What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-26 compared with 2023-10-27 · 65 added, 126 removed, 98 unchanged (66% of the section changed)

10 unchanged sentences

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, 2023 (“2023 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 10Q speak only as of the date of this report;

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.

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.

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.

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 2023 Form 10-K, Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2023 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.

and subsidiaries (hereafter collectively referred to as the “Company”), is a leading specialty construction company serving the infrastructure, industrial, and building sectors, providing 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.

Our marine segment provides construction and dredging services including marine transportation facility construction, marine pipeline construction, marine environmental structures construction, dredging of waterways, channels and ports, environmental dredging, design, and specialty services related to marine construction, fabrication, and dredging.

Our concrete segment provides turnkey concrete construction services including concrete surface place and finish, site preparation, layout, forming, and rebar placement for large commercial, structural and other associated business areas.

We are headquartered in Houston, Texas with regional offices throughout our 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.

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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.

We 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.

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● customer delays, work stoppages, and other costs due to weather and environmental restrictions;

● subcontractor performance;

● unforeseen site conditions;

● availability and skill level of workers;

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

September 30, 2023

June 30, 2023

March 31, 2024

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September 30, 2023

June 30, 2023

March 31, 2023

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 $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.

We are optimistic in our end-markets and in the opportunities that are emerging across our various marketplaces as evidenced by the $3.5 billion of quoted bids outstanding at quarter end, of which over $101 million resulted in the award of contracts subsequent to the end of the fiscal quarter ended March 31, 2024.

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 September 30, 2023 compared with three months ended September 30, 2022.

Three months ended September 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 income (loss)

Other (expense) income:

Interest income

Interest expense

Other expense, net

Loss before income taxes

Income tax expense (benefit)

Net (loss) income

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,

Income Statement Comparisons

Three months ended March 31, 2024 compared with three months ended March 31, 2023.

Three months ended March 31,

(dollar amounts in thousands)

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Loss before income taxes

Income tax expense

Income tax (benefit) expense

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.

Contract revenues for the three months ended March 31, 2024 of $160.7 million increased $1.5 million or 0.9% as compared to $159.2 million in the prior year period.

The increase was primarily due to an increase in marine segment revenue related to the Pearl Harbor, Hawaii drydock project, partially offset by lower concrete segment revenue due to disciplined bidding standards to win quality work at attractive margins.

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.

Gross profit was $15.5 million for the three months ended March 31, 2024 compared to $5.8 million in the prior year period, an increase of $9.7 million.

Gross profit in the first quarter was 9.7% of total contract revenues as compared to 3.7% in the prior year period.

The increase in gross profit dollars and margin was primarily driven by improved pricing of projects in both segments stemming from higher quality projects and improved execution, partially offset by lower margin and mix of dredging revenue.

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.

Selling, general and administrative (“SG&A”) expenses were $19.0 million for the three months ended March 31, 2024 compared to $17.0 million in the prior year period, an increase of $2.0 million or 11.6%.

As a percentage of total contract revenues, SG&A expenses increased from 10.7% to 11.8%.

The increase in SG&A dollars and percentage reflecting an increase in IT and business development spending, and higher legal costs related to pursuing project-related claims.

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.

During the three months ended March 31, 2024 and 2023 we realized $0.3 million and $0.7 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 $0.5 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.

Income Tax (Benefit) Expense.

We recorded tax benefit of $0.4 million in the three months ended March 31, 2024, compared to tax expense of $0.6 million in the prior year period.

Our effective tax rate for the three months ended March 31, 2024 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.

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

Three months ended September 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 income (loss)

Marine segment

Concrete segment

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.

Nine months ended September 30, 2023 compared with nine months ended September 30, 2022.

Nine months ended September 30,

Three months ended March 31, 2024 compared with three months ended March 31, 2023.

Three months ended March 31,

(dollar amounts in thousands)

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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%.

Revenues for our marine segment for the three months ended March 31, 2024 were $106.3 million compared to $79.3 million for the three months ended March 31, 2023, an increase of $27.0 million, or 34.1%.

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.

Operating loss for our marine segment for the three months ended March 31, 2024 was $4.9 million, compared to $6.1 million for the three months ended March 31, 2023, a decrease in operating loss of $1.2 million.

This decrease in operating loss was primarily due to margin improvements stemming from higher quality projects and improved execution, partially offset by lower margin and mix of dredging revenue.

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.

Revenues for our concrete segment for the three months ended March 31, 2024 were $54.3 million compared to $79.9 million for the three months ended March 31, 2023, a decrease of $25.6 million, or 32.0%.

This decrease was primarily due to a decrease in concrete segment revenue due to disciplined bidding standards to win quality work at attractive margins.

Operating income for our concrete segment for the three months ended March 31, 2024 was $1.7 million, compared to an operating loss of $4.6 million for the three months ended March 31, 2023, an increase of $6.3 million.

This increase was primarily due to reduction of lower margin work, winning higher margin jobs due to disciplined bidding standards and improved execution.

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

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.

At March 31, 2024, our working capital was $53.9 million, as compared to $55.9 million at December 31, 2023.

As of March 31, 2024, we had unrestricted cash on hand of $4.6 million.

Our borrowing availability under our revolving portion of our Credit Agreement at March 31, 2024 was approximately $28.1 million.

Our primary liquidity needs are to finance our working capital and fund capital expenditures.

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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:

The following table provides information regarding our cash flows and our capital expenditures for the three months ended March 31, 2024 and 2023:

Three months ended

Nine months ended

September 30,

Net (loss) income

Adjustments to remove non-cash and non-operating items

Cash flow from net income after adjusting for non-cash and non-operating items

Cash flow from net income (loss) after adjusting for non-cash and non-operating items

Change in operating assets and liabilities (working capital)

Cash flows (used in) provided by operating activities

Cash flows (used in) provided by investing activities

Cash flows provided by (used in) financing activities

Cash flows used in operating activities

Cash flows used in investing activities

Cash flows (used in) provided by financing activities

Capital expenditures (included in investing activities above)

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.

During the three months ended March 31, 2024, we used approximately $22.8 million in cash in our operating activities.

The net cash outflow is comprised of $25.8 million of outflows related to changes in net working capital, partially offset by $3.0 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,

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.

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 $30.2 million cash outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period, a $2.2 million decrease in operating lease liabilities and $0.7 million of other

outflows, partially offset by $5.1 million of cash inflows pursuant to the relative timing and significance of project progression and billings during the period and a $2.2 million decrease in prepaid expenses and other.

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.

Capital asset additions and betterments to our fleet were $1.9 million in both the three months ended March 31, 2024 and 2023.

Proceeds from the sale of property and equipment were $0.3 million in the three months ended March 31, 2024, as compared with $0.6 million in the three months ended March 31, 2023.

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.

During the three months ended March 31, 2024, we had borrowings and repayments of $1.6 million on the White Oak revolving credit line, payments on finance lease liabilities of $2.0 million and loan costs of $0.1 million and a cash inflow of $0.3 million for proceeds from the exercise of stock options.

Sources of Capital

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Please see “Note 9 – Debt” in our unaudited condensed consolidated financial statements for a more detailed description of the Credit Facility.

Amendment No.

3 to the Credit Agreement

On April 24, 2024, we executed Amendment No.

3 to the Loan Agreement with White Oak Commercial Finance, LLC.

This amendment, among other things, (i) replaces the Consolidated EBITDA covenant with a Consolidated Fixed Charge Coverage Ratio (FCCR) for the quarter ended March 31, 2024, (ii) lowers the FCCR covenant threshold from 1.10:1.00 to 1.00:1.00 through the quarter ended December 31, 2024, (iii) lowers the $15 million prepayment due June 30, 2024 to $10 million, (iv) extends the maturity of the Loan Agreement by one year to May 15, 2027, and (v) resets the make-whole provision to align with the extension.

We were in compliance with all financial covenants under the amended agreement as of March 31, 2024.

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 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.

At March 31, 2024, the capacity under our current bonding arrangement was at least $750 million, with approximately $550 million of projects being bonded.

While we believe that our current bonding capacity is sufficient to satisfy current demand for our services, any new major project opportunities may require us to seek additional bonding capacity in the future.

We believe our balance sheet and working capital position will allow us to access additional bonding capacity as needed in the future.

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.

Due to the relative short-term duration of our projects, we are generally able to include anticipated cost increases in the pricing of our bids.

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