UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission file number:
(Exact name of registrant as specified in its charter)
State of Incorporation | IRS Employer Identification Number |
Address of Principal Executive Office | ( Registrant’s telephone number (including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol(s) |
| Name of Each Exchange on Which Registered |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: ☑
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, "accelerated filer", "small reporting" company and "emerging growth" company in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company |
Emerging growth company |
If an emerging growth company, initiate by check mark if the registrant has elected not to use the extended transition period for complying with any, new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)
There were
ORION GROUP HOLDINGS, INC.
Quarterly Report on Form 10-Q for the period ended March 31, 2023
Index
2
Part
PART I.FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
Orion Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Information)
| March 31, |
| December 31, | |||
2023 |
| 2022 | ||||
(Unaudited) | ||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable: |
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Trade, net of allowance for credit losses of $ |
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Retainage |
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Income taxes receivable |
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Other current |
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Inventory |
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Contract assets |
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Prepaid expenses and other |
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Total current assets |
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Property and equipment, net of depreciation |
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Operating lease right-of-use assets, net of amortization | | | ||||
Financing lease right-of-use assets, net of amortization | | | ||||
Inventory, non-current |
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Intangible assets, net of amortization |
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Deferred income tax asset | | | ||||
Other non-current |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current debt, net of debt issuance costs | $ | | $ | | ||
Accounts payable: |
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Trade |
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Retainage |
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Accrued liabilities |
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Income taxes payable |
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Contract liabilities |
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Current portion of operating lease liabilities | | | ||||
Current portion of financing lease liabilities | | | ||||
Total current liabilities | | | ||||
Long-term debt, net of debt issuance costs |
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Operating lease liabilities | | | ||||
Financing lease liabilities | | | ||||
Other long-term liabilities |
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Deferred income tax liability |
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Total liabilities |
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Stockholders’ equity: |
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Preferred stock -- $ |
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Common stock -- $ |
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Treasury stock, |
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Additional paid-in capital |
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Retained loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements
3
Orion Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In Thousands, Except Share and Per Share Information)
(Unaudited)
Three months ended March 31, | ||||||
| 2023 |
| 2022 | |||
Contract revenues | $ | | $ | | ||
Costs of contract revenues |
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Gross profit |
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Selling, general and administrative expenses |
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Amortization of intangible assets | | | ||||
Gain on disposal of assets, net |
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Operating loss |
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Other (expense) income: |
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Other income |
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Interest income |
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Interest expense |
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Other expense, net |
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Loss before income taxes |
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Income tax expense |
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Net loss | $ | ( | $ | ( | ||
Basic loss per share | $ | ( | $ | ( | ||
Diluted loss per share | $ | ( | $ | ( | ||
Shares used to compute loss per share: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements
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Orion Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(In Thousands, Except Share and Per Share Information)
(Unaudited)
| Common |
| Treasury |
| Additional |
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Stock | Stock |
| Paid-In |
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Shares |
| Amount | Shares |
| Amount |
| Capital | Loss | Total | ||||||||||
Balance, December 31, 2022 | | $ | |
| ( | $ | ( | $ | | $ | ( | $ | | ||||||
Stock-based compensation | — | — | — | — | | — | | ||||||||||||
Issuance of restricted stock | | | — | — | ( | — | — | ||||||||||||
Forfeiture of restricted stock | ( | — | — | — | — | — | — | ||||||||||||
Payments related to tax withholding for stock-based compensation |
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Net loss |
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Balance, March 31, 2023 | | $ | |
| ( | $ | ( | $ | | $ | ( | $ | |
| Common |
| Treasury |
| Additional |
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Stock | Stock |
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Shares |
| Amount | Shares |
| Amount |
| Capital | Loss | Total | ||||||||||
Balance, December 31, 2021 |
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| ( | $ | ( | $ | | $ | ( | $ | | |||||
Stock-based compensation |
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Issuance of restricted stock | | — | — | — | — | — | — | ||||||||||||
Forfeiture of restricted stock | ( | — | — | — | — | — | |||||||||||||
Payments related to tax withholding for stock-based compensation |
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Net loss |
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Balance, March 31, 2022 |
| | $ | |
| ( | $ | ( | $ | | $ | ( | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements
5
Orion Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in Thousands)
(Unaudited)
Three months ended March 31, | ||||||
| 2023 |
| 2022 | |||
Cash flows from operating activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net (loss) income to net cash used in operating activities: |
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Operating activities: |
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Depreciation and amortization |
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Amortization of ROU operating leases | | | ||||
Amortization of ROU finance leases | | | ||||
Amortization of deferred debt issuance costs | | | ||||
Deferred income taxes |
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Stock-based compensation |
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Gain on disposal of assets, net |
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Allowance for credit losses |
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Change in operating assets and liabilities: |
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Accounts receivable |
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Income tax receivable |
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Inventory |
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Prepaid expenses and other |
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Contract assets |
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Accounts payable |
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Accrued liabilities |
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Operating lease liabilities | ( | ( | ||||
Income tax payable |
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Contract liabilities |
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Net cash (used in) provided by operating activities |
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Cash flows from investing activities: |
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Proceeds from sale of property and equipment |
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Purchase of property and equipment |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Borrowings from Credit Facility |
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Payments made on borrowings from Credit Facility |
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Loan costs from Credit Facility |
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Payments of finance lease liabilities | ( | ( | ||||
Payments related to tax withholding for share-based compensation | ( | ( | ||||
Net cash provided by (used in) financing activities |
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Net change in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
Cash paid during the period for: |
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Interest | $ | | $ | | ||
Taxes, net of refunds | $ | ( | $ | ( |
The accompanying notes are an integral part of these condensed consolidated financial statements
6
Orion Group Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Share and per Share Amounts)
(Unaudited)
1.Description of Business and Basis of Presentation
Description of Business
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 of the continental United States, Alaska, Canada and the Caribbean Basin. The Company’s marine segment services the infrastructure sector through marine transportation facility construction, marine pipeline construction, marine environmental structures, dredging of waterways, channels and ports, environmental dredging, design, and specialty services. Its concrete segment services the building sector by providing turnkey concrete construction services including place and finish, site preparation, layout, forming, and rebar placement for large commercial, structural and other associated business areas. The Company is headquartered in Houston, Texas with offices throughout its operating areas.
The tools used by the chief operating decision maker (“CODM”) to allocate resources and assess performance are based on
Although we describe the business in this report in terms of the services the Company provides, its base of customers and the areas in which it operates, the Company has determined that its operations currently comprise
In making this determination, the Company considered the similar economic characteristics of its operations that comprise its marine segment. For the marine segment, the methods used, and the internal processes employed, to deliver marine construction services are similar throughout the segment, including standardized estimating, project controls and project management. This segment has the same customers with similar funding drivers and are subject to similar regulatory regimes driven through Federal agencies such as the U.S. Army Corps of Engineers, U.S. Fish and Wildlife Service, U.S. Environmental Protection Agency and U.S. Occupational Safety and Health Administration (“OSHA”), among others. Additionally, the segment is driven by macro-economic considerations including the level of import/export seaborne transportation, development of energy-related infrastructure, cruise line expansion and operations, marine bridge infrastructure development, waterway pipeline crossings and the maintenance of waterways. These considerations, and others, are key catalysts for future prospects and are similar across the segment.
For the concrete segment, the Company also considered the similar economic characteristics of these operations. The methods used, and the internal processes employed, to deliver concrete construction services are similar throughout the segment, including standardized estimating, project controls and project management. The projects of this segment are subject to similar regulatory regimes such as OSHA. Additionally, this segment is driven by macro-economic considerations, including movements in population, commercial real estate development, institutional funding and expansion, and recreational development, specifically in metropolitan areas of Texas. These considerations, and others, are key catalysts for current operations and future prospects and are similar across the segment.
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Basis of Presentation
The accompanying condensed consolidated financial statements and financial information included herein have been prepared pursuant to the interim period reporting requirements of Form 10-Q. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. Readers of this report should also read the Company’s consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Form 10-K”) as well as Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in its 2022 Form 10-K.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the periods presented. Such adjustments are of a normal recurring nature. Interim results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
In connection with preparing consolidated financial statements for each annual and interim reporting period, the Company is required to evaluate whether there are conditions or events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Substantial doubt exists when conditions and events, considered in aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the date that the consolidated financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans and actions that have not been fully implemented as of the date that the financial statements are issued. When substantial doubt exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both: (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued; and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.
The assessment of the liquidity and going concern requires the Company to make estimates of future activity and judgments about whether the Company is compliant with financial covenant calculations under its debt and other agreements and has adequate liquidity to operate. Significant assumptions used in the Company's forecasted model of liquidity include forecasted sales, costs, and capital expenditures and expected timing and proceeds of planned real estate transactions. The Company has sustained operating losses for the years ended December 31, 2022 and 2021. Also as described in Note 11, the Company had $
8
To alleviate this condition, the Company engaged in a syndication process to refinance the outstanding debt. On May 15, 2023, the Company entered into a new
Based on an assessment of the completion of the debt refinancing process and the other factors above, management believes that the Company will have adequate liquidity for its operations for at least the next 12 months. Therefore, management’s conclusion is that the conditions that previously raised substantial doubt have been resolved and substantial doubt is no longer raised as to the Company’s ability to continue as a going concern.
2.Summary of Significant Accounting Policies
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates, judgments and assumptions are continually evaluated based on available information and experience; however, actual amounts could differ from those estimates.
On an ongoing basis, the Company evaluates the significant accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to:
● | Revenue recognition from construction contracts; |
● | The recording of accounts receivable and allowance for credit losses; |
● | The carrying value of property, plant and equipment; |
● | Leases; |
● | Finite and infinite-lived intangible assets, testing for indicators of impairment; |
● | Stock-based compensation; |
● | Income taxes; and |
● | Self-insurance. |
Revenue Recognition
The Company’s revenue is derived from contracts to provide marine construction, dredging, turnkey concrete services, and other specialty services. The Company’s projects are typically brief in duration, but occasionally, span a period of over one year. The Company determines the appropriate accounting treatment for each contract before work begins and, subject to qualifications discussed in the next paragraph, generally records contract revenue over time.
Performance obligations are promises in a contract to transfer distinct goods or services to the customer and are the unit of account under Topic 606. Each of the Company’s contracts and related change orders typically
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represent a single performance obligation because the Company provides an integrated service and individual goods and services are not separately identifiable. Revenue is recognized over time because control of the promised goods and services are continuously transferred to the customer over the life of the contract. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the stand-alone selling price of each distinct good or service. Progress is measured by the percentage of actual contract costs incurred to date to total estimated costs for each contract. This method is used because management considers contract costs incurred to be the best available measure of progress on these contracts. Contract costs include all direct costs, such as material and labor, and those indirect costs incurred that are related to contract performance such as payroll taxes and insurance. General and administrative costs are charged to expense as incurred. Upfront costs, such as costs to mobilize personnel and equipment prior to satisfying a performance obligation are capitalized and amortized over the contract performance period.
Changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and reported revenue and are recognized in the period in which the revisions are determined. The effect of changes in estimates of contract revenue or contract costs is recognized as an adjustment to recognized revenue on a cumulative catch-up basis. When the Company anticipates a loss on a contract that is not yet complete, it recognizes the entire loss in the period in which such losses are determined. Revenue is recorded net of any sales taxes collected and paid on behalf of the customer, if applicable.
Contract revenue is derived from the original contract price as modified by agreed-upon change orders and estimates of variable consideration related to incentive fees and change orders or claims for which price has not yet been agreed by the customer. The Company estimates variable consideration based on its assessment of the most likely amount to which it expects to be entitled. Variable consideration is included in the estimated recognition of revenue to the extent it is probable that a significant reversal of cumulative recognized revenue will not occur. A determination that the collection of a claim is probable is based upon compliance with the terms of the contract and the extent to which the Company performed in accordance therewith but does not guarantee collection in full.
Assets and liabilities derived from contracts with customers include the following:
● | Accounts Receivable: Trade, net of allowance - Represent amounts billed and currently due from customers and are stated at their estimated net realizable value. |
● | Accounts Receivable: Retainage - Represent amounts which have not been billed to or paid by customers due to retainage provisions in construction contracts, which amounts generally become payable upon contract completion and acceptance by the customer. |
● | Contract Assets - Represent revenues recognized in excess of amounts billed, which management believes will be billed and collected within one year of the completion of the contract and are recorded as a current asset, until such amounts are either received or written off. |
● | Contract Liabilities - Represent billings in excess of revenues recognized and are recorded as a current liability, until the underlying obligation has been performed or discharged. |
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Classification of Current Assets and Liabilities
The Company includes in current assets and liabilities amounts realizable and payable in the normal course of contract completion.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At times, cash held by financial institutions may exceed federally insured limits. The Company has not historically sustained losses on its cash balances in excess of federally insured limits. Cash equivalents at March 31, 2023 and December 31, 2022 consisted primarily of overnight bank deposits.
Risk Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk principally consist of accounts receivable.
The Company depends on its ability to continue to obtain federal, state and local governmental contracts, and indirectly, on the amount of funding available to these agencies for new and current governmental projects. Therefore, a portion of the Company’s operations is dependent upon the level and timing of government funding. Statutory mechanics liens provide the Company high priority in the event of lien foreclosures following financial difficulties of private owners, thus minimizing credit risk with private customers.
Accounts Receivable
Accounts receivable are stated at the historical carrying value, net of allowances for credit losses. The Company had significant investments in billed and unbilled receivables as of March 31, 2023 and December 31, 2022. Billed receivables represent amounts billed upon the completion of small contracts and progress billings on large contracts in accordance with contract terms and milestone achievements. Unbilled receivables on contracts represent recoverable costs and accrued profits that are not yet capable of being billed under the terms of the applicable contracts. Revenue associated with these billings is recorded net of any sales tax, if applicable.
Past due balances over 90 days and other higher risk receivables identified by management are reviewed individually for collectability. In establishing an allowance for credit losses, the Company evaluates its contract receivables and contract assets and thoroughly reviews historical collection experience, the financial condition of its customers, billing disputes and other factors. The Company writes off potentially uncollectible accounts receivable against the allowance for credit losses if it is determined that the amounts will not be collected or if a settlement with respect to a disputed receivable is reached for an amount that is less than the carrying value. As of March 31, 2023 and December 31, 2022, the Company had recorded an allowance for credit losses of $
Balances billed to customers but not paid pursuant to retainage provisions in construction contracts generally become payable upon contract completion and acceptance by the owner. Retainage at March 31, 2023 totaled $
From time to time, the Company negotiates change orders and claims with its customers. Unsuccessful negotiations of claims could result in a change to contract revenue that is less than amounts previously recorded, which could result in the recording of a loss in the amount of the shortfall. Successful claims negotiations could
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result in the recovery of previously recorded losses. Significant losses on receivables could adversely affect the Company’s financial position, results of operations and overall liquidity.
Advertising Costs
The Company primarily obtains contracts through the open bid process, and therefore advertising costs are not a significant component of expense. Advertising costs are expensed as incurred.
Environmental Costs
Costs related to environmental remediation are charged to expense. Other environmental costs are also charged to expense unless they increase the value of the property and/or provide future economic benefits, in which event the costs are capitalized. Environmental liabilities, if any, are recognized when the liability is considered probable and the amount can be reasonably estimated. The Company did not recognize any environmental liabilities as of March 31, 2023 or December 31, 2022.
Fair Value Measurements
The Company evaluates and presents certain amounts included in the accompanying condensed consolidated financial statements at “fair value” in accordance with U.S. GAAP, which requires the Company to base its estimates on assumptions that market participants, in an orderly transaction, would use to price an asset or liability, and to establish a hierarchy that prioritizes the information used to determine fair value. Refer to Note 8 for more information regarding fair value determination.
The Company generally applies fair value valuation techniques on a non-recurring basis associated with (1) valuing assets and liabilities acquired in connection with business combinations and other transactions; (2) valuing potential impairment loss related to long-lived assets; and (3) valuing potential impairment loss related to goodwill and indefinite-lived intangible assets.
Inventory
Current inventory consists of parts and small equipment held for use in the ordinary course of business and is valued at the lower of cost (using historical average cost) or net realizable value. Where shipping and handling costs are incurred by the Company, these charges are included in inventory and charged to cost of contract revenue upon use. Non-current inventory consists of spare parts (including engines, cutters and gears) that require special order or long-lead times for manufacture or fabrication, but must be kept on hand to reduce downtime and is valued at the lower of cost (using historical average cost) or net realizable value.
Property and Equipment
Property and equipment are recorded at cost. Ordinary maintenance and repairs that do not improve or extend the useful life of the asset are expensed as incurred. Major renewals and betterments of equipment are capitalized and depreciated generally over
When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in results of operations for the respective period.
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Depreciation is computed using the straight-line method over the estimated useful lives of the related assets for financial statement purposes, as follows:
Automobiles and trucks |
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Buildings and improvements |
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Construction equipment |
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Vessels and other equipment |
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Office equipment |
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The Company generally uses accelerated depreciation methods for tax purposes where beneficial.
Dry-docking costs are capitalized and amortized using the straight-line method over a period ranging from
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or the fair value, less the costs to sell, and are no longer depreciated. There was $
Leases
Management determines if a contract is or contains a lease at inception of the contract or modification of the contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.
Finance and operating lease right-of-use (“ROU”) assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. As the implicit rate is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The expected lease term includes options to extend or terminate the lease when it is reasonably certain the Company will exercise such option. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term.
The Company’s lease arrangements have lease and non-lease components. Leases with an expected term of 12 months or less are not accounted for on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.
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The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
See Note 18 for more information regarding leases.
Intangible Assets
Intangible assets that have finite lives are amortized. In addition, the Company evaluates the remaining useful life of intangible assets in each reporting period to determine whether events and circumstances warrant a revision of the remaining period of amortization. If the estimate of an intangible asset’s remaining life is changed, the remaining carrying value of such asset is amortized prospectively over that revised remaining useful life. Intangible assets that have infinite lives are not amortized, but are subject to impairment testing at least annually or more frequently if events or circumstances indicate that the asset may be impaired.
The Company has
See Note 9 for additional discussion of intangible assets and trade name impairment testing.
Stock-Based Compensation
The Company recognizes compensation expense for equity awards over the vesting period based on the fair value of these awards at the date of grant. The computed fair value of these awards is recognized as a non-cash cost over the period the employee provides services, which is typically the vesting period of the award. The fair value of restricted stock grants and restricted stock units is equivalent to the fair value of the stock issued on the date of grant and is measured as the closing price of the stock on the date of grant.
Compensation expense is recognized only for stock-based payments expected to vest. The Company estimates forfeitures at the date of grant based on historical experience and future expectations. This assessment is updated on a periodic basis. See Note 15 for further discussion of the Company’s stock-based compensation plan.
Income Taxes
The Company determines its consolidated income tax provision using the asset and liability method prescribed by U.S. GAAP, which requires the recognition of income tax expense for the amount of taxes payable or refundable for the current period and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. The Company must make significant assumptions, judgments and estimates to determine its current provision for income taxes, its deferred tax assets and liabilities, and any valuation allowance to be recorded against any deferred tax asset. The current provision for income tax is based upon the current tax laws and the Company’s interpretation of these laws, as well as the probable outcomes of any tax audits. The value of any net deferred tax asset depends
14
upon estimates of the amount and category of future taxable income reduced by the amount of any tax benefits that the Company does not expect to realize. Actual operating results and the underlying amount and category of income in future years could render current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate, thus impacting the Company’s financial position and results of operations. The Company computes deferred income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, Income Taxes which prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, on its consolidated tax return. The Company evaluates and records any uncertain tax positions based on the amount that management deems is more likely than not to be sustained upon examination and ultimate settlement with the tax authorities in the tax jurisdictions in which it operates.
See Note 13 for additional discussion of income taxes.
Insurance Coverage
The Company maintains insurance coverage for its business and operations. Insurance related to property, equipment, automobile, general liability, and a portion of workers’ compensation is provided through traditional policies, subject to a deductible or deductibles. A portion of the Company’s workers’ compensation exposure is covered through a mutual association, which is subject to supplemental calls.
The marine segment maintains
If a claim arises and a potential insurance recovery is probable, the impending gain is recognized separately from the related loss. The recovery will only be recognized up to the amount of the loss once the recovery of the claim is deemed probable and any excess gain will fall under contingency accounting and will only be recognized once it is realized. The Company does not net insurance recoveries against the related claim liability as the amount of the claim liability is determined without consideration of the anticipated insurance recoveries from third parties.
Separately, the Company’s marine segment employee health care is paid for by general assets of the Company and currently administered by a third party. The administrator has purchased appropriate stop-loss coverage. Losses on these policies up to the deductible amounts are accrued based upon known claims incurred and an estimate of claims incurred but not reported. The accruals are derived from known facts, historical trends and industry averages to determine the best estimate of the ultimate expected loss. Actual claims may vary from estimates. Any adjustments to such reserves are included in the condensed consolidated statements of operations in the period in which they become known. The Company’s concrete segment employee health care
15
is provided through
The total accrual for insurance claims liabilities was $
3.Revenue
Contract revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The following table represents a disaggregation of the Company’s contract revenues by service line for the marine and concrete segments:
Three months ended March 31, | ||||||
| 2023 |
| 2022 | |||
Marine Segment |
|
|
|
| ||
Construction | $ | | $ | | ||
Dredging |
| |
| | ||
Specialty Services |
| |
| | ||
Marine segment contract revenues | $ | | $ | | ||
Concrete Segment |
|
|
|
| ||
Structural | $ | | $ | | ||
Light Commercial |
| |
| | ||
Other |
| — |
| — | ||
Concrete segment contract revenues | $ | | $ | | ||
Total contract revenues | $ | | $ | |
The Company has determined that it has
Marine Segment
Construction services include construction, restoration, maintenance, dredging and repair of marine transportation facilities, marine pipelines, bridges and causeways and marine environmental structures. Dredging services generally enhance or preserve the navigability of waterways or the protection of shorelines
16
through the removal or replenishment of soil, sand or rock. Specialty services include design, salvage, demolition, surveying, towing, diving and underwater inspection, excavation and repair.
Concrete Segment
Structural services include elevated concrete pouring for products such as columns, elevated beams and structural walls. Light commercial services include horizontally poured concrete for products such as slabs, sidewalks, ramps and tilt walls. Other services comprise labor related to concrete pouring such as rebar installation and pumping services and typically support the Company’s structural and light commercial services.
4.Concentration of Risk and Enterprise-Wide Disclosures
In both reportable segments accounts receivable include amounts billed to governmental agencies and private customers and do not bear interest. Balances billed to customers but not paid pursuant to retainage provisions generally become payable upon contract completion and acceptance by the owner.
The table below presents the concentrations of current receivables (trade and retainage) at March 31, 2023 and December 31, 2022, respectively:
March 31, 2023 | December 31, 2022 |
| |||||||||
Federal Government |
| $ | |
| | % | $ | |
| | % |
State Governments |
| |
| | % |
| |
| | % | |
Local Governments |
| |
| | % |
| |
| | % | |
Private Companies |
| |
| | % |
| |
| | % | |
Gross receivables | | | % | | | % | |||||
Allowance for credit losses | ( | ( | |||||||||
Net receivables | $ | |
| $ | |
|
At March 31, 2023,
Additionally, the table below represents concentrations of contract revenue by type of customer for the three months ended March 31, 2023 and 2022, respectively:
| Three months ended March 31, |
| |||||||||
| 2023 |
| % |
| 2022 |
| % |
| |||
Federal Government |
| $ | |
| | % | $ | |
| | % |
State Governments |
|
| |
| | % |
| |
| | % |
Local Governments |
|
| |
| | % |
| |
| | % |
Private Companies |
|
| |
| | % |
| |
| | % |
Total contract revenues |
| $ | |
| | % | $ | |
| | % |
In the three months ended March 31, 2023,
17
The Company does not believe that the loss of any one of its customers would have a material adverse effect on the Company or its subsidiaries and affiliates since no single specific customer sustains such a large portion of receivables or contract revenue over time.
The concrete segment primarily purchases concrete from select suppliers. The loss of any one of these suppliers could adversely impact short-term operations.
Contract revenues generated outside the United States totaled
5.Contracts in Progress
Contracts in progress are as follows at March 31, 2023 and December 31, 2022:
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
Costs incurred on uncompleted contracts | $ | | $ | | ||
Estimated earnings |
| |
| | ||
| |
| | |||
Less: Billings to date |
| ( |
| ( | ||
$ | ( | $ | | |||
Included in the accompanying Condensed Consolidated Balance Sheets under the following captions: |
|
|
|
| ||
Contract assets | $ | | $ | | ||
Contract liabilities |
| ( |
| ( | ||
$ | ( | $ | |
Included in contract assets is approximately $
Remaining performance obligations represent the transaction price of firm orders or other written contractual commitments from customers for which work has not been performed or is partially completed and excludes unexercised contract options and potential orders. As of March 31, 2023, the aggregate amount of the remaining performance obligations was approximately $
18
6.Property and Equipment
The following is a summary of property and equipment at March 31, 2023 and December 31, 2022:
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
Automobiles and trucks | $ | | $ | | ||
Building and improvements |
| |
| | ||
Construction equipment |
| |
| | ||
Vessels and other equipment |
| |
| | ||
Office equipment |
| |
| | ||
| |
| | |||
Less: Accumulated depreciation |
| ( |
| ( | ||
Net book value of depreciable assets |
| |
| | ||
Construction in progress |
| |
| | ||
Land |
| |
| | ||
$ | | $ | |
For the three months ended March 31, 2023 and 2022, depreciation expense was $
Substantially all of the Company’s long-lived assets are located in the United States.
See Note 2 to the Company’s condensed consolidated financial statements for further discussion of property and equipment.
7.Other Current Accounts Receivable
Other current accounts receivable at March 31, 2023 and December 31, 2022 consisted of the following:
| March 31, 2023 |
| December 31, 2022 | |||
Accident loss receivables | $ | | $ | | ||
Vendor receivables |
| |
| | ||
Purchase incentive receivable | |
| | |||
Bond premium dividend receivable | | | ||||
Other current accounts receivable | | | ||||
Total other current accounts receivable | $ | | $ | |
8.Fair Value
Recurring Fair Value Measurements
The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. Due to their short-term nature, the Company believes that the carrying value of its accounts receivable, other current assets, accounts payable and other current liabilities approximate their fair values.
19
The Company classifies financial assets and liabilities into the following three levels based on the inputs used to measure fair value in the order of priority indicated:
● | Level 1- fair values are based on observable inputs such as quoted prices in active markets for identical assets or liabilities; |
● | Level 2 - fair values are based on pricing inputs other than quoted prices in active markets for identical assets and liabilities and are either directly or indirectly observable as of the measurement date; and |
● | Level 3- fair values are based on unobservable inputs in which little or no market data exists. |
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value requires judgment and may affect the placement of assets and liabilities within the fair value hierarchy levels.
The following table sets forth by level within the fair value hierarchy the Company’s recurring financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:
Fair Value Measurements | |||||||||
| Carrying Value |
| Level 1 |
| Level 2 |
| Level 3 | ||
March 31, 2023 |
|
|
|
| |||||
Assets: |
|
|
|
|
|
|
|
| |
Cash surrender value of life insurance policy | $ | |
| — |
| |
| — | |
December 31, 2022 |
|
|
|
| |||||
Assets: |
|
|
|
|
|
|
|
| |
Cash surrender value of life insurance policy | $ | |
| — |
| |
| — |
Our concrete segment had life insurance policies with a combined face value of $
Non-Recurring Fair Value Measurements
The Company generally applies fair value valuation techniques on a non-recurring basis associated with (1) valuing assets and liabilities acquired in connection with business combinations and other transactions; (2) valuing potential impairment loss related to long-lived assets; and (3) valuing potential impairment loss related to the infinite-lived intangible asset.
Other Fair Value Measurements
The fair value of the Company’s debt at March 31, 2023 and December 31, 2022 approximated its carrying value of $
20
9.Intangible Assets
The tables below present the activity and amortization of finite-lived intangible assets:
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
Finite-lived intangible assets, beginning of period | $ | | $ | | ||
Additions |
| |
| — | ||
Total finite-lived intangible assets, end of period | $ | | $ | | ||
Accumulated amortization, beginning of period | $ | ( | $ | ( | ||
Current year amortization |
| ( |
| ( | ||
Total accumulated amortization |
| ( |
| ( | ||
Net finite-lived intangible assets, end of period | $ | | | |||
Infinite-lived intangible assets | | | ||||
Total net intangible assets | $ | | $ | |
Remaining net finite-lived intangible assets were acquired as part of the purchase of TAS during 2015 and TBC during 2017 and included customer relationships. Customer relationships were valued at approximately $
Future expense remaining of approximately $
2023 |
| | |
2024 |
| | |
$ | |
The most recent annual impairment test of the Company’s indefinite-lived intangible asset concluded that the fair value of the trade name was in excess of the carrying value, therefore
21
10.Accrued Liabilities
Accrued liabilities at March 31, 2023 and December 31, 2022 consisted of the following:
| March 31, 2023 |
| December 31, 2022 | |||
Accrued salaries, wages and benefits | $ | | $ | | ||
Accrued liabilities expected to be covered by insurance |
| |
| | ||
Sales taxes |
| |
| | ||
Property taxes |
| |
| | ||
Sale-leaseback arrangement | | | ||||
Accounting and audit fees | | | ||||
Interest |
| |
| | ||
Other accrued expenses |
| |
| | ||
Total accrued liabilities | $ | | $ | |
11.Debt
The Company entered into an amended syndicated credit agreement (the “Credit Agreement” also known as the “Fourth Amendment”) on July 31, 2018 with Regions Bank, as administrative agent and collateral agent, and the following co-syndication agents: Bank of America, N.A., BOKF, NA dba Bank of Texas, KeyBank National Association, NBH Bank, IBERIABANK, Trustmark National Bank, First Tennessee Bank NA, and Branch Banking and Trust Company. The Credit Agreement was subsequently amended in March 2019 (the “Fifth Amendment”), May 2019 (the “Sixth Amendment”), June 2020 (the “Seventh Amendment”), October 2020 (the “Eighth Amendment”), and March 2022 (the “Ninth Amendment”). The Company incurred debt issuance costs related to the initial Credit Agreement and several of the subsequent amendments. The Credit Facility had a maturity date of July 31, 2023.
The Credit Agreement provided for borrowings under a revolving line of credit and a term loan (together, the “Credit Facility”). The Credit Facility was guaranteed by the subsidiaries of the Company, secured by the assets of the Company, including stock held in its subsidiaries, and was used to finance general corporate and working capital purposes, to finance capital expenditures, to refinance existing indebtedness, to finance permitted acquisitions and associated fees, and to pay for all related expenses to the Credit Facility. Interest was due and was computed based on the designation of the loan, with the option of a Base Rate Loan (the base rate plus the Applicable Margin), or an Adjusted LIBOR Rate Loan (the adjusted LIBOR rate plus the Applicable Margin). Interest was due on the last day of each quarter end for Base Rate Loans and at the end of the LIBOR rate period for Adjusted LIBOR Rate Loans. Principal balances drawn under the Credit Facility could be prepaid at any time, in whole or in part, without premium or penalty. Amounts repaid under the revolving line of credit could be re-borrowed.
Effective, March 1, 2022, the Company entered into the Ninth Amendment to the Credit Agreement to, among other things, waive certain covenant defaults, reset the revolver limit, implement an anti-cash hoarding provision and institute temporary covenant requirements. The amendment reduced the commitment on the revolving line of credit to $
22
The quarterly weighted average interest rate for the Credit Facility as of March 31, 2023 was
The Company’s obligations under debt arrangements consisted of the following:
March 31, 2023 | December 31, 2022 | |||||||||||||||||
|
| Debt Issuance |
|
|
| Debt Issuance |
| |||||||||||
Principal | Costs(1) | Total | Principal | Costs(1) | Total | |||||||||||||
Revolving line of credit | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
Other debt | | — | | | — | | ||||||||||||
Total current debt |
| |
| ( |
| |
| |
| ( |
| | ||||||
Refinancing debt issuance costs |
| — |
| ( |
| ( |
| — |
| — |
| — | ||||||
Other debt | | — | | | — | | ||||||||||||
Total long-term debt | | ( | ( | | — | | ||||||||||||
Total debt | $ | | $ | ( | $ | | $ | | $ | ( | $ | |
(1) | Total debt issuance costs include underwriter fees, legal fees, syndication fees and fees related to the execution of the Ninth Amendment to the Credit Agreement and the refinancing of the Company’s debt further discussed in Note19. |
Provisions of the revolving line of credit
The Company had a maximum borrowing availability under the revolving line of credit and swingline loans (as defined in the Credit Agreement) of $
Revolving loans could be designated as Base Rate Loan or Adjusted LIBOR Rate Loans, at the Company’s request, and could be drawn in an aggregate minimum amount of $
The Company was subject to a commitment fee for the unused portion of the maximum borrowing availability under the revolving line of credit. The commitment fee, which is due quarterly in arrears, was equal to the Applicable Margin of the actual daily amount by which the Aggregate Revolving Commitments exceeds the Total Revolving Outstanding. The revolving line of credit termination date was the earlier of the Credit Facility termination date, July 31, 2023, or the date the outstanding balance is permanently reduced to zero, in accordance with the terms of the amended Credit Facility.
As of March 31, 2023, the Company had $
Other debt
The Company has entered into debt agreements with De Lage Landen Financial Services, Inc. and Mobilease for the purpose of financing equipment purchased. As of March 31, 2023, the carrying value of this debt was
23
$
Financial covenants
The Company obtained from the Credit Facility lenders an extension of the consent with respect to the delivery of its annual financial statements with an audit opinion unqualified as to going concern and a consent for the Consolidated Leverage Ratio to exceed
Debt Refinancing
On May 15, 2023, the Company entered into a new
12.Other Long-Term Liabilities
Other long-term liabilities at March 31, 2023 and December 31, 2022 consisted of the following:
| March 31, 2023 |
| December 31, 2022 | |||
Sale-leaseback arrangement | $ | | $ | | ||
Deferred compensation |
| |
| | ||
Accrued liabilities expected to be covered by insurance | |
| | |||
Total other long-term liabilities | $ | | $ | |
Sale-Leaseback Arrangement
On September 27, 2019, the Company entered into a purchase and sale agreement (the “Purchase and Sale Agreement”). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its 17300 & 17140 Market Street location in Channelview, Texas (the “Property”) for a purchase price of $
13.Income Taxes
The Company’s effective tax rate is based on expected income, statutory rates and tax planning opportunities available to it. For interim financial reporting, the Company estimates its annual tax rate based on projected taxable income for the full year and records a quarterly tax provision in accordance with the anticipated annual rate.
24
Income tax expense included in the Company’s accompanying Condensed Consolidated Statements of Operations was as follows (in thousands, except percentages):
Three months ended |
| ||||||
March 31, | |||||||
| 2023 | 2022 | |||||
Income tax expense | $ | | $ | | |||
Effective tax rate |
| ( | % |
| ( | % |
The effective rate for the three months ended March 31, 2023 differed from the Company’s statutory federal rate of
The Company assessed the realizability of its deferred tax assets and determined that it was more likely than not that some portion or all the deferred tax assets would not be realized and therefore recorded a valuation allowance on the net deferred tax assets. The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. The Company considers the scheduled reversal of deferred tax liabilities, available carryback periods, and tax-planning strategies in making this assessment. For the period ended March 31, 2023 the Company evaluated all positive and negative evidence in determining the amount of deferred tax assets more likely than not to be realized. Based on the review of available evidence, Management believes that a valuation allowance on the net deferred tax assets at March 31, 2023 remains appropriate.
The Company does not expect that unrecognized tax benefits as of March 31, 2023 for certain federal income tax matters will significantly change due to any settlement and/or expiration of statutes of limitations over the next 12 months. The final outcome of these tax positions is not yet determinable. The Company’s uncertain tax benefits, if recognized, would affect the Company’s effective tax rate.
14.Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is based on the weighted average number of common shares outstanding as well as the effect of all dilutive common stock equivalents during each period net income is generated. For the three months ended March 31, 2023 and 2022, the Company had
25
The following table reconciles the denominators used in the computations of both basic and diluted earnings per share:
Three months ended March 31, | ||||
| 2023 |
| 2022 | |
Basic: |
|
|
|
|
Weighted average shares outstanding |
| |
| |
Diluted: |
|
|
|
|
Total basic weighted average shares outstanding |
| |
| |
Effect of potentially dilutive securities: |
|
|
|
|
Common stock options |
| |
| |
Total weighted average shares outstanding assuming dilution |
| |
| |
15.Stock-Based Compensation
The Compensation Committee of the Company’s Board of Directors is responsible for the administration of the Company’s stock incentive plans, which include the balance of shares remaining under the 2022 Long Term Incentive Plan (the “2022 LTIP”), which was approved by shareholders in May of 2022 and authorized
The Company applies a
In the three months ended March 31, 2023, compensation expense related to stock-based awards outstanding was $
In January 2023, certain officers and executives of the Company were awarded a total of
In March 2023, the Company granted certain executives a total of
In the three months ended March 31, 2023 and 2022, there were
At March 31, 2023, total unrecognized compensation expense related to unvested stock was approximately $
26
16.Commitments and Contingencies
The Company is involved in various legal and other proceedings which are incidental to the conduct of its business, none of which in the opinion of management will have a material effect on the Company’s financial condition, results of operations or cash flows. Management believes that it has recorded adequate accrued liabilities and believes that it has adequate insurance coverage or has meritorious defenses for these claims and contingencies.
17.Segment Information
The Company currently operates in
| Three months ended | |||||
March 31, | ||||||
2023 | 2022 | |||||
Marine | ||||||
Contract revenues | $ | | $ | | ||
Operating (loss) income | $ | ( | $ | | ||
Depreciation and amortization expense | $ | ( | $ | ( | ||
Total assets | $ | | $ | | ||
Property and equipment, net | $ | | $ | | ||
Concrete |
|
|
| |||
Contract revenues | $ | | $ | | ||
Operating loss | $ | ( | $ | ( | ||
Depreciation and amortization expense | $ | ( | $ | ( | ||
Total assets | $ | | $ | | ||
Property and equipment, net | $ | | $ | |
There were less than $
27
18.Leases
The Company has operating and finance leases for office space, equipment and vehicles.
Leases recorded on the balance sheet consists of the following:
| March 31, | December 31, | |||
Leases | 2023 | 2022 | |||
Assets | |||||
Operating lease right-of-use assets, net (1) | $ | | $ | | |
Financing lease right-of-use assets, net (2) |
| |
| | |
Total assets | $ | | $ | | |
Liabilities |
|
|
|
| |
Current |
|
|
|
| |
Operating | $ | | $ | | |
Financing |
| |
| | |
Total current |
| |
| | |
Noncurrent |
|
|
|
| |
Operating |
| |
| | |
Financing |
| |
| | |
Total noncurrent |
| |
| | |
Total liabilities | $ | | $ | |
(1) | Operating lease right-of-use assets are recorded net of accumulated amortization of $ |
(2) | Financing lease right-of-use assets are recorded net of accumulated amortization of $ |
Other information related to lease term and discount rate is as follows:
March 31, |
| December 31, |
| |
2023 |
| 2022 |
| |
Weighted Average Remaining Lease Term (in years) |
|
| ||
Operating leases | ||||
Financing leases | ||||
Weighted Average Discount Rate | ||||
Operating leases | | % | | % |
Financing leases | | % | | % |
28
The components of lease expense are as follows:
Three Months Ended March 31, | ||||||
| 2023 |
| 2022 | |||
Operating lease costs: |
|
|
|
| ||
Operating lease cost | $ | | $ | | ||
Short-term lease cost (1) |
| |
| | ||
Financing lease costs: |
|
|
|
| ||
Interest on lease liabilities |
| |
| | ||
Amortization of right-of-use assets |
| |
| | ||
Total lease cost | $ | | $ | |
(1) | Includes expenses related to leases with a lease term of more than one month but less than one year. |
Supplemental cash flow information related to leases is as follows:
Three Months Ended March 31, | |||||
2023 | 2022 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||
Operating cash flows for operating leases | $ | | $ | | |
Operating cash flows for finance leases | $ | | $ | | |
Financing cash flows for finance leases | $ | | $ | | |
Non-cash activity: |
|
|
| ||
ROU assets obtained in exchange for new operating lease liabilities | $ | | $ | | |
ROU assets obtained in exchange for new financing lease liabilities | $ | | $ | |
Maturities of lease liabilities are summarized as follows:
Operating Leases | Finance Leases | |||||
Year ending December 31, | ||||||
2023 (excluding the three months ended March 31, 2023) | $ | | $ | | ||
2024 |
| |
| | ||
2025 |
| |
| | ||
2026 |
| |
| | ||
2027 |
| |
| | ||
Thereafter |
| |
| | ||
Total future minimum lease payments |
| |
| | ||
Less - amount representing interest |
| |
| | ||
Present value of future minimum lease payments |
| |
| | ||
Less - current lease obligations |
| |
| | ||
Long-term lease obligations | $ | | $ | |
1
29
19.Subsequent Events
On April 26, 2023, the Company entered into a Land Sale Contract with Equity Resource Partners - East West, LLC, a Georgia limited liability company, who, subject to normal due diligence conditions, has agreed to purchase
On, May 5, 2023, the Company obtained from the Credit Facility lenders an extension of the consent with respect to the delivery of its annual financial statements with an audit opinion unqualified as to going concern and a consent for the Consolidated Leverage Ratio to exceed
On May 15, 2023, the Company entered into a new
The new credit facility includes a $
30
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Unless the context otherwise indicates, all references in this Quarterly Report on Form 10-Q to “Orion,” “the Company,” “we,” “our,” or “us” are to Orion Group Holdings, Inc. and its subsidiaries as a whole.
Certain information in this Quarterly Report on Form 10-Q, including but not limited to Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may constitute forward-looking statements as such term is defined within the meaning of the “safe harbor” provisions of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
All statements other than statements of historical facts, including those that express a belief, expectation, or intention are forward-looking statements. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, conversion of backlog, revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes.
We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control, including unforeseen productivity delays and other difficulties encountered in project execution, levels of government funding or other governmental budgetary constraints, contract modifications and changes, including change orders and contract cancellation at the discretion of the customer. These and other important factors, including those described under “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”) may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly.
MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition since the most recent fiscal year-end, and (ii) results of operations during the current fiscal year-to-date period and current fiscal quarter as compared to the corresponding periods of the preceding fiscal year. In order to better understand such changes, this MD&A should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in our 2022 Form 10-K, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Form 10-K and with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview
Orion Group Holdings, Inc., its subsidiaries and affiliates (hereafter collectively referred to as the “Company”), provide a broad range of specialty construction services in the infrastructure, industrial and building sectors
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throughout the continental United States, Alaska, and the Caribbean Basin. The Company’s marine segment services the infrastructure sector through marine transportation facility construction, marine pipeline construction, marine environmental structures, dredging of waterways, channels and ports, environmental dredging, design, and specialty services. Its concrete segment services the building sector by providing turnkey concrete construction services including place and finish, site preparation, layout, forming, and rebar placement for large commercial structural and other associated business areas. The Company is headquartered in Houston, Texas with offices throughout its operating areas.
Our contracts are obtained primarily through competitive bidding in response to “requests for proposals” by federal, state and local agencies and through negotiation and competitive bidding with private parties and general contractors. Our bidding activity and strategies are affected by factors such as our backlog, current utilization of equipment and other resources, job location, our ability to obtain necessary surety bonds and competitive considerations. The timing and location of awarded contracts may result in unpredictable fluctuations in the results of our operations.
Most of our revenue is derived from fixed-price contracts. We generally record revenue on construction contracts over time, measured by the percentage of actual contract costs incurred to date to total estimated costs for each contract. There are a number of factors that can create variability in contract performance and therefore impact the results of our operations. The most significant of these include the following:
● | completeness and accuracy of the original bid; |
● | increases in commodity prices such as concrete, steel and fuel; |
● | customer delays, work stoppages, and other costs due to weather and environmental restrictions; |
● | availability and skill level of workers; and |
● | a change in availability and proximity of equipment and materials. |
All of these factors can have a negative impact on our contract performance, which can adversely affect the timing of revenue recognition and ultimate contract profitability. We plan our operations and bidding activity with these factors in mind and they generally have not had a material adverse impact on the results of our operations in the past.
Consolidated Results of Operations
Backlog Information
Our contract backlog represents our estimate of the revenues we expect to realize under the portion of contracts remaining to be performed. Given the typical duration of our contracts, which is generally less than a year, our backlog at any point in time usually represents only a portion of the revenue that we expect to realize during a
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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.
Backlog as of the periods ended below are as follows (in millions):
March 31, 2023 |
| December 31, 2022 |
| September 30, 2022 |
| June 30, 2022 |
| March 31, 2022 | |||||||
Marine segment | $ | 187.0 | $ | 216.7 | $ | 280.2 | $ | 281.0 | $ | 317.4 | |||||
Concrete segment |
| 280.4 |
| 232.1 |
| 268.4 |
| 322.2 |
| 286.7 | |||||
Consolidated | $ | 467.4 | $ | 448.8 | $ | 548.6 | $ | 603.2 | $ | 604.1 |
We are optimistic in our end-markets and in the opportunities that are emerging across our various marketplaces as evidenced by the $3.1 billion of quoted bids outstanding at quarter end, of which over $610 million we have been awarded contracts subsequent to the end of the fiscal quarter ended March 31, 2023.
These estimates are subject to fluctuations based upon the scope of services to be provided, as well as factors affecting the time required to complete the project. Backlog is not necessarily indicative of future results. In addition to our backlog under contract, we also have a substantial number of projects in negotiation or pending award at any given time. Delays in decisions on pending awards also have a negative impact on the timing and amount by which we are able to increase backlog.
Three months ended March 31, 2023 compared with three months ended March 31, 2022.
Three months ended March 31, | |||||||||||
| 2023 |
| 2022 |
| |||||||
| Amount |
| Percent |
| Amount |
| Percent |
| |||
(dollar amounts in thousands) | |||||||||||
Contract revenues | $ | 159,174 |
| 100.0 | % | $ | 174,931 |
| 100.0 | % | |
Cost of contract revenues |
| 153,334 |
| 96.3 | % |
| 162,115 |
| 92.7 | % | |
Gross profit |
| 5,840 |
| 3.7 | % |
| 12,816 |
| 7.3 | % | |
Selling, general and administrative expenses |
| 17,017 |
| 10.8 | % |
| 16,170 |
| 9.1 | % | |
Amortization of intangible assets | 162 | 0.1 | % | 310 | 0.2 | % | |||||
Gain on disposal of assets, net | (696) | (0.5) | (809) | (0.4) | |||||||
Operating loss |
| (10,643) |
| (6.7) | % |
| (2,855) |
| (1.6) | % | |
Other (expense) income: |
|
|
|
|
|
|
|
| |||
Other income |
| 293 |
| 0.2 | % |
| 44 |
| — | % | |
Interest income |
| 28 |
| — | % |
| 19 |
| — | % | |
Interest expense |
| (1,633) |
| (1.0) | % |
| (740) |
| (0.4) | % | |
Other expense, net |
| (1,312) |
| (0.8) | % |
| (677) |
| (0.4) | % | |
Loss before income tax expense |
| (11,955) |
| (7.5) | % |
| (3,532) |
| (2.0) | % | |
Income tax expense |
| 640 |
| 0.4 | % |
| 1,324 |
| 0.8 | % | |
Net loss | $ | (12,595) |
| (7.9) | % | $ | (4,856) |
| (2.8) | % |
Contract Revenues. Contract revenues for the three months ended March 31, 2023 of $159.2 million decreased $15.7 million or 9.0% as compared to $174.9 million in the prior year period. The decrease was primarily due to weather and customer delays in both businesses and a reduction of concrete segment revenue in central Texas.
Gross Profit. Gross profit was $5.8 million for the three months ended March 31, 2023 compared to $12.8 million in the prior year period, a decrease of $7.0 million or 54.4%. Gross profit in the first quarter was 3.7% of total contract revenues as compared to 7.3% in the prior year period. Approximately half of this decrease
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was due to the impact of weather in Texas, which lowered labor and equipment utilization. The rest of the remaining decrease related to clean-up of low-margin projects resulting in write-downs in both the marine and concrete businesses. This was partly offset by actions to manage costs during project delays including reallocating equipment, reducing the size of the fleet and headcount reductions, as well as realizing margin improvements in the concrete business that reflected our margin improvement initiatives.
Selling, General and Administrative Expense. Selling, general and administrative (“SG&A”) expenses were $17.0 million for the three months ended March 31, 2023 compared to $16.2 million in the prior year period, an increase of $0.8 million or 5.2%. As a percentage of total contract revenues, SG&A expenses increased from 9.1% to 10.8%, primarily due to lower revenues in the current period. The increase in SG&A dollars was primarily due to an increase in compensation expense, partially offset by lower consulting expense related to the completion of the management transition.
Gain on Disposal of Assets, net. During the three months ended March 31, 2023 and 2022, we realized $0.7 million and $0.8 million, respectively, of net gains on disposal of assets.
Other Income, net of Expense. Other expense primarily reflects interest on our borrowings, partially offset by interest income and non-operating gains or losses.
Income Tax Expense. We recorded tax expense of $0.6 million in the three months ended March 31, 2023, compared to $1.3 million in the prior year period. Our effective tax rate for the three months ended March 31, 2023 differs from the federal statutory rate of 21% primarily due to the tax impact from the valuation allowance for current year activity, state income taxes and the non-deductibility of other permanent items.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment, segment revenues as a percentage of consolidated revenues and segment operating (loss) income as a percentage of segment revenues.
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Three months ended March 31, 2023 compared with three months ended March 31, 2022.
Three months ended March 31, | ||||||||||||
2023 | 2022 | |||||||||||
|
| Amount |
| Percent |
| Amount |
| Percent |
| |||
(dollar amounts in thousands) | ||||||||||||
Contract revenues | ||||||||||||
Marine segment | ||||||||||||
Public sector | $ | 57,926 | 73.0 | % | $ | 57,308 | 67.8 | % | ||||
Private sector | 21,372 | 27.0 | % | 27,172 | 32.2 | % | ||||||
Marine segment total | $ | 79,298 | 100.0 | % | $ | 84,480 | 100.0 | % | ||||
Concrete segment |
|
| ||||||||||
Public sector | $ | 4,146 | 5.2 | % | $ | 5,493 | 6.1 | % | ||||
Private sector | 75,730 | 94.8 | % | 84,958 | 93.9 | % | ||||||
Concrete segment total | $ | 79,876 | 100.0 | % | $ | 90,451 | 100.0 | % | ||||
Total | $ | 159,174 |
| $ | 174,931 |
| ||||||
Operating (loss) income |
|
|
|
|
|
|
|
| ||||
Marine segment | $ | (6,080) |
| (7.7) | % | $ | 1,840 |
| 2.2 | % | ||
Concrete segment |
| (4,563) |
| (5.7) | % |
| (4,695) |
| (5.2) | % | ||
Total | $ | (10,643) | $ | (2,855) |
Marine Segment
Revenues for our marine segment for the three months ended March 31, 2023 were $79.3 million compared to $84.5 million for the three months ended March 31, 2022, a decrease of $5.2 million, or 6.1%. The decrease was primarily due to weather and customer delays in the current year period.
Operating loss for our marine segment for the three months ended March 31, 2023 was $6.1 million, compared to operating income of $1.8 million for the three months ended March 31, 2022, a decrease in operating income of $7.9 million. This decrease in operating income was primarily due to decreased revenue, clean-up of low-margin projects resulting in write-downs and lower labor and equipment utilization.
Concrete Segment
Revenues for our concrete segment for the three months ended March 31, 2023 were $79.9 million compared to $90.5 million for the three months ended March 31, 2022, a decrease of $10.6 million, or 11.7%. This decrease was primarily due to weather and customer delays and a reduction of revenue in central Texas.
Operating loss for our concrete segment for the three months ended March 31, 2023 was $4.6 million, compared to $4.7 million for the three months ended March 31, 2022, a decrease in operating loss of $0.1 million. This decrease in operating loss was primarily due to lower indirect costs due to the winding down of the central Texas region, partially offset by the write-downs on several projects in the central Texas region.
Liquidity and Capital Resources
Changes in working capital are normal within our business given the varying mix in size, scope and timing of delivery of our projects. At March 31, 2023, our working capital was $21.8 million, as compared with $31.1 million at December 31, 2022. As of March 31, 2023, we had unrestricted cash on hand of $2.8 million. Our borrowing capacity under our revolving credit facility at March 31, 2023 was approximately $1.0 million.
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Our primary liquidity needs are to finance our working capital, fund capital expenditures, and pursue strategic acquisitions. Historically, our source of liquidity has been cash provided by our operating activities, sale of underutilized assets, and borrowings under our credit facilities. The assessment of the liquidity and going concern requires us to make estimates of future activity and judgments about whether we are compliant with financial covenant calculations under our debt and other agreements and have adequate liquidity to operate. Significant assumptions used in our forecasted model of liquidity include forecasted sales, costs, and capital expenditures; expected timing and proceeds of planned real estate transactions.
The following table provides information regarding our cash flows and our capital expenditures for the three months ended March 31, 2023 and 2022:
Three months ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Net loss | $ | (12,595) | $ | (4,856) | ||
Adjustments to remove non-cash and non-operating items | 6,668 | 7,051 | ||||
Cash flow from net income after adjusting for non-cash and non-operating items | (5,927) | 2,195 | ||||
Change in operating assets and liabilities (working capital) | 2,894 | 7,865 | ||||
Cash flows (used in) provided by operating activities | $ | (3,033) | $ | 10,060 | ||
Cash flows used in investing activities | $ | (1,300) | $ | (2,810) | ||
Cash flows provided by (used in) financing activities | $ | 3,394 | $ | (12,817) | ||
Capital expenditures (included in investing activities above) | $ | (1,876) | $ | (3,523) |
Operating Activities. During the three months ended March 31, 2023, we used approximately $3.0 million in cash from our operating activities. The net cash outflow is comprised of $5.9 million of cash outflows from net income, after adjusting for non-cash items, partially offset by $2.9 million of inflows related to changes in net working capital. The changes in net working capital, which are reflected as changes in operating assets and liabilities in our Condensed Consolidated Statements of Cash Flows, were primarily driven by a $12.7 million cash inflow pursuant to the relative timing and significance of project progression and billings during the period and $0.8 million of other inflows, partially offset by a $7.9 million cash outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period, a $1.5 million cash outflow from the increase in prepaid expenses and a $1.2 million decrease in operating lease liabilities.
Investing Activities. Capital asset additions and betterments to our fleet were $1.9 million in the three months ended March 31, 2023, as compared with $3.5 million in the three months ended March 31, 2022. Proceeds from the sale of property and equipment were $0.6 million in the three months ended March 31, 2023, as compared with $0.7 million in the three months ended March 31, 2022.
Financing Activities. During the three months ended March 31, 2023, we had borrowings of $5.0 million on our revolving line of credit and had payments of $0.8 million on finance lease liabilities, loan costs of $0.6 million and a cash outflow of $0.2 million for payments related to tax withholdings for share-based compensation.
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Sources of Capital
Financial covenants
We obtained from the Credit Facility lenders an extension of the consent with respect to the delivery of our annual financial statements with an audit opinion unqualified as to going concern and a consent for the Consolidated Leverage Ratio to exceed 3.00 to 1.00 and for the Consolidated Fixed Charge Coverage Ratio to be less than 1.25 to 1.00 for the Fiscal Quarter Ending March 31, 2023
On May 15, 2023, we entered into a new three-year $103.0 million senior secured credit facility with White Oak which includes a $65.0 million asset based revolving credit facility and a $38.0 million fixed asset term loan.
See Note 19 in the Notes to the Financial Statements (of this Form 10-Q) for further discussion on the Company’s Debt Refinancing.
Bonding Capacity
We are often required to provide various types of surety bonds that provide additional security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends on our capitalization, working capital, past performance and external factors, including the capacity of the overall surety market. At March 31, 2023, the capacity under our current bonding arrangement was at least $750 million, with approximately $210 million of projects being bonded. We believe our balance sheet and working capital position will allow us to continue to access our bonding capacity.
Effect of Inflation
We are subject to the effects of inflation through increases in the cost of raw materials, and other items such as fuel, concrete and steel. Due to the relative short-term duration of our projects, we are generally able to include anticipated price increases in the cost of our bids.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our results of operations are subject to risks related to fluctuations in commodity prices and fluctuations in interest rates. Historically, our exposure to foreign currency fluctuations has not been material and has been limited to temporary field accounts located in foreign countries where we perform work. Foreign currency fluctuations were immaterial in this reporting period.
Commodity price risk
We are subject to fluctuations in commodity prices for concrete, steel products and fuel. Although we routinely attempt to secure firm quotes from our suppliers, we generally do not hedge against increases in prices for commodity products. Commodity price risks may have an impact on our results of operations due to the fixed-price nature of many of our contracts, although the short-term duration of our projects may allow us to include price increases in the costs of our bids.
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Interest rate risk
At March 31, 2023, we had $40.0 million in outstanding borrowings under our credit facility, with a weighted average ending interest rate of 10.20%. Based on the amounts outstanding under our credit facility as of March 31, 2023, a 100 basis-point increase in LIBOR (or an equivalent successor rate) would increase the Company’s annual interest expense by approximately $0.4 million.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required, the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2023.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information about litigation involving us, see Note 16 to the condensed consolidated financial statements in Part I of this report, which we incorporate by reference into this Item 1 of Part II.
ITEM 1A.RISK FACTORS
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors”, of our 2022 Form 10-K.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of equity securities in the period ended March 31, 2023.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibit |
| Description |
---|---|---|
Amended and Restated Certificate of Incorporation of Orion Group Holdings, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the Securities and Exchange Commission on August 5, 2016 (File No. 001-33891)). | ||
Amended and Restated Bylaws of Orion Group Holdings, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, filed with the Securities and Exchange Commission on August 5, 2016 (File No. 001-33891)). | ||
Land Sale Contract, dated April 26, 2023, by and between Orion Group Holdings, Inc. and Equity Resource Partners – East West, LLC. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 2, 2023 (File No. 001-33891)). | ||
Consent Letter, dated May 5, 2023, by and between Orion Marine Group, Inc. as Borrower, certain subsidiaries of the Borrower, as Guarantors, the Lenders Party thereto, Regions Bank, as Administrative Agent and Collateral Agent, and Bank of America, N.A. and BOKF, NA dba Bank of Texas, as Co-Syndication Agents. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 10, 2023 (File No. 001-33891)). | ||
*10.3 | Loan Agreement dated as of May 15, 2023 among Orion Group Holdings, Inc. and certain of its subsidiaries from time to time party hereto as borrowers, the entities from time to time party hereto, as Lenders, White Oak Commercial Finance, LLC, as Administrative Agent and Collateral Agent. | |
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
**32 .1 | Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Title 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Exhibit |
| Description |
---|---|---|
*101.INS | XBRL Instance Document. | |
*101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
*101.CAL | Inline XBRL Extension Calculation Linkbase Document. | |
*101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
*101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
*101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
*104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
ORION GROUP HOLDINGS, INC. | ||
May 15, 2023 | By: | /s/ Travis J. Boone |
Travis J. Boone | ||
May 15, 2023 | By: | /s/ Scott Thanisch |
Scott Thanisch |
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