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 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 COVID-19 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, 2021 (“2021 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 2021 audited consolidated financial statements and notes thereto included in our 2021 Form 10-K, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 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 33 ​ 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 2022 Recap and 2022 Outlook In the quarter ended March 31, 2022, we recorded revenues of $174.9 million, of which $84.5 million was attributable to our marine segment and the remaining $90.4 million to our concrete segment. In addition, we ended the quarter with a consolidated backlog of $604.1 million. Our revenues in the quarter increased by 14.1% as compared with the comparable prior year period and we recorded a net loss of $4.9 million, as compared with net income of $0.9 million in the comparable prior year period. 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. The use of business practices like “social distancing” and “stay at home orders” to slow and stop the spread of COVID-19, 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 stoppage/cancelations or a slowdown/stoppage of accounts receivables collections, we have had and may 34 ​ Table of Contents continue to see disruptions to our operations as variants of the COVID-19 virus have caused increases in absenteeism rates among our workforce. Further, 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. 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 COVID-19 related uncertainties and the war in Ukraine. 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, opportunities under the Tourist Opportunities and Revived Economies of the Gulf Coast States Act (the “RESTORE Act”) may arise in 2022. 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 ● Potential opportunities related to the federal infrastructure bill. 35 ​ Table of Contents Concrete Segment Demand for our concrete segment’s services continues, although timing of certain new project releases could be delayed as a result of inflation, labor concerns, supply chain delays and 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 the 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 people 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 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, however 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, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Marine segment ​ $ 317.4 ​ $ 376.9 ​ $ 379.9 ​ $ 170.2 ​ $ 154.8 Concrete segment ​ 286.7 ​ 213.1 ​ 192.9 ​ 224.2 ​ 210.0 Consolidated ​ $ 604.1 ​ $ 590.0 ​ $ 572.8 ​ $ 394.4 ​ $ 364.8 ​ The increase in backlog during the quarter is primarily driven by new jobs we won. The now ended general trend of declining backlog through June 2021 was due in significant part to headwinds created by the COVID-19 pandemic in certain end market sectors, which slowed the timing of project awards. Backlog has since increased significantly and we are optimistic in our end-markets and in the opportunities that are emerging across our various marketplaces as evidenced by the $2.1 billion of quoted bids outstanding at quarter end, of which $112 million we are the apparent low bidder on or have been awarded contracts subsequent to the end of the fiscal quarter ended March 31, 2022. 36 ​ Table of Contents 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. Delays in decisions on pending awards also have a negative impact on the timing and amount by which we are able to increase backlog. Three months ended March 31, 2022, compared with three months ended March 31, 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ 2022 2021 ​ Amount Percent Amount Percent ​ ​ (dollar amounts in thousands) Contract revenues ​ $ 174,931 100.0 % $ 153,309 100.0 % Cost of contract revenues ​ 162,115 92.7 % 137,854 89.9 % Gross profit ​ 12,816 7.3 % 15,455 10.1 % Selling, general and administrative expenses ​ 16,170 9.2 % 14,630 9.6 % Amortization of intangible assets ​ ​ 310 ​ 0.2 % ​ 380 ​ 0.2 % Gain on disposal of assets, net ​ ​ (809) ​ (0.5) ​ ​ (1,610) ​ (1.0) ​ Operating (loss) income ​ (2,855) (1.6) % 2,055 1.3 % Other (expense) income: ​ ​ ​ Other income ​ 44 — % 37 — % Interest income ​ 19 — % 26 — % Interest expense ​ (740) (0.4) % (1,040) (0.6) % Other expense, net ​ (677) (0.4) % (977) (0.6) % (Loss) income before income tax expense ​ (3,532) (2.0) % 1,078 0.7 % Income tax expense ​ 1,324 0.8 % 150 0.1 % Net (loss) income ​ $ (4,856) (2.8) % $ 928 0.6 % ​ Contract Revenues. Contract revenues for the three months ended March 31, 2022 of $174.9 million increased $21.6 million or 14.1% as compared to $153.3 million in the prior year period. The increase was primarily driven by the start up on large jobs awarded in the second half of 2021 in the marine segment and increased cubic yard production on light commercial projects in the concrete segment. Gross Profit. Gross profit was $12.8 million for the three months ended March 31, 2022, compared to $15.5 million in the prior year period, a decrease of $2.7 million or 17.1%. Gross profit in the first quarter was 7.3% of total contract revenues as compared to 10.1% in the prior year period. The decrease in gross profit dollars and percentage was primarily driven by write-downs in the concrete segment as a result of project conditions, reduced dredging volume in the current quarter and a change in the mix of work in the current period. ​ Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses were $16.2 million for the three months ended March 31, 2022 compared to $14.6 million in the prior year period, an increase of $1.6 million or 10.5%. As a percentage of total contract revenues, SG&A expenses decreased from 9.6% to 9.2%, primarily due to higher revenues in the current period. The increase in SG&A dollars was driven primarily by additional consulting fees related to the management transition and additional property taxes, partially offset by reduced bonus expense. Gain on Disposal of Assets, net. During the three months ended March 31, 2022 and 2021, we realized $0.8 million and $1.6 million, respectively, of net gains on disposal of assets. 37 ​ Table of Contents 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 $1.3 million in the three months ended March 31, 2022, compared to tax expense of $0.2 million in the prior year period. Our effective tax rate for the three months ended March 31, 2022 was (37.5)%, 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. In connection with the preparation of the financial statements for the quarter ended June 30, 2021, the Company has identified and corrected certain immaterial errors in segment reporting for all periods presented. Specifically, certain corporate overhead costs previously recorded to the marine segment as part of operating income (loss) and allocated from the marine segment to the concrete segment below operating income in the other income (expense) line have been allocated from the marine segment to the concrete segment as part of the determination of operating income for each segment. These corrections resulted in an offsetting change in operating income (loss) for each segment of $2.9 million for the three months ended March 31, 2021. Three months ended March 31, 2022 compared with three months ended March 31, 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ 2022 ​ 2021 ​ ​ Amount Percent Amount Percent ​ ​ ​ (dollar amounts in thousands) Contract revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Marine segment ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Public sector ​ ​ $ 57,308 ​ 67.8 % $ 41,669 ​ 57.8 % Private sector ​ ​ ​ 27,172 ​ 32.2 % ​ 30,477 ​ 42.2 % Marine segment total ​ ​ $ 84,480 ​ 100.0 % $ 72,146 ​ 100.0 % Concrete segment ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Public sector ​ ​ $ 5,493 ​ 6.1 % $ 4,779 ​ 5.9 % Private sector ​ ​ ​ 84,958 ​ 93.9 % ​ 76,384 ​ 94.1 % Concrete segment total ​ ​ $ 90,451 ​ 100.0 % $ 81,163 ​ 100.0 % Total ​ ​ $ 174,931 ​ ​ $ 153,309 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating income (loss) ​ ​ ​ ​ Marine segment ​ ​ $ 1,840 2.2 % $ 2,848 3.9 % Concrete segment ​ ​ (4,695) (5.2) % (793) (1.0) % Total ​ ​ $ (2,855) ​ ​ ​ $ 2,055 ​ ​ ​ ​ Marine Segment Revenues for our marine segment for the three months ended March 31, 2022 were $84.5 million compared to $72.1 million for the three months ended March 31, 2021, an increase of $12.4 million, or 17.1%. The increase was primarily driven by the start up on large jobs awarded in the second half of 2021. 38 ​ Table of Contents Operating income for our marine segment for the three months ended March 31, 2022 was $1.8 million, compared to operating income of $2.8 million for the three months ended March 31, 2021, a decrease of $1.0 million. This decrease in operating income was primarily due to the decrease in gross profit margin noted above and the increase in selling, general and administrative expense noted above. ​ Concrete Segment Revenues for our concrete segment for the three months ended March 31, 2022 were $90.4 million compared to $81.2 million for the three months ended March 31, 2021, an increase of $9.2 million, or 11.4%. This increase was primarily driven by increased cubic yard production in light commercial projects. Operating loss for our concrete segment for the three months ended March 31, 2022 was $4.7 million, compared to $0.8 million for the three months ended March 31, 2021, a decrease of $3.9 million. This decrease in operating income was primarily due to the decline in project profits due to write-downs on several projects in addition to unabsorbed indirect expenses related to additional project management labor expense. 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. The assessment of the liquidity and going concern requires the Company to make estimates of future activity and judgments about whether the Company has adequate liquidity to operate. Significant assumptions used in the Company's forecasted model of liquidity include forecasted sales, costs, and capital expenditures. Based on a careful assessment of these factors management believes that the Company will have adequate liquidity for its operations for at least the next 12 months. ​ 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, 2022, our working capital was $32.7 million, as compared with $36.2 million at December 31, 2021. As of March 31, 2022, we had unrestricted cash on hand of $6.7 million. Our borrowing capacity at March 31, 2022 was approximately $13.4 million. Ninth Amendment to Revolving Credit Facility On March 1, 2022, we entered into an amended revolving line of credit and swingline loan agreement (the “Ninth Amendment”) to, among other things, waive covenant defaults, reset the revolver limit, implement an anti-cash hoarding provision and institute temporary covenant requirements. For further details of the Ninth Amendment, see Note 11 in the Notes to the Financial Statements (of this Form 10-Q). ​ 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. Although our line of credit is reduced, we believe our cash position and available credit is adequate for our general business requirements discussed above and to service our debt. 39 ​ Table of Contents The following table provides information regarding our cash flows and our capital expenditures for the three and months ended March 31, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ March 31, ​ 2022 2021 Net (loss) income ​ $ (4,856) ​ $ 928 Adjustments to remove non-cash and non-operating items ​ ​ 7,051 ​ ​ 6,895 Cash flow from net income after adjusting for non-cash and non-operating items ​ ​ 2,195 ​ ​ 7,823 Change in operating assets and liabilities (working capital) ​ ​ 7,865 ​ ​ 1,295 Cash flows provided by operating activities ​ $ 10,060 ​ $ 9,118 Cash flows (used in) provided by investing activities ​ $ (2,810) ​ $ 772 Cash flows used in financing activities ​ $ (12,817) ​ $ (6,837) ​ ​ ​ ​ ​ ​ ​ Capital expenditures (included in investing activities above) ​ $ (3,523) ​ $ (1,618) ​ Operating Activities. During the three months ended March 31, 2022, we generated approximately $10.1 million in cash from our operating activities. The net cash inflow is comprised of $2.2 million of cash inflows from net loss, after adjusting for non-cash items and $7.9 million of cash inflows related to changes in net working 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 $9.7 million inflow pursuant to the relative timing and significance of project progression and billings during the period, $2.5 million of inflows from the decrease in prepaid expense and other assets and $1.2 million of other inflows, partially offset by a $4.3 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. Investing Activities. Capital asset additions and betterments to our fleet were $3.5 million in the three months ended March 31, 2022, as compared with $1.6 million in the three months ended March 31, 2021. Proceeds from the sale of property and equipment were $0.7 in the three months ended March 31, 2022, as compared with $2.0 million in the three months ended March 31, 2021. Financing Activities. During the three months ended March 31, 2021, we repaid $11.6 million on our revolving line of credit, had payments of $0.6 million on finance lease liabilities and incurred $0.5 million of loan costs related to the Ninth Amendment of the Credit Facility. ​ 40 ​ Table of Contents Sources of Capital As of March 31, 2022, our available sources of capital consist of borrowing availability on our revolving line of credit of $13.4 million pursuant to our Credit Facility. Financial covenants Restrictive financial covenants under the Credit Facility include: • Consolidated EBITDA minimum of: - Fiscal Quarter Ending March 31, 2022 - $2.6 million - Fiscal Quarter Ending June 30, 2022 - $7.7 million on a year-to-date basis • Consolidated Leverage Ratio - Fiscal Quarter Ending September 30, 2022 and each Fiscal Quarter thereafter, maximum of 3.00 to 1.00 • Consolidated Fixed Charge Coverage Ratio - Fiscal Quarter Ending December 31, 2022 and each Fiscal Quarter thereafter, minimum of 1.25 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. ​ See Note 11 in the Notes to the Financial Statements (of this Form 10-Q) for further discussion on the Company’s Debt. 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, 2022, the capacity under our current bonding arrangement was at least $750 million, with approximately $235 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.