sept30200810q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[√]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended September 30,
2008
|
[ ]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from ________
to_________
|
|
(Exact
name of registrant as specified in its
charter)
|
DELAWARE
|
26-0097459
|
(State
or other jurisdiction of
Incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
12550
Fuqua
Houston,
Texas 77034
(Address
of principal executive offices)
(Zip
Code)
|
(713)
852-6500
(Registrant’s
telephone number, including area
code)
|
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
November 1, 2008, 21,553,678 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 September 30, 2008
INDEX
PART
I
|
FINANCIAL INFORMATION
|
|
|
Item
1
|
|
Page
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
Item
2
|
|
16
|
|
Item
3
|
|
22
|
|
Item
4
|
|
22
|
PART
II
|
OTHER INFORMATION
|
|
|
Item1
|
|
23
|
|
Item
1A
|
|
23
|
|
Item
4
|
|
23
|
|
Item
6
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIGNATURES
|
24
|
|
Exhibits
|
|
|
|
|
|
|
Orion
Marine Group, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
(Unaudited)
(In
Thousands, Except Share and Per Share Information)
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
18,985 |
|
|
$ |
12,584 |
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
Trade,
net of allowance of $50 and $500, respectively
|
|
|
39,025 |
|
|
|
30,832 |
|
Retainage
|
|
|
6,083 |
|
|
|
7,620 |
|
Other
|
|
|
510 |
|
|
|
899 |
|
Inventory
|
|
|
654 |
|
|
|
646 |
|
Deferred
tax asset
|
|
|
944 |
|
|
|
551 |
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
5,976 |
|
|
|
7,676 |
|
Prepaid
expenses and other
|
|
|
8,225 |
|
|
|
739 |
|
Total
current assets
|
|
|
80,402 |
|
|
|
61,547 |
|
Property
and equipment, net
|
|
|
85,312 |
|
|
|
68,746 |
|
Goodwill
|
|
|
12,096 |
|
|
|
2,481 |
|
Intangible
assets, net of amortization
|
|
|
4,761 |
|
|
|
653 |
|
Other
assets
|
|
|
90 |
|
|
|
107 |
|
Total
assets
|
|
$ |
182,661 |
|
|
$ |
133,534 |
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
3,500 |
|
|
$ |
-- |
|
Accounts
payable:
|
|
|
|
|
|
|
|
|
Trade
|
|
|
10,315 |
|
|
|
11,139 |
|
Retainage
|
|
|
511 |
|
|
|
678 |
|
Accrued
liabilities
|
|
|
10,434 |
|
|
|
7,546 |
|
Taxes
payable
|
|
|
-- |
|
|
|
2,324 |
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
13,578 |
|
|
|
7,408 |
|
Total
current liabilities
|
|
|
38,338 |
|
|
|
29,095 |
|
Long-term
debt, less current portion
|
|
|
31,500 |
|
|
|
-- |
|
Other
long-term liabilities
|
|
|
494 |
|
|
|
-- |
|
Deferred
income taxes
|
|
|
12,134 |
|
|
|
13,928 |
|
Deferred
revenue
|
|
|
385 |
|
|
|
427 |
|
Total
liabilities
|
|
|
82,851 |
|
|
|
43,450 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock—$0.01 par value, 50,000,000 shares authorized,
21,565,324
shares
issued ; 21,553,678 outstanding
|
|
|
216 |
|
|
|
216 |
|
Treasury
stock, $0.01 par value, 11,646 and 0 shares
|
|
|
-- |
|
|
|
-- |
|
Additional
paid-in capital
|
|
|
55,051 |
|
|
|
54,336 |
|
Retained
earnings
|
|
|
44,543 |
|
|
|
35,532 |
|
Total
stockholders’ equity
|
|
|
99,810 |
|
|
|
90,084 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
182,661 |
|
|
$ |
133,534 |
|
See notes
to unaudited condensed consolidated financial statements
Orion
Marine Group, Inc. and Subsidiaries
Condensed
Consolidated Statements of Income
(Unaudited)
(In
Thousands, Except Share and Per Share Information)
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
revenues
|
|
$ |
62,897 |
|
|
$ |
59,999 |
|
|
$ |
182,558 |
|
|
$ |
149,771 |
|
Costs
of contract revenues
|
|
|
50,297 |
|
|
|
45,668 |
|
|
|
150,056 |
|
|
|
114,850 |
|
Gross
profit
|
|
|
12,600 |
|
|
|
14,331 |
|
|
|
32,502 |
|
|
|
34,921 |
|
Selling,
general and administrative expenses
|
|
|
7,357 |
|
|
|
5,274 |
|
|
|
18,879 |
|
|
|
16,622 |
|
Income
from operations
|
|
|
5,243 |
|
|
|
9,057 |
|
|
|
13,623 |
|
|
|
18,299 |
|
Interest
(income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(107 |
) |
|
|
(214 |
) |
|
|
(375 |
) |
|
|
(774 |
) |
Interest
expense
|
|
|
365 |
|
|
|
71 |
|
|
|
855 |
|
|
|
910 |
|
Interest
(income) expense, net
|
|
|
258 |
|
|
|
(143 |
) |
|
|
480 |
|
|
|
136 |
|
Income
before income taxes
|
|
|
4,985 |
|
|
|
9,200 |
|
|
|
13,143 |
|
|
|
18,163 |
|
Income
tax expense
|
|
|
1,221 |
|
|
|
3,437 |
|
|
|
4,132 |
|
|
|
6,834 |
|
Net
income
|
|
$ |
3,764 |
|
|
$ |
5,763 |
|
|
$ |
9,011 |
|
|
$ |
11,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,764 |
|
|
$ |
5,763 |
|
|
$ |
9,011 |
|
|
$ |
11,329 |
|
Preferred
dividends
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
777 |
|
Earnings
available to common stockholders
|
|
$ |
3,764 |
|
|
$ |
5,763 |
|
|
$ |
9,011 |
|
|
$ |
10,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.18 |
|
|
$ |
0.27 |
|
|
$ |
0.42 |
|
|
$ |
0.57 |
|
Diluted
earnings per share
|
|
$ |
0.17 |
|
|
$ |
0.26 |
|
|
$ |
0.41 |
|
|
$ |
0.55 |
|
Shares
used to compute earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,487,542 |
|
|
|
21,447,492 |
|
|
|
21,478,238 |
|
|
|
18,631,171 |
|
Diluted
|
|
|
21,840,825 |
|
|
|
21,851,107 |
|
|
|
21,844,619 |
|
|
|
19,271,091 |
|
See notes
to unaudited condensed consolidated financial statements
Orion
Marine Group, Inc. and Subsidiaries
Consolidated
Statement of Stockholders’ Equity
(Unaudited)
(In
Thousands, Except Share Information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
Balance,
January 1, 2008
|
|
|
21,565,324 |
|
|
$ |
216 |
|
|
|
-- |
|
|
$ |
-- |
|
|
$ |
54,336 |
|
|
$ |
35,532 |
|
|
$ |
90,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
766 |
|
|
|
|
|
|
|
766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of restricted shares into treasury
|
|
|
(11,646 |
) |
|
|
-- |
|
|
|
11,646 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
from the sale of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
9,011 |
|
|
|
9,011 |
|
Balance
September 30, 2008
|
|
|
21,553,678 |
|
|
$ |
216 |
|
|
|
11,646 |
|
|
$ |
-- |
|
|
$ |
55,051 |
|
|
$ |
44,543 |
|
|
$ |
99,810 |
|
See notes
to unaudited condensed consolidated financial statements
Orion
Marine Group, Inc. and Subsidiaries
(Unaudited)
(In
Thousands)
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,011 |
|
|
$ |
11,329 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,862 |
|
|
|
9,342 |
|
Deferred
financing cost amortization
|
|
|
184 |
|
|
|
150 |
|
Non-cash
interest expense
|
|
|
22 |
|
|
|
65 |
|
Bad
debt expense
|
|
|
50 |
|
|
|
-- |
|
Deferred
income taxes
|
|
|
(2,187 |
) |
|
|
(814 |
) |
Stock-based
compensation
|
|
|
766 |
|
|
|
668 |
|
Gain
on sale of property and equipment
|
|
|
(1,040 |
) |
|
|
(333 |
) |
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,701 |
) |
|
|
(7,679 |
) |
Inventory
|
|
|
(8 |
) |
|
|
(46 |
) |
Prepaid
expenses and other
|
|
|
(3,282 |
) |
|
|
(486 |
) |
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
2,930 |
|
|
|
(3,511 |
) |
Accounts
payable
|
|
|
(991 |
) |
|
|
68 |
|
Accrued
liabilities
|
|
|
3,357 |
|
|
|
(952 |
) |
Income
tax payable
|
|
|
(6,540 |
) |
|
|
1,679 |
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
5,988 |
|
|
|
(3,111 |
) |
Deferred
revenue
|
|
|
(42 |
) |
|
|
(41 |
) |
Net
cash provided by operating activities
|
|
|
16,379 |
|
|
|
6,328 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of assets of Subaqueous Services, Inc.
|
|
|
(36,713 |
) |
|
|
-- |
|
Proceeds
from sale of property and equipment
|
|
|
3,581 |
|
|
|
1,885 |
|
Purchase
of property and equipment
|
|
|
(11,715 |
) |
|
|
(7,939 |
) |
Net
cash used in investing activities
|
|
|
(44,847 |
) |
|
|
(6,054 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
-- |
|
|
|
(23,357 |
) |
Borrowing
on credit facility
|
|
|
35,000 |
|
|
|
— |
|
Purchase
of treasury stock
|
|
|
-- |
|
|
|
— |
|
Exercise
of stock options
|
|
|
-- |
|
|
|
48 |
|
Payment
of accumulated preferred dividends and liquidation of preferred
stock
|
|
|
-- |
|
|
|
(40,431 |
) |
(Expenses)
proceeds from the sale of common stockstock
|
|
|
(51 |
) |
|
|
261,074 |
|
Redemption
of common stock
|
|
|
-- |
|
|
|
(201,555 |
) |
Increase
in loan costs
|
|
|
(80 |
) |
|
|
(194 |
) |
Net
cash provided by (used in) financing activities
|
|
|
34,869 |
|
|
|
(4,415 |
) |
Net
change in cash and cash equivalents
|
|
|
6,401 |
|
|
|
(4,141 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
12,584 |
|
|
|
18,561 |
|
Cash
and cash equivalents at end of period
|
|
$ |
18,985 |
|
|
$ |
14,420 |
|
Supplemental
disclosures of cash flow information: cash paid during the
period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
492 |
|
|
$ |
926 |
|
Taxes
|
|
$ |
12,405 |
|
|
$ |
7,804 |
|
See notes
to unaudited condensed consolidated financial statements
Orion
Marine Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three
and Nine Months Ended September 30, 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
and nine months ended September 30, 2008, are not necessarily indicative of the
results that may be expected for the year ending December 31,
2008.
Reclassifications
Certain
items on the prior period 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:
·
|
Stock
based compensation
|
Revenue
Recognition
The
Company records revenue on construction contracts for financial statement
purposes on the percentage-of-completion method, measured by the percentage of
contract costs incurred to date to total estimated costs for each contract. 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
September 30, 2008 and December 31, 2007, no single customer accounted for more
than 10% of total receivables. In the three months ended September
30, 2008 and 2007, one customer in each period generated revenue in excess of
10% of total revenues, representing 10.8% and 10.6% of contract revenues,
respectively. In the nine months ended September 30, 2008 no customer
generated revenues in excess of 10% of total revenues. In the nine
months ended September 30, 2007, two customers generated revenues in excess of
10% of total revenues, representing 14.4% and 12.1% of revenues in each
respective period.
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. In the second quarter of 2008, the Company
recovered a receivable it had previously partially reserved as a doubtful
account. As of September 30, 2008 and December 31, 2007, the
Company had an allowance for doubtful accounts of $50,000 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 September 30, 2008 totaled $6.1
million, of which $2.1 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).
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. As of January 1,
2008, the Company adopted SFAS 157, “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. We have
determined that the adoption of SFAS 157 did not have a material impact on our
consolidated financial position, results of operations or cash flows and do not
believe any of the Company’s assets or liabilities are subject to the quarterly
recurring measurement provisions of SFAS 157. The disclosure
requirements for assets and liabilities assessed on a non-recurring basis have
been deferred by FASB Staff Position (“FSP”) 157-2 “Effective Date of FASB
Statement No. 157” until fiscal years beginning after November 15, 2008
SFAS 157-3. In
October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active”. FSP
157-3 clarifies the application of SFAS 157 as it relates to the valuation of
financial assets in a market that is not active for those financial
assets. The FSP is effective immediately and includes those periods
for which financial statements have not been issued. The Company does
not have any financial assets that are valued using inactive markets, and as a
result, the Company is not impacted by the issuance of FSP 157-3.
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.
FSP 142-3. In
April 2008, the FASB issued FASB Staff Position 142-3, “Determination of the
Useful Life of Intangible Assets”. FSP 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142
“Goodwill and Other Intangible Assets”. FSP 142-3 is effective for
financial statements issued for fiscal years beginning on or after December 15,
2008. We are currently evaluating the impact of FSP 142-3 on our
consolidated financial statements.
In June
2008, the Financial Accounting Standard Board (FASB) issued FSP EITF
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 clarified that all
outstanding unvested share-based payment awards that contain rights to
nonforfeitable dividends participate in undistributed earnings with common
shareholders. Awards of this nature are considered participating securities and
the two-class method of computing basic and diluted earnings per share must be
applied. FSP EITF 03-6-1 is effective for fiscal years beginning after December
15, 2008. The Company is currently assessing the impact of FSP EITF 03-6-1 and
anticipates any impact to basic earnings per share will be
immaterial.
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. On July 31, 2008, SSLLC and the
Company provided the sole shareholder of SSI a notice of termination of the
Consulting Agreement.
The
Company funded the acquisition using its acquisition line of $25 million and a
draw on its accordion facility of $10 million, and cash on hand for the other
payments referenced above. SSLLC operates the acquired assets under the name
“Subaqueous Services, LLC,” and SSLLC is based in Jacksonville, Florida. In that
regard, SSLLC entered a lease agreement with Hill Street, LLC effective February
29, 2008, for premises and facilities constituting those formerly occupied and
used by SSI for its Jacksonville operations.
SSI was a
specialty dredging services provider that focused on shallow water dredging
projects in Florida and along the Atlantic Seaboard utilizing both mechanical
and hydraulic cutter suction pipeline dredging, with a wide variety of customers
both in the public and private sectors. The assets acquired consist
primarily of marine construction equipment, including several
dredges. The Company also purchased construction contracts in
progress and the right to the name “Subaqueous Services” and derivatives
thereof. In addition, SSLLC hired certain senior managers of SSI and
substantially all of SSI’s field personnel.
Prior to
this acquisition, no relationship outside the ordinary course of business
existed between SSI and the Company or SSI and SSLLC.
The
Company accounted for the purchase of the assets of SSI as a business
combination. The following represents the Company’s allocation of the
purchase price to the assets acquired:
Property
and equipment
|
|
$ |
18,500 |
|
Intangible
assets
|
|
|
6,900 |
|
Goodwill
|
|
|
9,600 |
|
|
|
$ |
35,000 |
|
The
Company’s condensed consolidated financial statements at September 30, 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 September
30,
|
|
|
Nine months ended September
30,
|
|
|
|
2008(Actual)
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue
|
|
$ |
62,897 |
|
|
$ |
72,262 |
|
|
$ |
185,336 |
|
|
$ |
186,560 |
|
Income
before taxes
|
|
$ |
4,985 |
|
|
$ |
9,212 |
|
|
$ |
12,369 |
|
|
$ |
18,470 |
|
Net
income
|
|
$ |
3,764 |
|
|
$ |
5,764 |
|
|
$ |
8,533 |
|
|
$ |
11,479 |
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.18 |
|
|
$ |
0.27 |
|
|
$ |
0.40 |
|
|
$ |
0.57 |
|
Diluted
|
|
$ |
0.17 |
|
|
$ |
0.26 |
|
|
$ |
0.39 |
|
|
$ |
0.56 |
|
4. Contracts
in Progress
Contracts
in progress are as follows at September 30, 2008 and December 31,
2007:
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Costs
incurred on uncompleted contracts
|
|
$ |
218,082 |
|
|
$ |
379,268 |
|
Estimated
earnings
|
|
|
54,555 |
|
|
|
131,437 |
|
|
|
|
272,637 |
|
|
|
510,705 |
|
Less:
Billings to date
|
|
|
(280,239 |
) |
|
|
(510,437 |
) |
|
|
$ |
(7,602 |
) |
|
$ |
268 |
|
Included
in the accompanying consolidated balance sheet under the following
captions:
|
|
|
|
|
|
|
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
$ |
5,976 |
|
|
$ |
7,676 |
|
Billings
in excess of costs and estimated earnings on uncompleted
contract
|
|
|
(13,578 |
) |
|
|
(7,408 |
) |
|
|
$ |
(7,602 |
) |
|
$ |
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.
5. Property
and Equipment
The
following is a summary of property and equipment at September 30, 2008 and
December 31, 2007:
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Automobiles
and trucks
|
|
$ |
1,536 |
|
|
$ |
1,807 |
|
Building
and improvements
|
|
|
11,914 |
|
|
|
12,363 |
|
Construction
equipment
|
|
|
86,486 |
|
|
|
74,736 |
|
Dredges
and dredging equipment
|
|
|
38,122 |
|
|
|
24,189 |
|
Office
equipment
|
|
|
1,108 |
|
|
|
891 |
|
|
|
|
139,166 |
|
|
|
113,986 |
|
Less:
accumulated depreciation
|
|
|
(65,667 |
) |
|
|
(56,223 |
) |
Net
book value of depreciable assets
|
|
|
73,499 |
|
|
|
57,763 |
|
Construction
in progress
|
|
|
6,591 |
|
|
|
5,761 |
|
Land
|
|
|
5,222 |
|
|
|
5,222 |
|
|
|
$ |
85,312 |
|
|
$ |
68,746 |
|
For the
three months ended September 30, 2008 and 2007, depreciation expense was
$3.9 million and $3.1 million, respectively and for the nine months ended
September 30, 2008, depreciation expense was $11.2 million and $9.3 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
September 30, 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. The Company sold the vessel on August 1, 2008 for
approximately $2.8 million.
6. Debt
and Line of Credit
The
Company has maintained a credit agreement with several participating banks since
October 2004. In July 2007, the Company restated its credit agreement
with its existing lenders. Debt under the new credit facility
included the balance of the old credit facility of $3.1 million, which was paid
in full in December 2007. In addition, the terms of the credit
facility provided for the Company to borrow up to $25 million under an
acquisition term loan facility and up to $8.5 million under a revolving line of
credit. At the discretion of the Company’s lenders, either the
acquisition term loan facility or the revolving line of credit may be increased
by $25 million, of which $10 million was used in the purchase of the assets of
SSI.
The
revolving line of credit is subject to a borrowing base and availability on the
revolving line of credit is reduced by any outstanding letters of
credit. At September 30, 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
November 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. Payments of principal commence December 31, 2008 in seven
equal quarterly installments of $875,000, plus an annual principal payment based
on year end results, beginning December 31, 2008, with the remaining balance due
September 30, 2010. All provisions under the credit facility mature
on September 30, 2010.
Interest
on the Company’s borrowings is based on the prime rate, less an applicable
margin, or LIBOR rate, plus an applicable margin, then in effect, at the
Company’s discretion. For each prime rate loan drawn under the credit
facility, interest is due quarterly at the then prime rate minus a margin that
is adjusted quarterly based on total leverage ratios, as
applicable. For each LIBOR loan, interest is due at the end of each
interest period at a rate of the then LIBOR rate for such period plus the LIBOR
margin based on total leverage ratios, as applicable. At September
30, 2008, interest on the Company’s outstanding loans was based on
prime. The prime interest rate, less the applicable margin, at
September 30, 2008 was 4.0%.
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 September 30,
2008, the Company was in compliance with all debt covenants.
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 September 30, 2008 was 24.5% and differed from the Company’s
statutory rate of 35% primarily due to true-ups of federal and state deferred
taxes and the benefit of the domestic production deduction. During 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, thereby reducing the effective rate for the
nine months ended September 30, 2008 to 31.4%. The Company’s
effective tax rate of 37.4% and 37.6% for the three and nine months ended
September 30, 2007, respectively, differed from the statutory rate principally
due to state income taxes.
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Three
months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$ |
2,342 |
|
|
$ |
(899 |
) |
|
$ |
1,443 |
|
State
and local
|
|
|
60 |
|
|
|
(282 |
) |
|
|
(222 |
) |
|
|
$ |
2,402 |
|
|
$ |
(1,181 |
) |
|
$ |
1,221 |
|
Three
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$ |
3,311 |
|
|
$ |
212 |
|
|
$ |
3,523 |
|
State
and local
|
|
|
(86 |
) |
|
|
— |
|
|
|
(86 |
) |
|
|
$ |
3,225 |
|
|
$ |
212 |
|
|
$ |
3,437 |
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Nine
months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$ |
5,603 |
|
|
$ |
(1,988 |
) |
|
$ |
3,615 |
|
State
and local
|
|
|
716 |
|
|
|
(199 |
) |
|
|
517 |
|
|
|
$ |
6,319 |
|
|
$ |
(2,187 |
) |
|
$ |
4,132 |
|
Nine
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$ |
7,383 |
|
|
$ |
(814 |
) |
|
$ |
6,569 |
|
State
and local
|
|
|
265 |
|
|
|
— |
|
|
|
265 |
|
|
|
$ |
7,648 |
|
|
$ |
(814 |
) |
|
$ |
6,834 |
|
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
September 30, 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. For the three and nine
months ended September 30, 2008, 569,840 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 September 30, 2007.
The
following table reconciles the denominators used in the computations of both
basic and diluted earnings per share:
|
|
Three
months ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
Basic:
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
21,557,601 |
|
|
|
21,565,324 |
|
Less
weighted average non-vested restricted stock
|
|
|
70,059 |
|
|
|
117,832 |
|
Total
basic weighted average shares outstanding
|
|
|
21,487,542 |
|
|
|
21,447,492 |
|
Diluted:
|
|
|
|
|
|
|
|
|
Total
basic weighted average shares outstanding
|
|
|
21,487,542 |
|
|
|
21,447,492 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Common
stock options
|
|
|
275,726 |
|
|
|
285,945 |
|
Non-vested
restricted stock
|
|
|
77,557 |
|
|
|
117,670 |
|
Total
weighted average shares outstanding assuming dilution
|
|
|
21,840,825 |
|
|
|
21,851,107 |
|
|
|
Nine
months ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
Basic:
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
21,562,721 |
|
|
|
18900,482 |
|
Less
weighted average non-vested restricted stock
|
|
|
84,483 |
|
|
|
269,310 |
|
Total
basic weighted average shares outstanding
|
|
|
21,478,238 |
|
|
|
18,631,171 |
|
Diluted:
|
|
|
|
|
|
|
|
|
Total
basic weighted average shares outstanding
|
|
|
21,478,238 |
|
|
|
18,631,171 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Common
stock options
|
|
|
277,648 |
|
|
|
330,273 |
|
Non-vested
restricted stock
|
|
|
88,733 |
|
|
|
309,647 |
|
Total
weighted average shares outstanding assuming dilution
|
|
|
21,844,619 |
|
|
|
19,271,091 |
|
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 (the “LTIP” and
the “2005 Plan”). In general, the plans provide for grants of
restricted stock and stock options to be issued with a per-share price equal to
the fair market value of a share of common stock on the date of
grant. Option terms are specified at each grant date, but generally
are 10 years. Options generally vest over a three to five year
period. Total shares of common stock that may be delivered under the
LTIP and the 2005 Plan may not exceed 2,943,946.
The
Company uses the Black-Scholes option pricing model to estimate the fair value
of stock-based awards. In March 2008, the Company granted options to
purchase 15,000 shares of common stock. 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 September 30, 2008 and 2007, compensation expense related to
stock options outstanding for the periods was $258,000 and $165,000,
respectively, and for the nine months ended September 30, 2008 and 2007 was
$766,000 and $311,000, respectively. Compensation expense for
restricted shares granted in May 2007 and which immediately vested totaled
$357,000.
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
as we believe we did not deviate from our contracted scope of work on a project.
In June of 2007, however, the plaintiffs have taken an appeal of this decision
to the United States Court of Appeals for the Fifth Circuit, where currently all
actions remaining in this litigation will be lodged.
11. Other
Possible Contingencies
In May
2008, the Company learned of a federal criminal investigation that related to
certain contracts and contracting activities in the Jacksonville, Florida area,
of, among others, the Jacksonville Port Authority and SSI. It
does not appear that the Company, or any of its subsidiaries, or their
respective operations, is the focus of such
investigation. Nevertheless, investigators have secured certain
documents and other materials from the Company concerning SSI’s operations and
activities prior to the sale of its assets to the Company. The
Company 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. Common stockholders are entitled to vote and to receive
dividends if declared.
In July
2008, 11,646 shares of non-vested restricted stock were
forfeited. Pursuant to the Company’s 2005 Stock Plan, the Company
exercised its right to repurchase these shares at the price of $0.02 per
share. These shares are recorded as common shares held in treasury on
the Company’s balance sheet.
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 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 operations, revenues,
income, profitability, 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 applicable 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 and the
Atlantic Seaboard and in the Caribbean Basin. Our customers include federal,
state and municipal governments, the combination of which accounted for
approximately 54% of our revenue in the nine months ended September 30, 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.
Recent
Developments
During
the summer months of 2008, the Atlantic and Gulf coastal regions of the United
States were affected by seven named storms which shut down the operations of the
Company at various times. All of the Company’s projects were
disrupted by at least one storm, and several projects were delayed by as many as
three storms. Approximately $6.0 million of revenue expected to be
recognized in the third quarter shifted into future periods due to the storm
activity.
On
October 9, 2008, the US Occupational Safety and Health Administration (“OSHA”)
published for comment in the Federal Register (73 Federal Register 59714) a
proposed rule regarding safety hazards associated with the use of hoisting
equipment, such as cranes, in construction activities. The Company
uses hoisting equipment, including cranes. The proposed rule, which
includes additional training, inspection, certification, and operating
requirements, has not been finalized and is subject to public
comment. The Company is actively assessing potential impacts of the
proposed rule to its operations.
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. In May 2008, 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
General
worldwide economic conditions have deteriorated due to credit conditions
impacted by the sub-prime mortgage turmoil and other
factors. Concerns over slower or declining economic growth are
affecting numerous industries and companies, and many states are facing
difficult budget decisions which could result in reduced demand for general
construction projects. This reduced demand may increase the number of
potential bidders in our markets and could increase the competitive environment
through pressure on pricing. Budgeting decisions and constraints due
to the tight credit markets may result in diversion of governmental funding from
projects we perform to other uses. A weak economy may also produce
less tax revenue, thereby decreasing funds for public sector
projects. However, to date, we have not seen a significant decline in
our end market bidding activity, including port development projects, cruise
ship pier development, and general infrastructure maintenance and
upgrades. Additionally, recent supplemental emergency funding
legislation was signed into law which provides $740 million to the Corp of
Engineers to be used for emergency dredging and construction projects in storm
affected areas, which include the markets in which we operate.
The cost
of certain commodities used in our business, such as concrete, steel and fuel,
continued to fluctuate significantly in recent months. Because our
projects are normally short-term in nature, we are generally able to include
price increases in the costs of our bids, and, in certain circumstances, may be
able to negotiate for price escalations during the execution of a
contract. However, certain projects may be negatively impacted
by substantial cost increases.
We
evaluated our credit exposure in response to the current global credit market
crises. During the nine months ended September 30, 2008, our
operations provided cash from operations in excess of $16.0 million and our cash
position at September 30, 2008 was in excess of $18.0 million. Our
operations are not currently dependent on external short-term funding and we
have not utilized our available borrowing of $7.8 million under our revolving
credit facility.
Acquisition
of assets
As
discussed in Note 3 in the Notes to Condensed Consolidated Financial Statements
included herein, SSLLC, a wholly-owned subsidiary of the Company purchased
substantially all of the assets and related business of Subaqueous
Services. Since the date of acquisition, we have integrated these
assets into our operations, and stand-alone financial information is not
provided.
Consolidated
Results of Operations
Three
months ended September 30, 2008 compared with three months ended September 30,
2007
|
|
Three
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Contract
revenues
|
|
$ |
62,897 |
|
|
|
100.0 |
% |
|
$ |
59,999 |
|
|
|
100.0 |
% |
Cost
of contract revenues
|
|
|
50,297 |
|
|
|
80.0 |
|
|
|
45,668 |
|
|
|
76.1 |
|
Gross
profit
|
|
|
12,600 |
|
|
|
20.0 |
|
|
|
14,331 |
|
|
|
23.9 |
|
Selling,
general and administrative expenses
|
|
|
7,357 |
|
|
|
11.7 |
|
|
|
5,274 |
|
|
|
8.8 |
|
Operating
income
|
|
|
5,243 |
|
|
|
8.3 |
|
|
|
9,057 |
|
|
|
15.1 |
|
Interest
(income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(income)
|
|
|
(107 |
) |
|
|
(0.2 |
) |
|
|
(214 |
) |
|
|
(0.4 |
) |
Interest
expense
|
|
|
365 |
|
|
|
0.6 |
|
|
|
71 |
|
|
|
0.1 |
|
Interest
(income) expense, net
|
|
|
258 |
|
|
|
0.4 |
|
|
|
(143 |
) |
|
|
(0.3 |
) |
Income
before income taxes
|
|
|
4,985 |
|
|
|
7.9 |
|
|
|
9,200 |
|
|
|
15.4 |
|
Income
tax expense
|
|
|
1,221 |
|
|
|
1.9 |
|
|
|
3,437 |
|
|
|
5.7 |
|
Net
income
|
|
$ |
3,764 |
|
|
|
6.0 |
% |
|
$ |
5,763 |
|
|
|
9.6 |
% |
Contract
Revenues. Revenues for the three months ended September 30, 2008
increased approximately 4.8% as compared with the same period last
year. However, the Atlantic and Gulf Coast areas experienced an
active hurricane season, with seven named storms disrupting all projects
throughout the Company at some point in time during the third
quarter. Several projects felt the impact of as many as three
storms. Demobilization prior to the storm, and remobilization after
conditions were safe to return to the jobsite delayed construction and pushed
approximately $6.0 million of revenues expected to be recognized in the third
quarter into future periods.
Gross Profit.
Gross profit for the third quarter of 2008 was $12.6 million,
representing a decrease of $1.7 million, or 12.1%, as compared with the
corresponding period last year when certain jobs in progress during the third
quarter of 2007 generated high margins. Approximately 12.6% of work
during the third quarter of 2008 was performed by outside subcontractors, as
compared with 9.5% in the third quarter of 2007. Such an increase in
work performed by subcontractors generally reduces margins.
Selling, General
and Administrative Expense. Selling, general and administrative expense
for the third quarter of 2008 was $7.4 million, an increase of $2.1 million as
compared with the prior year period. The increase was related to the
amortization of the intangible assets, as well as additional overhead cost for
personnel, related to the purchase of the assets from SSI, and a full complement
of expenses as a public company in the current year.
Income Tax
Expense The effective rate for the three months ended
September 30, 2008 was 24.5% and differed from the Company’s statutory rate of
35% primarily due to the benefit of the domestic production deduction on the
Company’s tax return and to true-ups of federal and state deferred
taxes. Excluding these true-ups, which should not reoccur, our
effective tax rate for the quarter was 36.4%. The true-ups represent
approximately $0.02 per diluted share. The effective rate of 37.4%
for the three months ended September 30, 2007 differed from the statutory rate
principally due to state income taxes.
Nine
months ended September 30, 2008 compared with nine months ended September 30,
2007
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Contract
revenues
|
|
$ |
182,558 |
|
|
|
100.0 |
% |
|
$ |
149,771 |
|
|
|
100.0 |
% |
Cost
of contract revenues
|
|
|
150,056 |
|
|
|
82.2 |
|
|
|
114,850 |
|
|
|
76.7 |
|
Gross
profit
|
|
|
32,502 |
|
|
|
17.8 |
|
|
|
34,921 |
|
|
|
23.3 |
|
Selling,
general and administrative expenses
|
|
|
18,879 |
|
|
|
10.3 |
|
|
|
16,622 |
|
|
|
11.1 |
|
Operating
income
|
|
|
13,623 |
|
|
|
7.5 |
|
|
|
18,299 |
|
|
|
12.2 |
|
Interest
(income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(income)
|
|
|
(375 |
) |
|
|
(0.2 |
) |
|
|
(774 |
) |
|
|
(0.5 |
) |
Interest
expense
|
|
|
855 |
|
|
|
0.5 |
|
|
|
910 |
|
|
|
0.6 |
|
Interest
(income) expense, net
|
|
|
480 |
|
|
|
0.3 |
|
|
|
136 |
|
|
|
0.1 |
|
Income
before income taxes
|
|
|
13,143 |
|
|
|
7.2 |
|
|
|
18,163 |
|
|
|
12.1 |
|
Income
tax expense
|
|
|
4,132 |
|
|
|
2.3 |
|
|
|
6,834 |
|
|
|
4.6 |
|
Net
income
|
|
$ |
9,011 |
|
|
|
4.9 |
% |
|
$ |
11,329 |
|
|
|
7.5 |
% |
Contract
Revenues. Revenues for the nine months ended September 30, 2008 increased
approximately 21.9% as compared with the same period last year. In
the current year, we expanded geographically through the addition of dredging
and other projects along the eastern coast of the United States. In
the first and second quarters of 2007, we experienced delays in the commencement
of work on several projects for reasons beyond our control and we elected to
withdraw from a sole-source negotiated project, which reduced revenues in that
period. Governmental agencies represented 54% and 57% of revenues in
the first nine months of 2008 and 2007, respectively. Revenues generated from
the private sector represented 46% and 43% of total revenues in each respective
period of 2008 and 2007. Our average project size in the first
nine months of 2008 was $2.5 million, an increase as compared with $1.7 million
in the same period last year.
Gross Profit.
Gross profit decreased $2.4 million, or 6.9%, in the first
nine months of 2008 as compared with the corresponding period last
year. Gross margin for the nine months ended September 30, 2008 was
17.8%, a decrease from 23.3% in the prior year period. The mix of
contracts in progress in the first and third quarters of the current year put
pressure on margin due to a larger component of outside subcontracting costs and
material costs, such as concrete and steel, which generally are not marked up as
much as labor and equipment intensive contracts, and thereby reduce
margins. In addition, gross margins were impacted by two dredging
projects in the first and second quarter of 2008 as a result of significant
production delays mostly related to unexpected amounts of trash and unforeseen
adverse site conditions. Also, the corresponding period in 2007
included several projects which generated high margins.
Selling, General
and Administrative Expense. Selling, general and administrative expense
increased by $2.3 million in the nine months ended September 30, 2008 as
compared with the prior year period. Current year expenses include
amortization related to intangible assets as well as additional overhead costs
for personnel related to the purchase of the assets from SSI and a full
complement of expenses as a public company in the current year.
Income Tax
Expense. Our effective rate for the nine months ended
September 30, 2008 was 31.4% and differed from the Company’s statutory rate of
35% primarily due to the benefit of the domestic production deduction on the
Company’s tax return and to true-ups of federal and state deferred
taxes. Excluding these true-ups, which should not reoccur, our
effective tax rate for the nine month period was 36.0% and differed from the
statutory rate due to
our
estimate of the impact of certain permanent deductions available on our federal
tax return, offset by increases in state income taxes. The true-ups
represent approximately $0.02 per diluted share. The effective rate
of 37.6% for the nine months ended September 30, 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 Subaqueous Services and at
September 30, 2008, our net indebtedness, which is comprised of total debt less
cash, was $16.1 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 September 30, 2008, our
working capital was $42.1 million compared to $32.5 million at
December 31, 2007. The increase of $9.6 million in working capital was
primarily due to an improved cash position and increases in accounts receivable,
resulting from the increased revenues, and other prepaid items, including our
estimate of tax pre-payments, offset by an increase in liabilities related to
billings in excess of costs and estimated earnings on uncompleted contracts,
which represents timing of billings to customers particularly for
mobilization. As of September 30, 2008, we had cash on hand and
availability under our revolving credit facility of
$26.7 million.
We
evaluated our credit exposure in response to the current global credit market
crises. During the nine months ended September 30, 2008, our
operations provided cash from operations in excess of $16.0 million and our cash
position at September 30, 2008 was in excess of $18.0 million. Our
operations are not currently dependent on external short-term funding and we
have not utilized our available borrowing of $7.8 million under our revolving
credit facility.
The
following table provides information regarding our cash flows and capital
expenditures for the nine months ended September 30, 2008 and 2007
(unaudited):
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows provided by operating activities
|
|
$ |
16,379 |
|
|
$ |
6,328 |
|
Cash
flows used in investing activities
|
|
$ |
(44,847 |
) |
|
$ |
(6,054 |
) |
Cash
flows provided by (used in) financing activities
|
|
$ |
34,869 |
|
|
$ |
(4,141 |
) |
|
|
|
|
|
|
|
|
|
Operating
Activities. During the nine months ended September 30, 2008, our
operating activities provided $16.4 million of cash as compared to
$6.3 million for the nine months ended September 30, 2007. The increase was
due primarily to improved collections of receivables as compared with the prior
year period and improved timing of billings to customers in relation to work
performed, offset by increases in prepaid items including tax
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 $11.7 million,
in the nine months ended September 30, 2008, as compared with capital asset
additions of $8.0 million in the three months ended September 30,
2007.
Financing
Activities. The increase in cash provided by financing activities for the
nine months ended September 30, 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 $23.4 million, primarily through the use of
cash received in connection with our stock offering.
Sources
of Capital
In
addition to our cash balances and cash provided by operations, we have a credit
facility available to us to finance capital expenditures and working capital
needs.
The
Company has maintained a credit agreement with several participating banks since
October 2004. In July 2007, the Company restated its credit agreement
with its existing lenders. Debt under the new credit facility
included the balance of the old credit facility of $3.1 million, which was paid
in full in December 2007. In addition, the terms of the credit
facility provided for the Company to borrow up to $25 million under an
acquisition term loan facility and up to $8.5 million under a revolving line of
credit. At the discretion of the Company’s lenders, either the
acquisition term loan facility or the revolving line of credit may be increased
by $15 million.
The
revolving line of credit is subject to a borrowing base and availability on the
revolving line of credit is reduced by any outstanding letters of
credit. At September 30, 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
September 30, 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. Payments of principal commence December 31, 2008 in seven
equal quarterly installments of $875,000, plus an annual principal payment based
on year end results, beginning December 31, 2008, with the remaining balance due
September 30, 2010. All provisions under the credit facility mature
on September 30, 2010.
Interest
on the Company’s borrowings is based on the prime rate, less an applicable
margin, or LIBOR rate, plus an applicable margin, then in effect, at the
Company’s discretion. For each prime rate loan drawn under the credit
facility, interest is due quarterly at the then prime rate minus a margin that
is adjusted quarterly based on total leverage ratios, as
applicable. For each LIBOR loan, interest is due at the end of each
interest period at a rate of the then LIBOR rate for such period plus the LIBOR
margin based on total leverage ratios, as applicable. At September
30, 2008, interest on the Company’s outstanding loans was based on
prime. The prime interest rate, less the applicable margin, at
September 30, 2008 was 4.0%.
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 September 30,
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 September 30, 2008, we believe our capacity under our
current bonding arrangement with Liberty Mutual was in excess of $400 million,
of which we had approximately $100 million in surety bonds
outstanding. During nine months ended September 30, 2008,
approximately 51% 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 and months ended September 30,
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
September 30, 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)
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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.
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(b)
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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.
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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
The
recent worldwide financial and credit crisis could lead to an extended worldwide
economic recession and have a material adverse affect on our revenue and
profitability.
Concerns
over slower or declining economic growth is affecting numerous industries and
companies and many states are facing difficult budget decisions which could
result in reduced demand for general construction projects. This
reduced demand may increase the number of potential bidders in our markets and
could increase the competitive environment through pressure on
pricing. Budgeting decisions and constraints due to the tight credit
markets may result in diversion of governmental funding from projects we perform
to other uses. A weak economy may also produce less tax revenue,
thereby decreasing funds for public sector projects. Lower levels of
activity may result in a corresponding decline in the demand for our services,
which could have a material adverse effect on our revenue and
profitability.
The
global financial crisis may have impacts on our business and financial condition
that we currently cannot predict.
General
worldwide economic conditions have deteriorated due to credit conditions
impacted by the sub-prime mortgage turmoil and other factors. We may
face challenges if conditions in the financial markets do not
improve. While these conditions have not impaired the Company’s
ability to access credit markets and finance operations, at this time, there can
be no assurance that there will not be a further deterioration in financial
markets and confidence in major economies. A continuing shortage of
liquidity could have an impact on the lenders under our credit facility or on
our customers,
Item
4. Submission
of Matters to a Vote of Security Holders
None
Item
5. Other
Information
None
Item
6. Exhibits
10.14* Executive
Incentive Plan
10.15* Subsidiary
Incentive Plan
31.1*
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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
|
32.1*
|
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
SIGNATURES
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.
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ORION
MARINE GROUP, INC.
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By:
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/s/ J. Michael Pearson |
November
6, 2008
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J.
Michael Pearson
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President
and Chief Executive Officer
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By:
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/s/ Mark R. Stauffer |
November
6, 2008
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Mark
R. Stauffer
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Executive
Vice President and Chief Financial
Officer
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