Orion Group Holdings Inc - Quarter Report: 2008 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
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[√]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended March 31,
2008
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ________
to_________
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Commission
file number:
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333-145588
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ORION
MARINE GROUP, INC.
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(Exact
name of registrant as specified in its
charter)
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DELAWARE
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26-0097459
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(State
or other jurisdiction of
Incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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12550
Fuqua
Houston,
Texas 77034
(Address
of principal executive offices)
(Zip
Code)
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(713)
852-6500
(Registrant’s
telephone number, including area
code)
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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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as described 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 Exchange Act). Yes[ ] No
[√]
As of May
1, 2008, 21,565,324 shares of the Registrant’s common stock, $0.01 par value
were outstanding.
ORION
MARINE GROUP, INC.
Quarterly
Report on Form 10-Q for the period ended March 31, 2008
INDEX
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PART
I
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Item
1
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Financial
Statements (Unaudited)
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Page
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Item
2
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Item
3
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Item
4
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PART
II
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Item1
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Legal
Proceedings
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Item
1A
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Risk
Factors
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Item
6
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Exhibits
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| Exhibit 10.1 | |||
-2-
Part I –
Financial Information
Orion
Marine Group, Inc. and Subsidiaries
Consolidated
Balance Sheets
(Unaudited)
(In
Thousands, Except Share and Per Share Information)
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March
31,
2008
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December
31,
2007
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|||||||
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Assets
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$ | 15,706 | $ | 12,584 | ||||
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Accounts
receivable:
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||||||||
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Trade,
net of allowance of $500 and $500, respectively
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36,314 | 30,832 | ||||||
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Retainage
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5,266 | 7,620 | ||||||
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Other
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1,587 | 1,345 | ||||||
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Inventory
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638 | 646 | ||||||
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Deferred
tax asset
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591 | 551 | ||||||
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Costs
and estimated earnings in excess of billings on uncompleted
contracts
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4,187 | 7,676 | ||||||
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Asset
held for sale
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1,952 | -- | ||||||
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Prepaid
expenses and other
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1,166 | 293 | ||||||
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Total
current assets
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67,407 | 61,547 | ||||||
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Property
and equipment, net
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85,998 | 68,746 | ||||||
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Goodwill
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11,881 | 2,481 | ||||||
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Intangible
assets, net of amortization
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7,359 | 653 | ||||||
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Other
assets
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100 | 107 | ||||||
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Total
assets
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$ | 172,745 | $ | 133,534 | ||||
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Liabilities
and Stockholders’ Equity
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||||||||
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Current
liabilities:
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||||||||
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Current
portion of long-term debt
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$ | 1,750 | $ | -- | ||||
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Accounts
payable:
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Trade
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7,544 | 11,139 | ||||||
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Retainage
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1,690 | 678 | ||||||
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Accrued
liabilities
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7,761 | 7,546 | ||||||
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Taxes
payable
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2,468 | 2,324 | ||||||
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Billings
in excess of costs and estimated earnings on uncompleted
contracts
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11,117 | 7,408 | ||||||
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Total
current liabilities
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32,330 | 29,095 | ||||||
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Long-term
debt, less current portion
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33,250 | -- | ||||||
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Other
long-term liabilities
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401 | -- | ||||||
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Deferred
income taxes
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13,167 | 13,928 | ||||||
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Deferred
revenue
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413 | 427 | ||||||
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Total
liabilities
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79,561 | 43,450 | ||||||
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Commitments
and contingencies
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Stockholders’
equity:
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||||||||
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Common
stock—$0.01 par value, 50,000,000 shares authorized,
21,565,324
shares
issued and outstanding
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216 | 216 | ||||||
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Additional
paid-in capital
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54,590 | 54,336 | ||||||
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Retained
earnings
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38,378 | 35,532 | ||||||
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Total
stockholders’ equity
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93,184 | 90,084 | ||||||
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Total
liabilities and stockholders’ equity
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$ | 172,745 | $ | 133,534 | ||||
See notes
to unaudited condensed consolidated financial statements
-3-
Orion
Marine Group, Inc. and Subsidiaries
Consolidated
Statements of Income
(Unaudited)
(In
Thousands, Except Share and Per Share Information)
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Three
months ended March 31,
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2008
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2007
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Contract
revenues
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$ | 52,591 | $ | 38,293 | ||||
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Costs
of contract revenues
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42,519 | 28,768 | ||||||
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Gross
profit
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10,072 | 9,525 | ||||||
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Selling,
general and administrative expenses
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5,827 | 4,128 | ||||||
| 4,245 | 5,397 | |||||||
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Interest
(income) expense
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||||||||
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Interest
income
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(149 | ) | (266 | ) | ||||
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Interest
expense
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126 | 446 | ||||||
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Interest
(income) expense, net
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(23 | ) | 180 | |||||
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Income
before income taxes
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4,268 | 5,217 | ||||||
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Income
tax expense
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1,422 | 1,931 | ||||||
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Net
income
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$ | 2,846 | $ | 3,286 | ||||
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Net
income
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$ | 2,846 | $ | 3,286 | ||||
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Preferred
dividends
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-- | 518 | ||||||
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Earnings
available to common stockholders
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$ | 2,846 | $ | 2,768 | ||||
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Basic
earnings per share
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$ | 0.13 | $ | 0.17 | ||||
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Diluted
earnings per share
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$ | 0.13 | $ | 0.17 | ||||
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Shares
used to compute earnings per share:
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||||||||
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Basic
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21,468,569 | 16,048,404 | ||||||
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Diluted
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21,845,207 | 16,168,837 | ||||||
See notes
to unaudited condensed consolidated financial statements
-4-
Orion
Marine Group, Inc. and Subsidiaries
Consolidated
Statement of Stockholders’ Equity
(Unaudited)
(In
Thousands, Except Share Information)
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Common
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Additional
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|||||||||||||||||||
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Stock
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Paid-In
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Retained
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Shares
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Amount
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Capital
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Earnings
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Total
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Balance,
December 31, 2007
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21,565,324 | $ | 216 | $ | 54,336 | $ | 35,532 | $ | 90,084 | |||||||||||
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Stock-based
compensation
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— | — | 254 | — | 254 | |||||||||||||||
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Net
income
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— | — | — | 2,846 | 2,846 | |||||||||||||||
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Balance,
March 31, 2008
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21,565,324 | $ | 216 | $ | 54,590 | $ | 38,378 | $ | 93,184 | |||||||||||
See notes
to unaudited condensed consolidated financial statements
-5-
Orion
Marine Group, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
(In
Thousands)
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Three
Months Ended March 31,
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2008
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2007
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Cash
flows from operating activities:
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Net
income
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$ | 2,846 | $ | 3,286 | ||||
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
and amortization
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3,751 | 3,119 | ||||||
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Deferred
financing cost amortization
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59 | 43 | ||||||
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Non-cash
interest expense
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23 | 22 | ||||||
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Deferred
income taxes
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(801 | ) | (436 | ) | ||||
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Stock-based
compensation
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254 | 19 | ||||||
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Gain
on sale of property and equipment
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(62 | ) | (81 | ) | ||||
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Change
in operating assets and liabilities:
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||||||||
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Accounts
receivable
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(2,754 | ) | 5,480 | |||||
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Inventory
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8 | (6 | ) | |||||
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Prepaid
expenses and other
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(806 | ) | (543 | ) | ||||
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Costs
and estimated earnings in excess of billings on uncompleted
contracts
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4,719 | (1,701 | ) | |||||
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Accounts
payable
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(2,583 | ) | (3,795 | ) | ||||
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Accrued
liabilities
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590 | (3,365 | ) | |||||
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Income
tax payable
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55 | 2,604 | ||||||
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Billings
in excess of costs and estimated earnings on uncompleted
contracts
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3,527 | (1,782 | ) | |||||
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Deferred
revenue
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(14 | ) | (13 | ) | ||||
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Net
cash provided by operating activities
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8,812 | 2,851 | ||||||
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Cash
flows from investing activities:
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Acquisition
of assets of Subaqueous Services, Inc.
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(36,698 | ) | -- | |||||
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Proceeds
from sale of property and equipment
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73 | 114 | ||||||
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Purchase
of property and equipment
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(3,985 | ) | (1,802 | ) | ||||
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Net
cash used in investing activities
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(40,610 | ) | (1,688 | ) | ||||
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Cash
flows from financing activities:
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||||||||
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Payments
on long-term debt
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-- | (1,452 | ) | |||||
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Borrowing
on line of credit
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35,000 | — | ||||||
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Payment
of stock issuance costs
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-- | (124 | ) | |||||
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Increase
in loan costs
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(80 | ) | — | |||||
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Net
cash provided by (used in) financing activities
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34,920 | (1,576 | ) | |||||
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Net
change in cash and cash equivalents
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3,122 | (413 | ) | |||||
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Cash
and cash equivalents at beginning of period
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12,584 | 18,561 | ||||||
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Cash
and cash equivalents at end of period
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$ | 15,706 | $ | 18,148 | ||||
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Supplemental
disclosures of cash flow information: cash paid during the
period for:
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Interest
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$ | 120 | $ | 203 | ||||
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Taxes
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$ | 1,961 | -- | |||||
See notes
to unaudited condensed consolidated financial statements
-6-
Orion
Marine Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three
Months Ended March 31, 2008
(Unaudited)
(Tabular
Amounts in thousands, Except for Share and per Share Amounts)
1. Description
of Business and Basis of Presentation
Description
of Business
Orion
Marine Group, Inc., and its wholly-owned 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. Heavy civil marine
projects include marine transportation facilities, bridges and causeways, marine
pipelines, mechanical and hydraulic dredging, and specialty projects. The
Company is headquartered in Houston, Texas.
Basis
of Presentation
The
accompanying condensed consolidated financial statements and financial
information included herein have been prepared pursuant to the interim period
reporting requirements of Form 10-Q. Consequently, certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted. Readers of this report
should also read our consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2007 (“2007 Form 10-K”) as well as Item 7 – Management’s Discussion and Analysis
of Financial Condition and Results of Operations also included in our
2007 Form 10-K.
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain 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. Such adjustments are of a
normal recurring nature. Interim results of operations for the three
months ended March 31, 2008, are not necessarily indicative of the results that
may be expected for the year ending December 31, 2008.
Reclassifications
Certain
items on the balance sheet related to intangible assets have been reclassified
to conform to current year presentation.
2. Summary
of Significant Accounting Principles
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States 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. 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 are more
fully described in Note 2 of the Notes to Consolidated Financial Statements in
the 2007 Form 10-K.
On an
ongoing basis, the Company evaluates the significant accounting policies used to
prepare its condensed consolidated financial statements, including, but not
limited to, those related to:
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·
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Revenue
recognition
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·
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Accounts
receivable
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·
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Income
taxes
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·
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Self-insurance
and
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·
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Stock
based compensation
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-7-
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. 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. 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.
The
current asset “costs and estimated earnings in excess of billings on uncompleted
contracts” represents revenues recognized in excess of amounts billed, 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.
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’s primary customers are governmental agencies in the United States. 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.
At March
31, 2008, 19.6% of our accounts receivable was due from one
customer. No single customer accounted for more than 10% of total
receivables at December 31, 2007. In the three months ended March 31, 2008 and
2007, one and two customers represented more than 10% of revenues,
generating 15.1% and 44% of total revenues, respectively.
Accounts
Receivable
Accounts
receivable are stated at the historical carrying value, less write-offs and
allowances for doubtful accounts. 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. As of March 31, 2008 and December 31,
2007, the Company had an allowance for doubtful accounts of $500,000 and
$500,000, respectively.
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 March 31, 2008 totaled $5.3
million, of which $1.2 million is expected to be collected beyond
2008. Retention at December 31, 2007 totaled $7.6
million.
Income
Taxes
The
Company records income taxes based upon Statement of Financial Accounting
Standards (“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
accounts for any uncertain tax positions in accordance with the provisions of
Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48).
-8-
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.
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 of 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.
Stock-Based
Compensation
The
Company recognizes compensation expense for equity awards based on the
provisions of SFAS No. 123(R), Share-Based
Payment. Compensation expense is recognized 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.
Compensation
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.
Recently
Issued Accounting Pronouncements
SFAS 157. In September 2006,
the FASB issued SFAS 157, “Fair Value Measurements,” to increase consistency and
comparability in fair value measurements by defining fair value, establishing a
framework for measuring fair value in generally accepted accounting principles,
and expanding disclosures about fair value measurements. SFAS 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. It clarifies the extent to which fair value is used to measure
recognized assets and liabilities, the inputs used to develop the measurements,
and the effect of certain measurements on earnings for the period. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and is applied on a prospective basis. On February 6, 2008,
the FASB announced it will issue a FASB Staff Position (FSP) to allow a one-year
deferral of adoption of SFAS 157 for nonfinancial assets and nonfinancial
liabilities that are recognized at fair value on a nonrecurring basis. The
FSP will also amend SFAS 157 to exclude SFAS 13, “Accounting for Leases,” and
its related interpretive accounting pronouncements. The FSP is expected to be
issued in the near future. We have determined that the adoption of SFAS 157 will
not have a material impact on our consolidated financial position, results of
operations or cash flows and adopted the provisions as it relates to financial
assets and liabilities on January 1, 2008.
SFAS 141R. In December
2007, the FASB issued SFAS 141(revised 2007), “Business Combinations,” to
increase the relevance, representational faithfulness, and comparability of the
information a reporting entity provides in its financial reports about a
business combination and its effects. SFAS 141R replaces SFAS 141, “Business
Combinations” but, retains the fundamental requirements of SFAS 141 that the
acquisition method of accounting be used and an acquirer be identified for all
business combinations. SFAS 141R expands the definition of a business and of a
business combination and establishes how the acquirer is to: (1) recognize and
measure in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling 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. SFAS 141R is applicable to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, and is to
be applied prospectively. Early adoption is prohibited. SFAS 141R will impact
the Company if we elect to enter into a business combination subsequent to
December 31, 2008.
SFAS 160. In December 2007,
the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51,” to improve the relevance,
comparability, and transparency of the financial information a reporting entity
provides in its consolidated financial statements. SFAS 160 amends ARB 51 to
establish accounting and reporting standards for noncontrolling interests in
subsidiaries and to make certain consolidation procedures consistent with the
requirements of SFAS 141R. It defines a noncontrolling interest in a subsidiary
as an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS 160 changes the way the
consolidated income statement is presented by requiring consolidated net income
to include amounts attributable to the parent and the noncontrolling interest.
SFAS 160 establishes a single method of accounting for changes in a parent’s
ownership interest in a subsidiary which do not result in deconsolidation. SFAS
160 also requires expanded disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners of a subsidiary. SFAS 160 is effective for financial statements issued
for fiscal years beginning on or after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. SFAS 160 shall be
applied prospectively, with the exception of the presentation and disclosure
requirements which shall be applied retrospectively for all periods presented.
We do not believe that the adoption of SFAS 160 would have a material effect on
our consolidated financial position, results of operations and cash
flows.
-9-
3. Acquisition
of the Assets of Subaqueous Services, Inc.
On
February 29, 2008, Subaqueous Services, LLC (“SSLLC”), a newly-formed,
wholly-owned subsidiary of the Company concurrently 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.
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 preliminary
allocation of the purchase price to the assets acquired:
|
Property
and equipment
|
$ | 18,500 | ||
|
Intangible
assets
|
7,100 | |||
|
Goodwill
|
9,400 | |||
| $ | 35,000 |
The
Company’s condensed consolidated financial statements at March 31, 2008 include
results of SSLLC for the period since the acquisition. Pro-forma
information is presented below as if the asset purchase had occurred on January
1 of each reporting period:
|
Three
months ended March 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenue
|
$ | 55,369 | $ | 50,556 | ||||
|
Income
before taxes
|
$ | 3,622 | $ | 5,451 | ||||
|
Net
income
|
$ | 2,447 | $ | 3,433 | ||||
|
Earnings
per share:
|
||||||||
|
Basic
|
$ | 0.11 | $ | 0.18 | ||||
|
Diluted
|
$ | 0.11 | $ | 0.18 | ||||
4. Contracts
in Progress
Contracts
in progress are as follows at March 31, 2008 and December 31, 2007:
|
March 31,
2008
|
December
31,
2007
|
|||||||
|
Costs
incurred on uncompleted contracts
|
$ | 263,942 | $ | 379,268 | ||||
|
Estimated
earnings
|
84,362 | 131,437 | ||||||
| 348,304 | 510,705 | |||||||
|
Less:
Billings to date
|
(355,234 | ) | (510,437 | ) | ||||
| $ | (6,930 | ) | $ | 268 | ||||
|
Included
in the accompanying consolidated balance sheet under the following
captions:
|
||||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
$ | 4,187 | $ | 7,676 | ||||
|
Billings
in excess of costs and estimated earnings on uncompleted
contract
|
(11,117 | ) | (7,408 | ) | ||||
| $ | (6,930 | ) | $ | 268 | ||||
Contract
costs include all direct costs, such as materials 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.
-10-
5. Property
and Equipment
The
following is a summary of property and equipment at March 31, 2008 and December
31, 2007:
|
March 31,
2008
|
December
31,
2007
|
|||||||
|
Automobiles
and trucks
|
$ | 1,883 | $ | 1,807 | ||||
|
Building
and improvements
|
12,558 | 12,363 | ||||||
|
Construction
equipment
|
83,330 | 74,736 | ||||||
|
Dredges
and dredging equipment
|
37,301 | 24,189 | ||||||
|
Office
equipment
|
899 | 891 | ||||||
| 135,971 | 113,986 | |||||||
|
Less:
accumulated depreciation
|
(59,077 | ) | (56,223 | ) | ||||
|
Net
book value of depreciable assets
|
76,894 | 57,763 | ||||||
|
Construction
in progress
|
3,882 | 5,761 | ||||||
|
Land
|
5,222 | 5,222 | ||||||
| $ | 85,998 | $ | 68,746 | |||||
For the
three months ended March 31, 2008 and 2007, depreciation expense was
$3.4 million and $3.1 million, respectively. The assets of the
Company are pledged as collateral for debt obligations in the amount of
$35.0 million and $0 million at March 31, 2008 and December 31, 2007,
respectively. The debt obligations mature 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. Management believes the sale is probable within a
year. The asset was reclassified on the Company’s March 31, 2008
balance sheet and is recorded as a current asset held for sale. No
depreciation has been taken on the vessel in 2008.
6. Debt
and Line of Credit
The
Company has had 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.
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 March 31, 2008, the Company had outstanding letters of
credit of $692,000, thus reducing the balance available to the Company on the
revolving line of credit to approximately $7.8 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 May 1,
2008, no amounts had been drawn under the revolving line of credit.
As
referenced in Note 3 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
beginning March 31, 2008. Payments of principal commence December 31,
2008 in seven equal quarterly installments based on 2.5% of the balance
outstanding on September 30, 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 or LIBOR rate 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 March 31,
2008, interest on the Company’s outstanding loans was based on
LIBOR. The LIBOR interest rate at March 31, 2008 was
4.6%.
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 March 31,
2008, the Company was in compliance with all debt covenants.
-11-
7. Income
Taxes
The
Company’s effective tax rate is based on expected income, statutory tax rates
and tax planning opportunities available to it. For interim financial
reporting, the Company estimates its annual tax rate based on projected taxable
income for the full year and records a quarterly tax provision in accordance
with the anticipated annual rate. The effective rate for the three
months ended March 31, 2008 was 33.3% and differed from the Company’s statutory
rate primarily due to state income taxes, non-deductible stock based
compensation expense associated with employee incentive stock options and other
permanent differences. In the first quarter of 2008, the Company revised its
estimate of the impact of certain permanent deductions, among other factors,
available to it on its federal tax return, which reduced its effective rate for
the period. The effective rate of 37.0% for the three months ended
March 31, 2007 differed from the statutory rate principally due to state income
taxes.
|
Current
|
Deferred
|
Total
|
||||||||||
|
Three
months ended March 31, 2008:
|
||||||||||||
|
U.S. Federal
|
$ | 2,004 | $ | (866 | ) | $ | 1,138 | |||||
|
State
and local
|
219 | 65 | 284 | |||||||||
| $ | 2,223 | $ | (801 | ) | $ | 1,422 | ||||||
|
Three
months ended March 31, 2007:
|
||||||||||||
|
U.S. Federal
|
$ | 2,210 | $ | (436 | ) | $ | 1,774 | |||||
|
State
and local
|
157 | — | 157 | |||||||||
| $ | 2,367 | $ | (436 | ) | $ | 1,931 | ||||||
The
Company does not believe that its uncertain tax positions will significantly
change due to the settlement and expiration of statutes of limitations prior to
March 31, 2009.
8. 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 is based on the
weighted average number of common shares outstanding and the effect of all
dilutive common stock equivalents during each period. At March 31, 2008, 604,261
common stock equivalents 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 March 31, 2007.
The
following table reconciles the denominators used in the computations of both
basic and diluted earnings per share:
|
Three
months ended March 31
|
||||||||
|
2008
|
2007
|
|||||||
|
Basic:
|
||||||||
|
Weighted
average shares outstanding
|
21,565,324 | 16,730,942 | ||||||
|
Less
weighted average non-vested restricted stock
|
96,755 | 682,538 | ||||||
|
Total
basic weighted average shares outstanding
|
21,468,569 | 16,048,404 | ||||||
|
Diluted:
|
||||||||
|
Total
basic weighted average shares outstanding
|
21,468,569 | 16,048,404 | ||||||
|
Effect
of dilutive securities:
|
||||||||
|
Common
stock options
|
280,034 | -- | ||||||
|
Restricted
stock
|
96,603 | 120,433 | ||||||
|
Total
weighted average shares outstanding assuming dilution
|
21,845,207 | 16,168,837 | ||||||
9. 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. 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.
In March
2008, the Company granted options to purchase 15,000 shares of common
stock. The Company uses the Black-Scholes option pricing model to
estimate the fair value of stock-based awards. The awards granted in
March 2008 used the following assumptions:
|
Expected
life of options
|
6
years
|
|
Expected
volatility
|
36.7%
|
|
Risk-free
interest rate
|
2.92%
|
|
Dividend
yield
|
0.0%
|
|
Grant
date fair value
|
$5.35
|
For the
three months ended March 31, 2008 and 2007, compensation expense related to
stock options outstanding for the periods was $254,000 and $19,000,
respectively.
-12-
10. Commitments
and Contingencies
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.
We have
been 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 recent 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
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.
11.
Other Possible Contingencies
Recently the Company
learned of a federal criminal investigation that appears to relate 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 is 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.
12. 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 such 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 21,565,324 have been issued
and are outstanding. Common stockholders are entitled to vote and to
receive dividends if declared.
-13-
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Unless the
context otherwise indicates, all references in this quarterly report to “Orion,”
“the company,” “we,” “our,” or “us” are to Orion Marine Group, Inc. and its
subsidiaries taken as a whole.
Certain
information in this Quarterly Report on Form 10-Q, including but not limited to
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”), may constitute forward-looking statements as such term
is defined within the meaning of the “safe harbor” provisions of Section 27A of
the Securities Exchange Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended.
All
statements other than statements of historical facts, including those that
express a belief, expectation, or intention are forward-looking statements. The
forward-looking statements may include projections and estimates concerning the
timing and success of specific projects and our future production, revenues,
income and capital spending. Our forward-looking statements are generally
accompanied by words such as “estimate,” “project,” “predict,” “believe,”
“expect,” “anticipate,” “potential,” “plan,” “goal” or other words that convey
the uncertainty of future events or outcomes.
We have
based these forward-looking statements on our current expectations and
assumptions about future events. While our management considers these
expectations and assumptions to be reasonable, they are inherently subject to
significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control. These and other important factors, including
those described under “Risk Factors” in Item 1A of the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K) (beginning on
page 16 thereto) may cause our actual results, performance or achievements to
differ materially from any future results, performance or achievements expressed
or implied by these forward-looking statements. The forward-looking
statements in this quarterly report on Form 10-Q speak only as of the date of
this report; we disclaim any obligation to update these statements unless
required by securities law, and we caution you not to rely on them
unduly.
The
purpose of MD&A is to provide a narrative analysis explaining the reasons
for material changes in the Company’s (i) financial condition since the most
recent fiscal year-end, and (ii) results of operations during the current fiscal
year-to-date period and current fiscal quarter as compared to the corresponding
periods of the preceding fiscal year. In order to better understand
such changes, this MD&A should be read in conjunction with the Company’s
fiscal 2007 audited consolidated financial statements and notes thereto included
in its 2007 Form 10-K (beginning on page F1 thereto), Item 7 Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included in our 2007 Form 10-K (beginning on page 34 thereto) and with our
unaudited financial statements and related notes appearing elsewhere in this
quarterly report.
Overview
We are a
leading marine specialty contractor serving the heavy civil marine
infrastructure market. We provide a broad range of marine construction and
specialty services on, over and under the water along the Gulf Coast, the
Atlantic Seaboard and the Caribbean Basin. Our customers include federal, state
and municipal governments, the combination of which accounted for approximately
58% of our revenue in the three months ended March 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.
-14-
Recent
Developments As discussed in Note 3 in the Notes to Condensed
Consolidated Financial Statements included herein, the Company completed the
acquisition of substantially all of the assets of Subaqueous Services, Inc.
(“SSI”) on February 29, 2008. Recently we learned of a federal
criminal investigation that appears to relate 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 is 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.
Outlook Certain
economic indicators continue to suggest a weaker US economy, raising short-term
concerns regarding the stability of US domestic
spending. Notwithstanding such concerns, however, we continue to see
robust bidding activity in most of our end markets, including Department of
Transportation bridge work, U.S. Navy infrastructure projects, port development
projects, and private sector terminal projects. However, the US Corp of
Engineers continues to delay release of projects for bidding, which may affect
our competitive environment in the future. Moreover, a weak economy
generally results in reduced demand for construction in the private sector,
could divert governmental funding from projects we perform to other uses, and
may also produce less tax revenue, thereby decreasing funds for public sector
projects. However, we anticipate that such risks should be mitigated
by, among other factors, continued port expansion, emphasis on bridge and
causeway repair and replacement, and the diversity of our end markets, both by
type and geographic region. Looking beyond 2008, we remain encouraged
that the end markets we serve will continue to remain robust through sources
such as the Water Resources and Development Act, which was passed last year,
domestic military bid opportunities, and other infrastructure
spending.
Consolidated
Results of Operations
Three
months ended March 31, 2008 compared with three months ended March 31,
2007
|
Three
months ended March 31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Contract
revenues
|
$ | 52,591 | 100.0 | % | $ | 38,293 | 100.0 | % | ||||||||
|
Cost
of contract revenues
|
42,519 | 80.8 | 28,768 | 75.1 | ||||||||||||
|
Gross
profit
|
10,072 | 19.2 | 9,525 | 24.9 | ||||||||||||
|
Selling,
general and administrative expenses
|
5,827 | 11.1 | 4,128 | 10.8 | ||||||||||||
|
Operating
income
|
4,245 | 8.1 | 5,397 | 14.1 | ||||||||||||
|
Interest
(income) expense
|
||||||||||||||||
|
Interest
(income)
|
(149 | ) | (0.2 | ) | (266 | ) | (0.7 | ) | ||||||||
|
Interest
expense
|
126 | 0.2 | 446 | 1.2 | ||||||||||||
|
Interest
(income) expense, net
|
(23 | ) | — | 180 | 0.5 | |||||||||||
|
Income
before income taxes
|
4,268 | 8.1 | 5,217 | 13.6 | ||||||||||||
|
Income
tax expense
|
1,422 | 2.7 | 1,931 | 5.0 | ||||||||||||
|
Net
income
|
$ | 2,846 | 5.4 | % | $ | 3,286 | 8.6 | % | ||||||||
-15-
Contract
Revenues. Revenues for the three months ended March 31, 2008 increased
approximately 37.3% as compared with the same period last
year. Revenues are driven by the progress schedules and the size,
composition and scope of projects under contract at any given
time. In the first quarter last year, we experienced delays beyond
our control in the start-up of several contracts, and we elected to withdraw
from sole source negotiations on a project scheduled to begin in early 2007;
these factors were reflected in lower revenues in that
period. Revenues for the first three months of 2008 included
one month of operations of Subaqueous Services, LLC, (“SSLLC”) which acquired
the assets of SSI on February 29, 2008, and generated approximately $1.5 million
in the month of March from contracts acquired in the asset
purchase. We worked on projects, among
others, encompassing bridge and causeway replacement, dock
construction and waterfront improvements and shoreline and beach restoration and
improvements.
Gross Profit.
Gross profit increased approximately $0.5 million, or 5.7%,
in the first quarter of 2008 as compared with the corresponding period last
year. The increase in gross profit was due mostly to the increased
revenues. Gross margin for the three months ended March 31, 2008 was
19.2%, a decrease from 24.9% in the prior year. In the current year
period, costs related to material purchases totaled 25.3% of total costs
compared with 18.0% of total costs for the same period last year; due primarily
to the nature and mix of contracts in progress. In addition, we had
higher depreciation expense related to the assets acquired from SSI and we
utilized certain cost contingencies on some contracts. We
self-performed approximately 89% of our work in the current period, essentially
equal to self-performance in the same period last year.
Selling, General
and Administrative Expense. Selling, general and administrative expenses
increased $1.7 million in the three months ended March 31, 2008 as compared
with the prior year period. The increase was due to amortization
expense related to intangible assets acquired from SSI, a full complement of
public company expenses and increases in salaries, benefits and stock-based
compensation due to the addition of personnel and grants under our long-term
incentive programs.
Income Tax
Expense Our effective rate for the three months ended March
31, 2008 was 33.3% and differed from the Company’s statutory rate of 35%
primarily due to state income taxes, non-deductible stock based compensation
expense associated with employee incentive stock options and other permanent
differences. In the first quarter of 2008, the Company revised its estimate of
the impact of certain permanent deductions available to it on its federal tax
return, which reduced its effective rate for the period. The
effective rate of 37.0% for the three months ended March 31, 2007 differed from
the statutory rate principally due to state income taxes.
Liquidity
and Capital Resources
Our
primary liquidity needs are to maximize our working capital to continually
improve our bonding position, invest in capital expenditures, expand internally,
and pursue strategic acquisitions. Historically, our source of liquidity has
been cash provided by our operating activities and borrowings under our credit
facility. At December 31, 2007, we had paid our debt facility in full and we had
available cash of $12.6 million. On February 29, 2008, we borrowed
$35 million to fund the purchase of the assets of SSI and at March 31, 2008, our
net indebtedness, which is comprised of total debt less cash was $19.3
million. We expect to meet our future internal liquidity and working
capital needs from funds generated by our operating activities for the next 12
months.
Our
working capital position fluctuates from period to period due to normal
increases and decreases in operational activity. At March 31, 2008, our working
capital was $35.1 million compared to $32.5 million at December 31,
2007. The increase of $2.6 million in working capital was primarily due to
an improved cash position and increases in assets related to insurance renewals,
offset by increases in liabilities related to billings in excess of costs and
estimated earnings on uncompleted contracts. As of March 31, 2008, we
had cash on hand and availability under our revolving credit facility of
$23.5 million.
-16-
The
following table provides information regarding our cash flows and capital
expenditures for the three months ended March 31, 2008 and 2007
(unaudited):
|
Three
months ended March 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows provided by operating activities
|
$ | 8,812 | $ | 2,851 | ||||
|
Cash
flows used in investing activities
|
$ | (40,610 | ) | $ | (1,688 | ) | ||
|
Cash
flows provided by (used in) financing activities
|
$ | 34,920 | $ | (1,576 | ) | |||
Operating
Activities. During the three months ended March 31, 2008, our operating
activities provided $8.8 million of cash as compared to $2.9 million
for the three months ended March 31, 2007. Contributing to the increase between
comparable periods was an increase of $5.9 million within working capital
components, related to the timing of cash receipts and payments. In
addition, we had increases in non-cash items affecting net income, such as
depreciation and amortization expense associated with the equipment and
intangible assets acquired from SSI, and an increase in non-cash stock-based
compensation related to grants of options during 2007.
Investing
Activities. On February 29, 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. We purchased heavy
construction equipment not related to SSI totaling approximately $4.0 million,
in the three months ended March 31, 2008, as compared with capital asset
additions of $1.8 million in the three months ended March 31, 2007.
Financing
Activities. The increase in cash provided by financing activities for the
three months ended March 31, 2008 is attributable to our borrowing of $35
million under of line of credit to fund the assets purchased from
SSI. In the prior year period, we paid down our principal balances on
our debt facility in the amount of $1.5 million.
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 had 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.
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 March 31, 2008, the Company had outstanding letters of
credit of $692,000, thus reducing the balance available to the Company on the
revolving line of credit to approximately $7.8 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 March
31, 2008 and May 1, 2008, no amounts had been drawn under the revolving line of
credit.
As
referenced in Note 3 in the Notes to Condensed 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 beginning March 31,
2008. Payments of principal commence December 31, 2008 in seven equal
quarterly installments based on 2.5% of the balance outstanding on September 30,
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 or LIBOR rate 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 March 31,
2008, interest on the Company’s outstanding loans was based on
LIBOR. The LIBOR interest rate at March 31, 2008 was
4.6%.
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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 March 31,
2008, the Company was in compliance with all debt covenants.
Bonding
Capacity
We are
generally required to provide various types of surety bonds that provide
additional security to our customers for our performance under certain
government and private sector contracts. Our ability to obtain surety
bonds depends on our capitalization, working capital, past performance and
external factors, including the capacity of the overall surety
market. At March 31, 2008, we believe our capacity under our current
bonding arrangement with Liberty Mutual was in excess of $250 million, of which
we had approximately $100 million in surety bonds outstanding. During
the quarter ended March 31, 2008, approximately 58% of projects, measured by
revenue, required us to post a bond.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
Management
is actively involved in monitoring exposure to market risk and continues to
develop and utilize appropriate risk management techniques. Our exposure to
significant market risks includes outstanding borrowings under our floating rate
credit agreement and fluctuations in commodity prices for concrete, steel
products and fuel. An increase in interest rates of 1% would not have increased
interest expense significantly for the three months ended March 31,
2008. 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.
As of
March 31, 2008, there was $35.0 million outstanding under our credit
agreement and there were no borrowings outstanding under our revolving credit
facility; however, there were letters of credit issued in the amount of $692,000
which lower the amount available to us on the revolving facility to
approximately $7.8 million.
Item
4. Controls and Procedures
|
(a)
|
Evaluation of Disclosure
Controls and Procedures. As required, the Company’s
management, with the participation of its Chief Executive Officer and
Chief Financial Officer, have conducted an evaluation of the effectiveness
of disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this quarterly
report. Based on that evaluation, such officers have concluded
that the disclosure controls and procedures are
effective.
|
|
(b)
|
Changes in Internal
Controls. There have been no changes in our internal
controls over financial reporting during the period covered by this report
that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial
reporting.
|
-18-
PART
II – Other Information
Item
1. Legal Proceedings
For
information about litigation involving us, see Note 10 to the condensed
consolidated financial statements in Part I of this report, which we incorporate
by reference into this Item 1.
Item
1A. Risk Factors
There
have been no material changes to the risk factors previously disclosed in our
2007 Form 10-K
Item
6. Exhibits
| 10.1.1* | First Amendment to Loan Agreement dated February 29, 2008 among the Cmopany, the lenders party thereto and Amegy National Association, a national banking association, as agent |
|
31.1*
|
Certification
of the Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2*
|
Certification
of the Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32*
|
Certification
of the Chief Executive Officer and the Chief Financial Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
*filed herewith
-19-
Pursuant
to the requirements 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.
|
|
|
By:
|
/s/
J. Michael Pearson
|
|
May
8, 2008
|
J.
Michael Pearson
|
|
President
and Chief Executive Officer
|
|
|
By:
|
/s/
Mark R. Stauffer
|
|
May
8, 2008
|
Mark
R. Stauffer
|
|
Executive
Vice President and Chief Financial
Officer
|
-20-