What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-28 compared with 2023-05-15 · 116 added, 46 removed, 111 unchanged (59% of the section changed)

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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.

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

throughout the continental United States, Alaska, and the Caribbean Basin.

with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

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.

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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.

We have not been adversely affected by contract cancellations or modifications in the past, however we may be in the future, especially in periods of economic uncertainty.

Backlog as of the periods ended below are as follows (in millions):

June 30, 2023

March 31, 2023

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June 30, 2022

March 31, 2022

Marine segment

Concrete segment

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.

We are optimistic in our end-markets and in the opportunities that are emerging across our various marketplaces as evidenced by the $2.8 billion of quoted bids outstanding at quarter end, of which over $84 million we have been awarded contracts subsequent to the end of the fiscal quarter ended June 30, 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.

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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,

Three months ended June 30, 2023 compared with three months ended Jun 30, 2022.

Three months ended June 30,

(dollar amounts in thousands)

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Gain on disposal of assets, net

Operating income (loss)

Other (expense) income:

Interest income

Interest expense

Other expense, net

Loss before income taxes

Income tax benefit

Contract Revenues.

Contract revenues for the three months ended June 30, 2023 of $182.5 million decreased $12.1 million or 6.2% as compared to $194.6 million in the prior year period.

The decrease was primarily due to our decision to exit the unprofitable concrete business in central Texas, partially offset by an increase in marine segment revenue primarily related to the Pearl Harbor, Hawaii drydock project.

Gross Profit.

Gross profit was $13.8 million for the three months ended June 30, 2023 compared to $14.3 million in the prior year period, a decrease of $0.5 million or 3.7%.

Gross profit in the second quarter was 7.6% of total contract revenues as compared to 7.4% in the prior year period.

The increase in gross profit margin was primarily driven by margin improvements in the concrete business, partially offset by lower equipment and labor utilization in our marine segment as compared to the prior year period.

Selling, General and Administrative Expense.

Selling, general and administrative (“SG&A”) expenses were $18.1 million for the three months ended June 30, 2023 compared to $17.2 million in the prior year period, an increase of $0.9 million or 5.1%.

As a percentage of total contract revenues, SG&A expenses increased from 8.9% to 9.9%, primarily due to lower revenues in the current period.

The increase in SG&A dollars reflected an increase in compensation expense for key new hires, 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 June 30, 2023 and 2022, we realized $6.5 million and $0.4 million, respectively, of net gains on disposal of assets.

The three months ended June 30, 2023 included a gain of $5.2 million related to the sale-leaseback of our Port Lavaca South Yard property in Texas.

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.

We recorded tax benefit of less than $0.1 million in the three months ended June 30, 2023, compared to tax benefit of $0.7 million in the prior year period.

Our effective tax rate for the three months ended June 30, 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.

Six months ended June 30, 2023 compared with six months ended June 30, 2022.

Six months ended June 30,

(dollar amounts in thousands)

Contract revenues

Cost of contract revenues

Selling, general and administrative expenses

Amortization of intangible assets

Gain on disposal of assets, net

Operating loss

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Other expense, net

Loss before income tax expense

Loss before income taxes

Income tax expense

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.

Contract revenues for the six months ended June 30, 2023 of $341.7 million decreased $27.8 million or 7.5% as compared to $369.5 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, partially offset by an increase in marine segment revenue primarily related to the Hawaii drydock project.

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

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.

Gross profit was $19.6 million for the six months ended June 30, 2023 compared to $27.1 million in the prior year period, a decrease of $7.5 million or 27.6%.

Gross profit in the six months ended June 30, 2023 was 5.7% of total contract revenues as compared to 7.3% in the prior year period.

This decrease was primarily due to the impact of weather in Texas in the first quarter of 2023, which lowered labor and equipment utilization and the completion 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%.

SG&A expenses were $35.1 million for the six months ended June 30, 2023 compared to $33.4 million in the prior year period, an increase of $1.7 million or 5.2%.

As a percentage of total contract revenues, SG&A expenses increased from 8.9% to 10.2%, primarily due to lower revenues in the current period.

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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.

During the six months ended June 30, 2023 and 2022, we realized $7.2 million and $1.2 million, respectively, of net gains on disposal of assets.

The six months ended June 30, 2023 included a gain of $5.2 million related to the sale-leaseback of our Port Lavaca South Yard property in Texas.

Other Income, net of Expense.

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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.

We recorded tax expense of $0.6 million in both the six months ended June 30, 2023, and in the prior year period.

Our effective tax rate for the six months ended June 30, 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.

Three months ended March 31, 2023 compared with three months ended March 31, 2022.

Three months ended March 31,

Three months ended June 30, 2023 compared with three months ended June 30, 2022.

Three months ended June 30,

(dollar amounts in thousands)

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Concrete segment total

Operating income (loss)

Marine segment

Concrete segment

Marine Segment

Revenues for our marine segment for the three months ended June 30, 2023 were $100.5 million compared to $82.3 million for the three months ended June 30, 2022, an increase of $18.2 million, or 22.1%.

The increase was primarily related to the Hawaii drydock project.

Operating income for our marine segment for the three months ended June 30, 2023 was $3.5 million, compared to $2.5 million for the three months ended June 30, 2022, an increase in operating income of $1.0 million.

Adjusted for the gain on the Port Lavaca South Yard property sale-leaseback in Texas operating loss for the three months ended June 30, 2023 was $1.7 million or a decrease of $4.2 million.

This decrease in operating income was primarily due to lower labor and equipment utilization.

Concrete Segment

Revenues for our concrete segment for the three months ended June 30, 2023 were $82.0 million compared to $112.3 million for the three months ended June 30, 2022, a decrease of $30.3 million, or 27.0%.

This decrease was primarily due to a reduction of revenue in central Texas in 2023.

Operating loss for our concrete segment for the three months ended June 30, 2023 was $1.5 million, compared to $5.4 million for the three months ended June 30, 2022, a decrease in operating loss of $3.9 million.

This decrease in operating loss was primarily due to higher gross margin on delivered projects.

Six months ended June 30, 2023 compared with six months ended June 30, 2022.

Six months ended June 30,

(dollar amounts in thousands)

Contract revenues

Marine segment

Public sector

Private sector

Marine segment total

Concrete segment

Public sector

Private sector

Concrete segment total

Operating (loss) income

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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.

Revenues for our marine segment for the six months ended June 30, 2023 were $179.8 million compared to $166.8 million for the six months ended June 30, 2022, an increase of $13.0 million, or 7.8%.

The increase was primarily related to the Hawaii drydock replacement project.

Operating loss for our marine segment for the six months ended June 30, 2023 was $2.6 million, compared to operating income of $4.4 million for the six months ended June 30, 2022, a decrease in operating income of $7.0 million.

Adjusted for the gain on the Port Lavaca South Yard property sale-leaseback in Texas operating loss for the six months ended June 30, 2023 was $7.8 million or a decrease of $12.2 million.

This decrease in operating income was primarily due to the completion 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.

Revenues for our concrete segment for the six months ended June 30, 2023 were $161.9 million compared to $202.7 million for the six months ended June 30, 2022, a decrease of $40.8 million, or 20.1%.

This decrease was primarily due to a reduction of revenue in central Texas.

Operating loss for our concrete segment for the six months ended June 30, 2023 was $6.0 million, compared to $10.1 million for the six months ended June 30, 2022, a decrease in operating loss of $4.1 million.

This decrease in operating loss was primarily due to lower indirect costs due to the exit of 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.

At June 30, 2023, our working capital was $60.8 million, as compared with $31.1

million at December 31, 2022.

As of June 30, 2023, we had unrestricted cash on hand of $8.9 million.

Our borrowing availability under our revolving credit facility at June 30, 2023 was approximately $51.2 million.

Our primary liquidity needs are to finance our working capital, fund capital expenditures, and pursue strategic acquisitions.

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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:

The following table provides information regarding our cash flows and our capital expenditures for the three and six months ended June 30, 2023 and 2022:

Three months ended

Six months ended

Adjustments to remove non-cash and non-operating items

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Cash flows (used in) provided by operating activities

Cash flows used in investing activities

Cash flows provided by (used in) investing activities

Cash flows provided by (used in) financing activities

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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.

During the three months ended June 30, 2023, we used approximately $8.9 million in cash from our operating activities.

The net cash outflow is comprised of $1.3 million of cash inflows from net income, after adjusting for non-cash items, partially offset by $10.2 million of 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 $11.4 million cash outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period, a $1.3 million decrease in operating lease liabilities, $0.6 million of cash outflows pursuant to the relative timing and significance of project progression and billings during the period and $1.1 million of other outflows, partially offset by $4.2 million cash inflow from the decrease in prepaid expenses.

During the six months ended June 30, 2023, we used approximately $12.0 million in cash from our operating activities.

The net cash outflow is comprised of $4.7 million of cash outflows from net loss, after adjusting for non-cash items and by $7.3 million of 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 $19.4 million cash outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period, $2.5 million decrease in operating lease liabilities and $0.3 million of other outflows, partially offset by

$12.1 million cash inflows pursuant to the relative timing and significance of project progression and billings during the period and $2.8 million of cash inflows from the decrease in prepaid expenses.

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.

Capital asset additions and betterments to our fleet were $2.4 million in the three months ended June 30, 2023, as compared with $4.5 million in the three months ended June 30, 2022.

Proceeds from the sale of property and equipment were $10.8 million in the three months ended June 30, 2023, as compared with $0.3 million in the three months ended June 30, 2022.

Included in the three months ended June 30, 2023 is $8.1 million of proceeds related to the sale-leaseback of the Port Lavaca South Yard property in Texas.

Capital asset additions and betterments to our fleet were $4.3 million in the six months ended June 30, 2023, as compared with $8.0 million in the six months ended June 30, 2022.

Proceeds from the sale of property and equipment were $11.3 million in the six months ended June 30, 2023, as compared with $1.0 million in the six months ended June 30, 2022.

Included in the six months ended June 30, 2023 is $8.1 million of proceeds related to the sale-leaseback of the Port Lavaca South Yard property in Texas.

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.

During the three months ended June 30, 2023, we had borrowings of $38.0 million on the White Oak term loan and borrowings of $14.8 million on the White Oak revolver and had repayments of $40.0 million on our prior credit agreement and repayments of $14.8 million on the White Oak revolver, had proceeds from failed sales-leasebacks of $24.3 million, had proceeds of $2.4 million related to the Port Lavaca land sale-leaseback financing, loan costs of $5.4 million, payments on finance lease liabilities of $0.8 million and a cash outflow of less than $0.1 million for payments related to tax withholdings for share-based compensation.

During the six months ended June 30, 2023, we had borrowings of $5.0 million on our prior credit agreement, $38.0 million on the White Oak term loan and borrowings of $14.8 million on the White Oak revolver and had repayments of $40.0 million on our prior credit agreement and repayments of $14.8 million on the White Oak revolver, had proceeds from failed sales-leasebacks of $24.3 million, had proceeds of $2.4 million related to the Port Lavaca land sale-leaseback financing, loan costs of $6.0 million, payments on finance lease liabilities of $1.6 million and a cash outflow of $0.2 million for payments related to tax withholdings for share-based compensation.

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.

On May 15, 2023, we entered into a new three-year $103.0 million Credit Agreement with White Oak which includes a $65.0 million asset based revolving credit facility and a $38.0 million fixed asset term loan.

Please see “Note 11 – Debt” in our unaudited condensed consolidated financial statements for a more detailed description of the Credit Agreement.

Bonding Capacity

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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.

At June 30, 2023, the capacity under our current bonding arrangement was at least $750 million, with approximately $475 million of projects being bonded.

We believe our balance sheet and working capital position will allow us to continue to access our bonding capacity.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis