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, 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 10-Q
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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 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.
Overview
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. 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 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;
● subcontractor performance;
● unforeseen site conditions;
● availability and skill level of workers; and
● a change in availability and proximity of equipment and materials.
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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 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):
March 31, 2024
December 31, 2023
September 30, 2023
June 30, 2023
March 31, 2023
Marine segment
$
569.9
$
602.5
$
699.9
$
614.9
$
187.0
Concrete segment
186.7
159.7
177.6
203.8
280.4
Consolidated
$
756.6
$
762.2
$
877.5
$
818.7
$
467.4
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. Backlog is not necessarily indicative of future results. In addition to our backlog under contract, we also have a substantial number of projects in negotiation or pending award at any given time. Delays in decisions on pending awards also have a negative impact on the timing and amount by which we are able to increase backlog.
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Income Statement Comparisons
Three months ended March 31, 2024 compared with three months ended March 31, 2023.
Three months ended March 31,
2024
2023
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
$
160,672
100.0
%
$
159,174
100.0
%
Cost of contract revenues
145,134
90.3
%
153,334
96.3
%
Gross profit
15,538
9.7
%
5,840
3.7
%
Selling, general and administrative expenses
18,999
11.8
%
17,017
10.7
%
Amortization of intangible assets
—
—
%
162
0.1
%
Gain on disposal of assets, net
(337)
(0.2)
%
(696)
(0.4)
%
Operating loss
(3,124)
(1.9)
%
(10,643)
(6.7)
%
Other (expense) income:
Other income
72
—
%
293
0.2
%
Interest income
17
—
%
28
—
%
Interest expense
(3,374)
(2.0)
%
(1,633)
(1.0)
%
Other expense, net
(3,285)
(2.0)
%
(1,312)
(0.8)
%
Loss before income taxes
(6,409)
(4.0)
%
(11,955)
(7.5)
%
Income tax (benefit) expense
(352)
(0.2)
%
640
0.4
%
Net loss
$
(6,057)
(3.8)
%
$
(12,595)
(7.9)
%
Contract Revenues. 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 $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. 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 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 (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
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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, 2024 compared with three months ended March 31, 2023.
Three months ended March 31,
2024
2023
Amount
Percent
Amount
Percent
(dollar amounts in thousands)
Contract revenues
Marine segment
Public sector
$
92,935
87.4
%
$
57,926
73.0
%
Private sector
13,390
12.6
%
21,372
27.0
%
Marine segment total
$
106,325
100.0
%
$
79,298
100.0
%
Concrete segment
Public sector
$
3,404
6.3
%
$
4,146
5.2
%
Private sector
50,943
93.7
%
75,730
94.8
%
Concrete segment total
$
54,347
100.0
%
$
79,876
100.0
%
Total
$
160,672
$
159,174
Operating (loss) income
Marine segment
$
(4,867)
(4.6)
%
$
(6,080)
(7.7)
%
Concrete segment
1,742
3.2
%
(4,563)
(5.7)
%
Total
$
(3,125)
$
(10,643)
Marine Segment
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 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. or 20.0%. 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 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.
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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 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. 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.
Cash Flow
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
March 31,
2024
2023
Net loss
$
(6,057)
$
(12,595)
Adjustments to remove non-cash and non-operating items
9,006
6,668
Cash flow from net income (loss) after adjusting for non-cash and non-operating items
2,949
(5,927)
Change in operating assets and liabilities (working capital)
(25,774)
2,894
Cash flows used in operating activities
$
(22,825)
$
(3,033)
Cash flows used in investing activities
$
(1,573)
$
(1,300)
Cash flows (used in) provided by financing activities
$
(1,902)
$
3,394
Capital expenditures (included in investing activities above)
$
(1,853)
$
(1,876)
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 $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
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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 $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 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
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 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
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, 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 cost increases in the pricing of our bids.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.