Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
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: 1-33891
ORION GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
State of Incorporation
26-0097459
IRS Employer Identification Number
12000 Aerospace Avenue, Suite 300
Houston, Texas 77034
Address of Principal Executive Office
(713) 852-6500
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
Common stock, $0.01 par value per share
ORN
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: ◻ Yes ☑ No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: ◻ Yes ☑ No
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: ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files
Yes ☑ No ☐
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 definition of “large accelerated filer”, "accelerated filer", "small reporting" company and "emerging growth" company in Rule 12b-2 of the Exchange Act (Check One):
Large Accelerated Filer ☐
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) ☐ Yes ☑ No
There were 30,911,558 shares of common stock outstanding as of July 29, 2021.
Quarterly Report on Form 10-Q for the period ended June 30, 2021
Index
Page
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020
3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021and 2020
4
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2021 and 2020
5
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020
6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020
7
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
45
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
46
Item 1A.
Risk Factors
Unregistered Sale of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
48
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)
June 30
December 31,
2021
2020
(Unaudited)
Current assets:
Cash and cash equivalents
$
2,410
1,589
Accounts receivable:
Trade, net of allowance for credit losses of $323 and $411, respectively
89,671
96,369
Retainage
38,388
36,485
Income taxes receivable
1,101
419
Other current
66,967
59,492
Inventory
2,102
1,548
Contract assets
23,112
32,271
Prepaid expenses and other
6,973
7,229
Total current assets
230,724
235,402
Property and equipment, net of depreciation
104,917
125,497
Operating lease right-of-use assets, net of amortization
16,204
18,874
Financing lease right-of-use assets, net of amortization
12,289
12,858
Inventory, non-current
4,839
6,455
Intangible assets, net of amortization
9,316
10,077
Deferred income tax asset
41
70
Other non-current
4,875
4,956
Total assets
383,205
414,189
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current debt, net of debt issuance costs
6,139
4,344
Accounts payable:
Trade
44,189
48,252
984
716
Accrued liabilities
83,638
84,637
Income taxes payable
101
639
Contract liabilities
28,363
33,135
Current portion of operating lease liabilities
4,395
4,989
Current portion of financing lease liabilities
2,085
3,901
Total current liabilities
169,894
180,613
Long-term debt, net of debt issuance costs
294
29,523
Operating lease liabilities
12,687
14,537
Financing lease liabilities
9,890
8,376
Other long-term liabilities
23,316
19,837
Deferred income tax liability
97
207
Interest rate swap liability
—
1,602
Total liabilities
216,178
254,695
Stockholders’ equity:
Preferred stock -- $0.01 par value, 10,000,000 authorized, none issued
Common stock -- $0.01 par value, 50,000,000 authorized, 31,617,998 and 31,171,804 issued; 30,906,767 and 30,460,573 outstanding at June 30, 2021 and December 31, 2020, respectively
316
312
Treasury stock, 711,231 shares, at cost, as of June 30, 2021 and December 31, 2020, respectively
(6,540)
Accumulated other comprehensive loss
(1,602)
Additional paid-in capital
185,793
184,324
Retained loss
(12,542)
(17,000)
Total stockholders’ equity
167,027
159,494
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these condensed consolidated financial statements
Condensed Consolidated Statements of Operations
Three months ended June 30,
Six months ended June 30,
Contract revenues
145,875
183,713
299,184
350,333
Costs of contract revenues
133,574
162,969
271,428
309,831
Gross profit
12,301
20,744
27,756
40,502
Selling, general and administrative expenses
13,715
16,512
28,345
32,381
Amortization of intangible assets
381
517
761
1,033
Gain on disposal of assets, net
(7,361)
(369)
(8,971)
(1,361)
Operating income
5,566
4,084
7,621
8,449
Other (expense) income:
Other income
72
39
109
136
Interest income
25
54
51
94
Interest expense
(2,943)
(1,169)
(3,983)
(2,571)
Other expense, net
(2,846)
(1,076)
(3,823)
(2,341)
Income before income taxes
2,720
3,008
3,798
6,108
Income tax (benefit) expense
(810)
980
(660)
1,357
Net income
3,530
2,028
4,458
4,751
Basic earnings per share
0.12
0.07
0.15
0.16
Diluted earnings per share
0.11
Shares used to compute income per share:
Basic
30,671,952
30,031,188
30,569,284
29,842,298
Diluted
30,702,151
30,601,669
Condensed Consolidated Statements of Comprehensive Income
(In Thousands)
Change in fair value of cash flow hedge, net of tax expense of $315 and $368 for the three and six months ended June 30, 2021, respectively and net of tax expense of $9 and tax benefit of $217 for the three and six months ended June 30, 2020, respectively.
1,057
31
1,234
(727)
Total comprehensive income
4,587
2,059
5,692
4,024
Condensed Consolidated Statements of Stockholders’ Equity
Common
Treasury
Accumulated Other
Additional
Stock
Comprehensive
Paid-In
Retained
Shares
Amount
Loss
Capital
Earnings (Loss)
Total
Balance, December 31, 2020
31,171,804
(711,231)
Stock-based compensation
383
Exercise of stock options
23,755
86
Payments related to tax withholding for stock-based compensation
(6,673)
(36)
Cash flow hedge
230
928
Balance, March 31, 2021
31,188,886
(1,372)
184,757
(16,072)
161,085
1,245
Issuance of restricted stock
489,850
(5)
Forfeiture of restricted stock
(27,983)
(32,755)
(1)
(204)
(205)
1,372
Balance, June 30, 2021
31,617,998
Balance, December 31, 2019
30,303,395
303
(1,045)
182,523
(37,220)
138,021
462
185,356
(2)
(3,351)
(984)
2,723
Balance, March 31, 2020
30,485,400
305
(2,029)
182,983
(34,497)
140,222
1,167
638,938
(6)
(54,510)
(9,727)
(24)
40
Balance, June 30, 2020
31,060,101
311
(1,989)
184,120
(32,469)
143,433
Condensed Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash used in operating activities:
Operating activities:
Depreciation and amortization
11,313
12,311
Amortization of ROU operating leases
2,794
3,066
Amortization of ROU finance leases
1,585
Write-off of debt issuance costs upon debt extinguishment
790
Amortization of deferred debt issuance costs
429
286
Deferred income taxes
(81)
(99)
1,628
1,629
Allowance for credit losses
411
Change in operating assets and liabilities:
Accounts receivable
5,147
23,645
Income tax receivable
(682)
(97)
277
(172)
337
900
9,159
5,050
Accounts payable
(3,754)
(23,680)
(5,290)
2,818
(2,721)
Income tax payable
(538)
(296)
(4,772)
5,048
Net cash provided by operating activities
11,275
33,074
Cash flows from investing activities:
Proceeds from sale of property and equipment
24,737
1,749
Purchase of property and equipment
(4,715)
(5,036)
Contributions to CSV life insurance
Insurance claim proceeds related to property and equipment
440
1,342
Net cash provided by (used in) investing activities
20,462
(2,044)
Cash flows from financing activities:
Borrowings from Credit Facility
20,000
5,000
Payments made on borrowings from Credit Facility
(49,086)
(24,500)
Loan costs from Credit Facility
(391)
Payments of finance lease liabilities
(1,675)
(1,858)
(241)
Net cash used in financing activities
(30,916)
(21,773)
Net change in cash, cash equivalents and restricted cash
821
9,257
Cash, cash equivalents and restricted cash at beginning of period
1,086
Cash, cash equivalents and restricted cash at end of period
10,343
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
2,064
2,130
Taxes, net of refunds
640
1,663
(Tabular Amounts in thousands, Except Share and per Share Amounts)
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 pour and finish, dirt work, layout, forming, rebar, and mesh across the light 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 two reportable and operating segments: marine, which operates under the Orion brand and logo, and concrete, which operates under the TAS Commercial Concrete brand and logo.
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 two reportable segments pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting.
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 it complies with regulatory environments 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. This segment complies with regulatory environments 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 future prospects and are similar across the segment.
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, 2020 (“2020 Form 10-K”) as well as Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations also included in its 2020 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 and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
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
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 and usually span a period of less than one year. The Company determines the appropriate accounting treatment for each contract
9
before work begins and, subject to qualifications discussed in the next paragraph, generally records contract 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. The Company’s contracts and related change orders typically 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 is continuously transferred to the customer. 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 losses on uncompleted contracts are anticipated, the entire loss is recognized 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:
10
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, Cash Equivalents and Restricted Cash
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 June 30, 2021 and December 31, 2020 consisted primarily of overnight bank deposits.
The Company had no restricted cash as of June 30, 2021 and December 31, 2020.
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 has significant investments in billed and unbilled receivables as of June 30, 2021 and December 31, 2020. 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, which are included in contract assets, arise as revenues are recognized over time. Unbilled amounts on contracts represent recoverable costs and accrued profits not yet billed. Revenue associated with these billings is recorded net of any sales tax, if applicable.
Past due balances over 90 days and other higher risk amounts 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 June 30, 2021, and December 31, 2020, the Company has recorded an allowance for credit losses of $0.3 million and $0.4 million, respectively.
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 June 30, 2021 totaled $38.4 million, of which $3.0 million is expected to be collected beyond June 30, 2022. Retainage at December 31, 2020 totaled $36.5 million.
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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 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 June 30, 2021 or December 31, 2020.
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.
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 three to seven years until the next scheduled maintenance.
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
12
period. 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
3 to 5 years
Buildings and improvements
5 to 30 years
Construction equipment
3 to 15 years
Vessels and other equipment
1 to 15 years
Office equipment
1 to 5 years
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 three to 15 years. Dry-docking costs include, but are not limited to, the inspection, refurbishment and replacement of steel, engine components, tailshafts, mooring equipment and other parts of the vessel. Amortization related to dry-docking activities is included as a component of depreciation. These costs and the related amortization periods are periodically reviewed to determine if the estimates are accurate. If warranted, a significant upgrade of equipment may result in a revision to the useful life of the asset, in which case the change is accounted for prospectively.
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 were no assets classified as held for sale as of June 30, 2021 or December 31, 2020.
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 one infinite-lived intangible asset, a trade name, which it tests for impairment annually on October 31, or whenever events or circumstances indicate that the carrying amount of the trade name may not be recoverable. Impairment is calculated as the excess of the trade name’s carrying value over its fair value. The fair value of the trade name is determined using the relief from royalty method, a variation of the income approach. This method assumes that if a company owns intellectual property, it does not have to “rent” the asset and is, therefore, “relieved” from paying a royalty. Once a supportable royalty rate is determined, the rate is then applied to the projected revenues over the expected remaining life of the intangible assets to estimate the royalty savings. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates, discount rates and other variables.
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 options granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of subjective assumptions in the computation. Changes in these assumptions can cause significant fluctuations in the fair value of the option award. The fair value of restricted stock grants 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
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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 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 five levels of excess loss insurance coverage, totaling $200 million in excess of primary coverage. The marine segment’s excess loss coverage responds to most of its policies when a primary limit of $1 million has been exhausted; provided that the primary limit for Contingent Maritime Employer’s Liability is $10 million and the Watercraft Pollution Policy primary limit is $5 million. The concrete segment maintains five levels of excess loss insurance coverage, totaling $200 million in excess of primary coverage. The concrete segment’s excess loss coverage responds to most of its policies when a primary limit of $1 million has been exhausted.
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
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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 Results of Operations in the period in which they become known. The Company’s concrete segment employee health care is provided through two policies. A fully funded policy is offered primarily to salaried employees and their dependents while a partially self-funded plan with an appropriate stop-loss is offered primarily to hourly employees and their dependents. The self-funded plan is funded to the maximum exposure and, as a result, is expected to receive a partial refund after the policy expiration.
The total accrual for insurance claims liabilities was $68.8 million and $60.4 million at June 30, 2021 and December 31, 2020, respectively, reflected as a component of accrued liabilities in the condensed consolidated balance sheet. The total accrual for insurance claims receivable was $64.7 million and $57.0 million at June 30, 2021 and December 31, 2020, respectively, reflected as a component of other current accounts receivable in the condensed consolidated balance sheet.
Accounting Standards Adopted in 2021
The Financial Accounting Standards Board (“FASB”) issues accounting standards and updates (each, an "ASU") from time to time to its Accounting Standards Codification (‘ASC’), which is the primary source of U.S. GAAP. The Company regularly monitors ASUs as they are issued and considers applicability to its business. All ASUs are adopted by their respective due dates and in the manner prescribed by the FASB.
In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within that year.
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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:
Marine Segment
Construction
38,859
65,814
82,795
118,954
Dredging
20,672
24,230
45,354
55,129
Specialty Services
4,411
1,675
7,939
3,585
Marine segment contract revenues
63,942
91,719
136,088
177,668
Concrete Segment
Structural
17,545
24,541
34,206
45,777
Light Commercial
64,388
67,442
128,883
126,875
Other
Concrete segment contract revenues
81,933
91,994
163,096
172,665
Total contract revenues
The Company has determined that it has two reportable segments pursuant to FASB ASC Topic 280, Segment Reporting, but has disaggregated its contract revenues in the above chart in terms of services provided within such segments. In making this determination, the Company considered the similar characteristics of its operations as discussed in Note 1. Additionally, as discussed, both the marine and concrete segments have limited contracts with multiple performance obligations. The Company’s contracts are often estimated and bid as one project and evaluated as to performance as one project, not by individual services performed by each. Both the marine and concrete segments have a single Executive Vice President responsible for the entire segment, not by service lines of the segments. Resources are allocated by segment and financial and budgetary information is compiled and reviewed by segment, not service line.
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 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.
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 sidewalks, ramps, tilt walls and trenches. 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.
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4.Concentration of Risk and Enterprise Wide Disclosures
Accounts receivable in both reportable segments 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 accounts receivable from customers (trade and retainage) at June 30, 2021 and December 31, 2020, respectively:
June 30, 2021
December 31, 2020
Federal Government
6,392
%
4,826
State Governments
215
-
Local Governments
15,170
17,823
Private Companies
106,605
83
110,616
Gross receivables
128,382
100
133,265
(323)
(411)
Net receivables
128,059
132,854
At June 30, 2021 one customer in the Private Companies category accounted for 10.2% of total current receivables. At December 31, 2020, no single customer accounted for more than 10.0% of total current receivables.
Additionally, the table below represents concentrations of contract revenue by type of customer for the three and six months ended June 30, 2021 and 2020, respectively:
12,345
10,902
25,109
16,221
246
9,092
414
21,324
Local Government
38,576
26
51,848
28
72,092
24
103,860
30
94,708
65
111,871
61
201,569
67
208,928
60
99
In the three months ended June 30, 2021, no single customer exceeded 10.0% of total contract revenues. In the three months ended June 30, 2020, one customer in the Local Governments category accounted for 10.1% of total contract revenues. In the six months ended June 30, 2021 and 2020, no single customer accounted for more than 10.0% of total contract revenues.
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.
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Contract revenues generated outside the United States totaled 0.2% and 2.1% of total revenues for the three months ended June 30, 2021 and 2020, respectively, and 0.9% and 2.3% for the six months ended June 30, 2021 and 2020, respectively, and were primarily located in the Caribbean Basin and Mexico.
5.Contracts in Progress
Contracts in progress are as follows at June 30, 2021 and December 31, 2020:
June 30,
Costs incurred on uncompleted contracts
1,249,670
1,151,987
Estimated earnings
217,698
202,369
1,467,368
1,354,356
Less: Billings to date
(1,472,619)
(1,355,220)
(5,251)
(864)
Included in the accompanying Condensed Consolidated Balance Sheets under the following captions:
(28,363)
(33,135)
Included in contract assets is approximately $3.8 million and $3.1 million at June 30, 2021 and December 31, 2020, respectively, related to claims and unapproved change orders. See Note 2 - Summary of Significant Accounting Policies to the Company’s condensed consolidated financial statements for discussion of the accounting for these claims.
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 June 30, 2021, the aggregate amount of the remaining performance obligations was approximately $394.4 million. Of this amount, the current expectation of the Company is that it will recognize $374.8 million, or 95%, in the next 12 months and the remaining balance thereafter.
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6.Property and Equipment
The following is a summary of property and equipment at June 30, 2021 and December 31, 2020:
2,677
2,379
Building and improvements
34,780
44,324
136,476
142,661
81,552
79,499
6,006
5,577
261,491
274,440
Less: Accumulated depreciation
(186,673)
(186,615)
Net book value of depreciable assets
74,818
87,825
Construction in progress
2,214
1,809
Land
27,885
35,863
During the quarter ended June 30, 2021 the Company sold its land, building and improvements located in Tampa, Florida. The book value of the assets and related accumulated depreciation have been removed from the balance sheet and the Company recognized a net gain on the sale of $6.8 million.
For the three months ended June 30, 2021 and 2020, depreciation expense was $5.2 million and $5.6 million, respectively. For the six months ended June 30, 2021 and 2020, depreciation expense was $10.6. million and $11.3 million, respectively. Substantially all depreciation expense is included in the cost of contract revenue in the Company’s Condensed Consolidated Statements of Operations. Substantially all of the assets of the Company are pledged as collateral under the Company’s Credit Agreement (as defined in Note 11).
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 June 30, 2021 and December 31, 2020 consisted of the following:
Insurance claims receivable
64,726
57,021
Accident loss receivables
1,425
1,448
Other current receivables
816
1,023
Total other current accounts receivable
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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.
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:
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 June 30, 2021 and December 31, 2020:
Carrying Value
Level 1
Level 2
Level 3
Assets:
Cash surrender value of life insurance policy
3,435
Liabilities:
Derivatives
3,169
The Company’s derivatives, which previously consisted of interest rate swaps, were valued using a discounted cash flow analysis that incorporated observable market parameters, such as interest rate yield curves and credit risk adjustments that were necessary to reflect the probability of default by us or the counterparty. These derivatives were classified as a Level 2 measurement within the fair value hierarchy. See Note 11 for additional information on the Company’s derivative instrument.
Our concrete segment has life insurance policies with a combined face value of $11.1 million as of June 30, 2021. The policies are invested in mutual funds and the fair value measurement of the cash surrender balance
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associated with these policies is determined using Level 2 inputs within the fair value hierarchy and will vary with investment performance. These assets are included in the "Other noncurrent" asset section in the Company’s Condensed Consolidated Balance Sheets.
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 June 30, 2021 and December 31, 2020 approximated its carrying value of $6.4 million and $35.1 million, respectively, as interest is based on current market interest rates for debt with similar risk and maturity. If the Company’s debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.
9.Goodwill and Intangible Assets
Intangible assets
The tables below present the activity and amortization of finite-lived intangible assets:
Finite-lived intangible assets, beginning of period
35,240
Additions
Total finite-lived intangible assets, end of period
Accumulated amortization, beginning of period
(32,055)
(29,985)
Current year amortization
(761)
(2,070)
Total accumulated amortization
(32,816)
Net finite-lived intangible assets, end of period
2,424
3,185
Infinite-lived intangible assets
6,892
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 $18.8 million and are being amortized over eight years using an accelerated method based on the pattern in which the economic benefits of the assets are consumed. For the six months ended June 30, 2021, $0.8 million of amortization expense was recognized for these assets.
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Future expense remaining of approximately $2.4 million will be amortized as follows:
759
2022
1,239
2023
389
2024
37
Additionally, the Company has one indefinite-lived intangible asset, a trade name, which is tested for impairment annually on October 31, or whenever events or circumstances indicate that the carrying amount of the trade name may not be recoverable. Impairment is calculated as the excess of the trade name’s carrying value over its fair value. The fair value of the trade name is determined using the relief from royalty method, a variation of the income approach. This method assumes that if a company owns intellectual property it does not have to "rent" the asset and is, therefore, "relieved" from paying a royalty. Once a supportable royalty rate is determined, the rate is then applied to the projected revenues over the expected remaining life of the intangible assets to estimate the royalty savings. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates, discount rates and other variables. The most recent annual impairment test concluded that the fair value of the trade name was in excess of the carrying value, therefore no impairment was recorded.
10.Accrued Liabilities
Accrued liabilities at June 30, 2021 and December 31, 2020 consisted of the following:
Accrued salaries, wages and benefits
7,907
15,071
Accrual for insurance claims liabilities
68,822
60,365
Sales taxes
4,254
5,909
Property taxes
466
908
Sale-leaseback arrangement
709
676
Accounting and audit fees
50
344
Equipment purchase
461
Other accrued expenses
1,408
881
Total accrued liabilities
11.Long-term Debt and Line of Credit
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”) and October 2020 (the “Eighth Amendment”). The company incurred debt issuance costs related to the initial Credit Agreement and several of the subsequent amendments. The Credit Facility matures on July 31, 2023.
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The Credit Agreement, which may be amended from time to time, provides for borrowings under a revolving line of credit and a term loan (together, the “Credit Facility”). The Credit Facility is guaranteed by the subsidiaries of the Company, secured by the assets of the Company, including stock held in its subsidiaries, and may be 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 is due and is 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 is 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 may be prepaid at any time, in whole or in part, without premium or penalty. Amounts repaid under the revolving line of credit may be re-borrowed.
Total debt issuance costs for the Fourth Amendment which included underwriter fees, legal fees and syndication fees were approximately $0.9 million and were capitalized as non-current deferred charges and scheduled for amortization using the effective interest rate method over the duration of the loan. The Company incurred additional debt issuance costs of approximately $0.6 million and $0.9 million respectively for the Fifth and Sixth Amendments. With the execution of the aforementioned Sixth Amendment, $50.0 million of the existing revolving line of credit was modified and accounted for under guidelines of ASC 470-50, Debt, Modifications and Extinguishments, and a pro-rated portion of unamortized debt issuance costs of approximately $0.4 million was recognized as interest expense as of May 2019. The then remaining debt issuance costs of approximately $0.9 million related to the Fourth, Fifth, and Sixth Amendments were scheduled to be amortized over the duration of the term loan, which coincides with the term of the Credit Facility.
On June 8, 2020, the Company entered into a new syndicated credit agreement (the “364-Day Revolving Credit Facility”) with Regions Bank, as administrative agent and collateral agent, and the following co-syndication agents: Bank of America, N.A. and BOKF, NA dba Bank of Texas. Concurrent with this the Company executed an amendment to the Credit Agreement with its existing lenders (“also known as the “Seventh Amendment”) for the sole intent and outcome of executing the 364-Day Revolving Credit Facility.
The 364-Day Revolving Credit Facility provided for borrowings of up to $20 million under a new revolving line of credit. No funds were ever drawn on the 364-Day Revolving Credit Facility. The 364-Day Revolving Credit Facility matured on June 7, 2021.
Effective, October 9, 2020, the Company entered into the Eighth Amendment to the Credit Agreement") , with Regions Bank, as Administrative Agent and Collateral Agent and Bank of America, N.A., BOKF, NA dba Bank of Texas, Iberiabank, NBH Bank, Truist Bank, and Trustmark National Bank, as Lenders. The Eighth Amendment provides for administrative revisions to the Credit Agreement, including changes to repayment requirements for involuntary asset dispositions and changes to the timing of repayment for voluntary asset dispositions. There were no debt issuance costs incurred with respect to the Eighth Amendment.
The quarterly weighted average interest rate for the Credit Facility as of June 30, 2021 was 2.33%.
The Company’s obligations under debt arrangements consisted of the following:
Debt Issuance
Principal
Costs(1)
Revolving line of credit
6,000
Term loan - current
4,500
(156)
Other debt
139
Total current debt
(174)
Term loan - long-term
25,586
(889)
24,697
Total long-term debt
30,586
(1,063)
Total debt
6,433
35,086
(1,219)
33,867
Provisions of the revolving line of credit
The Company has a maximum borrowing availability under the revolving line of credit and swingline loans (as defined in the Credit Agreement) of $50.0 million. There is a letter of credit sublimit that is equal to the lesser of $20.0 million and the aggregate unused amount of the revolving commitments then in effect. There is also a swingline sublimit equal to the lesser of $5.0 million and the aggregate unused amount of the revolving commitments then in effect.
Revolving loans may be designated as Base Rate Loan or Adjusted LIBOR Rate Loans, at the Company’s request, and must be drawn in an aggregate minimum amount of $1.0 million and integral multiples of $250,000 in excess of that amount. Swingline loans must be drawn in an aggregate minimum amount of $250,000 and integral multiples of $50,000 in excess of that amount. The Company may convert, change, or modify such designations from time to time.
The Company is 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, is 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 is 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.
The maturity date for amounts drawn under the revolving line of credit is the earlier of the Facility termination date of July 31, 2023, or the date the outstanding balance is permanently reduced to zero.
As of June 30, 2021, the Company had $6.0 million of borrowings under the revolving line of credit. There were $1.7 million in outstanding letters of credit as of June 30, 2021, which reduced the maximum borrowing availability on the revolving line of credit to $42.3 million. During the six months ended June 30, 2021, the Company drew down $20.0 million for general corporate purposes and made payments of $19.0 million on the revolving line of credit which resulted in a net increase of $1.0 million.
Provisions of the term loan
The original principal amount of $60.0 million for the term loan commitment was paid off in quarterly installment payments (as stated in the Credit Agreement). During the quarter ended June 30, 2021, the term loan component of the Credit Facility was fully extinguished, in part using proceeds of the sale of property in Tampa, Florida (see Note 6 – Property and Equipment). The extinguishment of the term loan reduced the Company’s exposure to variability in interest rates and eliminated future loan amortization payment commitments. Concurrent with extinguishing the term loan, the Company canceled the remaining open position on its interest rate swap, resulting in a $1.3 million loss on the mark to market value of the swap at the date of termination. The $1.3 million was paid to the counterparty, cleared from the balance sheet as an interest rate swap liability, removed from Other Comprehensive Income and charged to interest expense during the quarter ended June 30, 2021. Further, the remaining $0.8 million of unamortized deferred debt issuance costs were charged to interest expense related to the early extinguishment of the term loan. There were no penalties incurred related to early payment of the term loan.
The Company entered into a debt agreement with De Lage Landen Financial Services, Inc. for the purpose of financing a piece of equipment purchased. As of June 30, 2021, the carrying value of this debt is $0.4 million. The agreement is secured by the financed equipment asset and the debt is included as a component of current debt and long-term debt on the Condensed Consolidated Balance Sheets.
Financial covenants
Restrictive financial covenants under the Credit Facility include:
In addition, the Credit Facility contains events of default that are usual and customary for similar arrangements, including non-payment of principal, interest or fees; breaches of representations and warranties that are not timely cured; violation of covenants; bankruptcy and insolvency events; and events constituting a change of control.
The Company was in compliance with all financial covenants as of June 30, 2021.
Derivative Financial Instruments
On September 16, 2015, the Company entered into a series of receive-variable, pay-fixed interest rate swaps to hedge the variability in the interest payments on 50% of the aggregate principal amount of the Regions Term Loan outstanding, beginning with a notional amount of $67.5 million. There was a total of five sequential interest rate swaps to achieve the hedged position and each year on August 31, with the exception of the final swap, the existing interest rate swap was scheduled to expire and be immediately replaced with a new interest rate swap until the expiration of the final swap on July 31, 2020. On December 6, 2018, the Company entered
into a sixth receive-variable, pay-fixed interest rate swap to hedge the variability of interest payments. The sixth swap began with a notional amount of $27.0 million on July 31, 2020 and hedged the variability in the interest payments on the aggregate scheduled principal amount of the Regions Term Loan outstanding. The sixth swap was scheduled to expire on July 31, 2023. At inception, these interest rate swaps were designated as cash flow hedges for hedge accounting, and as such, the effective portion of unrealized changes in market value were recorded in other comprehensive income (loss) and reclassified into earnings during the period in which the hedged forecasted transaction affects earnings. Gains and losses from hedge ineffectiveness were recognized in current earnings.
Upon fully extinguishing the Term Loan during the quarter ended June 30, 2021, the Company canceled the remaining term of the sixth swap and no longer owns derivative financial instruments.
12.Other Long-Term Liabilities
Other long-term liabilities at June 30, 2021 and December 31, 2020 consisted of the following:
16,350
16,712
CARES Act deferred payroll taxes
3,821
Deferred compensation
2,903
242
307
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 $19.1 million. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company will lease back the Property at an annual rental rate of approximately $1.5 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has two consecutive options to extend the term of the Lease by ten years for each such option. This transaction was recorded as a failed sale-leaseback. The Company recorded a liability for the amounts received, will continue to depreciate the non-land portion of the asset, and has imputed an interest rate so that the net carrying amount of the financial liability and remaining assets will be zero at the end of the initial lease term. Concurrently with the sale, the Company paid $18.2 million towards the Term loan portion of the Company’s Credit Facility, consistent with terms of the Sixth Amendment.
CARES Act
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which among other things includes an optional payment deferral of the employer's portion of the Social Security taxes that were otherwise due through December 31, 2020. The Company elected to defer payments of approximately $7.6 million with $3.8 million due December 2021 reflected in accrued liabilities included in the Company’s Condensed Consolidated Balance Sheets and the remaining $3.8 million due
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December 2022 reflected in other long-term liabilities in the Company’s Condensed Consolidated Balance Sheets.
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.
Income tax (benefit) expense included in the Company’s accompanying Condensed Consolidated Statements of Operations was as follows (in thousands, except percentages):
Three months ended
Six months ended
Effective tax rate
(29.8)
32.6
(17.4)
22.2
The effective rate for the three and six months ended June 30, 2021 differed from the Company’s statutory federal rate of 21% primarily due to the movement in the valuation allowance for current year activity, state income taxes and the non-deductibility of other permanent items.
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, 2021 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 June 30, 2021 remains appropriate.
The Company does not expect that unrecognized tax benefits as of June 30, 2021 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 June 30, 2021 and 2020, the Company had 893,604 and 1,117,301 securities, respectively, that were potentially dilutive in earnings per share calculations. For the six months ended June 30, 2021 and 2020, the Company had 904,486 and 1,287,763 securities, respectively, that were potentially dilutive in earnings per share calculations. Such dilution is dependent on the excess of the market price of our stock over the exercise price and other components of the treasury stock method. The exercise price for certain stock
options awarded by the Company exceeded the average market price of the Company’s common stock for the three and six months ended June 30, 2021 and 2020. Such stock options are antidilutive and are not included in the computation of earnings per share for those periods.
The following table reconciles the denominators used in the computations of both basic and diluted earnings per share:
Basic:
Weighted average shares outstanding
Diluted:
Total basic weighted average shares outstanding
Effect of potentially dilutive securities:
Common stock options
30,199
32,385
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 2011 Long Term Incentive Plan (the "2011 LTIP") and 2017 Long Term Incentive Plan (the "2017 LTIP"), which was approved by shareholders in May 2017 and authorized the maximum aggregate number of shares to be issued of 2,400,000. In general, the Company’s 2017 LTIP provides for grants of restricted stock and stock options to be issued with a per-share price equal to the fair market value of a share of common stock on the date of grant. Option terms are specified at each grant date but generally are 10 years from the date of issuance. Options generally vest over a three to five-year period.
The Company applies a 3.2% and a 5.5% forfeiture rate, which is compounded over the vesting terms of the individual award, to its restricted stock and option grants, respectively, based on historical analysis.
In the three months ended June 30, 2021 and 2020, compensation expense related to stock-based awards outstanding was $1.2 million for both periods. In the six months ended June 30, 2021 and 2020, compensation related to stock based awards outstanding was $1.6 million for both periods. In the three and six months ended June 30, 2021 and 2020, payments related to tax withholding for stock-based compensation for certain officers of the Company was $0.2 million and less than $0.1 million, respectively.
In May 2021, independent directors as well as certain officers and executives of the Company were awarded 489,850 shares of restricted common stock. The total number included 89,850 shares, which were awarded to the six independent directors and vested immediately on the date of the grant, as well as 240,000 shares of performance-based stock awards to certain executives. The performance-based stock will potentially vest 100% if the target is met, with 100% of the shares to be earned based on the achievement of an objective, tiered return on invested capital, measured over a three-year performance period. The Company evaluates the probability of achieving this each reporting period. The fair value of all shares awarded on the date of the grant was $6.01 per share.
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In the three months ended June 30, 2021, there were no options exercised. In the six months ended June 30, 2021, there were 23,755 options exercised generating proceeds to the Company of approximately $0.1 million. In the three and six months ended June 30, 2020, there were no options exercised.
At June 30, 2021, total unrecognized compensation expense related to unvested stock and options was approximately $3.9 million, which is expected to be recognized over a period of approximately 2.6 years.
16.Commitments and Contingencies
On August 21, 2020, a Company dredge, the Waymon L. Boyd, was consumed by a fire while working on a project in the Port of Corpus Christi. Five crewmembers were killed, several more were injured, some seriously, and the vessel was declared a total loss. This incident also resulted in the discharge of approximately 18,000 gallons of oil, diesel fuel and contaminated water into the Corpus Christi Ship Channel, all of which was promptly cleaned up. The Company is fully cooperating with the U.S. Coast Guard, the Port of Corpus Christi Authority, and the National Transportation Safety Board, among others, while they investigate the cause of this incident. The National Transportation Safety Board has named the Company as a party of interest in their investigation. Thus far, eight separate lawsuits have been filed against the Company by certain crewmembers or their heirs under the general maritime law and the Jones Act. In response thereto, the Company has filed an action in the U.S. District Court for the Southern District of Texas seeking consolidation of the lawsuits for procedural purposes since they all arise out of the same occurrence and seeking exoneration from or limitation of liability relating to the foregoing incident as provided for in the federal rules of procedure for maritime claims. The Limitation Court set a deadline of February 17, 2021 by which all claims were required to be filed and as of the Court’s deadline, thirteen persons, estates and/or entities filed claims in the Limitation for personal injuries, death, property damages and business interruption, loss of profit, loss of use of natural resources and other economic damages for unspecified economic and compensatory damages. Some of these claimants may lack standing to bring their claims and will be challenged. Further, the Company filed a Default Motion with the Court which was granted on April 8, 2021 that bars the filing of any further claims. Applicable accounting guidance under ASC 450 would require the Company to recognize a loss if the loss is determined to be probable and reasonably estimable. As at June 30, 2021, the Company has recognized $91.7 million in total liabilities with respect to this incident to date, which includes approximately $27.5 million paid to date (including to nine of 18 crewmembers and wreck removal costs) and accruals totaling approximately $64.2 million. However, this is a multi-party, complex tort proceeding, and it is too early in the proceedings for the Company to establish loss accruals in regard to the balance of the claims. In any event, insurance coverage is available, and the carriers of such insurance have taken over the costs of the defense of the claims. In addition, the Company continues to believe that it has adequate insurance coverage for all pollution, marine, economic and other potential liabilities arising from the incident. The Company is also confident that it otherwise has adequate vessels, equipment and personnel to fulfill all ongoing, booked and reasonably foreseeable work.
In addition, the Company is involved in various other 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 other claims and contingencies.
A legal matter was settled in the Company’s favor for $5.5 million during the first quarter of 2018. Settlement amounts were recorded in Other gain from continuing operations in the Condensed Consolidated Statement of Operations, Prepaid expenses and other (current portion of the notes receivable) and Other non-current assets
(non-current portion of the notes receivable) in the Condensed Consolidated Balance Sheets. As of June 30, 2021, the current portion of the notes receivable was $0.8 million and the non-current portion was $1.4 million, net of $0.2 million of unamortized discount. Legal fees related to this matter were expensed as incurred during the respective reporting period.
17.Segment Information
The Company currently operates in two reportable segments: marine and concrete. The Company’s financial reporting systems present various data for management to run the business, including profit and loss statements prepared according to the segments presented. Management uses operating income to evaluate performance between the two segments. Segment information for the periods presented is provided as follows:
Marine
8,606
3,810
11,454
9,559
Depreciation and amortization expense
(4,322)
(4,744)
(8,680)
(9,520)
253,658
233,326
Property and equipment, net
90,961
111,416
Concrete
(3,040)
274
(3,833)
(1,110)
(2,107)
(2,260)
(4,235)
(4,376)
129,547
138,095
13,956
15,555
In connection with the preparation of the financial statements for the quarter ended June 30, 2021, the Company has identified and corrected certain immaterial errors in segment reporting for all periods presented. Specifically, certain corporate overhead costs previously recorded to the marine segment as part of operating income (loss) and allocated from the marine segment to the concrete segment below operating income in the other income (expense) line have been allocated from the marine segment to the concrete segment as part of the determination of operating income for each segment. These corrections resulted in an offsetting change in operating income (loss) for each segment of $3.2 million for the three months ended June 30, 2020 and $2.9 million and $6.1 million for the six months ended June 30, 2021 and 2020, respectively.
There were less than $0.1 million and $0.4 million in intersegment revenues between the Company’s two reportable segments for the three months ended June 30, 2021 and 2020, respectively. There were less than $0.1 million and $2.7 million in intersegment revenues between the Company’s two reportable segments for the six months ended June 30, 2021 and 2020, respectively. The marine segment had foreign revenues of $0.4 million and $3.9 million for the three months ended June 30, 2021 and 2020, respectively. The marine segment had foreign revenues of $2.8 million and $7.9 million for the six months ended June 30, 2021 and 2020, respectively. These revenues are derived from projects in the Caribbean Basin and Mexico and are paid primarily in U.S. dollars. There was no foreign revenue for the concrete segment.
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:
Assets
Operating lease right-of-use assets, net (1)
Financing lease right-of-use assets, net (2)
28,493
31,732
Liabilities
Current
Operating
Financing
Total current
6,480
8,890
Noncurrent
Total noncurrent
22,577
22,913
29,057
31,803
Other information related to lease term and discount rate is as follows:
Weighted Average Remaining Lease Term (in years)
Operating leases
5.16
5.25
Financing leases
5.27
4.96
Weighted Average Discount Rate
Operating leases (1)
4.76
4.73
4.33
4.46
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The components of lease expense are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
Operating lease costs:
Operating lease cost
1,518
1,613
3,172
3,227
Short-term lease cost (1)
317
920
1,007
2,081
Financing lease costs:
Interest on lease liabilities
118
169
244
275
Amortization of right-of-use assets
885
Total lease cost
2,774
3,587
6,025
7,168
Supplemental cash flow information related to leases is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
2,949
3,179
Operating cash flows for finance leases
Financing cash flows for finance leases
1,858
Non-cash activity:
ROU assets obtained in exchange for new operating lease liabilities
358
2,688
ROU assets obtained in exchange for new financing lease liabilities
3,147
9,425
Maturities of lease liabilities are summarized as follows:
Operating Leases
Finance Leases
Year ending December 31,
2021 (excluding the six months ended June 30, 2021)
2,761
1,992
4,330
2,437
3,276
2,577
2,549
2,017
2025
2,354
1,386
Thereafter
4,090
3,161
Total future minimum lease payments
19,360
13,570
Less - amount representing interest
2,278
1,595
Present value of future minimum lease payments
17,082
11,975
Less - current lease obligations
Long-term lease obligations
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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 to “Orion,” “the Company,” “we,” “our,” or “us” are to Orion Group Holdings, Inc. and its subsidiaries taken 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, 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 the duration of the COVID19 pandemic and the resiliency of the economy thereafter, unforeseen productivity delays and other difficulties encountered in project execution, levels of government funding or other governmental budgetary constraints, 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, 2020 (“2020 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 fiscal 2020 audited consolidated financial statements and notes thereto included in our 2020 Form 10-K, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Form 10-K and with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this quarterly report.
Overview
Orion Group Holdings, Inc., its subsidiaries and affiliates (hereafter collectively referred to as the “Company”), provides a broad range of specialty construction services in the infrastructure, industrial and building sectors of 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 pour and finish, dirt work, layout, forming, rebar, and mesh across the light 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 such factors 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:
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.
Second Quarter 2021 Recap and 2021 Outlook
In the quarter ended June 30, 2021, we recorded revenues of $145.9 million, of which $63.9 million was attributable to our marine segment and the remaining $81.9 million to our concrete segment. In addition, we ended the quarter with a consolidated backlog of $394.4 million. Our revenues in the quarter decreased by 20.6% as compared with the comparable prior year period and we recorded net income of $3.5 million, as compared with net income of $2.0 million in the comparable prior year period.
Looking toward the balance of 2021, the Company continues to focus on developing opportunities across the infrastructure, industrial, and building sectors through organic growth, greenfield expansion, and strategic acquisition opportunities.
The spread of COVID-19 has impacted the global economy, leaving supply chains disrupted. As the world uses tactics like “social distancing” and “stay at home orders” to slow and stop the spread of COVID-19, demand destruction has led to increased unemployment and to the weakening of consumer confidence. Although to date the Company hasn’t experienced materially negative impacts from COVID-19, such as widespread project
35
stoppage/cancelations or a slowdown/stoppage of accounts receivables collections, any delays in the timing of future awards could create gaps in the Company’s project delivery schedule across quarterly periods.
Federal and State governments have increased spending as part of efforts to mitigate the impact of COVID-19 on the economy. The amount and timing of such spending will be directly impacted by the duration of required efforts to contain COVID-19 and the severity of the negative impacts created by the virus and its effect on the economy. Although little progress has been made to date and on a federal infrastructure bill, the Company will continue to track and monitor any developments on a federal infrastructure bill which could potentially create bid opportunities for the Company.
Demand for our marine construction services continues, given our differentiated capabilities and service offering within the space. We continue to see bid opportunities to help maintain and expand the infrastructure that facilitates the movement of goods and people on or over waterways. However, we have some concerns about the short-term outlook for and are closely monitoring the short and long-term cruise line capital expenditures as their current demand has been severely impacted by COVID-19. Further, while we currently see bid opportunities from our private sector energy-related customers as they expand their marine facilities related to the storage, transportation and refining of domestically produced energy, we recognize that the timing of project awards may be impacted as a result of volatility of oil prices due to COIVD-19 related uncertainties. Over the long-term, we expect to see bid opportunities in this sector from petrochemical-related businesses, energy exporters, and liquefied natural gas facilities. Opportunities from local port authorities will also remain over the long-term, many of which are related to the widened Panama Canal. Additionally, bid opportunities related to coastal restoration funded through the Resource and Ecosystems Sustainability, Tourist Opportunities and Revived Economies of the Gulf Coast States Act (the “RESTORE Act”) may arise into 2021. We believe our current equipment fleet will allow us to better meet market demand for projects from both our public and private customers.
In the long-term, we see positive trends in demand for our services in our end markets, including:
36
Demand for our concrete segment’s services continues, although timing of certain new project releases could be delayed as a result of COVID-19 related macroeconomic impacts. We currently see long-term demand for our concrete construction services in the Texas building sector as Texas’ four major metropolitan areas, and expanding suburbs, continuously retain their positions as leading destinations for population and business growth. Population growth throughout our markets continues to drive new distribution centers, education facilities, office expansion, retail and grocery establishments, new multi-family housing units, and structural towers for business, residential or mixed-use purposes. The diversified Texas economy provides us with multiple sources of bid opportunities. Additional demand for concrete services in our markets could be provided by work as part of a federal infrastructure bill.
In the long-term, we see positive trends in demands for our services in our end markets, including:
Consolidated Results of Operations
Backlog Information
Our contract backlog represents our estimate of the revenues we expect to realize under the portion of contracts remaining to be performed. Given the typical duration of our contracts, which is generally less than a year, our backlog at any point in time usually represents only a portion of the revenue that we expect to realize during a twelve-month period. We have not been adversely affected by contract cancellations or modifications in the past, 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, 2021
September 30, 2020
June 30, 2020
Marine segment
170.2
154.8
202.6
241.7
312.2
Concrete segment
224.2
210.0
236.9
187.1
216.2
Consolidated
394.4
364.8
439.5
428.8
528.4
Although backlog increased during the current quarter, the primary driver related to weather impacts that negatively impacted the amount we were able to progress on our jobs in backlog. The general trend of declining backlog over the past year is due in significant part to headwinds created by the COVID-19 pandemic in certain end market sectors, which has slowed the timing of project awards. We, however, remain optimistic in our end-markets and in the opportunities that are emerging across our various market places as evidenced by
the $2.0 billion of quoted bids outstanding at quarter end, of which $30 million we are the apparent low bidder on or have been awarded contracts subsequent to the end of the quarter ended June 30, 2021.
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 June 30, 2021, compared with three months June 30, 2020
Percent
(dollar amounts in thousands)
100.0
Cost of contract revenues
91.6
88.7
8.4
11.3
9.3
9.0
0.3
(5.0)
(0.2)
3.8
2.2
(1.9)
(0.6)
Income before income tax expense
1.9
1.6
(0.5)
0.5
2.4
1.1
Contract Revenues. Contract revenues for the three months ended June 30, 2021 of $145.9 million decreased $37.8 million or 20.6% as compared to $183.7 million in the prior year period. The decrease was primarily driven by a reduction in project activity compared to the prior year in the marine segment and decreased production volumes in the concrete segment due to weather related impacts.
Gross Profit. Gross profit was $12.3 million for the three months ended June 30, 2021, compared to $20.7 million in the prior year period, a decrease of $8.4 million or 40.7%. Gross profit in the second quarter was 8.4% of total contract revenues as compared to 11.3% in the prior year period. The decrease in gross profit dollars and percentage was driven by the decreased activity and volumes which negatively impacted revenue and contributed to an under recovery of indirect costs primarily related to decreased labor and equipment utilization.
Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses were $13.7 million for the three months ended June 30, 2021 compared to $16.5 million in the prior year period. As a percentage of total contract revenues, SG&A expenses increased from 9.0% to 9.4%. The decrease in SG&A dollars was driven primarily by a decrease in bonus expense as compared to the prior year period.
Gain on Disposal of Assets, net. During the three months ended June 30, 2021 and 2020, we realized $8.1 million and $0.4 million, respectively, of net gains on disposal of assets. Included in this amount is a net gain
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of $6.8 million related to the sale of property in Tampa, Florida. See Note 6 – Property and Equipment in this form 10-Q for a further description of the sale of property.
Other Income, net of Expense. Other expense primarily reflects interest on our borrowings, partially offset by interest income and non-operating gains or losses. During the quarter ended June 30, 2021 we fully extinguished the term loan portion of our credit facility, in part using proceeds of the sale of property in Tampa, Florida. The extinguishment of the term loan reduced the Company’s exposure to variability in interest rates and eliminated future loan amortization payment commitments. Interest expense for the current quarter included $2.1 million related to the extinguishment of our term loan and related interest rate swaps.
Income Tax (Benefit) Expense. We recorded tax benefit of $0.8 million in the three months ended June 30, 2021, compared to tax expense of $1.0 million in the prior year period. Our effective tax rate for the three months ended June 30, 2021 was (29.8)%, which differs from the federal statutory rate of 21% primarily due to the movement in the valuation allowance for current year activity, state income taxes and the non-deductibility of other permanent items.
Six months ended June 30, 2021, compared with six months June 30, 2020
90.7
88.4
11.6
9.5
(3.0)
(0.4)
Operating income (loss) from operations
2.5
(1.2)
(0.7)
1.3
1.7
1.5
1.4
Contract Revenues. Contract revenues for the six months ended June 30, 2021 of $299.2 million decreased $51.1 million or 14.6% as compared to $350.3 million in the prior year period. The decrease was primarily driven by severe winter weather that shut down most of Texas for seven to ten days in February 2021, a reduction in project activity compared to the prior year in the marine segment and decreased production volumes in the concrete segment due to weather related impacts in the second quarter of 2021.
Gross Profit. Gross profit was $27.8 million for the six months ended June 30, 2021, compared to $40.5 million in the prior year period, a decrease of $12.7 million or 31.5%. Gross profit in the period was 9.3% of total contract revenues as compared to 11.6% in the prior year period. The decrease in gross profit dollars and percentage was driven by the decreased activity and volumes which negatively impacted revenue and contributed to an under recovery of indirect costs primarily related to decreased labor and equipment utilization as the result of the aforementioned winter and spring weather delays.
Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses were $28.3 million for the six months ended June 30, 2021 compared to $32.4 million in the prior year period. As a percentage of total contract revenues, SG&A expenses increased from 9.3% to 9.5%. The decrease in SG&A dollars was driven by a decrease in the current year period related to bonus expense, business development pursuant to timing of project pursuits and awards, and travel related costs.
Gain on Disposal of Assets, net. During the six months ended June 30, 2021 and 2020, we realized $9.0 million and $1.4 million, respectively, of net gains on disposal of assets. Included in this amount is a net gain of $6.8 million related to the sale of property in Tampa, Florida.
Other Income, net of Expense. Other expense primarily reflects interest on our borrowings, partially offset by interest income and non-operating gains or losses. Interest expense for the current year period included $2.1 million related to the extinguishment of our term loan and related interest rate swaps.
Income Tax (Benefit) Expense. We recorded tax benefit of $0.7 million in the six months ended June 30, 2021, compared to tax expense of $1.4 million in the prior year period. Our effective tax rate for the six months ended June 30, 2021 was (17.4)%, which differs from the federal statutory rate of 21% primarily due to the movement in 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. In connection with the preparation of the financial statements for the quarter ended June 30, 2021, the Company has identified and corrected certain immaterial errors in segment reporting for all periods presented. Specifically, certain corporate overhead costs previously recorded to the marine segment as part of operating income (loss) and allocated from the marine segment to the concrete segment below operating income in the other income (expense) line have been allocated from the marine segment to the concrete segment as part of the determination of operating income for each segment. These corrections resulted in an offsetting change in operating income (loss) for each segment of $3.2 million for the three months ended June 30, 2020 and $2.9 million and $6.1 million for the six months ended June 30, 2021 and 2020, respectively.
Three months ended June 30, 2021 compared with three months ended June 30, 2020.
Public sector
44,667
69.9
59,820
65.2
Private sector
19,275
30.1
31,899
34.8
Marine segment total
6,500
7.9
12,022
13.1
75,433
92.1
79,972
86.9
Concrete segment total
Operating income (loss)
13.5
4.2
(3.7)
Revenues for our marine segment for the three months ended June 30, 2021 were $63.9 million compared to $91.7 million for the three months ended June 30, 2020, a decrease of $27.8 million, or 30.3%. The decrease was primarily driven by a reduction in project activity compared to the prior year period.
Operating income for our marine segment for the three months ended June 30, 2021 was $8.6 million, compared to operating income of $3.8 million for the three months ended June 30, 2020, an increase of $4.8 million. Excluding the impact of the sale of property in Tampa, Florida operating income was $1.8 million, compared to operating income of $3.8 million for the three months ended June 30, 2020, a decrease of $2.0 million, or 51.7%. This decrease in operating income was primarily due to the decrease in revenue and related under recovery of indirect costs as a result of decreased labor and equipment utilization.
Revenues for our concrete segment for the three months ended June 30, 2021 were $81.9 million compared to $92.0 million for the three months ended June 30, 2021, a decrease of $10.1 million, or 10.9%. This decrease resulted from decreased production volumes due to weather related impacts.
Operating loss for our concrete segment for the three months ended June 30, 2021 was $3.0 million, compared to operating income of $0.3 million for the three months ended June 30, 2020, a decrease of $3.3 million. This decrease in operating income was primarily due to the aforementioned decreased production volumes due to weather related impacts.
Six months ended June 30, 2021 compared with six months ended June 30, 2020.
86,336
63.4
113,331
63.8
49,752
36.6
64,337
36.2
11,279
6.9
28,074
16.3
151,817
93.1
144,591
83.7
5.4
(2.4)
Revenues for our marine segment for the six months ended June 30, 2021 were $136.1 million compared to $177.7 million for the six months ended June 30, 2020, a decrease of $41.6 million, or 23.4%. The decrease was primarily attributable to the Texas winter storm in February 2021 and a reduction in project activity compared to the prior year period.
Operating loss for our marine segment for the six months ended June 30, 2021 was $11.5 million, compared to operating income of $9.6 million for the six months ended June 30, 2020, an increase of $1.9 million, or 19.8%. Excluding the impact of the sale of property in Tampa, Florida operating income was $4.7 million, compared to operating income of $9.6 million for the six months ended June 30, 2020, a decrease of $4.9 million, or 51.0%. This decrease in operating income was primarily due to the decrease in revenue and related under recovery of indirect costs as a result of decreased labor and equipment utilization.
Revenues for our concrete segment for the six months ended June 30, 2021 were $163.1 million compared to $172.7 million for the six months ended June 30, 2021, a decrease of $9.6 million, or 5.5%. This decrease resulted from decreased production volumes due to job delays caused by bad weather.
Operating loss for our concrete segment for the six months ended June 30, 2021 was $3.8 million, compared to $1.1 million for the six months ended June 30, 2020, an increase in operating loss of $2.7 million. This increase in operating loss was primarily due to the aforementioned decreased production volumes due to weather related impacts.
42
Liquidity and Capital Resources
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 and borrowings under our credit facilities.
Changes in working capital are normal within our business given the varying mix in size, scope and timing of delivery of our projects. At June 30, 2021, our working capital was $60.8 million, as compared with $54.8 million at December 31, 2020. As of June 30, 2021, we had unrestricted cash on hand of $2.4 million. Our borrowing capacity at June 30, 2021 was approximately $42.3 million.
We expect to meet our future internal liquidity and working capital needs and maintain or replace our equipment fleet through capital expenditure purchases, leases and major repairs, from funds generated by our operating activities for at least the next 12 months. We believe our cash position is adequate for our general business requirements discussed above and to service our debt.
The following table provides information regarding our cash flows and our capital expenditures for the three and six months ended June 30, 2021 and 2020:
Adjustments to remove non-cash and non-operating items
2,609
9,246
9,504
17,828
Cash flow from net income after adjusting for non-cash and non-operating items
11,274
13,962
22,579
Change in operating assets and liabilities (working capital)
(3,982)
6,347
(2,687)
10,495
Cash flows provided by operating activities
2,157
17,621
Cash flows provided by (used in) investing activities
19,690
(1,719)
Cash flows used in financing activities
(24,079)
(19,081)
Capital expenditures (included in investing activities above)
(3,097)
(2,283)
Operating Activities. During the three months ended June 30, 2021, we generated approximately $2.2 million in cash from our operating activities. The net cash inflow is comprised of $6.2 million of cash inflows from net income, after adjusting for non-cash items and $4.0 million of cash outflows related to changes in net working capital. The changes in net working capital, which are reflected as changes in operating assets and liabilities in our Condensed Consolidated Statements of Cash Flows, were primarily driven by a $6.1 million outflow pursuant to the relative timing and significance of project progression and billings during the period, a $1.4 million decrease in operating lease liabilities during the period and $0.9 million of other outflows, partially offset by a $4.4 million inflow related to an increase in our net position of accounts receivable and accounts payable plus accrued liabilities during the period.
During the six months ended June 30, 2021, we generated approximately $11.3 million in cash from our operating activities. The net cash inflow is comprised of $14.0 million of cash inflows from net income, after adjusting for non-cash items and $2.7 million of cash outflows related to changes in net working capital. The changes in net working capital, which are reflected as changes in operating assets and liabilities in our
43
Condensed Consolidated Statements of Cash Flows, were primarily driven by a $3.9 million outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period, a $2.6 million decrease in operating lease liabilities during the period and $0.6 million of other outflows, partially offset by a $4.4 million inflow pursuant to the relative timing and significance of project progression and billings during the period.
Investing Activities. Capital asset additions and betterments to our fleet were $3.1 million in the three months ended June 30, 2021, as compared with $2.3 million in the three months ended June 30, 2020. Proceeds from the sale of property and equipment were $22.8 in the three months ended June 30, 2021, as compared with $0.4 million in the three months ended June 30, 2020.
Capital asset additions and betterments to our fleet were $4.7 million in the six months ended June 30, 2021, as compared with $5.0 million in the six months ended June 30, 2020. Proceeds from the sale of property and equipment were $24.7 in the six months ended June 30, 2021, as compared with $1.7 million in the six months ended June 30, 2020. The increase in proceeds from the sale of property and equipment for the three and six months ended June 30, 2021 is primarily related to the sale of our property in Tampa, Florida.
Financing Activities.
During the three and six months ended June 30, 2021, we drew down $15.0 million and $20 million from our revolving line of credit and repaid $9 million and $19 million, respectively on our revolving line of credit.
During the three months ended June 30, 2021 we fully extinguished the term loan portion of our Credit Facility, in part using proceeds from the sale of property in Tampa, Florida. The extinguishment of the term loan reduced our exposure to variability in interest rates and eliminated future loan amortization payment commitments. Concurrent with extinguishing the term loan, we canceled the remaining open position on our interest rate swap, resulting in a $1.3 million loss on the mark to market value of the swap at the date of termination. The $1.3 million was paid to the counterparty, cleared from the balance sheet as an interest rate swap liability, removed from Other Comprehensive Income and charged to interest expense during the quarter ended June 30, 2021. Further, the remaining $0.8 million of unamortized deferred debt issuance costs were charged to interest expense related to the early extinguishment of the term loan. There were no penalties incurred related to early payment of the term loan.
Sources of Capital
As of June 30, 2021, our available sources of capital consist of the $50 million line of credit pursuant to our Credit Facility.
See Note 11 in the Notes to the Financial Statements (of this Form 10-Q) for further discussion on the Company’s Debt.
44
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 June 30, 2021, the capacity under our current bonding arrangement was at least $500 million, with approximately $135 million of projects being bonded. We believe our strong 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.
Interest rate risk
At June 30, 2021, we had $6.0 million in outstanding borrowings under our credit facility, with a weighted average ending interest rate of 4.50%. Our objectives in managing interest rate risk are to lower our overall borrowing costs and limit interest rate changes on our earnings and cash flows. To achieve this, we closely monitor changes in interest rates, and we utilize cash from operations to reduce our debt position, if warranted.
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. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2021.
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 June 30, 2021 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 2020 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 June 30, 2021.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
ExhibitNumber
Description
3.1
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)).
3.2
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)).
10.1
Fourth Amendment to Employment Agreement by and between Orion Group Holdings, Inc. and Mark R. Stauffer, effective June 30, 2021. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 2, 2021 (File No. 001-33891)).
10.2
Fourth Amendment to Employment Agreement by and between Orion Group Holdings, Inc. and Peter R. Buchler, effective June 30, 2021. (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 2, 2021 (File No. 001-33891)).
*31 .1
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.
*31 .2
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.
*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
47
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.
July 30, 2021
By:
/s/ Mark R. Stauffer
Mark R. StaufferPresident and Chief Executive Officer
/s/ Robert L. Tabb
Robert L. TabbExecutive Vice President and Chief Financial Officer