Orion Marine (ORN)

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Sar Medoff

Orion Marine Group (NYSE: ORN) is the fourth largest heavy civil marine contractor in the US, as measured by revenue.^[1] With operations based along the Gulf Coast, Atlantic Coast, and Caribbean islands, ORN constructs marine transportation facilities, underwater pipelines, bridges and causeways, environmental structures, and dredges various waterways. In 2008, the company worked on 410 projects and had total revenues of $261.8 million.^[2]

Government contracts (federal, state, and municipal) accounted for 50% of ORN's revenues in 2008, but revenues from private sector contracts saw a dramatic increase in 2007.^[3] ORN is a single-source provider for its customers, self-performing 88.2% of its contracts in 2008.^[4] Self-performance controls costs because most of ORN's contracts are awarded as a lump sum and it is then up to the company to complete the job at or under the amount awarded; when ORN is able to keep construction costs down by using more of their own equipment and less subcontracting, they receive larger net incomes.

Legislative acts, such as 2008's American Recovery and Reinvestment Act and the emergency spending bill for hurricane affected areas, have earmarked more than $33 billion for infrastructure spending on bridges, causeways, marine facilities, and other projects that fall under ORN's purview.^[5] In addition to these federal bills, the expansion of the Panama Canal, which will greatly increase the canal's shipping volume capability and is scheduled to be completed in 2014, is predicted by many experts to greatly increase shipping volume at Gulf and Atlantic seaboard ports in ORN's markets.^[6] ORN's maintenance dredging operation also provides a steady source of income as cleared waterways require maintenance dredging every one to three years and perhaps more frequently if damaged by hurricanes.^[7]

On May 19 and May 21, ORN was awarded contracts worth $10 million and $12 million for the construction of a pier in North Carolina^[8] and for US Navy wharf improvements in Florida,^[9] respectively.

Business Overview

In FY 2008, ORN's total revenues were $261.8 million, an increase of 24.5% from $210.36 million in 2007. The increase was primarily due to expanded dredging capabilities along the eastern seaboard. In a shift from years past, revenues from private sector contracts increased by 45% while revenues from federal agency contracts decreased by 22.4% due to fewer bid opportunities by the Army Corps of Engineers.^[10] In 2008, net income decreased by almost 17% to $14.47 million, primarily as a result of subcontracting more work to outside firms and unexpected delays on two dredging projects. In 2008, ORN self-performed 88.2% of all contracts versus 90.3% in 2007;^[11] by self-performing contracts, the company is able to more effectively manage the costs and quality of each project.

In FY 2007, ORN’s total revenues were $210.36 million, an increase of 14.8% from $183.28 million in FY 2006. Reduced funding for the Army Corps of Engineers reduced federal agency contracts by 14%, but this decrease was offset by a 44% increase in revenues from local government agencies and the private sector.^[12] Construction projects of 2007 included: causeway in Florida, cruise ship dock facility in Texas, container terminals in Texas and Louisiana, coastline protection in Louisiana, and bridge replacement in Florida.^[13] Net income in 2007 was increased almost 31% from 2006 by reducing subcontracting costs to only 10% of total costs, down from 14% in 2006.^[14]

In FY 2006, total revenues were $183.28 million; up 9.6% from FY 2005 total revenues of $167.32 million. More dramatically, net income during this period increased 78.2%, from $5.31 million in 2005 to $12.4 million in 2006. A calm hurricane season and increased demand for dredging by the Army Corps of Engineers were the primary factors driving these dramatic improvements.

ORN Revenues and Net Income^[15]

ORN's top five customers accounted for 30% of total revenues in 2008 (39% - 2007, 59%-2006, 50%-2005) and one of these customers accounted for more than 10% of total revenues for 2008.^[16]

Business by Segment

• Marine Construction - ORN constructs port facilities for container ship loading and unloading, cruise ships, recreational marinas and docks, and Navy terminals. The company also installs and removes underwater buried pipelines used by industrial facilities, wastewater systems, and river crossings. Also falling under this sector are bridge and causeway projects. ORN constructs, repairs, and maintains all types of bridges and causeways; occasionally the projects are design-build contracts where ORN then fabricates the physical structures that they subsequently install. Lastly, Orion Marine Group constructs marine environmental structures meant to protect against erosion, contain flooding, and restore beaches.^[17]

• Dredging - Dredging is the process of removing soil, sand, or rock from the bottom of waterways to increase, improve, and protect their navigability. Dredging is often required to remove silt and deepen shipping channels, containing erosion of wetlands and marshes, and maintaining many marine structures. In areas where no natural deep water port exists, such as the Texas Gulf Coast and Houston (the second busiest port in the USA^[18]), frequent maintenance dredging is required. This sector provides consistent recurring revenue since most active channels require dredging every one to three years due to silt buildup.^[19] In 2008, ORN acquired Florida-based Subaqueous Services, a specialty shallow water dredging firm, for $35 million.^[20]

• Specialty - The company's specialty capabilities include salvage, demolition, surveying, towing, underwater inspection, excavation, and repair of structures. Most of the specialty skills are provided to support other ORN's other construction projects.

Trends and Forces

• Government Spending and Army Corps of Engineers - More than half of the company's revenue comes from contracts with Federal, State, and Municipal governments. In FY 2008, government contracts accounted for approximately 50% of total revenues,^[21] while in FY 2007, government contracts accounted for approximately 57% of all revenues.^[22] Excluding State and Municipal governments, revenues earned from US government federal agencies, including the Army Corps of Engineers, totaled 11% in FY 2008, down from 18% in FY 2007.^[23] A 2005 federal transportation funding bill that provides funding for infrastructure construction and repair through 2009, allocated $22 billion for the building, reconstruction, and repairing of bridges. In total, this bill granted a 38% increase in infrastructure spending over the previous funding bill.^[24] Undoubtedly some of the the funding for bridges and causeways will be spent in ORN's primary markets of the Gulf and Atlantic coasts. In addition to this bill, emergency legislation from 2008 provides the Corp of Engineers with $740 million for dredging and construction in areas affected by the hurricanes of 2008, the same area served by ORN, and the American Recovery and Reinvestment Act provides $32.3 billion for infrastructure spending in ORN's specialty areas (highways, US Coast Guard bridges, etc.).^[25]

• Panama Canal Expansion - Proposed in 2006, the Panama Canal is being expanded to add another set of locks which will increase the canal's shipping capacity and increase the volume of trade for the gulf coast and eastern seaboard.^[26] 70% of the cargo shipped from Asia is offloaded in California and then transported cross-country via land, but the canal expansion, which will allow much larger ships to pass through than are presently able, is predicted to steal a significant portion of this trade.^[27] The canal can presently handle ships carrying only 4,500 containers, but the new locks will be able to handle ships loaded with up to 14,000 containers.^[28] The project's official completion date is 2014 (with a $50 million completion bonus for the constructor riding on the line). Many shipping experts foresee the canal expansion to lead to long-term growth in traffic at ports in the Gulf and East Coast once large Asian ships have the ability to bypass Long Beach, California.^[29]

• Infrastructure Maintenance – America's waterway transportation/trade infrastructure is in need of substantial repair and expansion. More than 2.5 billion tons of trade cargo moves through domestic ports and waterways annually (approximately 99% of all US cargo), and this number is predicted to double by 2022.^[30] ORN's primary market includes the ports of Houston, Savannah, Charleston, and Norfolk among others. Approximately 95% of overseas trade coming into or out of the United States transits through the ports. In order to accommodate the increase in cargo and larger cargo ships, many ports will need to build larger dock space and to deepen their channels.^[31] Likewise, an increase in cruise ship size will require many ports to upgrade their facilities; many cruise ship ports such as Miami, Galveston, Tampa, New Orleans, and the Caribbean all fall under ORN's business area.^[32]

Competition

Due to the specialized nature of the work, Orion Marine Group's primary competition is from small, local companies located in the vicinity of specific projects. The company bids against other large, more diversified construction companies such as Granite Construction, Primoris Services, or URS Corporation, but none of these companies specialize in marine construction to the same extent as ORN.

Market Share

Lacking consistent, comparable competitors, it is difficult to determine Orion Marine Group's market share of the marine construction industry. However, 28 of the 50 busiest foreign trading ports in the US are located in ORN's primary business area of the Gulf Coast and Atlantic Seaboard (south of Maryland) and Puerto Rico.^[36] In addition to these markets, Orion Marine Group and its subsidiaries has also completed projects in places as far away as Alaska and Africa.^[37]

Notes

1. ↑ Item 1: Business, page 6
2. ↑ ORN 2008 8-K Full Year 2008, page 9
3. ↑ ORN 2008 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 37
4. ↑ ORN 2008 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 37
5. ↑ ORN 2008 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 32
6. ↑ ORN 2008 10-K Item 1: Business, page 5
7. ↑ ORN 2008 10-K Item 1: Business, page 4-5
8. ↑ Orion Marine Group Announces a Contract Award of Approximately $10 Million - ORN Press Release - 5/19/2009
9. ↑ Orion Marine Group Announces a Contract Award of Approximately $12 Million - ORN Press Release - 5/21/2009
10. ↑ ORN 2008 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 37
11. ↑ ORN 2008 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 37
12. ↑ ORN 2007 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 37
13. ↑ ORN 2007 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 37
14. ↑ ORN 2007 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 37
15. ↑ ORN 2008 10-K Item 6: Selected Financial Data, page 29
16. ↑ ORN 2008 10-K Item 1A: Risk Factors, page 17
17. ↑ ORN 2008 10-K Item 1: Business, page 4-5
18. ↑ Port of Houston - Wikipedia
19. ↑ ORN 2008 10-K Item 1: Business, page 4-5
20. ↑ Orion Marine Group Acquires Subaqueous Services, Inc. - Reuters - 2/29/2008
21. ↑ ORN 2008 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 31
22. ↑ ORN 2007 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 31
23. ↑ ORN 2008 10-K Item 1: Business, page 8
24. ↑ ORN 2007 10-K Item 1: Business, page 6
25. ↑ ORN 2008 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 32
26. ↑ Proposal for the Expansion of the Panama Canal - Panama Canal Authority - 4/24/2006 - p. 1
27. ↑ Panama Canal Expansion on Stream Despite Downturn - The Business Times - 6/3/2009
28. ↑ Panama Canal Expansion is Chugging Along - LA Times - 6/1/2009
29. ↑ ORN 2008 10-K Item 1: Business, page 5
30. ↑ ORN 2007 10-K Item 1: Business, page 6
31. ↑ ORN 2007 10-K Item 1: Business, page 6
32. ↑ ORN 2008 10-K Item 1: Business, page 6
33. ↑ ORN 2007 10-K Item 1: Business, Page 8
34. ↑ ORN 2007 10-K Item 1: Business, Page 8
35. ↑ ORN 2008 10-K Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 37
36. ↑ Container by US Customs Ports - Statistics
37. ↑ Orion Marine Group - We Serve Global Markets
38. ↑ Container by US Customs Ports - Statistics