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 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 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, 2022 (“2022 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 2022 Form 10-K, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 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 (hereafter collectively referred to as the “Company”), provide a broad range of specialty construction services in the infrastructure, industrial and building sectors 31 ​ Table of Contents throughout the continental United States, Alaska, 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 place and finish, site preparation, layout, forming, and rebar placement for large 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. 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 32 ​ Table of Contents 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, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Marine segment ​ $ 187.0 ​ $ 216.7 ​ $ 280.2 ​ $ 281.0 ​ $ 317.4 Concrete segment ​ 280.4 ​ 232.1 ​ 268.4 ​ 322.2 ​ 286.7 Consolidated ​ $ 467.4 ​ $ 448.8 ​ $ 548.6 ​ $ 603.2 ​ $ 604.1 ​ We are optimistic in our end-markets and in the opportunities that are emerging across our various marketplaces as evidenced by the $3.1 billion of quoted bids outstanding at quarter end, of which over $610 million we have been awarded contracts subsequent to the end of the fiscal quarter ended March 31, 2023. 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, 2023 compared with three months ended March 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ 2023 2022 ​ Amount Percent Amount Percent ​ ​ (dollar amounts in thousands) Contract revenues ​ $ 159,174 100.0 % $ 174,931 100.0 % Cost of contract revenues ​ 153,334 96.3 % 162,115 92.7 % Gross profit ​ 5,840 3.7 % 12,816 7.3 % Selling, general and administrative expenses ​ 17,017 10.8 % 16,170 9.1 % Amortization of intangible assets ​ ​ 162 ​ 0.1 % ​ 310 ​ 0.2 % Gain on disposal of assets, net ​ ​ (696) ​ (0.5) ​ ​ (809) ​ (0.4) ​ Operating loss ​ (10,643) (6.7) % (2,855) (1.6) % Other (expense) income: ​ ​ ​ Other income ​ 293 0.2 % 44 — % Interest income ​ 28 — % 19 — % Interest expense ​ (1,633) (1.0) % (740) (0.4) % Other expense, net ​ (1,312) (0.8) % (677) (0.4) % Loss before income tax expense ​ (11,955) (7.5) % (3,532) (2.0) % Income tax expense ​ 640 0.4 % 1,324 0.8 % Net loss ​ $ (12,595) (7.9) % $ (4,856) (2.8) % ​ Contract Revenues. Contract revenues for the three months ended March 31, 2023 of $159.2 million decreased $15.7 million or 9.0% as compared to $174.9 million in the prior year period. The decrease was primarily due to weather and customer delays in both businesses and a reduction of concrete segment revenue in central Texas. Gross Profit. Gross profit was $5.8 million for the three months ended March 31, 2023 compared to $12.8 million in the prior year period, a decrease of $7.0 million or 54.4%. Gross profit in the first quarter was 3.7% of total contract revenues as compared to 7.3% in the prior year period. Approximately half of this decrease 33 ​ Table of Contents was due to the impact of weather in Texas, which lowered labor and equipment utilization. The rest of the remaining decrease related to clean-up of low-margin projects resulting in write-downs in both the marine and concrete businesses. This was partly offset by actions to manage costs during project delays including reallocating equipment, reducing the size of the fleet and headcount reductions, as well as realizing margin improvements in the concrete business that reflected our margin improvement initiatives. ​ Selling, General and Administrative Expense. Selling, general and administrative (“SG&A”) expenses were $17.0 million for the three months ended March 31, 2023 compared to $16.2 million in the prior year period, an increase of $0.8 million or 5.2%. As a percentage of total contract revenues, SG&A expenses increased from 9.1% to 10.8%, primarily due to lower revenues in the current period. The increase in SG&A dollars was primarily due to an increase in compensation expense, partially offset by lower consulting expense related to the completion of the management transition. ​ Gain on Disposal of Assets, net. During the three months ended March 31, 2023 and 2022, we realized $0.7 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 Expense. We recorded tax expense of $0.6 million in the three months ended March 31, 2023, compared to $1.3 million in the prior year period. Our effective tax rate for the three months ended March 31, 2023 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. 34 ​ Table of Contents Three months ended March 31, 2023 compared with three months ended March 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended March 31, ​ ​ ​ 2023 ​ 2022 ​ ​ Amount Percent Amount Percent ​ ​ ​ (dollar amounts in thousands) Contract revenues ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Marine segment ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Public sector ​ ​ $ 57,926 ​ 73.0 % $ 57,308 ​ 67.8 % Private sector ​ ​ ​ 21,372 ​ 27.0 % ​ 27,172 ​ 32.2 % Marine segment total ​ ​ $ 79,298 ​ 100.0 % $ 84,480 ​ 100.0 % Concrete segment ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Public sector ​ ​ $ 4,146 ​ 5.2 % $ 5,493 ​ 6.1 % Private sector ​ ​ ​ 75,730 ​ 94.8 % ​ 84,958 ​ 93.9 % Concrete segment total ​ ​ $ 79,876 ​ 100.0 % $ 90,451 ​ 100.0 % Total ​ ​ $ 159,174 ​ ​ $ 174,931 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating (loss) income ​ ​ ​ ​ Marine segment ​ ​ $ (6,080) (7.7) % $ 1,840 2.2 % Concrete segment ​ ​ (4,563) (5.7) % (4,695) (5.2) % Total ​ ​ $ (10,643) ​ ​ ​ $ (2,855) ​ ​ ​ Marine Segment Revenues for our marine segment for the three months ended March 31, 2023 were $79.3 million compared to $84.5 million for the three months ended March 31, 2022, a decrease of $5.2 million, or 6.1%. The decrease was primarily due to weather and customer delays in the current year period. Operating loss for our marine segment for the three months ended March 31, 2023 was $6.1 million, compared to operating income of $1.8 million for the three months ended March 31, 2022, a decrease in operating income of $7.9 million. This decrease in operating income was primarily due to decreased revenue, clean-up of low-margin projects resulting in write-downs and lower labor and equipment utilization. Concrete Segment Revenues for our concrete segment for the three months ended March 31, 2023 were $79.9 million compared to $90.5 million for the three months ended March 31, 2022, a decrease of $10.6 million, or 11.7%. This decrease was primarily due to weather and customer delays and a reduction of revenue in central Texas. Operating loss for our concrete segment for the three months ended March 31, 2023 was $4.6 million, compared to $4.7 million for the three months ended March 31, 2022, a decrease in operating loss of $0.1 million. This decrease in operating loss was primarily due to lower indirect costs due to the winding down of the central Texas region, partially offset by the write-downs on several projects in the central Texas region. Liquidity and Capital Resources 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, 2023, our working capital was $21.8 million, as compared with $31.1 million at December 31, 2022. As of March 31, 2023, we had unrestricted cash on hand of $2.8 million. Our borrowing capacity under our revolving credit facility at March 31, 2023 was approximately $1.0 million. 35 ​ Table of Contents 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 us to make estimates of future activity and judgments about whether we are compliant with financial covenant calculations under our debt and other agreements and have adequate liquidity to operate. Significant assumptions used in our forecasted model of liquidity include forecasted sales, costs, and capital expenditures; expected timing and proceeds of planned real estate transactions. ​ The following table provides information regarding our cash flows and our capital expenditures for the three months ended March 31, 2023 and 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ ​ March 31, ​ 2023 2022 Net loss ​ $ (12,595) ​ $ (4,856) Adjustments to remove non-cash and non-operating items ​ ​ 6,668 ​ ​ 7,051 Cash flow from net income after adjusting for non-cash and non-operating items ​ ​ (5,927) ​ ​ 2,195 Change in operating assets and liabilities (working capital) ​ ​ 2,894 ​ ​ 7,865 Cash flows (used in) provided by operating activities ​ $ (3,033) ​ $ 10,060 Cash flows used in investing activities ​ $ (1,300) ​ $ (2,810) Cash flows provided by (used in) financing activities ​ $ 3,394 ​ $ (12,817) ​ ​ ​ ​ ​ ​ ​ Capital expenditures (included in investing activities above) ​ $ (1,876) ​ $ (3,523) ​ Operating Activities. During the three months ended March 31, 2023, we used approximately $3.0 million in cash from our operating activities. The net cash outflow is comprised of $5.9 million of cash outflows from net income, after adjusting for non-cash items, partially offset by $2.9 million of 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 $12.7 million cash inflow pursuant to the relative timing and significance of project progression and billings during the period and $0.8 million of other inflows, partially offset by a $7.9 million cash outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period, a $1.5 million cash outflow from the increase in prepaid expenses and a $1.2 million decrease in operating lease liabilities. Investing Activities. Capital asset additions and betterments to our fleet were $1.9 million in the three months ended March 31, 2023, as compared with $3.5 million in the three months ended March 31, 2022. Proceeds from the sale of property and equipment were $0.6 million in the three months ended March 31, 2023, as compared with $0.7 million in the three months ended March 31, 2022. Financing Activities. During the three months ended March 31, 2023, we had borrowings of $5.0 million on our revolving line of credit and had payments of $0.8 million on finance lease liabilities, loan costs of $0.6 million and a cash outflow of $0.2 million for payments related to tax withholdings for share-based compensation. ​ 36 ​ Table of Contents Sources of Capital Financial covenants We obtained from the Credit Facility lenders an extension of the consent with respect to the delivery of our annual financial statements with an audit opinion unqualified as to going concern and a consent for the Consolidated Leverage Ratio to exceed 3.00 to 1.00 and for the Consolidated Fixed Charge Coverage Ratio to be less than 1.25 to 1.00 for the Fiscal Quarter Ending March 31, 2023 On May 15, 2023, we entered into a new three-year $103.0 million senior secured credit facility with White Oak which includes a $65.0 million asset based revolving credit facility and a $38.0 million fixed asset term loan. See Note 19 in the Notes to the Financial Statements (of this Form 10-Q) for further discussion on the Company’s Debt Refinancing. 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, 2023, 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.