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 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 Part 1, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10K”) 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 10Q 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
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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 10K, Part 11, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Form 10K 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, provides services both on and off the water in the continental United States, Alaska, Hawaii, Canada and the Caribbean Basin through its marine segment and its concrete segment. The Company’s marine segment provides construction and dredging services relating to 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 provides turnkey concrete construction services including place and finish, site prep, layout, forming, and rebar placement for large commercial, structural and other associated business areas. The Company is headquartered in Houston, Texas with regional 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.
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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 periods of economic uncertainty.
Backlog as of the periods ended below are as follows (in millions):
September 30, 2023
June 30, 2023
March 31, 2023
December 31, 2022
September 30, 2022
Marine segment
$
699.9
$
614.9
$
187.0
$
216.7
$
280.2
Concrete segment
177.6
203.8
280.4
232.1
268.4
Consolidated
$
877.5
$
818.7
$
467.4
$
448.8
$
548.6
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 $43 million resulted in the award of contracts subsequent to the end of the fiscal quarter ended September 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. 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 September 30, 2023 compared with three months ended September 30, 2022.
Three months ended September 30,
2023
2022
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
$
168,476
100.0
%
$
182,621
100.0
%
Cost of contract revenues
149,406
88.7
%
169,189
92.6
%
Gross profit
19,070
11.3
%
13,432
7.4
%
Selling, general and administrative expenses
17,135
10.2
%
15,380
8.5
%
Amortization of intangible assets
59
—
%
309
0.2
%
Gain on disposal of assets, net
(685)
(0.4)
%
(3,388)
(1.9)
%
Operating income (loss)
2,561
1.5
%
1,131
0.6
%
Other (expense) income:
Other income
49
—
%
48
—
%
Interest income
21
—
%
36
—
%
Interest expense
(3,414)
(2.0)
%
(1,215)
(0.6)
%
Other expense, net
(3,344)
(2.0)
%
(1,131)
(0.6)
%
Loss before income taxes
(783)
(0.5)
%
—
—
%
Income tax expense (benefit)
(123)
(0.1)
%
(247)
(0.1)
%
Net (loss) income
$
(660)
(0.4)
%
$
247
0.1
%
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Contract Revenues. Contract revenues for the three months ended September 30, 2023 of $168.5 million decreased $14.1 million or 7.7% as compared to $182.6 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 related to the Pearl Harbor, Hawaii drydock project (the “Pearl Harbor Project”).
Gross Profit. Gross profit was $19.1 million for the three months ended September 30, 2023 compared to $13.4 million in the prior year period, an increase of $5.7 million or 42.0%. Gross profit in the third quarter was 11.3% of total contract revenues as compared to 7.4% in the prior year period. The increase in gross profit dollars and margin was primarily driven by margin improvements in both segments stemming from higher quality projects and improved execution, partially offset by lower equipment and labor utilization in our dredging business.
Selling, General and Administrative Expense. Selling, general and administrative (“SG&A”) expenses were $17.1 million for the three months ended September 30, 2023 compared to $15.4 million in the prior year period, an increase of $1.7 million or 11.4%. As a percentage of total contract revenues, SG&A expenses increased from 8.5% to 10.2%, primarily due to lower revenues and an increase in SG&A in the third quarter. The increase in SG&A dollars reflected an increase in IT and business development spending and higher legal costs related to customer claims.
Gain on Disposal of Assets, net. During the three months ended September 30, 2023 and 2022, we realized $0.7 million and $3.4 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. We recorded tax benefit of $0.1 million in the three months ended September 30, 2023, compared to tax benefit of $0.2 million in the prior year period. Our effective tax rate for the three months ended September 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.
Nine months ended September 30, 2023 compared with nine months ended September 30, 2022.
Nine months ended September 30,
2023
2022
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
$
510,184
100.0
%
$
552,127
100.0
%
Cost of contract revenues
471,488
92.4
%
511,548
92.7
%
Gross profit
38,696
7.6
%
40,579
7.3
%
Selling, general and administrative expenses
52,271
10.3
%
48,783
8.7
%
Amortization of intangible assets
383
0.1
%
929
0.2
%
Gain on disposal of assets, net
(7,915)
(1.6)
%
(4,561)
(0.8)
%
Operating loss
(6,043)
(1.2)
%
(4,572)
(0.8)
%
Other (expense) income:
Other income
592
0.1
%
147
—
%
Interest income
90
—
%
71
—
%
Interest expense
(7,674)
(1.5)
%
(2,913)
(0.5)
%
Other expense, net
(6,992)
(1.4)
%
(2,695)
(0.5)
%
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Loss before income taxes
(13,035)
(2.6)
%
(7,267)
(1.3)
%
Income tax expense
475
—
%
396
0.1
%
Net loss
$
(13,510)
(2.6)
%
$
(7,663)
(1.4)
%
Contract Revenues. Contract revenues for the nine months ended September 30, 2023 of $510.2 million decreased $41.9 million or 7.6% as compared to $552.1 million in the prior year period. The decrease was primarily due to weather and customer delays in both businesses in the first quarter of 2023 and a reduction of concrete segment revenue in central Texas, partially offset by an increase in marine segment revenue primarily related to the Pearl Harbor Project.
Gross Profit. Gross profit was $38.7 million for the nine months ended September 30, 2023 compared to $40.6 million in the prior year period, a decrease of $1.9 million or 4.6%. Gross profit in the nine months ended September 30, 2023 was 7.6% of total contract revenues as compared to 7.3% in the prior year period. The decrease in gross profit dollars 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. The increase in gross profit margin was primarily due to 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. SG&A expenses were $52.3 million for the nine months ended September 30, 2023 compared to $48.8 million in the prior year period, an increase of $3.5 million or 7.2%. As a percentage of total contract revenues, SG&A expenses increased from 8.7% to 10.3%, primarily due to lower revenues and increased SG&A 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 nine months ended September 30, 2023 and 2022, we realized $7.9 million and $4.6 million, respectively, of net gains on disposal of assets. The nine months ended September 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 Expense. We recorded tax expense of $0.5 million in the nine months ended September 30, 2023, compared to $0.4 million of tax expense in the prior year period. Our effective tax rate for the nine months ended September 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 income (loss) as a percentage of segment revenues.
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Three months ended September 30, 2023 compared with three months ended September 30, 2022.
Three months ended September 30,
2023
2022
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
Marine segment
Public sector
$
61,144
75.6
%
$
54,769
72.0
%
Private sector
19,769
24.4
%
21,329
28.0
%
Marine segment total
$
80,913
100.0
%
$
76,098
100.0
%
Concrete segment
Public sector
$
7,974
9.1
%
$
10,070
9.5
%
Private sector
79,589
90.9
%
96,453
90.5
%
Concrete segment total
$
87,563
100.0
%
$
106,523
100.0
%
Total
$
168,476
$
182,621
Operating income (loss)
Marine segment
$
2,001
2.5
%
$
5,197
6.8
%
Concrete segment
560
0.6
%
(4,066)
(3.8)
%
Total
$
2,561
$
1,131
Marine Segment
Revenues for our marine segment for the three months ended September 30, 2023 were $80.9 million compared to $76.1 million for the three months ended September 30, 2022, an increase of $4.8 million, or 6.3%. The increase was primarily related to the Pearl Harbor Project.
Operating income for our marine segment for the three months ended September 30, 2023 was $2.0 million, compared to $5.2 million for the three months ended September 30, 2022, a decrease in operating income of $3.2 million. This decrease in operating income was primarily due to a larger gain from asset sales in the prior year period.
Concrete Segment
Revenues for our concrete segment for the three months ended September 30, 2023 were $87.6 million compared to $106.5 million for the three months ended September 30, 2022, a decrease of $18.9 million, or 17.8%. This decrease was primarily due to a reduction of revenue in central Texas in 2023.
Operating income for our concrete segment for the three months ended September 30, 2023 was $0.6 million, compared to an operating loss of $4.1 million for the three months ended September 30, 2022, an increase of $4.7 million. This increase was primarily due to higher gross margin on delivered projects.
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Nine months ended September 30, 2023 compared with nine months ended September 30, 2022.
Nine months ended September 30,
2023
2022
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
Marine segment
Public sector
$
193,813
74.3
%
$
164,357
67.7
%
Private sector
66,941
25.7
%
78,540
32.3
%
Marine segment total
$
260,754
100.0
%
$
242,897
100.0
%
Concrete segment
Public sector
$
17,662
7.1
%
$
23,068
7.5
%
Private sector
231,768
92.9
%
286,162
92.5
%
Concrete segment total
$
249,430
100.0
%
$
309,230
100.0
%
Total
$
510,184
$
552,127
Operating (loss) income
Marine segment
$
(587)
(0.2)
%
$
9,553
3.9
%
Concrete segment
(5,456)
(2.2)
%
(14,125)
(4.6)
%
Total
$
(6,043)
$
(4,572)
Marine Segment
Revenues for our marine segment for the nine months ended September 30, 2023 were $260.8 million compared to $242.9 million for the nine months ended September 30, 2022, an increase of $17.9 million, or 7.4%. The increase was primarily related to the Pearl Harbor Project.
Operating loss for our marine segment for the nine months ended September 30, 2023 was $0.6 million, compared to operating income of $9.6 million for the nine months ended September 30, 2022, a decrease in operating income of $10.2 million. Adjusted for the gain on the Port Lavaca South Yard property sale-leaseback in Texas operating loss for the nine months ended September 30, 2023 was $5.8 million or a decrease of $15.4 million. This decrease in operating income was primarily due to the mixture of contributing projects in backlog, lower equipment utilization, and higher SG&A in the current year.
Concrete Segment
Revenues for our concrete segment for the nine months ended September 30, 2023 were $249.4 million compared to $309.2 million for the nine months ended September 30, 2022, a decrease of $59.8 million, or 19.3%. This decrease was primarily due to a reduction of revenue in central Texas.
Operating loss for our concrete segment for the nine months ended September 30, 2023 was $5.5 million, compared to $14.1 million for the nine months ended September 30, 2022, a decrease in operating loss of $8.6 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, seasonality and timing of delivery of our projects. At September 30, 2023, our working capital was $67.9 million, as
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compared with $31.1 million at December 31, 2022. As of September 30, 2023, we had unrestricted cash on hand of $3.9 million. Our borrowing availability under our revolving Credit Facility at September 30, 2023 was approximately $31.7 million.
Our primary liquidity needs are to finance our working capital and fund capital expenditures. 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 our liquidity 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, as well as 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 and nine months ended September 30, 2023 and 2022:
Three months ended
Nine months ended
September 30,
September 30,
2023
2022
2023
2022
Net (loss) income
$
(660)
$
247
$
(13,510)
$
(7,663)
Adjustments to remove non-cash and non-operating items
8,214
5,095
16,393
20,164
Cash flow from net income after adjusting for non-cash and non-operating items
7,554
5,342
2,883
12,501
Change in operating assets and liabilities (working capital)
(24,079)
(7,917)
(31,384)
(3,400)
Cash flows (used in) provided by operating activities
$
(16,525)
$
(2,575)
$
(28,501)
$
9,101
Cash flows (used in) provided by investing activities
$
(1,650)
$
803
$
5,391
$
(6,155)
Cash flows provided by (used in) financing activities
$
11,631
$
(3,580)
$
23,207
$
(12,502)
Capital expenditures (included in investing activities above)
$
(2,387)
$
(2,626)
$
(6,678)
$
(10,627)
Operating Activities. During the three months ended September 30, 2023, we used approximately $16.5 million in cash in our operating activities. The net cash outflow is comprised of $24.1 million of outflows related to changes in net working capital, partially offset by $7.6 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 $19.2 million cash outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period, $2.9 million of cash outflows pursuant to the relative timing and significance of project progression and billings during the period and a $2.1 million decrease in operating lease liabilities, partially offset by $0.1 million of other cash inflows.
During the nine months ended September 30, 2023, we used approximately $28.5 million in cash in our operating activities. The net cash outflow is comprised of $31.4 million of outflows related to changes in net working capital, partially offset by $2.9 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 $38.5 million cash outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period, a $4.6 million decrease in operating lease liabilities and $0.6 million of other outflows,
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partially offset by $9.2 million cash inflows pursuant to the relative timing and significance of project progression and billings during the period and $3.1 million of cash inflows from the decrease in prepaid expenses.
Investing Activities. Capital asset additions and betterments to our fleet were $2.4 million in the three months ended September 30, 2023, as compared with $2.6 million in the three months ended September 30, 2022. Proceeds from the sale of property and equipment were $0.7 million in the three months ended September 30, 2023, as compared with $3.4 million in the three months ended September 30, 2022.
Capital asset additions and betterments to our fleet were $6.7 million in the nine months ended September 30, 2023, as compared with $10.6 million in the nine months ended September 30, 2022. Proceeds from the sale of property and equipment were $12.1 million in the nine months ended September 30, 2023, as compared with $4.5 million in the nine months ended September 30, 2022. Included in the nine months ended September 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 September 30, 2023, we had borrowings of $31.7 million from the White Oak revolving credit line and had repayments of $18.2 million on the White Oak revolving credit line, loan costs of $0.6 million, payments on finance lease liabilities of $0.9 million and a cash outflow of $0.3 million for payments related to tax withholdings for share-based compensation.
During the nine months ended September 30, 2023, we had borrowings of $5.0 million from our prior credit agreement, $38.0 million from the White Oak term loan and borrowings of $46.5 million on the White Oak revolving credit line and had repayments of $40.0 million on our prior credit agreement and repayments of $33.0 million on the White Oak revolving credit line, 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 $6.5 million, payments on finance lease liabilities of $2.5 million and a cash outflow of $0.5 million for payments related to tax withholdings for share-based compensation.
Sources of Capital
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 line 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 Facility.
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, 2023, the capacity under our current bonding arrangement was at least $750 million, with approximately $450 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.
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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.