Item 2. Management’s Discussion and Analysis
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 on Form 10-Q 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, conversion of backlog, 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, contract modifications and changes, including change orders 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 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 on Form 10-Q.
Overview
Orion Group Holdings, Inc., its subsidiaries and affiliates, provide a broad range of specialty construction services in the infrastructure, industrial and building sectors throughout the continental United States, Alaska,
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and the Caribbean Basin. The Company’s marine segment services the 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 factors such 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.
Third Quarter 2022 Recap and 2022 Outlook
In the quarter ended September 30, 2022, we recorded revenues of $182.6 million, of which $76.1 million was attributable to our marine segment and the remaining $106.5 million to our concrete segment. In addition, we ended the quarter with a consolidated backlog of $548.6 million. Our revenues in the quarter increased by 30.5% as compared with the comparable prior year period and we recorded net income of $0.2 million, as compared with a net loss of $10.2 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.
Although to date the Company hasn’t experienced materially negative impacts from COVID-19, we have had and may continue to see disruptions to our operations as variants of the COVID-19 virus have caused increases in absenteeism rates among our workforce and other impacts to supply chains and labor markets.
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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 2023. 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 Fixing America’s Surface Transportation Act;
● Nearly $7 billion of federal funding provided by the US Army Core of Engineers (“USACE”) in connection with disaster recovery in Texas; and
● Potential opportunities related to the 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 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
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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):
September 30, 2022
June 30, 2022
March 31, 2022
December 31, 2021
September 30, 2021
Marine segment
$
280.2
$
281.0
$
317.4
$
376.9
$
379.9
Concrete segment
268.4
322.2
286.7
213.1
192.9
Consolidated
$
548.6
$
603.2
$
604.1
$
590.0
$
572.8
The sequential decline in backlog was due to a lower book-to-bill ratio in the concrete segment which was driven by more disciplined bidding practices and an effort to reduce exposure to under-performing projects. We are optimistic in our end-markets and in the opportunities that are emerging across our various marketplaces as evidenced by the $1.8 billion of quoted bids outstanding at quarter end, of which $39 million we are the apparent low bidder on or have been awarded contracts subsequent to the end of the fiscal quarter ended September 30, 2022.
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.
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Three months ended September 30, 2022 compared with three months ended September 30, 2021.
Three months ended September 30,
2022
2021
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
$
182,621
100.0
%
$
139,907
100.0
%
Cost of contract revenues
169,189
92.6
%
133,329
95.3
%
Gross profit
13,432
7.4
%
6,578
4.7
%
Selling, general and administrative expenses
15,380
8.5
%
15,733
11.2
%
Amortization of intangible assets
309
0.2
%
380
0.3
%
Gain on disposal of assets, net
(3,388)
(1.9)
%
(792)
(0.6)
%
Operating income (loss)
1,131
0.6
%
(8,743)
(6.2)
%
Other (expense) income:
Other income
48
—
%
50
—
%
Interest income
36
—
%
22
—
%
Interest expense
(1,215)
(0.6)
%
(523)
(0.4)
%
Other expense, net
(1,131)
(0.6)
%
(451)
(0.4)
%
Income (loss) before income tax expense
—
—
%
(9,194)
(6.6)
%
Income tax (benefit) expense
(247)
(0.1)
%
1,001
0.7
%
Net income (loss)
$
247
0.1
%
$
(10,195)
(7.3)
%
Contract Revenues. Contract revenues for the three months ended September 30, 2022 of $182.6 million increased $42.7 million or 30.5% as compared to $139.9 million in the prior year period. The increase was primarily driven by the start of large jobs awarded in the fourth quarter of 2021 in the marine segment, higher volume in the concrete segment, and the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods.
Gross Profit. Gross profit was $13.4 million for the three months ended September 30, 2022, compared to $6.6 million in the prior year period, an increase of $6.9 million or 104.5%. Gross profit in the third quarter was 7.4% of total contract revenues as compared to 4.7% in the prior year period. The increase in gross profit dollars and margin was primarily driven by the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods, the release of discretionary project bonuses and increased dredging activity as compared to the prior year period.
Selling, General and Administrative Expense. Selling, general and administrative (“SG&A”) expenses were $15.4 million for the three months ended September 30, 2022 compared to $15.7 million in the prior year period, a decrease of $0.3 million or 2.2%. As a percentage of total contract revenues, SG&A expenses decreased from 11.2% to 8.5%, primarily due to higher revenues in the current period. The decrease in SG&A dollars was driven primarily by a decrease in ERP implementation expense as compared to the prior year period, partially offset by consulting fees related to the management transition.
Gain on Disposal of Assets, net. During the three months ended September 30, 2022 and 2021, we realized $3.4 million and $0.8 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 (Benefit) Expense. We recorded a tax benefit of $0.2 million in the three months ended September 30, 2022, compared to tax expense of $1.0 million in the prior year period. Our effective tax rate for the three
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months ended September 30, 2022 differs from the federal statutory rate of 21% primarily due to the tax impact from the valuation allowance for current year activity, state income taxes and the non-deductibility of other permanent items.
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021.
Nine months ended September 30,
2022
2021
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
$
552,127
100.0
%
$
439,091
100.0
%
Cost of contract revenues
511,548
92.7
%
404,757
92.2
%
Gross profit
40,579
7.3
%
34,334
7.8
%
Selling, general and administrative expenses
48,783
8.7
%
44,078
10.0
%
Amortization of intangible assets
929
0.2
%
1,141
0.3
%
Gain on disposal of assets, net
(4,561)
(0.8)
%
(9,763)
(2.2)
%
Operating loss
(4,572)
(0.8)
%
(1,122)
(0.3)
%
Other (expense) income:
Other income
147
—
%
159
—
%
Interest income
71
—
%
73
—
%
Interest expense
(2,913)
(0.5)
%
(4,506)
(0.9)
%
Other expense, net
(2,695)
(0.5)
%
(4,274)
(0.9)
%
Loss before income tax expense
(7,267)
(1.3)
%
(5,396)
(1.2)
%
Income tax expense
396
0.1
%
341
0.1
%
Net loss
$
(7,663)
(1.4)
%
$
(5,737)
(1.3)
%
Contract Revenues. Contract revenues for the nine months ended September 30, 2022 of $552.1 million increased $113.0 million or 25.7% as compared to $439.1 million in the prior year period. The increase was primarily driven by the start of large jobs awarded in the second half of 2021 in the marine segment, higher volume in the concrete segment, and the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods.
Gross Profit. Gross profit was $40.6 million for the nine months ended September 30, 2022, compared to $34.3 million in the prior year period, an increase of $6.3 million or 18.2%. Gross profit in the period was 7.3% of total contract revenues as compared to 7.8% in the prior year period. The increase in gross profit dollars was primarily driven by the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods and the release of discretionary project bonuses. The decrease in gross profit margin was primarily driven by additional costs in the concrete segment as a result of project performance and conditions and a change in the mix of work in the current period partially offset by the impact from claims and unapproved change orders related to work primarily incurred in previous periods.
Selling, General and Administrative Expense. SG&A expenses were $48.8 million for the nine months ended September 30, 2022 compared to $44.1 million in the prior year period, an increase of $4.7 million or 10.7%. As a percentage of total contract revenues, SG&A expenses decreased from 10.0% to 8.8%, primarily due to higher revenues in the current period. The increase in SG&A dollars was driven primarily by severance, consulting fees related to the management transition and property tax true-ups in the current year period, partially offset by a decrease in ERP implementation expense.
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Gain on Disposal of Assets, net. During the nine months ended September 30, 2022 and 2021, we realized $4.6 million and $9.8 million, respectively, of net gains on disposal of assets. Included in the prior year amount was a net gain of $6.7 million related to the sale of property in Tampa, Florida. See Note 6 – Property and Equipment in this Form 10-Q for a further description of the sale of property.
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 $0.4 million in the nine months ended September 30, 2022, compared to tax expense of $0.3 million in the prior year period. Our effective tax rate for the nine months ended September 30, 2022 was (5.5)%, which differs from the federal statutory rate of 21% primarily due to the tax impact from 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 September 30, 2022 compared with three months ended September 30, 2021.
Three months ended September 30,
2022
2021
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
Marine segment
Public sector
$
54,769
72.0
%
$
35,580
65.0
%
Private sector
21,329
28.0
%
19,159
35.0
%
Marine segment total
$
76,098
100.0
%
$
54,739
100.0
%
Concrete segment
Public sector
$
10,070
9.5
%
$
2,301
2.7
%
Private sector
96,453
90.5
%
82,867
97.3
%
Concrete segment total
$
106,523
100.0
%
$
85,168
100.0
%
Total
$
182,621
$
139,907
Operating income (loss)
Marine segment
$
5,197
6.8
%
$
(4,965)
(9.1)
%
Concrete segment
(4,066)
(3.8)
%
(3,778)
(4.4)
%
Total
$
1,131
$
(8,743)
Marine Segment
Revenues for our marine segment for the three months ended September 30, 2022 were $76.1 million compared to $54.7 million for the three months ended September 30, 2021, an increase of $21.4 million, or 39.1%. The
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increase was primarily driven by the start of large jobs awarded in the fourth quarter of 2021 and the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods.
Operating income for our marine segment for the three months ended September 30, 2022 was $5.2 million, compared to an operating loss of $5.0 million for the three months ended September 30, 2021, an increase of $10.2 million. This increase in operating income was primarily due to the increase in revenue noted above, the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods, the gain on the disposal of excess equipment and the release of discretionary project bonuses.
Concrete Segment
Revenues for our concrete segment for the three months ended September 30, 2022 were $106.5 million compared to $85.2 million for the three months ended September 30, 2021, an increase of $21.3 million, or 25.1%. 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 September 30, 2022 was $4.1 million, compared to $3.8 million for the three months ended September 30, 2021, an increase of $0.3 million. This increase in operating loss 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, partially offset by the release of discretionary project bonuses.
Nine months ended September 30, 2022 compared with nine months ended September 30, 2021.
Nine months ended September 30,
2022
2021
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
Marine segment
Public sector
$
164,357
67.7
%
$
121,916
63.9
%
Private sector
78,540
32.3
%
68,911
36.1
%
Marine segment total
$
242,897
100.0
%
$
190,827
100.0
%
Concrete segment
Public sector
$
23,068
7.5
%
$
13,580
5.5
%
Private sector
286,162
92.5
%
234,684
94.5
%
Concrete segment total
$
309,230
100.0
%
$
248,264
100.0
%
Total
$
552,127
$
439,091
Operating income (loss)
Marine segment
$
9,553
3.9
%
$
6,489
3.4
%
Concrete segment
(14,125)
(4.6)
%
(7,611)
(3.1)
%
Total
$
(4,572)
$
(1,122)
Marine Segment
Revenues for our marine segment for the nine months ended September 30, 2022 were $242.9 million compared to $190.8 million for the nine months ended September 30, 2021, an increase of $52.1 million, or 27.3%. The increase was primarily driven by the start of large jobs awarded in the second half of 2021 and the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods.
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Operating income for our marine segment for the nine months ended September 30, 2022 was $9.6 million, compared to operating income of $6.5 million for the nine months ended September 30, 2021, an increase of $3.1 million. Excluding the impact of the sale of property in Tampa, Florida in the prior year period operating income was $9.6 million, compared to an operating loss of $0.2 million for the nine months ended September 30, 2021, an increase of $9.8 million. This increase in operating income was primarily due to the increase in revenue noted above, the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods, the gain on the disposal of excess equipment and the release of discretionary project bonuses, partially offset by the increase in SG&A expense noted above.
Concrete Segment
Revenues for our concrete segment for the nine months ended September 30, 2022 were $309.2 million compared to $248.3 million for the nine months ended September 30, 2021, an increase of $60.9 million, or 24.6%. This increase was primarily driven by increased cubic yard production in light commercial projects.
Operating loss for our concrete segment for the nine months ended September 30, 2022 was $14.1 million, compared to $7.6 million for the nine months ended September 30, 2021, an increase of $6.5 million. This increase in operating loss 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, partially offset by the release of discretionary project bonuses.
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, sale of underutilized assets, 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 September 30, 2022, our working capital was $34.7 million, as compared with $36.2 million at December 31, 2021. As of September 30, 2022, we had unrestricted cash on hand of $2.7 million. Our borrowing capacity at September 30, 2022 was approximately $10.8 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 forecasted cash position and available credit, including our ability to access liquidity beyond the maturing date of the Credit Agreement, is adequate for our general business requirements discussed above, to service our debt, and to maintain compliance with our financial covenants.
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The following table provides information regarding our cash flows and our capital expenditures for the three and nine months ended September 30, 2022 and 2021:
Three months ended
Nine months ended
September 30,
September 30,
2022
2021
2022
2021
Net income (loss)
$
247
$
(10,195)
$
(7,663)
$
(5,737)
Adjustments to remove non-cash and non-operating items
5,095
7,234
20,164
16,738
Cash flow from net income (loss) after adjusting for non-cash and non-operating items
5,342
(2,961)
12,501
11,001
Change in operating assets and liabilities (working capital)
(7,917)
(4,074)
(3,400)
(6,761)
Cash flows (used in) provided by operating activities
$
(2,575)
$
(7,035)
$
9,101
$
4,240
Cash flows provided by (used in) investing activities
$
803
$
(5,973)
$
(6,155)
$
14,489
Cash flows (used in) provided by financing activities
$
(3,580)
$
11,491
$
(12,502)
$
(19,425)
Capital expenditures (included in investing activities above)
$
(2,626)
$
(6,879)
$
(10,627)
$
(11,594)
Operating Activities. During the three months ended September 30, 2022, we used approximately $2.6 million in cash from our operating activities. The net cash outflow is comprised of $7.9 million of cash outflows related to changes in net working capital, partially offset by $5.3 million of cash inflows from net income, after adjusting for non-cash items. 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 $11.1 million cash outflow pursuant to the relative timing and significance of project progression and billings during the period and a $1.2 million decrease in operating lease liabilities, partially offset by a $3.7 million cash inflow related to an increase in our net position of accounts receivable and accounts payable plus accrued liabilities during the period and $0.7 million of cash inflows from the decrease in prepaid expenses and other assets.
During the nine months ended September 30, 2022, we generated approximately $9.1 million in cash from our operating activities. The net cash inflow is comprised of $12.5 million of cash inflows from net income, after adjusting for non-cash items and $3.4 million of cash outflows 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 $8.7 million cash outflow pursuant to the relative timing and significance of project progression and billings during the period and a $3.5 million decrease in operating lease liabilities, partially offset by $5.2 million of cash inflows from the decrease in prepaid expenses and other assets and $3.6 million cash inflow related to an increase in our net position of accounts receivable and accounts payable plus accrued liabilities during the period.
Investing Activities. Capital asset additions and betterments to our fleet were $2.6 million in the three months ended September 30, 2022, as compared with $6.9 million in the three months ended September 30, 2021. Proceeds from the sale of property and equipment were $3.4 million in the three months ended September 30, 2022, as compared with $0.9 million in the three months ended September 30, 2021.
Capital asset additions and betterments to our fleet were $10.6 million in the nine months ended September 30, 2022, as compared with $11.6 million in the nine months ended September 30, 2021. Proceeds from the sale of
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property and equipment were $4.5 million in the nine months ended September 30, 2022, as compared with $25.6 million in the nine months ended September 30, 2021. The decrease in proceeds from the sale of property and equipment for the nine months ended September 30, 2022 was primarily related to the sale of our property in Tampa, Florida in the prior year period.
Financing Activities. During the three months ended September 30, 2022, we had borrowings of $4.0 million and payments of $6.4 million on our revolving line of credit and had payments of $0.8 million on finance lease liabilities.
During the nine months ended September 30, 2022 we had borrowings of $9.0 million and payments of $18.0 million on our revolving line of credit, had payments of $2.2 million on finance lease liabilities and incurred $0.7 million of loan costs related to the Ninth Amendment of the Credit Facility.
Sources of Capital
As of September 30, 2022, our available sources of capital consisted of cash flows from operations and borrowing availability on our revolving line of credit of $10.8 million pursuant to our Credit Facility.
Financial covenants
Restrictive financial covenants under the Credit Facility include:
• 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.
The Company was in compliance with all financial covenants as of September 30, 2022, with the reported consolidated leverage ratio of 2.88 to 1.00.
See Note 11 in the Notes to the Financial Statements (of this Form 10-Q) for further discussion on the Company’s Debt.
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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 September 30, 2022, the capacity under our current bonding arrangement was at least $750 million, with approximately $210 million of projects being bonded. We believe our 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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.