Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in thousands, Except for Share and per Share Amounts)
(Unaudited)
1.
Description of Business and Basis of Presentation
Description of Business
Orion Group Holdings, Inc., its subsidiaries and affiliates (hereafter collectively referred to as the "Company"), provide a broad range of specialty construction and services in the infrastructure, industrial, and building sectors of the continental United States, Alaska, Canada and the Caribbean Basin. The Company’s marine construction segment service the infrastructure sector through its services which include marine transportation facility construction, marine pipeline construction, marine environmental structures, dredging of waterways, channels and ports, environmental dredging, design, and specialty services. Its concrete construction segment services the building sector by providing turnkey concrete construction services including pour and finish, dirt work, layout, forming, rebar, and mesh across the light commercial structural and other associated business areas. The Company is headquartered in Houston, Texas with offices throughout its operating areas.
The tools used by the chief operating decision maker to allocate resources and assess performance are based on
two
reportable and operating segments: marine construction (formerly heavy civil marine construction), which operates under the Orion Marine Group brand and logo, and concrete construction (formerly commercial concrete construction), which operates under the TAS Commercial Concrete brand and logo.
Although we describe the business in this report in terms of the services the Company provides, the base of customers and the areas in which it operates, the Company has determined that its operations currently comprise
two
reportable segments pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 - Segment Reporting.
In making this determination, the Company considered the similar economic characteristics of its operations. For the marine construction segment, the methods used, and the internal processes employed, to deliver marine construction services are similar throughout the segment, including standardized estimating, project controls and project management. This segment has the same customers with similar funding drivers, and it complies with regulatory environments driven through Federal agencies such as the U.S. Army Corps of Engineers, U.S. Fish and Wildlife Service, U.S. Environmental Protection Agency ("EPA") and the U.S. Occupational Safety and Health Administration ("OSHA"), among others. Additionally, the segment is driven by macro-economic considerations including the level of import/export seaborne transportation, development of energy related infrastructure, cruise line expansion and operations, marine bridge infrastructure development, waterway pipeline crossings and the maintenance of waterways. These considerations, and others, are key catalysts for future prospects and are similar across the segment.
For the concrete construction segment, the Company also considered the similar economic characteristics of these operations. The methods used, and the internal processes employed, to deliver concrete construction services are similar throughout the segment, including standardized estimating, project controls and project management. This segment complies with regulatory environments such as OSHA. Additionally, this segment is driven by macro-economic considerations, including movements in population, commercial real estate development, institutional funding and expansion, and recreational development, specifically in metropolitan areas of Texas. These considerations, and others, are key catalysts for future prospects and are similar across the segment.
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 ("U.S. GAAP") 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, 2016
(“
2016
Form 10-K”) as well as Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations
also included in our
2016
Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments considered necessary for a fair presentation 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
six
months ended
June 30, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
.
2. Summary of Significant Accounting Principles
The preparation of consolidated financial statements in conformity with U.S. 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. Management's estimates, judgments and assumptions are continually evaluated based on available information and experience; however, actual amounts could differ from those estimates. Please refer to Note 2 of the Notes to Consolidated Financial Statements included in our
2016
Form 10-K for a discussion of other significant estimates and assumptions affecting our condensed consolidated financial statements which are not discussed below.
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:
|
|
|
|
•
|
Revenue recognition from construction contracts;
|
|
|
|
|
•
|
Allowance for doubtful accounts;
|
|
|
|
|
•
|
Assessing of goodwill and other long-lived assets for indicators of impairment;
|
|
|
|
|
•
|
Stock-based compensation.
|
Revenue Recognition
For financial statement purposes, the Company records revenue on construction contracts using the percentage-of-completion method, measured by the percentage of actual 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. Contract revenue is derived from the original contract price adjusted for agreed upon change orders. Contract costs include all direct costs, such as material and labor, and those indirect costs incurred that are related to contract performance such as payroll taxes and insurance. General and administrative costs are charged to expense as incurred. Incentive fees, if available, are billed to the customer based on the terms and conditions of the contract. Pending claims are recognized as an increase in contract revenue 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. The Company records revenue and the unbilled receivable for project claims to the extent of costs incurred and to the extent management believes related collection is probable and includes no profit on claims recorded. Through the second quarter of 2017, in accordance with ASC 605-35-25-30, the Company has recognized a claim of approximately
$0.5 million
with a customer. Additionally, during 2016, the Company recognized claims of approximately
$12.3 million
with customers. The Company believes collection of these claims are probable, although the full amount of the recorded claims may not be recognized. 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, without regard to the percentage of completion. 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, 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 less than one year. Historically, the Company has not had cause to combine or segment 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 and 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. The Company has not historically sustained losses on its cash balances in excess of federally insured limits. Cash equivalents at
June 30, 2017
and
December 31, 2016
consisted primarily of overnight bank deposits.
Risk Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk principally consist of 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, a portion of the Company’s operations is dependent upon 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.
Accounts Receivable
Accounts receivable are stated at the historical carrying value, less allowances for doubtful accounts. The Company has significant investments in billed and unbilled receivables. Billed receivables represent amounts billed upon the completion of small contracts and progress billings on large contracts in accordance with contract terms and milestone achievements. Unbilled receivables on contracts, which are included in costs in excess of billings, arise as revenues are recognized under the percentage-of-completion method. Unbilled amounts on contracts represent recoverable costs and accrued profits not yet billed. Revenue associated with these billings is recorded net of any sales tax, if applicable. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. 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. As of
June 30, 2017
and
December 31, 2016
, the Company had not recorded an allowance for doubtful accounts.
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. Retainage at
June 30, 2017
totaled
$32.5 million
, of which
$8.5 million
is expected to be collected beyond June 30, 2018. Retainage at
December 31, 2016
totaled
$40.2 million
.
The Company negotiates change orders and claims with its customers. Unsuccessful negotiations of claims could result in a change to contract revenue that is less than amounts recorded, which could result in the recording of a loss. Successful claims negotiations could result in the recovery of previously recorded losses. Significant losses on receivables could adversely affect the Company’s financial position, results of operations and overall liquidity.
Advertising Costs
The Company primarily obtains contracts through an open bid process, and therefore advertising costs are not a significant component of expense. Advertising costs are expensed as incurred.
Environmental Costs
Costs related to environmental remediation are charged to expense. Other environmental costs are also charged to expense unless they increase the value of the property and/or provide future economic benefits, in which event the costs are capitalized. Environmental liabilities, if any, are recognized when the expenditure is considered probable and the amount can be reasonably estimated.
Fair Value Measurements
The Company evaluates and presents certain amounts included in the accompanying condensed consolidated financial statements at “fair value” in accordance with U.S. GAAP, which requires the Company to base its estimates on assumptions that market participants, in an orderly transaction, would use to price an asset or liability, and to establish a hierarchy that prioritizes the information used to determine fair value. Refer to
Note 8
for more information regarding fair value determination.
The Company generally applies fair value valuation techniques on a non-recurring basis associated with (1) valuing assets and liabilities acquired in connection with business combinations and other transactions; (2) valuing potential impairment loss related to long-lived assets; and (3) valuing potential impairment loss related to goodwill and indefinite-lived intangible assets.
Inventory
Current inventory consists of parts and small equipment held for use in the ordinary course of business and is valued at the lower of cost (using historical average cost) or net realizable value. Where shipping and handling costs are incurred by the Company, these charges are included in inventory and charged to cost of contract revenue upon use. Non-current inventory consists of spare parts (including engines, cutters and gears) that require special order or long-lead times for manufacture or fabrication, but must be kept on hand to reduce equipment downtime.
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.
When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in results of operations for the respective period. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets for financial statement purposes, as follows:
|
|
|
|
|
|
Automobiles and trucks
|
3 to 5 years
|
|
Buildings and improvements
|
5 to 30 years
|
|
Construction equipment
|
3 to 15 years
|
|
Vessels and other equipment
|
1 to 15 years
|
|
Office equipment
|
1 to 5 years
|
The Company generally uses accelerated depreciation methods for tax purposes where appropriate.
Dry-docking costs are capitalized and amortized on the straight-line method over a period ranging from
three
to
15
years. Dry-docking costs 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 costs 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.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group 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. Assets held for sale at
June 30, 2017
and
December 31, 2016
are expected to be disposed of within one year.
Goodwill and Other Intangible Assets
Goodwill
The Company has acquired businesses and assets in purchase transactions that resulted in the recognition of goodwill. Goodwill represents the costs in excess of fair values assigned to the identifiable assets acquired and liabilities assumed in the acquisition. In accordance with U.S. GAAP, acquired goodwill is not amortized, but is subject to impairment testing at least annually or more frequently if events or circumstances indicate that the asset more likely than not may be impaired. The Company determined that its operations comprise
two
reporting units for goodwill impairment testing, which match its
two
operating segments for financial reporting.
The Company assesses the fair value of its reporting units based on a weighted average of valuations based on market multiples, discounted cash flows, and consideration of its market capitalization. The key assumptions used in the discounted cash flow valuations are discount rates, weighted average cost of capital and perpetual growth rates applied to cash flow projections. Also, inherent in the discounted cash flow valuation models are past performance, projections and assumptions in current operating plans, and revenue growth rates over the next five years. These assumptions contemplate business, market and overall economic conditions. Other considerations are assumptions that market participants may use an analysis of comparable companies. The underlying assumptions used for determining fair value, as discussed above, require significant judgment and are susceptible to change from period to period and could potentially cause a material impact to the income statement. In the future, the Company's estimated fair value could be negatively impacted by extended declines in stock price, changes in macroeconomic indicators, sustained operating losses, and other factors which may affect of assessment of fair value.
See
Note 9
for additional discussion of our goodwill and related goodwill impairment testing.
Intangible Assets
Intangible assets that have finite lives are amortized. In addition, the Company evaluates the remaining useful life of intangible assets 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. Intangible assets that have indefinite lives are not amortized, but are subject to impairment testing at least annually or more frequently if events or circumstances indicate that the asset more likely than not may be impaired.
The Company has one indefinite-lived intangible asset, a trade name, which is tested for impairment annually on October 31, or whenever events or circumstances indicate that the carrying amount of the trade name may not be recoverable. Impairment is calculated as the excess of the trade name's carrying value over its fair value. The fair value of the trade name is determined using the relief from royalty method, a variation of the income approach. This method assumes that if a company owns intellectual property, it does not have to "rent" the asset and is, therefore, "relieved" from paying a royalty. Once a supportable royalty rate is determined, the rate is then applied to the projected revenues over the expected remaining life of the intangible assets to estimate the royalty savings. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates, discount rates and other variables.
See
Note 9
for additional discussion of our intangible assets and trade name impairment testing.
Stock-Based Compensation
The Company recognizes 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 Black-Scholes model requires the use of highly subjective assumptions in the computation. Changes in these assumptions can cause significant fluctuations in the fair value of the option award. The fair value of restricted stock grants is equivalent to the fair value of the stock issued on the date of grant, and is measured as the mean price of the stock 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 and this assessment is updated on a periodic basis. See
Note 14
for further discussion of the Company’s stock-based compensation plan.
Income Taxes
The Company determines its consolidated income tax provision using the asset and liability method prescribed by U.S. GAAP, 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 as income in the period that includes the enactment date.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740-10 which prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, on its consolidated tax return. The Company evaluates and records any uncertain tax positions based on the amount that management deems is more likely than not to be sustained upon examination and ultimate settlement with the tax authorities in the tax jurisdictions in which it operates.
Insurance Coverage
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 or deductibles. A portion of the Company's workers’ compensation exposure is covered through a mutual association, which is subject to supplemental calls.
The marine construction segment maintains
five
levels of excess loss insurance coverage, totaling
$200.0 million
in excess of primary coverage. The marine construction segment's excess loss coverage responds to most of its policies when a primary limit of
$1.0 million
has been exhausted; provided that the primary limit for Contingent Maritime Employer’s Liability is
$10.0 million
and the Watercraft Pollution Policy primary limit is
$5.0 million
. The concrete construction segment maintains
five
levels of excess loss insurance coverage, totaling
$200.0 million
in excess of primary coverage which excess loss coverage responds to most of its policies when a primary limit of
$1.0 million
has been exhausted.
If a claim arises and a potential insurance recovery is probable the impending gain is recognized separately from the related loss. The recovery will only be recognized up to the amount of the loss once the recovery of the claim is deemed probable and any excess gain will fall under contingency accounting and will only be recognized once it is realized. The Company does not net insurance recoveries against the related claim liability as the amount of the claim liability is determined without consideration of the anticipated insurance recoveries from third parties.
Separately, the Company’s marine construction segment employee health care is provided through a trust administered by a third party. Funding of the trust is 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 known facts, historical trends and industry averages to determine the best estimate of the ultimate expected loss. Actual claims may vary from estimates. Any adjustments to such reserves are included in the consolidated results of operations in the period in which they become known. The Company's concrete construction segment employee health care is provided through
two
policies. A fully funded policy is offered primarily to salaried employees and their dependents while a partially self-funded plan with an appropriate stop-loss is offered primarily to hourly employees and their dependents. The self-funded plan is funded to the maximum exposure and, as a result, is expected to receive a partial refund after the policy expiration.
The accrued liability for insurance includes incurred but not reported claims of
$5.5 million
and
$5.2 million
at
June 30, 2017
and
December 31, 2016
, respectively.
Recent Accounting Pronouncements
The FASB issues accounting standards and updates (each, an "ASU") from time to time to its Accounting Standards Codification, which is the primary source of U.S. GAAP. The Company regularly monitors ASUs as they are issued and considers applicability to its business. All ASUs are adopted by their respective due dates and in the manner prescribed by the FASB. The following are those recently issued ASUs most likely to affect the presentation of the Company's condensed consolidated financial statements:
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment.
The FASB issued this update to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The amendments in this update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds
its fair value. The guidance should be applied on a prospective basis and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted and the Company does not anticipate that the changes will materially impact the financial statements unless a goodwill impairment is recognized in the future.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
The Board issued this update to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company anticipates the most significant of the amendments to our organization to be the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard the Company will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods. In early 2017, the Company established a steering committee to analyze the potential impact of the new standard and identify potential differences that will result from adopting the standard. The Company is currently assessing the effects of adoption on the Company's financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. This comprehensive new revenue recognition standard will supersede existing revenue guidance under U. S. GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company currently anticipates adopting the standard using the cumulative catch-up transition method which will involve recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous years.
The Company established a steering committee consisting of representatives from various business segments within the organization. The purpose of this committee is to analyze the impact of the new standard on the Company's business by reviewing the current revenue practices to identify potential differences that would result from applying the requirements of the new standard to revenue contracts. In addition, the Company is analyzing the possibility of any necessary changes to current business processes, systems and controls to support recognition and disclosure under the new standard.
The effective date of this guidance was deferred through the issuance of ASU 2015-14 and is effective for the Company beginning January 1, 2018. The impact of adopting the new standard is not expected to materially impact revenue, net income or the consolidated balance sheet. The Company expects the largest impact from the new standard to be on performance obligations within the contracts and the timing of revenue being recognized. The Company continues to evaluate all areas of the standard and its effect on the Company’s financial statements.
During the periods presented in these financial statements, the Company implemented other new accounting pronouncements other than those noted above that are discussed in the notes where applicable.
3. Business Acquisition
On April 9, 2017, T.A.S. Commercial Concrete Construction, LLC, a wholly owned subsidiary of Orion Group Holdings, Inc. ("the Company") entered into a Stock Purchase Agreement ("the Agreement") for the purchase of all the issued and outstanding shares (the "shares") of Tony Bagliore Concrete, Inc., a Texas corporation ("TBC"). The Company and the two sole shareholders of TBC closed the purchase transactions on April 10, 2017 (the "Closing Date"). Upon the terms of and subject to the conditions set forth in the Agreement, the total aggregate consideration paid on the Closing Date by the Company to the Sellers for the shares was
$6 million
in cash. In addition however, if certain target considerations are met in future periods, up to an additional cash payment of
$2 million
will become payable to the Seller.
The allocation of the estimated acquisition consideration is preliminary because initial accounting for this business combination is incomplete. The preliminary allocation is based on estimates, assumptions, valuations, and other studies which have not progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the acquisition consideration allocation unaudited purchase accounting adjustments will remain preliminary until the Company determines the final acquisition consideration allocation. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the combined consolidated financial statements.
The purpose of the acquisition was primarily to achieve growth by expanding the Company's current service offerings in addition to expansion into new markets. The tangible assets acquired include accounts receivable, retainage and fixed assets.
Under the acquisition method of accounting, the total acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of TBC based on their estimated fair values as of the closing of the acquisition. The table below outlines the total actual acquisition consideration allocated to the fair values of TBC’s tangible and intangible assets and liabilities as of April 9, 2017:
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
3,239
|
|
|
Retainage
|
1,860
|
|
|
Fixed assets, net
|
2,098
|
|
|
Other
|
9
|
|
|
Goodwill
|
2,562
|
|
|
Other intangible assets
|
878
|
|
|
Accounts payable
|
(2,017
|
)
|
|
Accrued expenses and other current liabilities
|
(1,080
|
)
|
|
Contingent consideration
|
(456
|
)
|
|
Deferred tax liability
|
(1,093
|
)
|
|
Total Acquisition Consideration at April 9, 2017
|
$
|
6,000
|
|
The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed was allocated to goodwill. The goodwill of
$2.6 million
arising from the acquisition consists primarily of synergies and business opportunities expected to be realized from the purchase of the Company. The goodwill is not deductible for income tax purposes.
Finite-lived intangible assets include customer relationships and contractual backlog. (See
Note 9
).
The fixed assets acquired include construction equipment and automobiles and trucks and will be depreciated in accordance with Company policy, generally
3
to
15
years.
As stated in the Agreement, the Company has agreed to pay the sellers an earn-out of up to
$2.0 million
in cash, if earned, as additional purchase consideration. The seller's right to receive the contingent consideration, if any, shall be based on the Company's achievement of certain future financial targets. The Company measured the fair value of the contingent consideration at the Acquisition Date, and determined that fair value to be approximately
$0.5 million
, as shown above. This amount of contingent liability is classified on the Condensed Consolidated Balance Sheets as other long-term liabilities.
Pro Forma Results (unaudited)
The results and operations of TBC have been included in the Consolidated Statements of Operations since the acquisition date of April 9, 2017. The Company has calculated the pro forma impact of the acquisition of TBC on its operating results for the six months ended
June 30, 2017
and
2016
, respectively.
The Company derived the pro forma results of the acquisition based upon historical financial information obtained from the seller and certain management assumptions. The pro forma adjustments related to incremental amortization expense associated with the acquired finite-lived intangible assets and interest expense on borrowings extinguished by the Company during the purchase, assuming a January 1, 2017 and 2016 effective transaction date. In addition, the tax impact of these adjustments was calculated at a
35%
statutory rate.
These pro forma results are not necessarily indicative of the results that would have been obtained had the acquisition of TBC been completed on January 1 of the respective period, or that may be obtained in the future.
Unaudited Pro Forma Combined Condensed Consolidated Statements of Operations
For the Six Month Period Ended June 30, 2017
(in thousands except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orion Group Holdings
|
TBC (through April 9)
|
Combined Historical
|
Pro Forma Adjustments
|
Combined Pro Forma
|
|
Contract revenues
|
$
|
276,177
|
|
$
|
5,507
|
|
$
|
281,684
|
|
$
|
—
|
|
$
|
281,684
|
|
|
Costs of contract revenues
|
247,795
|
|
5,325
|
|
253,120
|
|
—
|
|
253,120
|
|
|
Gross profit
|
28,382
|
|
182
|
|
28,564
|
|
—
|
|
28,564
|
|
|
Selling, general and administrative expenses
|
32,507
|
|
598
|
|
33,105
|
|
146
|
|
33,251
|
|
|
(Gain) loss on sale of assets, net
|
(177
|
)
|
—
|
|
(177
|
)
|
—
|
|
(177
|
)
|
|
Operating loss from operations
|
(3,948
|
)
|
(416
|
)
|
(4,364
|
)
|
(146
|
)
|
(4,510
|
)
|
|
Other (expense) income
|
|
|
|
|
|
|
|
Other income
|
21
|
|
3
|
|
24
|
|
—
|
|
24
|
|
|
Interest income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Interest expense
|
(2,817
|
)
|
(10
|
)
|
(2,827
|
)
|
10
|
|
(2,817
|
)
|
|
Other expense, net
|
(2,796
|
)
|
(7
|
)
|
(2,803
|
)
|
10
|
|
(2,793
|
)
|
|
Loss before income taxes
|
(6,744
|
)
|
(423
|
)
|
(7,167
|
)
|
(136
|
)
|
(7,303
|
)
|
|
Income tax benefit
|
(2,643
|
)
|
—
|
|
(2,643
|
)
|
(196
|
)
|
(2,839
|
)
|
|
Net loss
|
$
|
(4,101
|
)
|
$
|
(423
|
)
|
$
|
(4,524
|
)
|
$
|
60
|
|
$
|
(4,464
|
)
|
|
|
|
|
|
|
|
|
Basic loss per share
|
$
|
(0.15
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.16
|
)
|
|
Diluted loss per share
|
$
|
(0.15
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.16
|
)
|
|
Shares used to compute loss per share
|
|
|
|
|
|
|
|
Basic
|
27,867,090
|
|
|
27,867,090
|
|
|
27,867,090
|
|
|
Diluted
|
27,867,090
|
|
|
27,867,090
|
|
|
27,867,090
|
|
Unaudited Pro Forma Combined Condensed Consolidated Statements of Operations
For the Six Month Period Ended June 30, 2016
(in thousands except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orion Group Holdings
|
TBC
|
Combined Historical
|
Pro Forma Adjustments
|
Combined Pro Forma
|
|
Contract revenues
|
$
|
269,924
|
|
$
|
17,076
|
|
$
|
287,000
|
|
$
|
—
|
|
$
|
287,000
|
|
|
Costs of contract revenues
|
238,267
|
|
15,754
|
|
254,021
|
|
—
|
|
254,021
|
|
|
Gross profit
|
31,657
|
|
1,322
|
|
32,979
|
|
—
|
|
32,979
|
|
|
Selling, general and administrative expenses
|
32,437
|
|
525
|
|
32,962
|
|
146
|
|
33,108
|
|
|
(Gain) loss on sale of assets, net
|
(606
|
)
|
—
|
|
(606
|
)
|
—
|
|
(606
|
)
|
|
Operating loss from operations
|
(174
|
)
|
797
|
|
623
|
|
(146
|
)
|
477
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
Other income
|
22
|
|
—
|
|
22
|
|
—
|
|
22
|
|
|
Interest income
|
1
|
|
—
|
|
1
|
|
—
|
|
1
|
|
|
Interest expense
|
(3,117
|
)
|
(18
|
)
|
(3,135
|
)
|
18
|
|
(3,117
|
)
|
|
Other expense, net
|
(3,094
|
)
|
(18
|
)
|
(3,112
|
)
|
18
|
|
(3,094
|
)
|
|
Loss before income taxes
|
(3,268
|
)
|
779
|
|
(2,489
|
)
|
(128
|
)
|
(2,617
|
)
|
|
Income tax benefit
|
(1,252
|
)
|
—
|
|
(1,252
|
)
|
228
|
|
(1,024
|
)
|
|
Net loss
|
$
|
(2,016
|
)
|
$
|
779
|
|
$
|
(1,237
|
)
|
$
|
(356
|
)
|
$
|
(1,593
|
)
|
|
|
|
|
|
|
|
|
Basic loss per share
|
$
|
(0.07
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
Diluted loss per share
|
$
|
(0.07
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
Shares used to compute loss per share
|
|
|
|
|
|
|
|
Basic
|
27,383,748
|
|
|
27,383,748
|
|
|
27,383,748
|
|
|
Diluted
|
27,383,748
|
|
|
27,383,748
|
|
|
27,383,748
|
|
4. Concentration of Risk and Enterprise Wide Disclosures
Accounts receivable include amounts billed to governmental agencies and private customers and do not bear interest. Balances billed to customers but not paid pursuant to retainage provisions generally become payable upon contract completion and acceptance by the owner. The table below presents the concentrations of current receivables (trade and retainage) at
June 30, 2017
and
December 31, 2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Federal Government
|
$
|
5,996
|
|
5
|
%
|
|
$
|
5,542
|
|
4
|
%
|
|
State Governments
|
4,314
|
|
4
|
%
|
|
9,302
|
|
7
|
%
|
|
Local Governments
|
20,183
|
|
17
|
%
|
|
20,886
|
|
16
|
%
|
|
Private Companies
|
89,608
|
|
74
|
%
|
|
96,673
|
|
73
|
%
|
|
Total receivables
|
$
|
120,101
|
|
100
|
%
|
|
$
|
132,403
|
|
100
|
%
|
At
June 30, 2017
and
December 31, 2016
no single customer accounted for more than
10%
of total current receivables.
Additionally, the table below represents concentrations of contract revenue by type of customer for the
three and six
months ended
June 30, 2017
and
2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
Federal
|
$
|
18,360
|
|
|
13
|
%
|
|
$
|
7,776
|
|
|
6
|
%
|
|
$
|
38,092
|
|
|
14
|
%
|
|
$
|
11,932
|
|
|
4
|
%
|
|
State
|
12,706
|
|
|
9
|
%
|
|
10,462
|
|
|
7
|
%
|
|
24,726
|
|
|
9
|
%
|
|
15,829
|
|
|
6
|
%
|
|
Local
|
20,731
|
|
|
15
|
%
|
|
22,470
|
|
|
16
|
%
|
|
44,556
|
|
|
16
|
%
|
|
42,147
|
|
|
16
|
%
|
|
Private
|
85,623
|
|
|
63
|
%
|
|
99,593
|
|
|
71
|
%
|
|
168,803
|
|
|
61
|
%
|
|
200,016
|
|
|
74
|
%
|
|
Total contract revenues
|
$
|
137,420
|
|
|
100
|
%
|
|
$
|
140,301
|
|
|
100
|
%
|
|
$
|
276,177
|
|
|
100
|
%
|
|
$
|
269,924
|
|
|
100
|
%
|
In the
three and six
months ended
June 30, 2017
and
2016
, no single customer generated more than
10%
of total contract revenues.
The Company does not believe that the loss of any one of its customers would have a material adverse effect on the Company or its subsidiaries and affiliates since no single specific customer sustains such a large portion of receivables or contract revenue over time.
In addition, the concrete construction segment primarily purchases concrete from select suppliers. The loss of one of these suppliers could adversely impact short-term operations.
5. Contracts in Progress
Contracts in progress are as follows at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Costs incurred on uncompleted contracts
|
$
|
871,900
|
|
|
$
|
802,140
|
|
|
Estimated earnings
|
140,465
|
|
|
143,975
|
|
|
|
1,012,365
|
|
|
946,115
|
|
|
Less: Billings to date
|
(999,487
|
)
|
|
(933,828
|
)
|
|
|
$
|
12,878
|
|
|
$
|
12,287
|
|
|
Included in the accompanying condensed consolidated balance sheet under the following captions:
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
$
|
41,829
|
|
|
$
|
39,968
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
(28,951
|
)
|
|
(27,681
|
)
|
|
|
$
|
12,878
|
|
|
$
|
12,287
|
|
Costs and estimated earnings in excess of billings on completed contracts totaled
$0.4 million
at
June 30, 2017
and
$0.6 million
at
December 31, 2016
.
6. Property and Equipment
The following is a summary of property and equipment at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Automobiles and trucks
|
$
|
2,219
|
|
|
$
|
2,525
|
|
|
Building and improvements
|
37,277
|
|
|
37,269
|
|
|
Construction equipment
|
164,373
|
|
|
165,023
|
|
|
Vessels and other equipment
|
89,313
|
|
|
88,659
|
|
|
Office equipment
|
7,472
|
|
|
7,125
|
|
|
|
300,654
|
|
|
300,601
|
|
|
Less: accumulated depreciation
|
(188,996
|
)
|
|
(181,293
|
)
|
|
Net book value of depreciable assets
|
111,658
|
|
|
119,308
|
|
|
Construction in progress
|
1,612
|
|
|
543
|
|
|
Land
|
38,231
|
|
|
38,231
|
|
|
|
$
|
151,501
|
|
|
$
|
158,082
|
|
For the three months ended
June 30, 2017
and
2016
, depreciation expense was
$6.2 million
and
$6.8 million
, respectively. For the six months ended
June 30, 2017
and
2016
, depreciation expense was
$12.5 million
and
$13.6 million
, respectively. Substantially all depreciation expense is included in the cost of contract revenue in the Company’s Condensed Consolidated Statements of Operations. Substantially all of the assets of the Company are pledged as collateral under the Company's Credit Agreement (as defined in
Note 11
).
Substantially all of the Company’s long-lived assets are located in the United States.
The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group 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. 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. During the six months ended
June 30, 2017
, approximately
$5.0 million
of these assets were sold for cash of
$4.5 million
. The difference of
$0.5 million
is classified as a loss on sale of assets on the Consolidated Statement of Operations. Approximately
$1.4 million
remain as held for sale on the Company's Consolidated Balance Sheet at
June 30, 2017
. The Company expects to dispose of the remaining assets within one year of the balance sheet date.
7. Inventory
Current inventory at
June 30, 2017
and
December 31, 2016
, of
$5.5 million
and
$5.4 million
, respectively, consisted primarily of spare parts and small equipment held for use in the ordinary course of business.
Non-current inventory at
June 30, 2017
and
December 31, 2016
of
$3.9 million
and
$4.0 million
respectively, consisted primarily of spare engine components or items which require longer lead times for sourcing or fabrication for certain of the Company's assets to reduce equipment downtime.
8. Fair Value
The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. Due to their short term nature, the Company believes that the carrying value of its accounts receivable, other current assets, accounts payable and other current liabilities approximate their fair values.
The Company classifies financial assets and liabilities into the following three levels based on the inputs used to measure fair value in the order of priority indicated:
|
|
|
|
•
|
Level 1- fair values are based on observable inputs such as quoted prices in active markets for identical assets or liabilities;
|
|
|
|
|
•
|
Level 2 - fair values are based on pricing inputs other than quoted prices in active markets for identical assets and liabilities and are either directly or indirectly observable as of the measurement date; and
|
|
|
|
|
•
|
Level 3- fair values are based on unobservable inputs in which little or no market data exists.
|
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value requires judgment and may affect the placement of assets and liabilities within the fair value hierarchy levels.
The following table sets forth by level within the fair value hierarchy the Company's recurring financial assets and liabilities that were accounted for at fair value on a recurring basis as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
Carrying Value
|
Level 1
|
Level 2
|
Level 3
|
|
June 30, 2017
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Cash surrender value of life insurance policy
|
$
|
1,430
|
|
—
|
|
1,430
|
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
Derivatives
|
$
|
436
|
|
—
|
|
436
|
|
—
|
|
|
December 31, 2016
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Cash surrender value of life insurance policy
|
$
|
1,188
|
|
—
|
|
1,188
|
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
Derivatives
|
$
|
447
|
|
—
|
|
447
|
|
—
|
|
The Company's derivatives, which are comprised of interest rate swaps, are valued using a discounted cash flow analysis that incorporates observable market parameters, such as interest rate yield curves and credit risk adjustments that are necessary to reflect the probability of default by us or the counterparty. These derivatives are classified as a Level 2 measurement within the fair value hierarchy. See
Note 11
for additional information on the Company's derivative instrument.
The Company's concrete segment has life insurance policies covering
4
employees with a combined face value of
$11.1 million
. The policies are invested in mutual funds and the fair value measurement of the cash surrender balance associated with these policies is determined using Level 2 inputs within the fair value hierarchy and will vary with investment performance. These assets are included in the "Other noncurrent" asset section in the consolidated balance sheets.
Other Fair Value Measurements
The fair value of the Company's debt at
June 30, 2017
and
December 31, 2016
approximated its carrying value of
$88.5 million
and
$104.6 million
, respectively, as interest is based on current market interest rates for debt with similar risk and maturity. If the Company's debt was measured at fair value, it would have been classified as a Level 2 measurement in the fair value hierarchy.
9. Goodwill and Intangible Assets
Goodwill
The table below summarizes changes in goodwill recorded by the Company during the periods ended
June 30, 2017
and
December 31, 2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Beginning balance, January 1
|
$
|
66,351
|
|
|
$
|
65,982
|
|
|
Additions
|
2,562
|
|
|
369
|
|
|
Ending balance
|
$
|
68,913
|
|
|
$
|
66,351
|
|
At
June 30, 2017
, goodwill totaled
$68.9 million
, of which
$33.8 million
relates to the marine construction segment and
$35.1 million
relates to the concrete construction segment.
As discussed previously in
Note 2
, goodwill is reviewed at a reporting unit level for impairment annually as of October 31 or when circumstances arise that indicate a possible impairment might exist. Test of impairment requires a two-step process to be performed to analyze whether or not goodwill has been impaired. The first step of this test, used to identify potential impairment,
compares the estimated fair value of a reporting unit with its carrying amount. The second step, if necessary, quantifies the impairment.
During the three months ended
June 30, 2017
the Company identified potential indicators of impairment, specifically to goodwill in its marine construction reporting unit. These indicators included having losses for three consecutive quarters within the segment, adjusted forecasted earnings for future quarters, and other negative trends within the reporting unit. As such, the Company performed an interim goodwill impairment analysis as of
June 30, 2017
. The result of the first step in the two-step process indicated that no impairment existed and, as such, the Company did not progress to the second step.
Intangible assets
The tables below present the activity and amortization of finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
2017
|
|
2016
|
|
Intangible assets, January 1
|
$
|
34,362
|
|
|
$
|
34,362
|
|
|
Additions
|
878
|
|
|
—
|
|
|
Total intangible assets, end of period
|
35,240
|
|
|
34,362
|
|
|
|
|
|
|
|
|
Accumulated amortization, January 1
|
$
|
(19,220
|
)
|
|
$
|
(11,933
|
)
|
|
Current year amortization
|
(2,613
|
)
|
|
(1,822
|
)
|
|
Total accumulated amortization
|
(21,833
|
)
|
|
(13,755
|
)
|
|
|
|
|
|
|
|
Net intangible assets, end of period
|
$
|
13,407
|
|
|
$
|
20,607
|
|
Finite-lived intangible assets were acquired as part of the purchase of T.A.S. Commercial Concrete Construction ("TAS") which included contractual backlog and customer relationships. Contractual backlog was valued at approximately
$8.7 million
and is currently being amortized over
two
years. Customer relationships were valued at approximately
$18.1 million
and is currently being amortized over
eight
years. In addition, during the second quarter of 2017, the Company acquired finite-lived intangible assets as part of the purchase of TBC, which also included contractual backlog and customer relationships. Contractual backlog was valued at approximately
$0.1 million
and will be amortized over
seven
months. Customer relationships were valued at approximately
$0.7 million
and will be amortized over
seven
years. Both of these assets will be amortized using an accelerated method based on the pattern in which the economic benefits of the assets are consumed. For the
six
months ended
June 30, 2017
,
$2.6 million
of amortization expense was recognized for these assets. Future expense remaining of approximately $
13.4 million
will be amortized as follows:
|
|
|
|
|
|
|
|
2017
|
$
|
2,124
|
|
|
2018
|
3,389
|
|
|
2019
|
2,640
|
|
|
2020
|
2,069
|
|
|
2021
|
1,521
|
|
|
Thereafter
|
1,664
|
|
|
|
$
|
13,407
|
|
Additionally, the Company has one indefinite-lived intangible asset, as described in
Note 2.
At
June 30, 2017
the trade name was valued at approximately
$6.9 million
and no indicators of impairment existed.
10. Accrued Liabilities
Accrued liabilities at
June 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Accrued salaries, wages and benefits
|
$
|
9,409
|
|
|
$
|
10,818
|
|
|
Accrual for insurance liabilities
|
5,538
|
|
|
5,223
|
|
|
Property taxes
|
929
|
|
|
1,615
|
|
|
Sales taxes
|
1,237
|
|
|
1,722
|
|
|
Interest
|
—
|
|
|
19
|
|
|
Other accrued expenses
|
358
|
|
|
549
|
|
|
Total accrued liabilities
|
$
|
17,471
|
|
|
$
|
19,946
|
|
11. Long-term Debt, Line of Credit and Derivatives
The Company entered into a syndicated credit agreement (the "Credit Agreement") on August 5, 2015 with Regions Bank, as administrative agent and collateral agent, and the following co-syndication agents: Bank of America, N.A., BOKF, NA dba Bank of Texas, Branch Banking & Trust Company, Frost Bank, Bank Midwest, a division of NBH Bank, N.A., IBERIABANK, KeyBank NA, Trustmark National Bank, and First Tennessee Bank NA. The primary purpose of the Credit Agreement was to finance the acquisition of TAS, to provide a revolving line of credit, and to provide financing to extinguish all prior indebtedness with Wells Fargo Bank, National Associates, as administrative agent, and Wells Fargo Securities, LLC.
The Credit Agreement, which may be amended from time to time, provides for borrowings under a revolving line of credit and swingline loans with a commitment amount of
$50.0 million
and a term loan with a commitment amount of
$135.0 million
(together, the “Credit Facility”). The Credit Facility is guaranteed by the subsidiaries of the Company, secured by the assets of the Company, including stock held in its subsidiaries, and may be used to finance general corporate and working capital purposes, to finance capital expenditures, to refinance existing indebtedness, to finance permitted acquisitions and associated fees, and to pay for all related expenses to the Credit Facility. Interest is due and is computed based on the designation of the loan, with the option of a Base Rate Loan (the base rate plus the Applicable Margin), or an Adjusted LIBOR Rate Loan (the adjusted LIBOR rate plus the Applicable Margin). Interest is due on the last day of each quarter end for Base Rate Loans and at the end of the LIBOR rate period for Adjusted LIBOR Rate Loans. The rate for all loans at the time of loan origination was
4.75%
. Principal balances drawn under the Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. Amounts repaid under the revolving line of credit may be re-borrowed. The Credit Facility matures on August 5, 2020.
The quarterly weighted average interest rate for the Credit Facility as of
June 30, 2017
was
3.57%
.
The Company's obligations under debt arrangements consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
Principal
|
Debt Issuance Costs
(1)
|
Total
|
|
Principal
|
Debt Issuance Costs
(1)
|
Total
|
|
Revolving line of credit
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
8,000
|
|
$
|
(252
|
)
|
$
|
7,748
|
|
|
Term loan - current
|
13,500
|
|
(407
|
)
|
13,093
|
|
|
11,813
|
|
(373
|
)
|
11,440
|
|
|
Total current debt
|
13,500
|
|
(407
|
)
|
13,093
|
|
|
19,813
|
|
(625
|
)
|
19,188
|
|
|
Term loan - long-term
|
75,000
|
|
(2,261
|
)
|
72,739
|
|
|
84,750
|
|
(2,673
|
)
|
82,077
|
|
|
Total debt
|
$
|
88,500
|
|
$
|
(2,668
|
)
|
$
|
85,832
|
|
|
$
|
104,563
|
|
$
|
(3,298
|
)
|
$
|
101,265
|
|
(1) Total debt issuance costs, include underwriter fees, legal fees and syndication fees and fees related to the execution of the First Amendment to the Credit Agreement.
Provisions of the revolving line of credit and accordion
The Company has a maximum borrowing availability under the revolving line of credit and swingline loans (as defined in the Credit Agreement) of
$50.0 million
. The letter of credit sublimit is equal to the lesser of
$20.0 million
and the aggregate unused amount of the revolving commitments then in effect. The swingline sublimit is equal to the lesser of
$5.0 million
and the aggregate unused amount of the revolving commitments then in effect.
Revolving loans may be designated as Base Rate Loan or Adjusted LIBOR Rate Loans, at the Company’s request, and must be made in an aggregate minimum amount of
$1.0 million
and integral multiples of
$250,000
in excess of that amount. Swingline loans must be made in an aggregate minimum amount of
$250,000
and integral multiples of
$50,000
in excess of that amount. The Company may convert, change, or modify such designations from time to time.
The Company is subject to a Commitment Fee for the unused portion of the maximum available to borrow under the revolving line of credit. The Commitment Fee, which is due quarterly in arrears, is equal to the Applicable Margin of the actual daily amount by which the Aggregate Revolving Commitments exceeds the Total Revolving Outstanding. The revolving line of credit termination date is the earlier of the Credit Facility termination date, August 5, 2020, or the date the outstanding balance is permanently reduced to zero. The Company has the intent and ability to repay the amounts outstanding on the revolving line of credit within one year, therefore, the outstanding balance as of
June 30, 2017
has been classified as current.
As of
June 30, 2017
, there was no outstanding balance on the revolving line of credit. There was
$0.9 million
in outstanding letters of credit as of
June 30, 2017
, which reduced the maximum borrowing availability on the revolving line of credit to
$49.1 million
as of
June 30, 2017
. The Company made payments of
$28.5 million
on the outstanding revolving balance during the second quarter of
2017
. Subsequent to the second quarter, the Company drew
$15.0 million
on the revolving line of credit.
Provisions of the term loan
The original principal amount of
$135.0 million
for the term loan commitment is paid off in quarterly installment payments (as stated in the Credit Agreement). At
June 30, 2017
, the outstanding term loan component of the Credit Facility totaled
$88.5 million
and was secured by specific assets of the Company. The table below outlines the total remaining payment amounts annually for the term loan through maturity of the Credit Facility:
|
|
|
|
|
|
|
|
2017
|
$
|
6,750
|
|
|
2018
|
13,500
|
|
|
2019
|
15,188
|
|
|
2020
|
53,062
|
|
|
|
$
|
88,500
|
|
During the three months ended
June 30, 2017
, the Company made the scheduled quarterly principal payment of
$2.5 million
, and an additional principal paydown of
$3.0 million
, which reduced the outstanding principal balance to
$88.5 million
at
June 30, 2017
. The current portion of debt is
$13.5 million
and the non-current portion is
$75.0 million
. As of
June 30, 2017
, the term loan was designated as an Adjusted LIBOR Rate Loan with an interest rate of
3.56%
.
Financial covenants
Restrictive financial covenants under the Credit Facility include:
|
|
|
|
•
|
A consolidated Fixed Charge Coverage Ratio as of the end of any fiscal quarter to not be less than
1.25
to 1.00.
|
|
|
|
|
•
|
A consolidated Leverage Ratio to not exceed the following during each noted period:
|
-Closing Date through and including December 31, 2015, to not exceed
3.25
to 1.00;
-Fiscal Quarter Ending March 31, 2016, to not exceed
4.00
to 1.00;
-Fiscal Quarter Ending June 30, 2016, to not exceed
3.75
to 1.00;
-Fiscal Quarter Ending September 30, 2016, to not exceed
3.25
to 1.00;
-Fiscal Quarter Ending December 31, 2016, to not exceed
3.00
to 1.00;
-Fiscal Quarter Ending March 31, 2017, to not exceed
2.75
to 1.00;
-Fiscal Quarter Ending June 30, 2017, to not exceed
2.75
to 1.00;
-Fiscal Quarter Ending September 30, 2017, to not exceed
2.75
to 1.00;
-Fiscal Quarter Ending December 31, 2017 and each Fiscal Quarter thereafter, to not exceed
2.50
to 1.00.
In addition, the Credit Facility contains events of default that are usual and customary for similar arrangements, including non-payment of principal, interest or fees; breaches of representations and warranties that are not timely cured; violation of covenants; bankruptcy and insolvency events; and events constituting a change of control.
During the second quarter of 2017, the Company initiated discussions with the lead bank in an effort to explore available options given the step down of the Leverage Ratio covenant and concerns the Company would not be in compliance with financial covenants. A second amendment to the Credit Agreement was executed during July 2017, which was effective as of June 30, 2017. The Leverage Ratio was adjusted beginning with the quarter ended
June 30, 2017
through September 30, 2017, as reflected above. The Fixed Charge Coverage Ratio was unchanged. This amendment to the Credit Agreement will increase the cost of the Company's borrowings if the Leverage Ratio exceeds
2.75
to 1.00 and will impose additional limitations on certain types of activities, such as acquisitions. With the execution of the aforementioned amendment, the Company was in compliance with all financial covenants as of
June 30, 2017
.
De
rivative Financial Instruments
On September 16, 2015, the Company entered into a series of receive-variable, pay-fixed interest rate swaps to hedge the variability in the interest payments on
50%
of the aggregate principal amount of the Regions Term Loan outstanding, beginning with a notional amount of
$67.5 million
. There are a total of
five
sequential interest rate swaps to achieve the hedged position and each year on August 31, with the exception of the final swap, the existing interest rate swap is scheduled to expire and will be immediately replaced with a new interest rate swap until the expiration of the final swap on July 31, 2020. At inception, these interest rate swaps were designated as a cash flow hedge for hedge accounting, and as such, the effective portion of unrealized changes in market value are recorded in accumulated other comprehensive income (loss) and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness are recognized in current earnings. The change in fair market value of the swaps as of
June 30, 2017
is
$0.3 million
, which is reflected in the balance sheet as a liability. The fair market value of the swaps as of
June 30, 2017
is
$0.4 million
. See
Note 8
for more information regarding the fair value of the Company's derivative instruments.
12. Income Taxes
The Company's effective tax rate is based on expected income, statutory rates and tax planning opportunities available to it. For interim financial reporting, the Company estimates its annual tax rate based on projected taxable income (or loss) for the full year and records a quarterly tax provision in accordance with the anticipated annual rate. The effective rate for the six months ended
June 30, 2017
and
2016
was
39.2%
and
38.3%
, respectively. For both 2016 and 2017 the effective tax rate differed from the Company’s statutory rate of
35.0%
primarily due to state income taxes, the non-deductibility of certain permanent items, such as incentive stock compensation expense, a movement in the valuation allowance related to state attributes, as discussed below, and a benefit related to the domestic production gross receipts deduction.
The Company assessed the realizability of its deferred tax assets at
June 30, 2017
, and 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, which includes the reversal of deferred tax liabilities related to depreciation, during the periods in which these temporary differences become deductible.
The Company has a tax effected net operating loss carryforward ("NOL") of approximately
$4.2 million
for state income tax reporting purposes due to the losses sustained in various states. The Company believes it will be able to partially utilize these NOLs against future income primarily with reversing of temporary differences attributable to depreciation and due to expiration dates well into the future. However, the Company determined that a portion of the NOLs related to certain jurisdictions will more likely than not be able to be fully utilized. Therefore, the Company has an existing valuation allowance of
$3.4 million
for this portion of the NOLs. For federal tax reporting purposes, the Company has utilized its ability to carry losses back prior to 2016. Approximately
$11.2 million
remains as a federal tax carryforward. The Company expects it will be able to fully utilize these NOLs before the end of
2017
.
The Company has adopted ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting.
As part of this adoption, certain federal NOLs that were previously classified off balance sheet must now be recognized as deferred tax assets through an adjustment to opening retained earnings. The Company chase to prospectively adopt this guidance during the first quarter of 2017 and as such the balance sheet includes an adjustment of approximately
$0.7 million
as an addition to the "Retained earnings" and a reduction to the "Deferred income taxes" lines on the Condensed Consolidated Balance Sheet to true up the tax effected portion of the NOLs mentioned above. Due to the prospective adoption, no prior year adjustments were made.
The Company does not believe that its tax positions will significantly change due to any settlement and/or expiration of statutes of limitations prior to December 31, 2017.
13. Earnings (Loss) Per Share
Basic earnings (loss) 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. The exercise price for certain stock options awarded by the Company exceeds the average market price of the Company's common stock. Such stock options are antidilutive and are not included in the computation of earnings (loss) per share. In the three months ended
June 30, 2017
and
June 30, 2016
,
no
potential common stock equivalents were included as the effect of such would be anti-dilutive. For the three month periods ended
June 30, 2017
and
June 30, 2016
, the Company had
2,251,034
and
2,358,684
securities, respectively, that were potentially dilutive in future earnings per share calculations. For the six months ended
June 30, 2017
and
June 30, 2016
, the Company had
2,243,763
and
2,239,139
securities, respectively, that were potentially dilutive in future earnings calculations. Such dilution will be dependent on the excess of the market price of our stock over the exercise price and other components of the treasury stock method.
The following table reconciles the denominators used in the computations of both basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
Six months ended June 30,
|
|
|
2017
|
2016
|
2017
|
2016
|
|
Basic:
|
|
|
|
|
|
Weighted average shares outstanding
|
27,941,814
|
|
27,464,683
|
|
27,867,090
|
|
27,383,748
|
|
|
Diluted:
|
|
|
|
|
|
Total basic weighted average shares outstanding
|
27,941,814
|
|
27,464,683
|
|
27,867,090
|
|
27,383,748
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Common stock options
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Total weighted average shares outstanding assuming dilution
|
27,941,814
|
|
27,464,683
|
|
27,867,090
|
|
27,383,748
|
|
|
Anti-dilutive stock options
|
—
|
|
2,317,572
|
|
—
|
|
2,237,217
|
|
|
Shares of common stock issued from the exercise of stock options
|
55,953
|
|
—
|
|
159,808
|
|
3,924
|
|
14. Stock-Based Compensation
The Compensation Committee of the Company's Board of Directors is responsible for the administration of the Company's stock incentive plans, which include the 2017 Long Term Incentive Plan, or the "2017 LTIP", which was approved by shareholders in May 2017 and authorized the maximum aggregate number of shares of common stock to be issued at
2,400,000
. In general, the Company's 2017 LTIP provides 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 are generally
10
years from the date of issuance. Options generally vest over a
three
to
five
year period.
The Company applies a
3.2%
and a
5.5%
forfeiture rate, which gets compounded over the vesting terms of the individual award, to its restricted stock and option grants, respectively, based on historical analysis.
In the three months ended
June 30, 2017
and
2016
, compensation expense related to stock based awards outstanding was
$858,000
and
$869,000
, respectively. In the six months ended
June 30, 2017
and
2016
, compensation expense related to stock based awards
outstanding was
$1.2 million
and
$1.3 million
, respectively.
In May 2017, the Company granted certain executives options to purchase
425,204
shares of common stock and used the Black Scholes option pricing model to estimate the fair value of these options using the following assumptions:
|
|
|
|
|
|
|
|
Grant-date fair value
|
$
|
2.44
|
|
|
Risk-free interest rate
|
1.46
|
%
|
|
Expected volatility
|
48.2
|
%
|
|
Expected term of options (in years)
|
3.0
|
|
|
Dividend yield
|
—
|
%
|
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.
Also, in May 2017, certain officers and executives of the Company were awarded
345,913
shares of restricted common stock. The fair value on the date of the grant was
$7.22
per share.
In May 2017, the Company awarded certain executives
69,945
shares of performance based stock options, with
100%
of shares to be earned based on the achievement of an objective return on invested capital measured over a
two
-year performance period. The fair value on the date of the grant of
$7.22
per share.
In the three months ended
June 30, 2017
,
55,953
options were exercised, generating proceeds to the Company of
$316,000
. In the three months ended
June 30, 2016
,
no
options were exercised, generating no proceeds to the Company. In the
six
months ended
June 30, 2017
,
159,808
options were exercised, generating proceeds to the Company of approximately
$940,000
. In the
six
months ended
June 30, 2016
,
3,924
options were exercised, generating proceeds to the Company of approximately
$8,000
.
At
June 30, 2017
, total unrecognized compensation expense related to unvested stock and options was approximately
$4.9 million
, which is expected to be recognized over a period of approximately
two
years.
15. Commitments and Contingencies
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 other proceedings, individually or in the aggregate, would be expected to have a material adverse effect on results of operations, cash flows or financial condition.
16. Segment Information
The Company currently operates in
two
reportable segments: marine construction and concrete construction. The Company's financial reporting systems present various data for management to run the business, including profit and loss statements prepared according to the segments presented. Management uses operating income to evaluate performance between the two segments. Segment information for the periods presented is provided as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2017
|
Three months ended June 30, 2016
|
Six months ended June 30, 2017
|
Six months ended June 30, 2016
|
|
Marine Construction
|
|
|
|
|
|
Contract revenues
|
$
|
62,003
|
|
$
|
79,966
|
|
$
|
129,183
|
|
$
|
142,381
|
|
|
Operating loss
|
(8,617
|
)
|
(1,212
|
)
|
(16,323
|
)
|
(4,354
|
)
|
|
Depreciation and amortization expense
|
(5,087
|
)
|
(5,176
|
)
|
(10,342
|
)
|
(10,243
|
)
|
|
|
|
|
|
|
|
Total Assets
|
$
|
252,348
|
|
$
|
297,207
|
|
$
|
252,348
|
|
$
|
297,207
|
|
|
Property, Plant and Equipment, net
|
135,492
|
|
149,912
|
|
135,492
|
|
$
|
149,912
|
|
|
|
|
|
|
|
|
Concrete Construction
|
|
|
|
|
|
Contract revenues
|
$
|
75,417
|
|
$
|
60,335
|
|
$
|
146,994
|
|
$
|
127,543
|
|
|
Operating income
|
6,150
|
|
1,493
|
|
12,375
|
|
4,180
|
|
|
Depreciation and amortization expense
|
(2,505
|
)
|
(3,477
|
)
|
(4,777
|
)
|
(6,960
|
)
|
|
|
|
|
|
|
|
Total Assets
|
$
|
174,124
|
|
$
|
146,127
|
|
$
|
174,124
|
|
$
|
146,127
|
|
|
Property, Plant and Equipment, net
|
16,009
|
|
14,472
|
|
16,009
|
|
14,472
|
|
There were
no
intersegment revenues between the Company's
two
reportable segments for the three and six months ended
June 30, 2017
and
2016
. The marine construction segment had foreign revenues of approximately
$0.8 million
and
$3.7 million
for the three months ended
June 30, 2017
and
2016
, respectively, and
$0.9 million
and
$6.1 million
for the six months ended
June 30, 2017
and
2016
, respectively. These revenues are derived from projects in Mexico and the Caribbean and are paid in U.S. dollars. There was
no
foreign revenue for the concrete construction segment.
17. Related Party Transactions
Upon the completion of the acquisition of TAS, the Company entered into a lease arrangement with an entity in which an employee owns an interest. This lease is for office space and yard facilities used by the concrete construction segment. Annual lease expense will be approximately
$820,000
, of which approximately
$205,000
and
$410,000
represented lease expense during the three and six months ended
June 30, 2017
, respectively.