carrying value of a
reporting unit to its fair value. If the fair value exceeds the
carrying value, no further testing is required. If the carrying
value exceeds the fair value, additional steps must be taken to determine
impairment. The Company did not recognize any impairment charges for
goodwill during 2008, 2007 or 2006.
Intangible
assets
Intangible
assets that have finite lives continue to be subject to
amortization. In addition, the Company must evaluate the remaining
useful life in each reporting period to determine whether events and
circumstances warrant a revision of the remaining period of
amortization. If the estimate of an intangible asset’s remaining life
is changed, the remaining carrying value of such asset is amortized
prospectively over that revised remaining useful life. As described
more fully in Note 4, the Company acquired certain intangible assets as part of
the acquisition of the assets of Subaqueous Services, Inc. in February
2008. The table below presents the amortization of such finite-lived
intangible assets since the time of acquisition.
|
2008
|
||||
|
Intangible
assets, January 1, 2008
|
-- | |||
|
Additions
|
6,900 | |||
|
Total
intangible assets
|
6,900 | |||
|
Accumulated
amortization
|
-- | |||
|
Current
year amortization
|
(3,806 | ) | ||
|
Total
accumulated amortization
|
(3,806 | ) | ||
|
Net
intangible assets, end of year
|
$ | 3,094 | ||
Debt
Issuance Costs
Debt
issuance costs paid in connection with new loan facilities are included in other
assets and are amortized ratably over the scheduled maturity of the
debt. The table below presents loan cost amortization for each
of the three years ended December 31, 2008, 2007 and 2006.
|
Year
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Loan
costs
|
1,222 | 1,028 | 1,028 | |||||||||
|
Additions
|
80 | 194 | -- | |||||||||
|
Total
loan costs
|
1,302 | 1,222 | 1,028 | |||||||||
|
Accumulated
amortization
|
(591 | ) | (384 | ) | (212 | ) | ||||||
|
Current
year amortization
|
(249 | ) | (207 | ) | (172 | ) | ||||||
|
Total
accumulated amortization
|
(840 | ) | (591 | ) | (384 | ) | ||||||
|
Net
loan costs, end of year
|
$ | 462 | $ | 631 | $ | 644 | ||||||
The
Company’s finite-lived intangible assets are estimated to be amortized as
follows:
|
Year Ended December 31,
|
||||
|
2009
|
$ | 3,308 | ||
|
2010
|
$ | 243 | ||
|
2011
|
$ | 5 | ||
Stock-Based
Compensation
The
Company accounts for equity awards issued to employees and others under the
provisions of SFAS No. 123(R), Share-Based
Payment. Among its provisions, SFAS No. 123(R)
requires the Company to recognize compensation expense for equity awards over
the vesting period based on the fair value of these awards at the date of
grant. The computed fair value of these awards is recognized as a
non-cash cost over the period the employee provides services, which is typically
the vesting period of the award. The fair value of options
granted is estimated on the date of grant using the Black-Scholes option-pricing
model. The fair value of restricted stock grants is equivalent to the
fair value of the stock issued on the date of grant.
Compensation
expense is recognized only for share-based payments expected to vest. The
Company estimates forfeitures at the date of grant based on historical
experience and future expectations. See Note 10 to the consolidated
financial statements for further discussion of the Company’s stock-based
compensation plan.
Income
Taxes
The
Company records income taxes based upon SFAS No. 109, Accounting for Income Taxes, which requires
the recognition of income tax expense for the amount of taxes payable or
refundable for the current period and for deferred tax liabilities and assets
for the future tax consequences of events that have been recognized in an
entity’s financial statements or tax returns. The Company must make significant
assumptions, judgments and estimates to determine its current provision for
income taxes, its deferred tax assets and liabilities, and any valuation
allowance to be recorded against any deferred tax asset. The current provision
for income tax is based upon the current tax laws and the Company’s
interpretation of these laws, as well as the probable outcomes of any tax
audits. The value of any net deferred tax asset depends upon estimates of the
amount and category of future taxable income reduced by the amount of any tax
benefits that the Company does not expect to realize. Actual operating results
and the underlying amount and category of income in future years could render
current assumptions, judgments and estimates of recoverable net deferred taxes
inaccurate, thus impacting the Company’s financial position and results of
operations. The Company computes deferred income taxes using the liability
method. Under the liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
the liability method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The
Company accounts for uncertain tax positions in accordance with the provisions
of FASB Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes” (FIN 48), which it adopted on January 1, 2007. The implementation
of FIN 48 required the Company to make subjective assumptions and judgments
regarding income tax exposure. Interpretations of and guidance surrounding
income tax laws and regulations change over time, and these may change the
Company’s subjective assumptions, which in turn, affect amounts recognized in
the condensed consolidated balance sheets and statements of income. Accounting
for uncertain tax positions is described more fully in Note 11.
Fair
Values of Financial Instruments
At
December 31, 2008 and 2007, the carrying amounts of the Company’s cash and cash
equivalents, receivables, and payables approximated their fair values due to the
short maturity of such financial instruments. The carrying amount of the
Company’s floating-rate debt approximated its fair value at December 31,
2008 as such instrument bore short-term, market-based interest
rates.
Self-Insurance
The
Company maintains insurance coverage for its 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 the Company's
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, $20 million in
excess of primary coverage and $10 million in excess of the $20 million, which
excess loss coverage responds to all of the Company’s insurance policies other
than a portion of its Workers’ Compensation coverage and employee health care
coverage. 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.
Separately,
the Company’s employee health care is provided through a trust, administered by
a third party. The Company funds the trust based on current
claims. The administrator has purchased appropriate stop-loss
coverage. Losses on these policies up to the deductible amounts are
accrued based upon known claims incurred and an estimate to claims incurred but
not reported. The accruals are derived from actuarial studies, known
facts, historical trends and industry averages utilizing the assistance of an
actuary to determine the best estimate of the ultimate expected
loss.
We
believe our self insurance accruals are adequate based on the facts and
circumstances known to us as of the balance sheet dates. However,
self-insurance liabilities are difficult to assess and estimate due to unknown
factors, including the severity of an injury or illness, the determination of
our liability in proportion to other parties, the number of incidents not
reported and the effectiveness of our safety program. Therefore, if
actual experience differs from the assumptions used in the actuarial valuation,
adjustments to the reserve may be required and would be recorded in the period
that the experience becomes known.
Recently
Issued Accounting Pronouncements
SFAS 157. In September 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS No. 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. We adopted SFAS No. 157 on January 1, 2008 as it relates
to our financial assets. In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2 “Effective Date
of FASB Statement No. 157”, which deferred the effective date for us to
January 1, 2009 for all nonfinancial assets and liabilities, except those that
are recognized or disclosed at fair value on a recurring
basis. Adoption of SFAS No. 157 on January 1, 2009 did not have a
material effect on our consolidated financial statements.
SFAS 141(R). In
December 2007, the FASB issued Statement No. 141(R), “Business
Combinations”. SFAS No. 141(R) improves consistency and
comparability of information about the nature and effect of a business
combination by establishing principles and requirements for how an acquirer is
to (1) recognized and measure in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree; (2) recognize and measure the goodwill acquired in the business
combination or a gain from a bargain purchase; and (3) determine what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business
combination.
SFAS141(R)
applies prospectively to all business combination transactions for which the
acquisition date is on or after January 1, 2009. The impact of our
adoption of SFAS 141(R) will depend upon the nature and terms of business
combinations, if any, that we consummate on or after January 1,
2009.
3. Private
Placement Offering
In May,
2007, the Company completed the sale of 20,949,216 shares of its common stock
(the “Transaction”). Immediately prior to the sale of the common stock, the
Company’s certificate of incorporation was amended whereby all Class A
common stock was converted into preferred stock and the Class B common
stock was converted into common stock and each 2.23 outstanding shares of common
stock was combined into one outstanding share of common stock. In
accordance with SFAS 128 – Earnings Per Share, all per
share information and share and per-share information related to our equity
compensation plans has been adjusted retroactively for all periods presented
herein to reflect the reverse stock split.
In
connection with the Transaction, the Company entered into employment agreements
and transaction bonus agreements with its executive officers and certain key
employees. Under the agreements, the Company granted 26,426 shares of common
stock, granted options to acquire 327,357 shares of common stock, and made cash
payments totaling $2.2 million. In addition, the Company granted options to
acquire 26,904 shares of common stock to its independent directors.
From the
sale of its common stock in the Transaction, the Company received net proceeds
of approximately $260.5 million and used approximately $242.0 million to
purchase and retire all of the outstanding preferred stock and 16,053,816 shares
of common stock from its former principal stockholders.
Pursuant
to an agreement entered into at the end of March 2007, a related party who
participated in the Transaction agreed to accelerate the vesting of his
restricted stock and forfeit unvested stock options. The agreement
also provided that these shares would be redeemed in the Transaction but that
the Company would hold the proceeds until the end of the term of his employment
agreement (July 31, 2007), at which time he ceased to be a related
party. The proceeds were paid on July 31, 2007.
4. Acquisition
of the Assets of Subaqueous Services, Inc. and F. Miller & Sons,
LLC
Subaqueous
Services, Inc.
On
February 29, 2008, Subaqueous Services, LLC (“SSLLC”), a newly-formed,
wholly-owned subsidiary of the Company entered into an agreement to purchase and
closed the purchase of substantially all of the assets (with the exception of
working capital) and related business (principally consisting of project
contracts) of Orlando, Florida-based Subaqueous Services, Inc., a Florida
corporation (“SSI”) for
$35 million in cash.
In
addition, SSLLC (i) paid SSI approximately $1.7 million for net under-billings
and retained funds held under certain project contracts and for transition
support services to be provided by SSI through September, 2008; and (ii) entered
a three-year Consulting Agreement with the sole shareholder of SSI, terminable
on thirty (30) days prior written notice by the parties thereto, for $150,000
per year payable monthly. On July 31, 2008, SSLLC and the
Company provided the sole shareholder of SSI a notice of termination of the
Consulting Agreement.
The
Company funded the acquisition using its acquisition line of $25 million and a
draw on its accordion facility of $10 million, and cash on hand for the other
payments referenced above. SSLLC operates the acquired assets under the name
“Subaqueous Services, LLC,” and SSLLC is based in Jacksonville, Florida. In that
regard, SSLLC entered a lease agreement with Hill Street, LLC effective February
29, 2008, for premises and facilities constituting those formerly occupied and
used by SSI for its Jacksonville operations.
SSI was a
specialty dredging services provider that focused on shallow water dredging
projects in Florida and along the Atlantic Seaboard utilizing both mechanical
and hydraulic cutter suction pipeline dredging, with a wide variety of customers
both in the public and private sectors. The assets acquired consist
primarily of marine construction equipment, including several
dredges.
The
Company also purchased construction contracts in progress and the right to the
name “Subaqueous Services” and derivatives thereof. In addition,
SSLLC hired certain senior managers of SSI and substantially all of SSI’s field
personnel.
Prior to
this acquisition, no relationship outside the ordinary course of business
existed between SSI and the Company or SSI and SSLLC.
The
Company accounted for the purchase of the assets of SSI as a business
combination. The following represents the Company’s allocation of the
purchase price to the assets acquired:
|
Property
and equipment
|
$ | 18,500 | ||
|
Intangible
assets
|
6,900 | |||
|
Goodwill
|
9,615 | |||
| $ | 35,015 |
Pro-forma
information presented below reflects the asset purchase as if it had occurred on
January 1 of each reporting period:
|
2008
|
2007
|
|||||||
|
Revenue
|
$ | 264,580 | $ | 259,412 | ||||
|
Income
before taxes
|
$ | 21,043 | $ | 28,512 | ||||
|
Net
income
|
$ | 14,034 | $ | 17,988 | ||||
|
Earnings
per share:
|
||||||||
|
Basic
|
$ | 0.65 | $ | 0.89 | ||||
|
Diluted
|
$ | 0.64 | $ | 0.86 | ||||
F.
Miller and Sons, LLC
On
September 13, 2006, the Company acquired substantially all of the operations of
F. Miller and Sons, LLC, including its cash and accounts receivable, the
majority of its equipment fleet, its outstanding contracts and the right to the
name F. Miller and Sons for a total purchase price of $4.1 million (including
acquisition costs).
Pro forma
revenues and net income are not presented as if the acquisition occurred as of
January 1, 2006 as the effect on the Company’s results of operations for the
year ended December 31, 2006 was not material.
5. Contracts
in Progress
Contracts
in progress are as follows at December 31, 2008 and December 31,
2007:
|
2008
|
2007
|
|||||||
|
Costs
incurred on uncompleted contracts
|
$ | 196,363 | $ | 379,268 | ||||
|
Estimated
earnings
|
54,711 | 131,437 | ||||||
| 251,074 | 510,705 | |||||||
|
Less: Billings
to date
|
(255,512 | ) | (510,437 | ) | ||||
| $ | (4,438 | ) | $ | 268 | ||||
|
Included
in the accompanying consolidated balance sheet under the following
captions:
|
||||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts.
|
$ | 7,228 | $ | 7,676 | ||||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts.
|
(11,666 | ) | (7,408 | ) | ||||
| $ | (4,438 | ) | $ | 268 | ||||
Contract
costs include all direct costs, such as material and labor, and those indirect
costs related to contract performance such as payroll taxes and insurance.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions
and estimated profitability may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
6. Property
and Equipment
The
following is a summary of property and equipment at December 31, 2008 and
December 31, 2007:
|
2008
|
2007
|
|||||||
|
Automobiles
and trucks
|
$ | 1,472 | $ | 1,807 | ||||
|
Building
and improvements
|
12,015 | 12,363 | ||||||
|
Construction
equipment
|
88,070 | 74,736 | ||||||
|
Dredges
and dredging equipment
|
42,458 | 24,189 | ||||||
|
Office
equipment
|
1,123 | 891 | ||||||
| 145,138 | 113,986 | |||||||
|
Less: accumulated
depreciation
|
(69,092 | ) | (56,223 | ) | ||||
|
Net
book value of depreciable assets
|
76,046 | 57,763 | ||||||
|
Construction
in progress
|
2,886 | 5,761 | ||||||
|
Land
|
5,222 | 5,222 | ||||||
| $ | 84,154 | $ | 68,746 | |||||
For the
years ended December 31, 2008, 2007 and 2006 depreciation expense was $14.7
million, $12.4 million and $11.6 million, respectively. The assets of
the Company are pledged as collateral for debt obligations of which
$34.1 million was outstanding at December 31, 2008. There was no debt
outstanding at December 31, 2007. The loan agreements expire in
September 2010.
In
January 2008, management committed to a plan to sell a vessel which it had
purchased in 2006 and was no longer considered integral to the Company’s
fleet. The Company sold the vessel in August 2008, for approximately
$2.8 million.
7. Goodwill
In
October 2004, the Company’s predecessor was acquired in a purchase transaction
whereby goodwill in the amount of $2.5 million was recorded. In
February 2008, the Company recorded $9.6 million of goodwill related to the
purchase of the assets of SSI, as more fully described in Note 4,
above. The Company performs impairment testing in the fourth quarter
of each fiscal year in accordance with SFAS 142, Goodwill and Other Intangible
Assets. No impairment resulted from the test completed in
2008.
The table
below summarizes goodwill recorded by the Company at December 31, 2008 and
2007:
|
2008
|
2007
|
|||||||
|
Beginning
balance, January 1
|
$ | 2,481 | $ | 2,481 | ||||
|
Additions
|
9,615 | -- | ||||||
|
Impairment
|
-- | -- | ||||||
|
Ending
balance, December 31
|
$ | 12,096 | $ | 2,481 | ||||
8. Accrued
Liabilities
Accrued
liabilities at December 31, 2008 2007 consisted of the following:
|
2008
|
2007
|
|||||||
|
Accrued
salaries, wages and benefits
|
$ | 3,856 | $ | 3,620 | ||||
|
Accrual
for self-insurance liabilities
|
2,143 | 2,598 | ||||||
|
Other
accrued expenses
|
2,177 | 1,692 | ||||||
| $ | 8,176 | $ | 7,910 | |||||
9. Debt
and Line of Credit
The
Company has maintained a credit agreement with several participating banks since
October 2004. In July 2007, the Company restated its credit agreement
with its existing lenders. Debt under the new credit facility
included the balance of the old credit facility of $3.1 million, which was paid
in full in December 2007. In addition, the terms of the credit
facility provided for the Company to borrow up to $25 million under an
acquisition term loan facility and up to $8.5 million under a revolving line of
credit. At the discretion of the Company’s lenders, either the
acquisition term loan facility or the revolving line of credit may be increased
by $25 million, of which $10 million was used in the purchase of the assets of
SSI.
The
revolving line of credit is subject to a borrowing base and availability on the
revolving line of credit is reduced by any outstanding letters of
credit. At December 31, 2008, the Company had outstanding letters of
credit of $910,000, thus reducing the balance available to the Company on the
revolving line of credit to approximately $7.6 million. The Company
is subject to a monthly commitment fee on the unused portion of the revolving
line of credit at a rate of 0.20% of the unused balance. As of
December 31, 2008, no amounts had been drawn under the revolving line of
credit.
As
referenced in Note 4 above, the Company borrowed $35 million to fund the
purchase of the assets of SSI in February 2008 and amended its credit facility
to reflect the borrowing. Payments of interest are due
quarterly. Payments of principal commenced December 31, 2008 in seven
equal quarterly installments of $875,000, plus an annual principal payment based
on year end results, due within 120 days of year-end, with the remaining balance
due September 30, 2010, as summarized in the table below. All
provisions under the credit facility mature on September 30, 2010.
|
Year
ended:
|
||||
|
2009
|
$ | 5,909 | ||
|
2010
|
$ | 28,216 | ||
Interest
on the Company’s borrowings is based on the prime rate, less an applicable
margin, or LIBOR rate, plus an applicable margin, then in effect, at the
Company’s discretion. For each prime rate loan drawn under the credit
facility, interest is due quarterly at the then prime rate minus a margin that
is adjusted quarterly based on total leverage ratios, as
applicable. For each LIBOR loan, interest is due at the end of each
interest period at a rate of the then LIBOR rate for such period plus the LIBOR
margin based on total leverage ratios, as applicable. At December 31,
2008, interest was based on LIBOR. The LIBOR interest rate, plus the
applicable margin, at December 31, 2008 was in two tranches, with rates of 1.96%
and 2.97%.
The
credit facility requires the Company to maintain certain financial ratios,
including net worth, fixed charge and leverage ratios, and places other
restrictions on the Company as to its ability to incur additional debt, pay
dividends, advance loans and other actions. The credit facility is
secured by the bank accounts, accounts receivable, inventory, equipment and
other assets of the Company and its subsidiaries. As of December 31,
2008, the Company was in compliance with all debt covenants.
10. Stock-Based
Compensation
The
Compensation Committee of the Company’s Board of Directors is responsible for
the administration of the Company’s two stock incentive plans (the “LTIP” and
the “2005 Plan”). In general, the plans provide for grants of
restricted stock and stock options to be issued with a per-share price equal to
the fair market value of a share of common stock on the date of
grant. Option terms are specified at each grant date, but generally
are 10 years. Options generally vest over a three to five year
period. Total shares of common stock that may be delivered under the
LTIP and the 2005 Plan may not exceed 2,943,946.
Restricted
Stock
In 2005
the Company issued 1,035,874 shares of restricted stock under the 2005
Plan. Of these awards, 17,937 shares vested immediately and the remaining
shares vest 20% in the first year and at a rate of 1/60 of total shares at each
month of continuous services thereafter. In 2006, the Company exercised its
option to repurchase 100,897 shares of restricted stock from individuals whose
employment with the Company had terminated.
As part
of the Transaction more fully described in Note 3, vesting was accelerated on
213,004 shares of restricted stock which were then sold in the May common stock
offering. Vesting was also accelerated on an additional 227,206
shares of restricted stock which had been granted to certain executives as part
of the May common stock offering. In May 2007, 26,426 shares of fully
vested stock were granted to certain employees of the Company upon completion of
the Transaction. Compensation related to this grant of fully vested
shares in May 2007 totaled approximately $357,000.
As part
of their 2008 compensation package, the independent directors each received an
equity award of either restricted stock or options with a fair value on the date
of grant of $35,000. In December 2008, three directors elected to
receive stock, which is restricted from sale in total for a period of three
years. One director elected to receive options, which is also
restricted from exercise for a period of three years and is included in the
discussion of stock options below. Compensation related to the grants
of restricted stock totaled $105,000, expensed ratably over the three-year
vesting period.
The
following table summarizes the restricted stock activity under the 2005 Plan and
LTIP:
|
Number
of
Shares
|
Weighted
Average
Fair
Value
Per Share
|
Weighted
Average
Remaining
Vesting
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||
|
Balance,
January 1, 2006
|
1,017,937 | $ | 0.02 | |||||||
|
Granted
|
-- | $ | 0.02 | |||||||
|
Vested
|
(312,332 | ) | $ | 0.02 | ||||||
|
Forfeited/repurchased
shares
|
(100,897 | ) | $ | 0.02 | ||||||
|
Nonvested
at December 31, 2006
|
604,708 | $ | 0.02 | |||||||
|
Granted
|
26,426 | $ | 13.50 | |||||||
|
Vested
|
(520,142 | ) | $ | 0.71 | ||||||
|
Forfeited/repurchased
shares
|
(8,969 | ) | $ | 0.02 | ||||||
|
Nonvested
at December 31, 2007
|
102,023 | $ | 0.02 | |||||||
|
Granted
|
12,042 | $ | 8.72 | |||||||
|
Vested
|
(38,132 | ) | $ | 0.02 | ||||||
|
Forfeited/repurchased
shares
|
(11,646 | ) | $ | 0.02 | ||||||
|
Nonvested
at December 31, 2008
|
64,287 | $ | 1.65 |
1.63
|
$ 514
|
|||||
|
Vested
at December 31, 2008 and expected to vest
|
614,433 | $ | 0.77 |
1.31
|
$ 5,461
|
|||||
Stock
Options
In 2006
the Company issued 443,946 options under the 2005 Plan. The shares vest 20% in
the first year and at a rate of 1/60 of total shares at each month of continuous
service thereafter. Under FAS 123(R), the estimated fair value of these
options on the date of grant was $376,000. As part of the Transaction in May
2007, 89,686 options were forfeited, 22,422 were exercised and vesting was
accelerated on 165,078 options, for additional compensation costs of
$140,000.
The
balance of equity awards available under the 2005 Plan were combined with the
adoption of the LTIP in 2007.
The
following table summarizes the stock option activity under the 2005 Plan and
LTIP:
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
Per Share
|
Weighted
Average
Contractual
Life
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at January 1, 2006
|
-- | |||||||||||||||
|
Granted
|
443,959 | $ | 1.96 | |||||||||||||
|
Exercised
|
-- | -- | ||||||||||||||
|
Forfeited
|
-- | -- | ||||||||||||||
|
Outstanding
at December 31, 2006
|
443,959 | $ | 1.96 | |||||||||||||
|
Granted
|
579,261 | $ | 13.79 | |||||||||||||
|
Exercised
|
(22,422 | ) | $ | 1.96 | ||||||||||||
|
Forfeited
|
(98,654 | ) | $ | 3.00 | ||||||||||||
|
Outstanding
at December 31, 2007
|
902,144 | |||||||||||||||
|
Granted
|
451,749 | $ | 6.48 | |||||||||||||
|
Exercised
|
-- | -- | ||||||||||||||
|
Forfeited
|
(25,553 | ) | $ | 13.65 | ||||||||||||
|
Outstanding
at December 31, 2008
|
1,328,340 | $ | 8.35 | 8.73 | $ | 1,740 | ||||||||||
|
Vested
at December 31, 2008 and expected to vest....
|
1,320,287 | $ | 8.35 | $ | 1,700 | |||||||||||
|
Exercisable
at December 31, 2008…………………..
|
530,019 | $ | 7.53 | $ | 1,129 | |||||||||||
The
Company calculates the fair value of each option on the date of grant using the
Black-Scholes pricing model and the following weighted-average assumptions in
each year:
|
2008
|
2007
|
2006
|
||||||||||
|
Risk-free
interest rate
|
2.9 | % | 4.3 | % | 4.7 | % | ||||||
|
Expected
volatility
|
37 | % | 31 | % | 32 | % | ||||||
|
Expected
term of options (in years)
|
6.0 | 6.0 | 6.5 | |||||||||
|
Dividend
yield
|
0 | % | 0 | % | 0 | % | ||||||
The
risk-free interest rate is based on interest rates on U.S. Treasury zero-coupon
issues that match the contractual terms of the stock option
grants. The expected term represents the period in which the
Company’s equity awards are expected to be outstanding. The expected
term is calculated using the “simplified method” as defined in the U.S.
Securities and Exchange Commission Staff Accounting Bulletin 107 and as
permitted by Staff Accounting Bulletin 110, as the Company does not currently
have sufficient information regarding historical exercise behavior to accurately
estimate the expected term. Volatility is calculated using an average
of similar public companies within the Company’s industry. The
Company does not anticipate paying dividends in the future.
Compensation
expense related to stock option grants totaled $1.1 million, $858,000 and
$130,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
As of
December 31, 2008, there was $2.7 million of unrecognized compensation
cost, net of estimated forfeitures, related to the Company’s non-vested stock
options, which is expected to be recognized over a weighted average period of
2.2 years.
The table
below summarizes the non-vested stock options:
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
Per Share
|
|||||||
|
Nonvested
at January 1, 2006
|
-- | |||||||
|
Granted
|
443,959 | $ | 1.96 | |||||
|
Vested
|
-- | |||||||
|
Forfeited
|
-- | |||||||
|
Nonvested
at December 31, 2006
|
443,959 | $ | 1.96 | |||||
|
Granted
|
579,261 | $ | 13.79 | |||||
|
Vested
|
(276,757 | ) | 1.96 | |||||
|
Forfeited
|
(98,654 | ) | $ | 3.00 | ||||
|
Nonvested
at December 31, 2007
|
647,809 | $ | 12.38 | |||||
|
Granted
|
451,749 | $ | 6.48 | |||||
|
Vested
|
(275,682 | ) | $ | 12.67 | ||||
|
Forfeited
|
(25,553 | ) | $ | 13.65 | ||||
|
Nonvested
at December 31, 2008
|
798,323 | $ | 8.90 | |||||
11. Income
Taxes
The
following table presents the components of our consolidated income tax expense
for each fiscal year ended December 31:
|
Current
|
Deferred
|
Total
|
||||||||||
|
2008
|
||||||||||||
|
U.S. Federal
|
$ | 9,090 | $ | (2,403 | ) | $ | 6,687 | |||||
|
State
and local
|
602 | (7 | ) | 595 | ||||||||
| $ | 9,692 | $ | (2,410 | ) | $ | 7,282 | ||||||
|
2007
|
||||||||||||
|
U.S. Federal
|
$ | 11,577 | $ | (1,392 | ) | $ | 10,185 | |||||
|
State
and local
|
599 | (606 | ) | (7 | ) | |||||||
| $ | 12,176 | $ | (1,998 | ) | $ | 10,178 | ||||||
|
2006
|
||||||||||||
|
U.S. Federal
|
$ | 7,712 | $ | (1,096 | ) | $ | 6,616 | |||||
|
State
and local
|
661 | (237 | ) | 424 | ||||||||
| $ | 8,373 | $ | (1,333 | ) | $ | 7,040 | ||||||
The
Company’s income tax provision reconciles to the provision at the statutory
U.S. federal income tax rate for each year ended December 31 as
follows:
|
2008
|
2007
|
2005
|
||||||||||
|
Statutory
amount (computed at 35%)
|
$ | 7,615 | $ | 9,652 | $ | 6,805 | ||||||
|
State
income tax, net of federal benefit
|
385 | (5 | ) | 424 | ||||||||
|
Permanent
differences
|
(86 | ) | (101 | ) | (70 | ) | ||||||
|
Other
(net)
|
(632 | ) | 632 | (119 | ) | |||||||
|
Consolidated
income tax provision
|
$ | 7,282 | $ | 10,178 | $ | 7,040 | ||||||
|
Consolidated
effective tax rate
|
33.5 | % | 36.9 | % | 36.2% | % | ||||||
The
Company’s deferred tax (assets) liabilities are as follows:
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||
|
Current
|
Long-term
|
Current
|
Long-term
|
|||||||||||||
|
Assets
related to:
|
||||||||||||||||
|
Accrued
liabilities
|
738 | 376 | ||||||||||||||
|
Intangible
assets
|
1,771 | 505 | ||||||||||||||
|
Allowance
for bad debt
|
280 | 175 | ||||||||||||||
|
Non-qualified
stock options
|
32 | 10 | ||||||||||||||
|
Other
|
301 | 21 | -- | 21 | ||||||||||||
|
Total
assets
|
1,319 | 1,824 | 551 | 536 | ||||||||||||
|
Liabilities
related to:
|
||||||||||||||||
|
Depreciation
and amortization
|
(14,098 | ) | (14,315 | ) | ||||||||||||
|
Deferred
gain on sale of real estate
|
(149 | ) | ||||||||||||||
|
Other
|
-- | (12 | ) | -- | -- | |||||||||||
|
Total
liabilities
|
-- | (14,110 | ) | -- | (14,464 | ) | ||||||||||
|
Net
deferred assets (liabilities)
|
$ | 1,319 | $ | (12,286 | ) | $ | 551 | $ | (13,928 | ) | ||||||
As
reported in the balance sheet:
|
December
31,
2008
|
December 31,
2007
|
|||||||
|
As
reported in the balance sheet:
|
||||||||
|
Net
current deferred tax assets
|
1,319 | 551 | ||||||
|
Net
non-current deferred tax liabilities
|
(12,286 | ) | (13,928 | ) | ||||
|
Total
net deferred tax liabilities:
|
$ | (10,967 | ) | $ | (13,377 | ) | ||
In
assessing the realizability of deferred tax assets at December 31, 2008, the
Company considered whether it was more likely than not that some portion or all
of the deferred tax assets will not be realized. The realization of deferred tax
assets depends upon the generation of future taxable income during the periods
in which these temporary differences become deductible. As of December 31, 2008,
the Company believes that all of the deferred tax assets will be utilized and
therefore has not recorded a valuation allowance.
Although
the Company believes its recorded assets and liabilities are reasonable, tax
regulations are subject to interpretation and tax litigation is inherently
uncertain; therefore the Company’s assessments can involve both a series of
complex judgments about future events and rely heavily on estimates and
assumptions. Although the Company believes that the estimates and assumptions
supporting its assessments are reasonable, the final determination of tax audit
settlements and any related litigation could be materially different from that
which is reflected in historical income tax provisions and recorded assets and
liabilities. If the Company were to settle an audit or a matter under
litigation, it could have a material effect on the income tax provision, net
income, or cash flows in the period or periods for which that determination is
made. Any accruals for tax contingencies are provided for in accordance with the
requirements of SFAS No. 5, Accounting for Contingencies.
The
Company adopted FIN 48 effective January 1, 2007. Adoption of this pronouncement
did not result in the recording of any uncertain tax positions. The Company does
not believe that its tax positions will significantly change due to the
settlement and expiration of statutes of limitations prior to December 31,
2009.
The
Company and its subsidiaries file income tax returns in the United States
federal jurisdiction and in various states. With few exceptions, the Company
remains subject to federal and state income tax examinations for the years of
2005, 2006, 2007 and 2008. The Company’s policy is to recognize interest and
penalties related to any unrecognized tax liabilities as additional tax expense.
No interest or penalties have been accrued at December 31, 2008, as the Company
has not recorded any uncertain tax positions. The Company believes it has
appropriate and adequate support for the income tax positions taken and to be
taken on its tax returns and that its accruals for tax liabilities are adequate
for all open years based on an assessment of many factors including past
experience and interpretations of tax law applied to the facts of each
matter.
12. Earnings
Per Share
Basic
earnings per share are based on the weighted average number of common shares
outstanding during each period. Diluted earnings per share are based on the
weighted average number of common shares outstanding and the effect of all
dilutive common stock equivalents during each period. In April 2007, the Company
authorized a 2.23 for one reverse split of the then Class B common shares,
which became effective upon the closing of the Transaction at which time the
Company’s certificate of incorporation was modified such that Class A shares
were converted into preferred and Class B shares were converted into common
shares. In accordance with SFAS No. 128, Earnings Per Share, the
computations of basic and diluted earnings per share have been adjusted
retroactively for all periods presented to reflect the common stock
split. At December 31, 2008 and 2007, 996,489 and 570,293 common
stock equivalents, respectively, were not included in the diluted earnings per
share calculation, as the effect of these shares would have been
anti-dilutive. No common stock equivalents were considered
anti-dilutive at December 31, 2006.
In May
2007, all outstanding preferred (Class A) dividends were paid in full and these
shares were redeemed and retired.
The
following table reconciles the numerators and denominators used in the
computations of both basic and diluted EPS for each fiscal year ended December
31:
|
2008
|
2007
|
2006
|
||||||||||
|
Basic
EPS computation:
|
||||||||||||
|
Numerator:
|
||||||||||||
|
Net
income
|
$ | 14,475 | $ | 17,399 | $ | 12,403 | ||||||
|
Preferred
dividends
|
-- | 782 | 2,100 | |||||||||
|
Earnings
available to common stockholders
|
$ | 14,475 | $ | 16,617 | $ | 10,303 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted
average shares outstanding
|
21,561,200 | 19,657,436 | 16,730,934 | |||||||||
|
Less
weighted average non-vested restricted stock
|
78,300 | 256,494 | 858,574 | |||||||||
|
Total
basic weighted average shares outstanding
|
21,482,900 | 19,400,492 | 15,872,360 | |||||||||
|
Basic
earnings per share
|
$ | 0.67 | $ | 0.86 | $ | 0.65 | ||||||
|
Diluted
EPS computation:
|
||||||||||||
|
Total
basic weighted average shares outstanding
|
21,482,900 | 19,400,942 | 15,872,360 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Common
stock options
|
418,334 | 319,247 | 31,983 | |||||||||
|
Restricted
stock
|
78,083 | 256,128 | 502,907 | |||||||||
|
Total
weighted average shares outstanding assuming dilution
|
21,979,317 | 19,976,317 | 16,407,250 | |||||||||
|
Diluted
earnings per share
|
$ | 0.66 | $ | 0.83 | $ | 0.63 | ||||||
|
(1)
|
Upon
any liquidation of the Company, holders of preferred shares would have
received a liquidation preference of $1,000 per share, plus 6% cumulative
dividends per year. Holders were not entitled to additional payment or
distribution of the earnings, assets or surplus funds of the Company upon
liquidation. The shares were converted into preferred
stock, redeemed and retired in May 2007. See Note
17.
|
13. Enterprise
Wide Disclosures
The
Company is a heavy civil contractor specializing in marine
construction. The Company operates as a single segment, as each
project has similar characteristics, includes similar services, has similar
types of customers and is subject to the same regulatory
environment. The Company organizes and evaluates its financial
information around each project when making operating decisions and assessing
its overall performance.
The
Company’s primary customers are governmental agencies in the United
States. The following table represents concentrations of revenue by
type of customer for the years ended December 31, 2008, 2007, and
2006.
|
2008
|
%
|
2007
|
%
|
2006
|
%
|
|||||||||||||||||||
|
Federal
|
$ | 29,134 | 11 | % | $ | 37,528 | 18 | % | $ | 43,682 | 24 | % | ||||||||||||
|
State
|
37,340 | 14 | % | 13,489 | 6 | % | 29,172 | 16 | % | |||||||||||||||
|
Local
|
64,713 | 25 | % | 69,235 | 33 | % | 59,159 | 32 | % | |||||||||||||||
|
Private
|
130,615 | 50 | % | 90,108 | 43 | % | 51,265 | 28 | % | |||||||||||||||
| $ | 261,802 | 100 | % | $ | 210,360 | 100 | % | $ | 183,278 | 100 | % | |||||||||||||
Revenues
generated outside the United States totaled 7.0%, 4.0% and 3.9% of total
revenues for the years ended 2008, 2007, and 2006, respectively.
The
Company’s long-lived assets are substantially located in the United
States.
Significant
customers
The
following customers accounted for 10% or more of contract revenues for the years
ended December 31, 2008, 2007 and 2006:
|
2008
|
2007
|
2006
|
||||||||||
|
Customer
A
|
N/A | 13 | % | 15 | % | |||||||
|
Customer
B
|
N/A | 12 | % | 23 | % | |||||||
|
Customer
C
|
N/A | N/A | 10 | % | ||||||||
|
Customer
D
|
10 | % | N/A | N/A | ||||||||
14. Employee
Benefits
All
employees except the Associate Divers and Associate Tugmasters are eligible to
participate in the Company’s 401(k) Retirement Plan after completing six months
of service. Each participant may contribute between 1% and 80% of eligible
compensation on a pretax basis, up to the annual IRS limit. The Company matches
100% on the first 2% of eligible compensation contributed to the Plan and 50% on
the next 2% of eligible compensation contributed to the Plan. Participants’
contributions are fully vested at all times. Employer matching contributions
vest over a four-year period. At its discretion, the Company may make additional
matching and profit-sharing contributions. During the years ended December 31,
2008, 2007 and 2006, the Company contributed $0.9 million, $0.8 million and $0.6
million, respectively, to the plan.
15. Commitments
and Contingencies
Operating
Leases
In July
2005, the Company executed a sale-leaseback transaction in which it sold an
office building for $2.1 million and entered into a ten year lease
agreement. The Company, at its option, can extend the lease for two additional
five year terms. Scheduled increases in monthly rent are included in the lease
agreement.
The sale
of the office building resulted in a gain of $562,000 which has been deferred
and amortized over the life of the lease. The Company recognized $54,212 in each
of the years ending December 31, 2008, 2007 and 2006,
respectively. Rent expense under this agreement was $168,504,
$178,100 and $164,400 for each of the years ending December 31, 2008, 2007 and
2006, respectively.
In 2005,
the Company entered into a lease agreement for certain machinery and equipment
under a continuing operating lease agreement. Rental expense under this lease
for the years ended December 31, 2008, 2007 and 2006 was $1.4 million, $951,000
and $512,000, respectively.
The
Company leases office space in Lake Charles, Louisiana and Tampa, Florida, yard
space in Port Lavaca, Texas, yard and office space in Jacksonville, Florida and
field office space in Ingleside, Texas, under lease terms that range from one to
three years. The Company also leases short-term field office space at
its various construction sites for the duration of the projects.
Future
minimum lease payments under non-cancelable operating leases as of December 31,
2008 are as follows:
|
Amount
|
||||
|
Year
ended December 31,
|
||||
|
2009
|
$ | 2,102 | ||
|
2010
|
1,595 | |||
|
2011
|
837 | |||
|
2012
|
283 | |||
|
2013
|
176 | |||
|
Thereafter
|
281 | |||
| $ | 5,274 | |||
Litigation
From time
to time the Company is a party to various lawsuits, claims and other legal
proceedings that arise in the ordinary course of business. These
actions typically seek, among other things, compensation for alleged personal
injury, breach of contract, property damage, punitive damages, civil penalties
or other losses, or injunctive or declaratory relief. With respect to
such lawsuits, the Company accrues reserves when it is probable a liability has
been incurred and the amount of loss can be reasonably estimated. The
Company does not believe any of these proceedings, individually or in the
aggregate, would be expected to have a material adverse effect on results of
operations, cash flows or financial condition.
The
Company was named as one of a substantial number of defendants in
numerous individual claims and lawsuits brought by the residents and
landowners of New Orleans, Louisiana and surrounding areas in the United States
District Court for the Eastern District of Louisiana. These suits have been
classified as a subcategory of suits under the more expansive proceeding, In re Canal Breaches Consolidation
Litigation, Civil Action No: 05-4182, (E.D. La,), which was instituted in
late 2005. While not technically class actions, the individual claims and
lawsuits are being prosecuted in a manner similar to that employed for federal
class actions. The claims are based on flooding and related damage from
Hurricane Katrina. In general, the claimants state that the flooding and related
damage resulted from the failure of certain aspects of the levee system
constructed by the Corps of Engineers, and the claimants seek recovery of
alleged general and special damages. The Corps of Engineers has contracted with
various private dredging companies, including us, to perform maintenance
dredging of the waterways. In accordance with a decision (In re Canal Breaches Consolidation
Litigation, Civil Action No: 05-4182, "Order and Reasons," March 9,
2007 (E.D. La, 2007)), we believe that we have no liability under these claims
unless we deviated from our contracted scope of work on a project. In June of
this year, however, the plaintiffs appealed this decision to the United States
Court of Appeals for the Fifth Circuit, where the appeal is currently pending.
16. Other Possible Contingencies
In May
2008, the Company learned of a federal criminal investigation that related to
certain contracts and contracting activities in the Jacksonville, Florida area,
of, among others, the Jacksonville Port Authority and SSI. It does
not appear that the Company, or any of its subsidiaries, or their respective
operations, is the focus of such investigation. Nevertheless,
investigators have secured certain documents and other materials from the
Company concerning SSI’s operations and activities prior to the sale of its
assets to the Company. The Company has been further cooperating with
the investigation, including responding to requests for any additional relevant
documents or materials. Based on information available to us at this
time, we do not anticipate that the investigation will have any material adverse
impact on the Company’s financial condition or results of
operations.
17. Stockholders’
Equity
Common
Stock
Prior to
May 2007, the Company had a capital structure consisting of Class A and Class B
Common stock. The Class A stock was entitled to receive
cumulative dividends at the annual rate of 6 percent of the original issue
price. On May 17, 2007, the Company converted all Class A stock into preferred,
redeemed all Class A stock and paid all outstanding dividends totaling $5.4
million. Upon redemption the preferred stock was
retired. The Class B common stock was converted into common stock and
was subject to a 1 for 2.23 exchange of outstanding shares. The
Company has authorized 50,000,000 shares of which 21,656,719 are issued and
outstanding. Common stockholders are entitled to vote and to receive
dividends if declared.
Treasury
Stock
During
2006 and the first quarter of 2007, the Company repurchased 109,866 common
shares that had been granted under the 2005 Plan according to the terms of the
plan. The Company hired a third party consultant to provide a fair value of the
common shares, which the Company used to value the repurchased
shares. The 109,866 shares in treasury were issued as part of the
Transaction completed in May 2007. The Company’s board of directors
resolved in July 2007 to retire the 16,053,816 shares redeemed in the May
Transaction (See Note 3).
In July
2008, 11,646 shares of non-vested restricted stock were
forfeited. Pursuant to the Company’s 2005 Stock Plan, the Company
exercised its right to repurchase these shares at the price of $0.02 per
share. These shares are recorded as common shares held in treasury on
the Company’s balance sheet at December 31, 2008.
18. Related
Party Transaction
The
Company had a management services agreement with one of its former stockholders
until the end of 2006. During the year ended December 31, 2006, the annual
commitment under this agreement was $300,000. The agreement was amended in 2006,
which eliminated the annual commitment under the agreement. The management fee
expense is included in general and administrative expenses in the accompanying
consolidated statement of income. This agreement was terminated upon the closing
of the Transaction, as more fully described in Note 3.
The
Company rented and purchased various pieces of construction equipment from a
party considered to be related until July 31, 2007. Through July 31,
2007, related party rental expense was $546,000 and was $625,000 and $300,000 in
the years ended December 31, 2006 and 2005, respectively. Through
July 31, 2007, $17,000 of equipment was purchased from this former related party
and during 2006, $1.6 million of assets were purchased.
EXHIBIT INDEX
|
Exhibit
|
||||
|
Number
|
Description
|
|||
|
1
|
.01
|
Form
of Indemnity Agreement for Directors and Certain Officers dated November
24, 2008 (filed as Exhibit 1.01 to Form 8-K filed on November 25,
2008)
|
||
|
**
|
2
|
.1
|
Asset
Purchase Agreement dated February 29, 2008, by and between OMGI Sub, LLC
and
Orion
Marine Group, Inc., on the one hand, and Subaqueous Services, Inc. and
Lance Young, on the other hand
|
|
|
3
|
.1
|
Amended
and Restated Certificate of Incorporation of Orion Marine Group,
Inc.
|
||
|
3
|
.2
|
Amended
and Restated Bylaws of Orion Marine Group, Inc.
|
||
|
4
|
.1
|
Registration
Rights Agreement between Friedman, Billings, Ramsey & Co., Inc.
and Orion Marine Group, Inc. dated May 17, 2007
|
||
|
10
|
.1
|
Loan
Agreement, dated as of July 10, 2007, between Orion Marine Group,
Inc. and Amegy Bank National Association
|
||
|
**
|
10
|
.1.1
|
First
Amendment to Loan Agreement dated February 29, 2008, among Orion Marine
Group, Inc., and Amegy Bank National Association, a national banking
association, as agent
|
|
|
10
|
.2
|
Purchase/Placement
Agreement dated May 9, 2007 between Orion Marine Group, Inc. and
Friedman, Billings, Ramsey & Co., Inc.
|
||
|
10
|
.3
|
Amended &
Restated Redemption Agreement dated May 7,
2007
|
||
|
10
|
.4
|
Lease
dated September 13, 2006, by and between F. Miller Construction,
LLC and Joe T. Miller Sr.
|
||
|
10
|
.5
|
Lease
dated September 28, 2006, by and between Southpoint Square I,
Ltd. and Misener Marine Construction, Inc.
|
||
|
10
|
.6
|
Lease
dated June 23, 1997, by and between the City of Port Lavaca, Texas
and King Fisher Marine Service, Inc.
|
||
|
10
|
.7
|
Land
Sublease Agreement dated May 1, 2007, by and between Signet Maritime
Corporation and Orion Construction, L.P.
|
||
|
+
|
10
|
.8
|
2005
Stock Incentive Plan
|
|
|
+
|
10
|
.9
|
Form
of Stock Option Agreement Under the 2005 Stock Incentive Plan &
Notice of Grant of Stock Option
|
|
|
+
|
10
|
.10
|
Form
of Restricted Stock Agreement Under the 2005 Stock Incentive
Plan & Notice of Grant of Restricted Stock
|
|
|
+
|
10
|
.11
|
Orion
Marine Group, Inc. Long Term Incentive Plan
|
|
|
+
|
10
|
.12
|
Form
of Stock Option Agreement Under the 2007 Long Term Incentive
Plan
|
|
|
+
|
10
|
.13
|
Form
of Restricted Stock Agreement and Notice of Grant of Restricted
Stock
|
|
|
+
|
10
|
.14
|
Executive
Incentive Plan (filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2008)
|
|
|
+
|
10
|
.15
|
Subsidiary
Incentive Plan (filed as an exhibit to the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2008)
|
|
|
+
|
10
|
.16
|
Employment
Agreement, dated as of April 2, 2007, by and between Orion Marine
Group, Inc. and J. Michael Pearson
|
|
|
+
|
10
|
.17
|
Employment
Agreement, dated as of April 2, 2007, by and between Orion Marine
Group, Inc. and Mark Stauffer
|
|
|
+
|
10
|
.18
|
Employment
Agreement , dated as of April 2, 2007, by and between Orion Marine
Group, Inc. and Elliott Kennedy
|
|
|
+
|
10
|
.19
|
Employment
Agreement, dated as of April 2, 2007, by and between Orion Marine
Group, Inc. and Jim Rose
|
|
|
+
|
10
|
.20
|
Employment
Agreement, dated as of August 13, 2007, by and between Orion Marine
Group, Inc. and J. Cabell Acree, III
|
|
|
**
|
10
|
.21
|
Lease
Agreement dated February 29, 2008, between OMGI Sub, LLC and Hill Street,
LLC
|
|
|
+
|
10
|
.22
|
Amendment
No. 1 to the Employment Agreement, effective as of April 11, 2008, by
and between Orion Marine Group, Inc. and J. Michael Pearson (filed as an
exhibit to the Current Report on Form 8-K/A filed April 25,
2008)
|
|
|
+
|
10
|
.23
|
Schedule
of Changes to Compensation of Non-employee Directors, effective for 2008
(filed as an exhibit to the Quarterly Report on Form 1-Q for the quarterly
period ended June 30, 2008)
|
|
|
*
|
21
|
.1
|
||
|
*
|
23
|
.1
|
||
|
24
|
.1
|
Power
of Attorney (included on signature page of this filing)
|
||
|
*
|
31
|
.1
|
||
|
*
|
31
|
.2
|
||
|
*
|
32
|
.1
|
||
|
*
|
Filed
herewith
|
|
|
**
|
Incorporated
by reference to the Company’s report on Form 8K filed with the SEC on
March 4, 2008
|
|
| + | Management contract or compenstory plan or arrangement | |
|
(b)
|
Financial
Statement Schedules
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and
Shareholders
of Orion Marine Group, Inc.
We have
audited in accordance with the standards of the Public Company Accounting
Oversight Board (United States) the consolidated financial statements of Orion
Marine Group, Inc. and subsidiaries referred to in our report dated March 16,
2009, which is included in the annual report to security holders and
incorporated by reference in Part II of this form. Our audits of the basic
financial statements included the financial statement schedule listed in the
index appearing under Item 15 (2), which is the responsibility of the Company’s
management. In our opinion, this financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
Houston,
Texas
March 16,
2009
ORION
MARINE GROUP, INC.
SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
(Dollars
in thousands)
|
Description
|
Balance
at the
Beginning
of
the Period
|
Charged
to
Revenue,
Cost
or Expense
|
Deduction
|
Balance
at the
End
of
the Period
|
||||||||||||
|
Year
ended December 31, 2006:
|
||||||||||||||||
|
Provision
for Doubtful Accounts
|
$ | -- | $ | 500 | $ | -- | $ | 500 | ||||||||
|
Year
ended December 31, 2007:
|
||||||||||||||||
|
Provision
for Doubtful Accounts
|
$ | 500 | $ | -- | $ | -- | $ | 500 | ||||||||
|
Year
ended December 31, 2008:
|
||||||||||||||||
|
Provision
for Doubtful Accounts
|
$ | 500 | $ | 800 | $ | (500 | ) | $ | 800 | |||||||