Orion Group Holdings Inc 10-Q

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 Group Holdings, Inc. and its subsidiaries taken as a whole . Certain information in this Quarterly Report on Form 10-Q, including but not limited to Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may constitute forward-looking statements as such term is defined within the meaning of the “safe harbor” provisions of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts, including those that express a belief, expectation, or intention are forward-looking statements. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control, including the duration of the COVID19 pandemic and the resiliency of the economy thereafter, unforeseen productivity delays and other difficulties encountered in project execution, levels of government funding or other governmental budgetary constraints, and contract cancellation at the discretion of the customer. 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, 2020 (“2020 Form 10-K”) may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements in this quarterly report on Form 10-Q speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. MD&A provides 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 2020 audited consolidated financial statements and notes thereto included in our 2020 Form 10-K, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Form 10-K and with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this quarterly report. Overview Orion Group Holdings, Inc., its subsidiaries and affiliates (hereafter collectively referred to as the “Company”), provides a broad range of specialty construction services in the infrastructure, industrial and building sectors of the continental United States, Alaska, and the Caribbean Basin. The Company’s marine segment services the 34 ​ Table of Contents infrastructure sector through marine transportation facility construction, marine pipeline construction, marine environmental structures, dredging of waterways, channels and ports, environmental dredging, design, and specialty services. Its concrete 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. Our contracts are obtained primarily through competitive bidding in response to “requests for proposals” by federal, state and local agencies and through negotiation and competitive bidding with private parties and general contractors. Our bidding activity and strategies are affected by such factors as our backlog, current utilization of equipment and other resources, job location, our 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. We generally record revenue on construction contracts over time, measured by the percentage of actual contract costs incurred to date to total estimated costs for each contract. 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, work stoppages, and other costs 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 have a negative impact on our contract performance, which can adversely affect the timing of revenue recognition and ultimate contract profitability. We plan our operations and bidding activity with these factors in mind and they generally have not had a material adverse impact on the results of our operations in the past. First Quarter 2021 Recap and 2021 Outlook In the quarter ended March 31, 2021, we recorded revenues of $153.3 million, of which $72.1 million was attributable to our marine segment and the remaining $81.2 million to our concrete segment. In addition, we ended the quarter with a consolidated backlog of $364.8 million. Our revenues in the quarter decreased by 8.0% as compared with the comparable prior year period and we recorded net income of $0.9 million, as compared with net income of $2.7 million in the comparable prior year period. Looking toward the balance of 2021, the Company continues to focus on developing opportunities across the infrastructure, industrial, and building sectors through organic growth, greenfield expansion, and strategic acquisition opportunities. The spread of COVID-19 has impacted the global economy, leaving supply chains disrupted. As the world uses tactics like “social distancing” and “stay at home orders” to slow and stop the spread of COVID-19, demand destruction has led to increased unemployment and to the weakening of consumer confidence. Although to date the Company hasn’t experienced materially negative impacts from COVID-19, such as widespread project 35 ​ Table of Contents stoppage/cancelations or a slowdown/stoppage of accounts receivables collections, any delays in the timing of future awards could create gaps in the Company’s project delivery schedule across quarterly periods. ​ Federal and State governments have increased spending as part of efforts to mitigate the impact of COVID-19 on the economy. The amount and timing of such spending will be directly impacted by the duration of required efforts to contain COVID-19 and the severity of the negative impacts created by the virus and its effect on the economy. Although little progress has been made to date and on a federal infrastructure bill, the Company will continue to track and monitor any developments on a federal infrastructure bill which could potentially create bid opportunities for the Company. Marine Segment Demand for our marine construction services continues, given our differentiated capabilities and service offering within the space. We continue to see bid opportunities to help maintain and expand the infrastructure that facilitates the movement of goods and people on or over waterways. However, we have some concerns about the short-term outlook for and are closely monitoring the short and long-term cruise line capital expenditures as their current demand has been severely impacted by COVID-19. Further, while we currently see bid opportunities from our private sector energy-related customers as they expand their marine facilities related to the storage, transportation and refining of domestically produced energy, we recognize that the timing of project awards may be impacted as a result of volatility of oil prices due to COIVD-19 related uncertainties. Over the long-term, we expect to see bid opportunities in this sector from petrochemical-related businesses, energy exporters, and liquefied natural gas facilities. Opportunities from local port authorities will also remain over the long-term, many of which are related to the widened Panama Canal. Additionally, bid opportunities related to coastal restoration funded through the Resource and Ecosystems Sustainability, Tourist Opportunities and Revived Economies of the Gulf Coast States Act (the “RESTORE Act”) may arise into 2021. We believe our current equipment fleet will allow us to better meet market demand for projects from both our public and private customers. ​ In the long-term, we see positive trends in demand for our services in our end markets, including: ​ ● Continuing need to repair and improve degrading U. S. marine infrastructure; ● Long-term demand from downstream energy-related companies will be driven by larger capital projects, as well as maintenance call-out work; ● Expected increases in cargo volume and future demands from larger ships transiting the Panama Canal will require ports along the Gulf Coast and Atlantic Seaboard to expand port infrastructure as well as perform additional dredging services; ● Possible work opportunities generated by the Water Resources Reform and Development Act (the “WRRDA Act”) authorizing expenditures for the conservation and development of the nation’s waterways as well as addressing funding deficiencies within the Harbor Maintenance Trust Fund; ● Renewed focus on coastal rehabilitation along the Gulf Coast, particularly through the use of RESTORE Act funds based on fines collected related to the 2010 Gulf of Mexico oil spill; ● Funding for highways and transportation under successor Acts to the FAST Act; ● Nearly $7 billion of federal funding provided by the USACE in connection with disaster recovery in Texas; and, 36 ​ Table of Contents ● Potential opportunities related to the impending federal infrastructure bill. Concrete Segment Demand for our concrete segment’s services continues, although timing of certain new project releases could be delayed as a result of COVID-19 related macroeconomic impacts. We currently see long-term demand for our concrete construction services in the Texas building sector as Texas’ four major metropolitan areas, and expanding suburbs, continuously retain their positions as leading destinations for population and business growth. Population growth throughout our markets continues to drive new distribution centers, education facilities, office expansion, retail and grocery establishments, new multi-family housing units, and structural towers for business, residential or mixed-use purposes. The diversified Texas economy provides us with multiple sources of bid opportunities. Additional demand for concrete services in our markets could be provided by work as part of a federal infrastructure bill. In the long-term, we see positive trends in demands for our services in our end markets, including: ● Population growth in the state of Texas driven by corporate relocations; ​ ● Continued investment in warehouse/distribution space in the Dallas-Fort Worth region; ​ ● COVID-19 driven shift of populous moving from the inner cities to suburban areas; ​ ● Nearly $7 billion of federal funding provided by the USACE in connection with disaster recovery in Texas; and, ● Potential opportunities related to the impending federal infrastructure bill. Consolidated Results of Operations Backlog Information Our contract backlog represents our estimate of the revenues we expect to realize under the portion of contracts remaining to be performed. Given the typical duration of our contracts, which is generally less than a year, our backlog at any point in time usually represents only a portion of the revenue that we expect to realize during a twelve-month period. We have not been adversely affected by contract cancellations or modifications in the past, we may be in the future, especially in economically uncertain periods. Backlog as of the periods ended below are as follows (in millions): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Marine segment ​ $ 154.8 ​ $ 202.6 ​ $ 241.7 ​ $ 312.2 ​ $ 344.6 Concrete segment ​ 210.0 ​ 236.9 ​ 187.1 ​ 216.2 ​ 247.3 Consolidated ​ $ 364.8 ​ $ 439.5 ​ $ 428.8 ​ $ 528.4 ​ $ 591.9 ​ A previously reported backlog amount has been adjusted in the accompanying table to correct for a clerical error in the underlying calculation file, as to which steps have been taken to prevent a recurrence. Accordingly, reported backlog has been reduced by $17.6 million for the period ended March 31, 2020. The recent trend of declining backlog is due in significant part to headwinds created by the COVID-19 pandemic in certain end market sectors. We, however, remain optimistic in our end-markets and in the opportunities that are emerging 37 ​ Table of Contents across our various market places as evidenced by the $1.9 billion of quoted bids outstanding at quarter end, of which $134 million we are the apparent low bidder on or have been awarded contracts subsequent to the end of the quarter ended March 31, 2021. These estimates are subject to fluctuations based upon the scope of services to be provided, as well as factors affecting the time required to complete the project. Backlog is not necessarily indicative of future results. In addition to our backlog under contract, we also have a substantial number of projects in negotiation or pending award at any given time. Three months ended March 31, 2021, compared with three months ended March 31, 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ 2021 2020 ​ Amount Percent Amount Percent ​ ​ ​ (dollar amounts in thousands) ​ ​ Contract revenues ​ $ 153,309 100.0 % $ 166,620 100.0 % ​ Cost of contract revenues ​ 137,854 89.9 % 146,862 88.1 % ​ Gross profit ​ 15,455 10.1 % 19,758 11.9 % ​ Selling, general and administrative expenses ​ 14,630 9.6 % 15,869 9.6 % ​ Amortization of intangible assets ​ ​ 380 ​ 0.2 % ​ 516 ​ 0.3 % ​ Gain on disposal of assets, net ​ ​ (1,610) ​ (1.0) % ​ (992) ​ (0.6) % ​ Operating income ​ 2,055 1.3 % 4,365 2.6 % ​ Other (expense) income: ​ ​ ​ ​ Other income ​ 37 — % 97 0.1 % ​ Interest income ​ 26 — % 40 — % ​ Interest expense ​ (1,040) (0.6) % (1,402) (0.8) % ​ Other expense, net ​ (977) (0.6) % (1,265) (0.7) % ​ Income before income tax expense ​ 1,078 0.7 % 3,100 1.9 % ​ Income tax expense ​ 150 0.1 % 377 0.3 % ​ Net income ​ $ 928 0.6 % $ 2,723 1.6 % ​ ​ Contract Revenues. Contract revenues for the three months ended March 31, 2021 of $153.3 million decreased $13.3 million or 8.0% as compared to $166.6 million in the prior year period. The decrease was primarily driven by severe winter weather that shut down most of Texas for seven to ten days in the 2021 period and the timing and mix of projects in the marine segment in the prior period. Gross Profit. Gross profit was $15.5 million for the three months ended March 31, 2021, compared to $19.8 million in the prior year period, a decrease of $4.3 million or 21.8%. Gross profit in the first quarter was 10.1% of total contract revenues as compared to 11.9% in the prior year period. The decrease in gross profit dollars and percentage was primarily driven by decreased equipment and labor utilization as the result of the aforementioned winter weather delays. ​ Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses were $14.6 million for the three months ended March 31, 2021 compared to $15.9 million in the prior year period. As a percentage of total contract revenues, SG&A expenses remained flat. The decrease in SG&A dollars was driven in part by reduced business development, based on timing of project pursuits, and travel related costs in the current year period. 38 ​ Table of Contents Gain on Disposal of Assets, net. During the three months ended March 31, 2021 and 2020, we realized $1.6 million and $1.0 million, respectively, of net gains on disposal of assets. Other Income, net of Expense. Other expense primarily reflects interest on our borrowings, partially offset by interest income and non-operating gains or losses. Income Tax Expense. We recorded tax expense of $0.2 million in the three months ended March 31, 2021, compared to tax expense of $0.4 million in the prior year period. Our effective tax rate for the three months ended March 31, 2021 was 13.9%, which differs from the federal statutory rate of 21% primarily due to the movement in the valuation allowance for current year activity, state income taxes and the non-deductibility of other permanent items. Segment Results The following table sets forth, for the periods indicated, statements of operations data by segment, segment revenues as a percentage of consolidated revenues and segment operating (loss) income as a percentage of segment revenues: Three months ended March 31, 2021 compared with three months ended March 31, 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ 2021 ​ 2020 ​ ​ Amount Percent Amount Percent ​ ​ (dollar amounts in thousands) ​ Contract revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Marine segment ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Public sector ​ $ 41,669 ​ 57.8 % $ 53,511 ​ 62.3 % Private sector ​ ​ 30,477 ​ 42.2 % ​ 32,438 ​ 37.7 % Marine segment total ​ $ 72,146 ​ 100.0 % $ 85,949 ​ 100.0 % Concrete segment ​ ​ ​ ​ ​ ​ ​ ​ ​ Public sector ​ $ 4,779 ​ 5.9 % $ 16,052 ​ 19.9 % Private sector ​ ​ 76,384 ​ 94.1 % ​ 64,619 ​ 80.1 % Concrete segment total ​ $ 81,163 ​ 100.0 % $ 80,671 ​ 100.0 % Total ​ $ 153,309 ​ ​ $ 166,620 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating income (loss) ​ ​ ​ Marine segment ​ $ (9) (0.0) % $ 2,855 3.3 % Concrete segment ​ 2,064 2.5 % 1,510 1.9 % Total ​ $ 2,055 ​ ​ ​ $ 4,365 ​ ​ Marine Segment Revenues for our marine segment for the three months ended March 31, 2021 were $72.1 million compared to $85.9 million for the three months ended March 31, 2020, a decrease of $13.8 million, or 16.1%. The decrease was primarily attributable to the Texas winter storm and the timing and mix of projects. Operating loss for our marine segment for the three months ended March 31, 2021 was less than $0.1 million, compared to operating income of $2.9 million for the three months ended March 31, 2020, a decrease of $2.9 39 ​ Table of Contents million. This decrease in operating income was primarily due to the decrease in revenue, decreased equipment utilization and an increase in insurance premiums. ​ Concrete Segment Revenues for our concrete segment for the three months ended March 31, 2021 were $81.2 million compared to $80.7 million for the three months ended March 31, 2021, an increase of $0.5 million, or 0.6%. This increase in revenue was primarily driven by an increase in production volume. Operating income for our concrete segment for the three months ended March 31, 2021 was $2.1 million, compared to $1.5 million for the three months ended March 31, 2020, an increase of $0.6 million, or 36.7%. This increase in operating income was primarily due to an increase in effective project labor management. Liquidity and Capital Resources Our primary liquidity needs are to finance our working capital, fund capital expenditures, and pursue strategic acquisitions. Historically, our source of liquidity has been cash provided by our operating activities and borrowings under our credit facilities. Changes in working capital are normal within our business given the varying mix in size, scope and timing of delivery of our projects. At March 31, 2021, our working capital was $60.7 million, as compared with $54.8 million at December 31, 2020. As of March 31, 2021, we had unrestricted cash on hand of $4.6 million. Our borrowing capacity at March 31, 2021 was approximately $68.3 million. We expect to meet our future internal liquidity and working capital needs and maintain or replace our equipment fleet through capital expenditure purchases, leases and major repairs, from funds generated by our operating activities for at least the next 12 months. We believe our cash position is adequate for our general business requirements discussed above and to service our debt. The following table provides information regarding our cash flows and our capital expenditures for the three months ended March 31, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ ​ March 31, ​ ​ 2021 2020 ​ Net income ​ $ 928 ​ $ 2,723 Adjustments to remove non-cash and non-operating items ​ ​ 6,895 ​ ​ 8,582 ​ Cash flow from net income after adjusting for non-cash and non-operating items ​ ​ 7,823 ​ ​ 11,305 ​ Change in operating assets and liabilities (working capital) ​ ​ 1,295 ​ ​ 4,148 ​ Cash flows provided by operating activities ​ $ 9,118 ​ $ 15,453 ​ Cash flows provided by (used in) investing activities ​ $ 772 ​ $ (325) ​ Cash flows used in financing activities ​ $ (6,837) ​ $ (2,692) ​ ​ ​ ​ ​ ​ ​ ​ ​ Capital expenditures (included in investing activities above) ​ $ (1,618) ​ $ (2,753) ​ ​ Operating Activities. During the three months ended March 31, 2021, we generated approximately $9.1 million in cash from our operating activities. The net cash inflow is comprised of $7.8 million of cash inflows from net income, after adjusting for non-cash items and $1.3 million of cash inflows related to changes in net working 40 ​ Table of Contents capital. The changes in net working capital, which are reflected as changes in operating assets and liabilities in our Condensed Consolidated Statements of Cash Flows, were primarily driven by a $10.5 million inflow pursuant to the relative timing and significance of project progression and billings during the period and a $0.3 million inflow from other working capital items, partially offset by a $8.3 million outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period and a $1.2 million decrease in operating lease liabilities during the period. Investing Activities. Capital asset additions and betterments to our fleet were $1.6 million in the three months ended March 31, 2021, as compared with $2.8 million in the three months ended March 31, 2020. The changes are primarily a result of the timing of purchase of capital assets. Financing Activities. During the three months ended March 31, 2021, we drew down $5.0 million from our revolving line of credit and repaid $10 million on our revolving line of credit, as well as made the regularly scheduled debt payments on the term loan of $1.2 million. Sources of Capital We entered into an amended syndicated credit agreement (the “Credit Agreement” also known as the “Fourth Amendment”) on July 31, 2018, 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, KeyBank National Association, NBH Bank, IBERIABANK, Trustmark National Bank, First Tennessee Bank NA, and Branch Baking and Trust Company. The primary purpose of the Credit Agreement was to provide the Company with greater flexibility as it provides for the calculation of Adjusted EBITDA that adds back various project specific costs. Additionally, we executed the Fifth Amendment during March 2019, which was made effective as of December 31, 2018, executed the Sixth Amendment during May 2019, executed the Seventh Amendment during June 2020 and executed the Eighth Amendment during October 2020. The Credit Agreement, which may be amended from time to time, provides for borrowings under a revolving line of credit and a term loan (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 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. 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 July 31, 2023. We entered into a new syndicated credit agreement (the “364-Day Revolving Credit Facility”) on June 8, 2020 with Regions Bank, as administrative agent and collateral agent, and the following co-syndication agents: Bank of America, N.A. and BOKF, NA dba Bank of Texas. Concurrent with this the Company executed an amendment to the Credit Agreement with its existing lenders (“also known as the “Seventh Amendment”) for the sole intent and outcome of executing the 364-Day Revolving Credit Facility. 41 ​ Table of Contents The Company has a maximum borrowing availability under the 364-Day Revolving Credit Facility of $20.0 million. Borrowings may be designated as Base Rate Loan or Adjusted LIBOR Rate Loans, at the Company’s request, and must be drawn in an aggregate minimum amount of $1.0 million and integral multiples of $250,000 in excess of that amount. The Company may convert, change, or modify rate designations from time to time. The Company is subject to a commitment fee for the unused portion of the maximum borrowing availability under the 364-Day Revolving Credit Facility. 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. We have not made any borrowings under 364-Day Revolving Credit Facility. Effective, October 9, 2020, the Company entered into an amendment (the "Eighth Amendment") to its syndicated credit agreement (the "Credit Agreement" , with Regions Bank, as Administrative Agent and Collateral Agent and Bank of America, N.A., BOKF, NA dba Bank of Texas, Iberiabank, NBH Bank, Truist Bank, and Trustmark National Bank, as Lenders. The Eighth Amendment provides for administrative revisions to the Credit Agreement, including changes to repayment requirements for involuntary asset dispositions and changes to the timing of repayment for voluntary asset dispositions. See Note 11 in the Notes to the Financial Statements (of this Form 10-Q) for further discussion on the Company’s Debt. Financial covenants Restrictive financial covenants under the Credit Facility include: ● A consolidated Fixed Charge Coverage Ratio to not be less than the following during each noted period: -Fiscal Quarter Ending December 31, 2019 and each Fiscal Quarter thereafter, to not be less than 1.25 to 1.00. ● A consolidated Leverage Ratio to not exceed the following during each noted period: -Fiscal Quarter Ending March 31, 2020 and each Fiscal Quarter thereafter, to not exceed 3.00 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. The Company expects to meet its future internal liquidity and working capital needs and maintain or replace its equipment fleet through capital expenditure purchases, leases and major repairs, from funds generated by its operating activities for at least the next 12 months. The Company believes that its cash position and available borrowings together with cash flow from its operations is adequate for general business requirements and to service its debt. The Company was in compliance with all financial covenants as of March 31, 2021. Derivative 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 was 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 was scheduled to expire and be immediately replaced with a new interest rate swap until the expiration of the final swap on July 31, 2020. On December 6, 2018, the Company entered into a sixth receive-variable, pay-fixed interest rate swap to hedge the variability of interest payments. The sixth swap began with a notional amount of $27.0 million on July 31, 2020 and hedges the variability in the interest 42 ​ Table of Contents payments on the aggregate scheduled principal amount of the Regions Term Loan outstanding. The sixth swap is scheduled to expire on July 31, 2023. At inception, these interest rate swaps were designated as cash flow hedges for hedge accounting, and as such, the effective portion of unrealized changes in market value are recorded in 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 for the comparative periods ended March 31, 2021 and March 31, 2020, as reflected in accumulated other comprehensive loss in the Condensed Consolidated Statements of Stockholders’ Equity, is approximately $(0.2) million and $1.0 million. The fair market value of the swaps as of March 31, 2021 is reflected as a liability of $1.4 million on the Condensed Consolidated Balance Sheets. See Note 8 for more information regarding the fair value of the Company’s derivative instruments. Sale-Leaseback Arrangement On September 27, 2019, the Company entered into a purchase and sale agreement (the “Purchase and Sale Agreement”). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its 17300 & 17140 Market Street location in Channelview, Texas (the “Property”) for a purchase price of $19.1 million. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company will lease back the Property at an annual rental rate of approximately $1.5 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has two consecutive options to extend the term of the Lease by ten years for each such option. This transaction was recorded as a failed sale-leaseback. The Company recorded a liability for the amounts received, will continue to depreciate the non-land portion of the asset, and has imputed an interest rate so that the net carrying amount of the financial liability and remaining assets will be zero at the end of the initial lease term. Concurrently with the sale, the Company paid $18.2 million as an additional principal payment towards the Term loan portion of the Company’s Credit Facility, consistent with terms of the Sixth Amendment. Bonding Capacity We are often required to provide various types of surety bonds that provide additional security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends on our capitalization, working capital, past performance and external factors, including the capacity of the overall surety market. At March 31, 2021, the capacity under our current bonding arrangement was at least $500 million, with approximately $170 million of projects being bonded. We believe our strong balance sheet and working capital position will allow us to continue to access our bonding capacity. Effect of Inflation We are subject to the effects of inflation through increases in the cost of raw materials, and other items such as fuel, concrete and steel. Due to the relative short-term duration of our projects, we are generally able to include anticipated price increases in the cost of our bids.