# Orion Group Holdings Inc (ORN) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Orion Group Holdings Inc's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1402829/000140282923000010/orn-20221231x10k.htm
Accession: 0001402829-23-000010
Filing date: 2023-03-16
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/ORN/
All MD&A years: /company/ORN/mda/
Previous year: /company/ORN/mda/fy2021/ (FY 2021)
Next year: /company/ORN/mda/fy2023/ (FY 2023)

Item  7.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes beginning on page F-1 of this Annual Report on Form 10-K. Certain statements made in our discussion may be forward-looking. Forward-looking statements involve risks and uncertainties and a number of other factors that could cause actual results or outcomes to differ materially from our expectations. See “Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K for additional discussion of some of these risks and uncertainties. Unless the context requires otherwise, when we refer to “we”, “us” and “our”, we are describing Orion Group Holdings, Inc. and its consolidated subsidiaries.

Overview

Orion Group Holdings, Inc., its subsidiaries and affiliates (hereafter collectively referred to as the “Company”), provide a broad range of specialty construction services in the infrastructure, industrial and building sectors throughout the continental United States, Alaska, and the Caribbean Basin. The Company’s marine segment services the infrastructure sector through marine transportation facility construction, marine pipeline construction, marine environmental structures, dredging of waterways, channels and ports, environmental dredging, design, and specialty services. Its concrete segment services the building sector by providing turnkey concrete construction services including place and finish, site preparation, layout, forming, and rebar placement for large commercial structural and other associated business areas. The Company is headquartered in Houston, Texas with offices throughout its operating areas.

Our contracts are obtained primarily through competitive bidding in response to “requests for proposals” by federal, state and local agencies and through negotiation and competitive bidding with private parties and general contractors. Our bidding activity and strategies are affected by factors such as our backlog, current utilization of equipment and other resources, job location, our ability to obtain necessary surety bonds and competitive considerations. The timing and location of awarded contracts may result in unpredictable fluctuations in the results of our operations.

Most of our revenue is derived from fixed-price contracts. We generally record revenue on construction contracts over time, measured by the percentage of actual contract costs incurred to date to total estimated costs for each contract. There are a number of factors that can create variability in contract performance and therefore impact the results of our operations. The most significant of these include the following:

[[GREPCENT_TABLE]]
[["","\u25cf","completeness and accuracy of the original bid;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","increases in commodity prices such as concrete, steel and fuel;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","customer delays, work stoppages, and other costs due to weather and environmental restrictions;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","availability and skill level of workers; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","a change in availability and proximity of equipment and materials."]]
[[/GREPCENT_TABLE]]

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.

Our independent registered public accounting firm has included an explanatory paragraph describing the uncertainty about our ability to continue as a going concern in its report contained in this Annual Report.  See “Liquidity and Capital Resources” below for more information.

2022 Recap and 2023 Outlook

In 2022, we recorded revenues of $748.3 million, of which $339.2 million was attributable to our marine segment and the remaining $409.1 million to our concrete segment. In addition, we ended 2022 with a consolidated backlog of $448.8

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million. Our revenues in 2022 increased by 24.4% as compared with 2021 and we recorded a net loss of $12.6 million, as compared with net loss of $14.6 million in the prior year.

Looking toward 2023, the Company continues to focus on developing opportunities across the infrastructure, industrial, and building sectors through organic growth.

Although to date the Company hasn’t experienced materially negative impacts from COVID-19, we have had and may continue to see some disruption to our operations due to variants of the COVID-19 virus that caused temporary increases in absenteeism rates among our workforce and other impacts to supply chains and labor markets.

Marine Segment

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.  Cruise line capital expenditures have yet to recover significantly from the pullback due to COVID-19, however we anticipate that, with continued recovery of end customer demand, we will see renewed interest in capital improvements from these customers. Opportunities from local port authorities and private clients are expected to expand over the long-term due to the need to accommodate larger ships and deeper drafts because of the expanded Panama Canal. Though the pace of bidding opportunities from the U.S. Army Corps of Engineers slowed towards the end of 2022, significant approved funding for USACE projects leads us to believe that we will see this translate into an increase in bid opportunities as we progress through 2023.  Additionally, bid opportunities related to coastal restoration funded through the Resource and Ecosystems Sustainability, opportunities under the Tourist Opportunities and Revived Economies of the Gulf Coast States Act (the “RESTORE Act”) may arise in 2023. The Coastal Protection and Restoration Authority (“CPRA”) has a $1.35 billion budget for fiscal 2023, and our capabilities are well-suited to win a portion of this spending.  In addition to these, the $1.2 trillion Infrastructure Investment and Jobs Act contains billions of dollars allocated to ports and water infrastructure, bridges, and causeways.  We believe our current equipment fleet will allow us to 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:

​

[[GREPCENT_TABLE]]
[["","\u25cf","Continuing need to repair and improve degrading U.S. marine infrastructure;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Long-term demand from downstream energy-related companies will be driven by larger capital projects, as well as maintenance call-out work;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Expected increases in cargo volume and future demands from larger ships transiting the Panama Canal will require ports along the Gulf Coast and Atlantic Seaboard to expand port infrastructure as well as perform additional dredging services;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Possible work opportunities generated by the Water Resources Reform and Development Act (the \u201cWRRDA Act\u201d) authorizing expenditures for the conservation and development of the nation\u2019s waterways as well as addressing funding deficiencies within the Harbor Maintenance Trust Fund;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Renewed focus on coastal rehabilitation along the Gulf Coast, particularly through the use of RESTORE Act funds based on fines collected related to the 2010 Gulf of Mexico oil spill;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Funding for highways and transportation under successor Acts to the Fixing America\u2019s Surface Transportation Act;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Nearly $7 billion of federal funding provided by the US Army Core of Engineers (\u201cUSACE\u201d) in connection with disaster recovery in Texas; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Opportunities related to the Infrastructure Investment and Jobs Act (IIJA)."]]
[[/GREPCENT_TABLE]]

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Concrete Segment

Demand for our concrete segment’s services continues, although timing of certain new project releases could be delayed as a result of inflation, labor concerns, supply chain delays and macroeconomic impacts. We currently see long-term demand for our concrete construction services in the Texas building sector as Texas’ 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 the federal infrastructure bill.

In the long-term, we see positive trends in demands for our services in our end markets, including: 

●Population growth in the state of Texas driven by corporate relocations; 

​

●Continued investment in warehouse/distribution space in our core markets; 

​

[[GREPCENT_TABLE]]
[["","\u25cf","Nearly $7 billion of federal funding provided by the USACE in connection with disaster recovery in Texas; and,"]]
[[/GREPCENT_TABLE]]

●Potential opportunities related to the Infrastructure Investment and Jobs Act (IIJA).

​

Consolidated Results of Operations

Backlog Information

Our contract backlog represents our estimate of the revenues we expect to realize under the portion of contracts remaining to be performed. Given the typical duration of our contracts, which is generally less than a year, our backlog at any point in time usually represents only a portion of the revenue that we expect to realize during a twelve-month period. We have not been adversely affected by contract cancellations or modifications in the past, however we may be in the future, especially in economically uncertain periods.

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31, 2022","","September 30, 2022","","June 30, 2022","","March 31, 2022","","December 31, 2021"],["Marine segment","\u200b","$","216.7","\u200b","$","280.2","\u200b","$","281.0","\u200b","$","317.4","\u200b","$","376.9"],["Concrete segment","\u200b","","232.1","\u200b","","268.4","\u200b","","322.2","\u200b","","286.7","\u200b","","213.1"],["Consolidated","\u200b","$","448.8","\u200b","$","548.6","\u200b","$","603.2","\u200b","$","604.1","\u200b","$","590.0"]]
[[/GREPCENT_TABLE]]

​

The sequential decline in backlog was due to a lower book-to-bill ratio in the concrete segment which was driven by more disciplined bidding practices and an effort to reduce exposure to under-performing projects. We are optimistic in our end-markets and in the opportunities that are emerging across our various marketplaces as evidenced by the $2.4 billion of quoted bids outstanding at quarter end, of which over $582 million we are the apparent low bidder on or have been awarded contracts subsequent to the end of the fiscal year ended December 31, 2022.

These estimates are subject to fluctuations based upon the scope of services to be provided, as well as factors affecting the time required to complete the project. Backlog is not necessarily indicative of future results. In addition to our backlog under contract, we also have a substantial number of projects in negotiation or pending award at any given time.  Delays in decisions on pending awards also have a negative impact on the timing and amount by which we are able to increase backlog.

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Income Statement Comparisons

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended December 31,"],["\u200b","","2022","","2021","","2020"],["\u200b","","Amount","","Percent","","Amount","","Percent","","Amount","","Percent"],["\u200b","\u200b","(dollar amounts in thousands)","\u200b"],["Contract revenues","\u200b","$","748,322","","100.0","%","$","601,360","","100.0","%","$","709,942","","100.0","%"],["Cost of contract revenues","\u200b","","697,580","","93.2","%","","560,393","","93.2","%","","625,239","","88.1","%"],["Gross profit","\u200b","","50,742","","6.8","%","","40,967","","6.8","%","","84,703","","11.9","%"],["Selling, general and administrative expenses","\u200b","","62,503","","8.4","%","","60,181","","10.0","%","","65,091","","9.3","%"],["Amortization of intangible assets","\u200b","\u200b","1,239","\u200b","0.2","%","\u200b","1,521","\u200b","0.3","%","\u200b","2,070","\u200b","0.3","%"],["Gain on disposal of assets, net","\u200b","\u200b","(4,970)","\u200b","(0.7)","\u200b","\u200b","(11,418)","\u200b","(2.0)","\u200b","\u200b","(9,044)","\u200b","(1.4)","%"],["Operating (loss) income","\u200b","","(8,030)","","(1.1)","%","","(9,317)","","(1.5)","%","","26,586","","3.7","%"],["Other (expense) income:","\u200b","","","","","\u200b","","","","","\u200b","","","","","\u200b"],["Other income","\u200b","","199","","\u2014","%","","199","","\u2014","%","","347","","\u2014","%"],["Interest income","\u200b","","104","","\u2014","%","","136","","\u2014","%","","183","","\u2014","%"],["Interest expense","\u200b","","(4,456)","","(0.6)","%","","(5,076)","","(0.8)","%","","(4,920)","","(0.6)","%"],["Other expense, net","\u200b","","(4,153)","","(0.6)","%","","(4,741)","","(0.8)","%","","(4,390)","","(0.6)","%"],["(Loss) income before income tax expense","\u200b","","(12,183)","","(1.6)","%","","(14,058)","","(2.3)","%","","22,196","","3.1","%"],["Income tax expense","\u200b","","429","","0.1","%","","502","","0.1","%","","1,976","","0.3","%"],["Net (loss) income","\u200b","$","(12,612)","","(1.7)","%","$","(14,560)","","(2.4)","%","$","20,220","","2.8","%"]]
[[/GREPCENT_TABLE]]

​

Year ended December 31, 2022 compared with year ended December 31, 2021

Contract Revenues. Contract revenues for the year ended December 31, 2022 of $748.3 million increased $146.9 million or 24.4% as compared to $601.4 million in the prior year period. The increase was primarily driven by the start of large jobs awarded in the second half of 2021 in the marine segment, higher volume in the concrete segment, and the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods.

Gross Profit.  Gross profit was $50.7 million for the year ended December 31, 2022, compared to $41.0 million in the prior year period, an increase of $9.7 million or 23.9%. Gross profit in both periods was 6.8% of total contract revenues. The increase in gross profit dollars was primarily driven by the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods and the release of discretionary project bonuses.

​

Selling, General and Administrative Expense. SG&A expenses were $62.5 million for the year ended December 31, 2022, compared to $60.2 million in the prior year period, an increase of $2.3 million or 3.9%. As a percentage of total contract revenues, SG&A expenses decreased from 10.0% to 8.4% primarily due to higher revenues in the current period. The increase in SG&A dollars was driven primarily by severance, consulting fees related to the management transition and property tax true-ups in the current year period, partially offset by a decrease in ERP implementation expense.

Gain on Disposal of Assets, net. During the year ended December 31, 2022 and 2021, we realized $5.0 million and $11.4 million, respectively, of net gains on disposal of assets. Included in the prior year amount is a net gain of $6.7 million related to the sale of property in Tampa, Florida. See Note 6 in this form 10-K 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. Interest expense for the prior year period included $2.1 million related to the extinguishment of our term loan and related interest rate swaps.

​

Income Tax Expense. We recorded tax expense of $0.4 million in the year ended December 31, 2022, compared to tax expense of $0.5 million in the prior year period. Our effective tax rate for the year ended December 31, 2022 was (3.5)%, which differs from the federal statutory rate of 21% primarily due to the tax impact from the valuation allowance for current year activity, state income taxes and the non-deductibility of other permanent items.

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Year ended December 31, 2021 compared with year ended December 31, 2020

Contract Revenues. Contract revenues for the year ended December 31, 2021 of $601.4 million decreased $108.5 million or 15.3% as compared to $709.9 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 as a result of reduced and/or delayed bid opportunities due to the continued impacts from COVID 19 on the industries in which we serve.

Gross Profit.  Gross profit was $41.0 million for the year ended December 31, 2021, compared to $84.7 million in the prior year period, a decrease of $43.7 million or 51.6%. Gross profit in the period was 6.8% of total contract revenues as compared to 11.9% 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. We also incurred decreased project performance in our concrete segment.

​

Selling, General and Administrative Expense. Selling, general and administrative expenses were $60.2 million for the year ended December 31, 2021 compared to $65.1 million in the prior year period, a decrease of $4.9 million or 7.5%. As a percentage of total contract revenues, SG&A expenses increased from 9.3% to 10.0% primarily as a result of the reduced revenue noted above. The decrease in SG&A dollars was driven by a decrease in the current year period related to bonus expense, business development costs pursuant to timing of project pursuits and awards and travel related costs. 

Gain on Disposal of Assets, net. During the year ended December 31, 2021 and 2020, we realized $11.4 million and $9.0 million, respectively, of net gains on disposal of assets. Included in the current year amount is a net gain of $6.7 million related to the sale of property in Tampa, Florida. Included in the prior year amount is a $2.9 million net gain on insurance recoveries.

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 Expense. We recorded tax expense of $0.5 million in the year ended December 31, 2021, compared to tax expense of $2.0 million in the prior year period. Our effective tax rate for the year ended December 31, 2021 was (3.6)%, which differs from the federal statutory rate of 21% primarily due to the valuation allowance related to the current year net loss.

​

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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.

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","Year ended December 31,"],["\u200b","\u200b","\u200b","2022","\u200b","2021","\u200b","2020"],["\u200b","","","Amount","","Percent","","Amount","","Percent","","Amount","","Percent"],["\u200b","\u200b","\u200b","(dollar amounts in thousands)"],["Contract revenues","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Marine segment","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Public sector","\u200b","\u200b","$","237,363","\u200b","70.0","%","$","164,636","\u200b","62.4","%","$","240,353","\u200b","61.9","%"],["Private sector","\u200b","\u200b","\u200b","101,850","\u200b","30.0","%","\u200b","99,279","\u200b","37.6","%","\u200b","147,820","\u200b","38.1","%"],["Marine segment total","\u200b","\u200b","$","339,213","\u200b","100.0","%","$","263,915","\u200b","100.0","%","$","388,173","\u200b","100.0","%"],["Concrete segment","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b"],["Public sector","\u200b","\u200b","$","30,284","\u200b","7.4","%","$","14,945","\u200b","4.4","%","$","41,853","\u200b","13.0","%"],["Private sector","\u200b","\u200b","\u200b","378,825","\u200b","92.6","%","\u200b","322,500","\u200b","95.6","%","\u200b","279,916","\u200b","87.0","%"],["Concrete segment total","\u200b","\u200b","$","409,109","\u200b","100.0","%","$","337,445","\u200b","100.0","%","$","321,769","\u200b","100.0","%"],["Total","\u200b","\u200b","$","748,322","","\u200b","\u200b","$","601,360","","\u200b","\u200b","$","709,942","","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating income (loss)","\u200b","\u200b","","","","","\u200b","","","","","\u200b","","","","","\u200b"],["Marine segment","\u200b","\u200b","$","9,787","","2.9","%","$","5,760","","2.2","%","$","29,815","","7.7","%"],["Concrete segment","\u200b","\u200b","","(17,817)","","(4.4)","%","","(15,077)","","(4.5)","%","","(3,229)","","(1.0)","%"],["Total","\u200b","\u200b","$","(8,030)","\u200b","\u200b","\u200b","$","(9,317)","\u200b","\u200b","\u200b","$","26,586","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

Year ended December 31, 2022 compared with year ended December 31, 2021

Marine Segment

Revenues for our marine segment for the year ended December 31, 2022 were $339.2 million compared to $263.9 million for the year ended December 31, 2021, an increase of $75.3 million, or 28.5%. The increase was primarily driven by the start of large jobs awarded in the second half of 2021 and the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods.

Operating income for our marine segment for the year ended December 31, 2022 was $9.8 million, compared to operating income of $5.8 million for the year ended December 31, 2021, an increase of $4.0 million. Excluding the impact of the sale of property in Tampa, Florida in the prior year, operating income was $9.8 million for the year ended December 31, 2022, compared to an operating loss of $0.6 million for the year ended December 31, 2021, an increase of $10.5 million. This increase in operating income was primarily due to the increase in revenue noted above, the impact from claims and unapproved change orders recognized related to work primarily incurred in previous periods, the gain on the disposal of excess equipment and the release of discretionary project bonuses, partially offset by the increase in SG&A expense noted above.

​

Concrete Segment

Revenues for our concrete segment for the year ended December 31, 2022 were $409.1 million compared to $337.5 million for the year ended December 31, 2021, an increase of $71.6 million, or 21.2%. This increase was primarily driven by increased cubic yard production in light commercial projects.

Operating loss for our concrete segment for the year ended December 31, 2022 was $17.8 million, compared to $15.1 million for the year ended December 31, 2021, an increase in operating loss of $2.7 million. This increase in operating loss was primarily due to the decline in project profits due to write-downs on several projects in addition to unabsorbed indirect expenses related to additional project management labor expense, partially offset by the release of discretionary project bonuses.

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Year ended December 31, 2021 compared with year ended December 31, 2020

Marine Segment

Revenues for our marine segment for the year ended December 31, 2021 were $263.9 million compared to $388.2 million for the year ended December 31, 2020, a decrease of $124.3 million, or 32.0%. The decrease was primarily attributable to a reduction in project activity compared to the prior year period.

Operating income for our marine segment for the year ended December 31, 2021 was $5.8 million, compared to operating income of $29.8 million for the year ended December 31, 2020, a decrease of $24.0 million. Excluding the impact of the sale of property in Tampa, Florida in the current year and the net gain on insurance recoveries and the recovery on a disputed receivable in the prior year operating loss was $0.6 million for the year ended December 31, 2021, compared to operating income of $26.1 million for the year ended December 31, 2020, a decrease of $26.7 million. This decrease in operating income was primarily due to the decrease in revenue noted above and related under recovery of indirect costs as a result of decreased labor and equipment utilization.

Concrete Segment

Revenues for our concrete segment for the year ended December 31, 2021 were $337.5 million compared to $321.8 million for the year ended December 31, 2020, an increase of $15.7 million, or 4.9%. This increase resulted from increased production volumes in the current year period.

Operating loss for our concrete segment for the year ended December 31, 2021 was $15.1 million, compared to $3.2 million for the year ended December 31, 2020, an increase in operating loss of $11.9 million. This increase in operating loss was primarily due to decreased project performance and lower margins on several projects during the 2021 period.

Critical Accounting Estimates

The consolidated financial statements contained in this report were prepared in accordance with U.S. GAAP. The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect both the Company’s carrying values of its assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Although our significant accounting policies are described in more detail in Note 2 of the Notes to Consolidated Financial Statements; we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:

[[GREPCENT_TABLE]]
[["","\u25cf","Revenue Recognition from Construction Contracts;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Long Lived Assets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Income Taxes;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Insurance Coverage, Litigation, Claims and Contingencies."]]
[[/GREPCENT_TABLE]]

​

Revenue Recognition

Our revenue is derived from contracts to provide marine construction, dredging, turnkey concrete services, and other specialty services. Our projects are typically short in duration and usually span a period of less than one year. We determine the appropriate accounting treatment for each contract before work begins and generally record revenue on contracts 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. Our contracts and related change orders typically represent a single performance obligation because individual goods and services are not separately identifiable and we provide a significantly integrated service. Revenue is recognized over time because control is continuously transferred to the customer. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our 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. These estimates are

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subject to uncertainties and require judgment. Estimates of 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 incurring costs to mobilize personnel and equipment prior to satisfying a performance obligation are capitalized and amortized over the contract performance period.

These estimates consider historical performance, the complexity of the work to be performed, the estimated time to complete the project, and other economic factors such as inflation and market rates. 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.

Long-Lived Assets

Our long-lived assets consist primarily of equipment used in our operations. Fixed assets are carried at cost and are depreciated over their estimated useful lives, ranging from one to 30 years, using the straight-line method for financial reporting purposes and accelerated methods for tax reporting purposes. The carrying value of our long-lived assets is evaluated periodically based on utilization of the asset and physical condition of the asset, as well as the useful life of the asset to determine if adjustment to the depreciation period or the carrying value is warranted. If events and circumstances such as poor utilization or deteriorated physical condition indicate that the asset(s) should be reviewed for possible impairment, we use projections to assess whether future cash flows, including disposition, on a non-discounted basis related to the tested assets are likely to exceed the recorded carrying amount of those assets to determine if an impairment exists. If we identify a potential impairment, we will estimate the fair value of the asset through known market transactions of similar equipment and other valuation techniques, which could include the use of similar projections on a discounted cash flow basis. We will report a loss to the extent that the carrying value of the impaired assets exceeds their fair values.

Income Taxes

We determine our 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. We must make significant assumptions, judgments and estimates to determine our current provision for income taxes, our 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 our 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 we do not expect to realize. The factors used to assess the likelihood of realization include our forecast of future taxable income exclusive of reversing temporary differences and carryforwards, future reversals of existing taxable temporary differences and available tax planning strategies that could be implemented to realize the net deferred tax assets.

We consider both positive and negative evidence when evaluating the need for a valuation allowance on our deferred tax assets in accordance with ASC 740. Available evidence includes historical financial information supplemented by currently available information about future years. Generally, historical financial information is more objectively verifiable than projections of future income and is therefore given more weight in our assessment.  We consider cumulative losses in the most recent twelve quarters to be significant negative evidence that is difficult to overcome in considering whether a valuation allowance is required. Conversely, we consider a cumulative income position over the most resent twelve quarters, to be significant positive evidence that a valuation allowance may not be required.

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 our financial position and results of operations. We compute 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

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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.

We account for uncertain tax positions in accordance with the provisions of the FASB’s ASC 740-10, which prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, on our consolidated tax return. We evaluate and record any uncertain tax positions based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the tax jurisdictions in which we operate.

Insurance Coverage, Litigation, Claims and Contingencies

We maintain insurance coverage for our 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 our 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. This excess loss coverage responds to most of its liability 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. This excess loss coverage responds to most of its liability policies when a primary limit of $1 million has been exhausted.

Separately, the Company’s marine segment employee health care is paid for by general assets of the Company and currently administered by a third party. The administrator has purchased appropriate stop-loss coverage. Losses on these policies up to the deductible amounts are accrued based upon known claims incurred and an estimate of claims incurred but not reported. The accruals are derived from known facts, historical trends and industry averages to determine the best estimate of the ultimate expected loss.  Actual claims may vary from estimates. Any adjustments to such reserves are included in the 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.

Liquidity and Capital Resources

Changes in working capital are normal within our business given the varying mix in size, scope and timing of delivery of our projects. At December 31, 2022, our working capital was $31.1 million, as compared with $36.2 million at December 31, 2021. As of December 31, 2022, we had unrestricted cash on hand of $3.8 million. Our borrowing capacity under our revolving credit facility at December 31, 2022 was approximately $6.0 million.

Our primary liquidity needs are to finance our working capital, fund capital expenditures, and pursue strategic acquisitions. Historically, our source of liquidity has been cash provided by our operating activities, sale of underutilized assets, and borrowings under our credit facilities. The assessment of the liquidity and going concern requires us to make estimates of future activity and judgments about whether we are compliant with financial covenant calculations under our debt and other agreements and have adequate liquidity to operate. Significant assumptions used in our forecasted model of liquidity include forecasted sales, costs, and capital expenditures; expected timing and proceeds of planned real estate transactions.

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Going Concern

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As described in Note 11 of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K, we had $35.0 million of outstanding indebtedness under our Credit Facility as of December 31, 2022 which matures on July 31, 2023. As of the date of these financial statements, our existing cash and cash equivalents are not sufficient to satisfy our operating cash needs for at least one year after the issuance of these financial statements.

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To alleviate these conditions, we are engaged in a syndication process to refinance the outstanding debt. Based on the advanced nature of our discussions, the completion of substantial due diligence by potential lenders, agreement among the parties on key terms of a new credit facility, and the expected timeline for documentation and execution of a new credit agreement, Management believes it will successfully complete a refinancing transaction prior to the maturity of the current credit facility. Additionally, we are exploring sales of underutilized assets as a source of liquidity.

Our ability to continue as a going concern is dependent on our ability to successfully refinance the credit facility, sale of underutilized assets and continue operations in forthcoming reporting periods. As our refinancing activities are ongoing, there can be no assurances that we will be able to secure financing on terms that are acceptable to us or at all.

These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. While management has developed and is in process to implement plans that management believes could alleviate in the future the substantial doubt that was raised, management concluded at the date of the issuance of the financial statements that substantial doubt exists as those plans are not within the control of management. Our consolidated financial statements do not include adjustments, if any, that may arise from the outcome of this uncertainty.

There is an explanatory paragraph included in the report of our independent registered public accounting firm describing the uncertainty about our ability to continue as a going concern, which is considered an event of noncompliance under our Credit Facility. Management has obtained a consent with respect to the delivery of annual financial statements with an audit opinion unqualified as to going concern from the Credit Facility lenders, and we are compliant with the financial covenants of the credit agreement.

Please see “Risk Factors – Risk Factors Relating to Our Indebtedness and Financing Plans”.

The following table provides information regarding our cash flows and our capital expenditures for the years ending December 31, 2022, 2021 and 2020:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","2022","\u200b","2021","\u200b","2020"],["Net (loss) income","","$","(12,612)","","$","(14,560)","","$","20,220"],["Adjustments to remove non-cash and non-operating items","\u200b","\u200b","27,413","\u200b","\u200b","22,726","\u200b","\u200b","26,338"],["Cash flow from net income after adjusting for non-cash and non-operating items","\u200b","\u200b","14,801","\u200b","\u200b","8,166","\u200b","\u200b","46,558"],["Change in operating assets and liabilities (working capital)","\u200b","\u200b","(5,236)","\u200b","\u200b","(8,097)","\u200b","\u200b","(526)"],["Cash flows provided by operating activities","\u200b","$","9,565","\u200b","$","69","\u200b","$","46,032"],["Cash flows (used in) provided by investing activities","\u200b","$","(9,704)","\u200b","$","10,629","\u200b","$","(3,129)"],["Cash flows(used in) provided by financing activities","\u200b","$","(8,370)","\u200b","$","6","\u200b","$","(42,400)"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Capital expenditures (included in investing activities above)","\u200b","$","(14,584)","\u200b","$","(16,975)","\u200b","$","(14,694)"]]
[[/GREPCENT_TABLE]]

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Operating Activities. During 2022, we generated approximately $9.6 million in cash from our operating activities. The net cash inflow is comprised of $14.8 million of cash inflows from net income, after adjusting for non-cash items and $5.2 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 Consolidated Statements of Cash Flows, were primarily driven by a $4.7 million decrease in operating lease liabilities during the period and a $4.7 million outflow pursuant to the relative timing and significance of project progression and billings during the period, partially offset by a $4.1 million inflow related to an increase in our net position of accounts receivable and accounts payable plus accrued  liabilities during the period and $0.1 million of other cash inflows.

During 2021, we generated approximately $0.1 million in cash from our operating activities. The net cash inflow is comprised of $8.2 million of cash inflows from net income, after adjusting for non-cash items and $8.1 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 Consolidated Statements of Cash Flows, were primarily driven by a $2.4 million outflow pursuant to the relative timing and significance of project progression and billings during the period, a  $1.3

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million outflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued  liabilities during the period and a $4.9 million decrease in operating lease liabilities during the period, partially offset by $0.5 million of other cash inflows.

During 2020, we generated approximately $46.0 million in cash from our operating activities. The net cash inflow is comprised of $46.5 million of cash inflows from net income, after adjusting for non-cash items, partially offset by $0.5 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 Consolidated Statements of Cash Flows, were primarily driven by a $6.5 million outflow pursuant to the relative timing and significance of project progression and billings during the period, a $5.4 million decrease in operating lease liabilities during the period and $1.3 million of other outflows, partially offset by a $12.7 million inflow related to a decrease in our net position of accounts receivable and accounts payable plus accrued liabilities during the period.

Investing Activities. Capital asset additions and betterments to our fleet were $14.6 million in 2022, as compared with $17.0 million and $14.7 million in 2021 and 2020, respectively. Proceeds from the sale of property and equipment were $4.9 million in 2022, as compared with $27.1 million and $5.9 million in in 2021 and 2020, respectively. The increase in proceeds from the sale of property and equipment for the year ended December 31, 2021 is primarily related to the sale of our property in Tampa, Florida.

Financing Activities.

During the year ended December 31, 2022, we drew down $24.0 million from our revolving line of credit. During the year ended December 31, 2022, we repaid $28.0 million on our revolving line of credit, had payments of $3.0 million on finance lease liabilities and incurred $0.7 million of loan costs related to the Ninth Amendment of the Credit Facility.

During the year ended December 31, 2021, we drew down $53.0 million from our revolving line of credit. During the year ended December 31, 2021, we repaid $19.0 million on our revolving line of credit.

During the year ended December 31, 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 year ended December 31, 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.

During 2020, we drew down $10.0 million from our revolving line of credit. Additionally, we repaid $41.0 million on our revolving line of credit, as well as made the regularly scheduled debt payment on the term loan of $3.8 million and an additional principal paydown of $3.4 million with proceeds from the sale of equipment.

Sources of Capital

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Financial covenants

Restrictive financial covenants under the Credit Facility include:

[[GREPCENT_TABLE]]
[["","\u2022","Consolidated Leverage Ratio"]]
[[/GREPCENT_TABLE]]

- Fiscal Quarter Ending December 31, 2022 and each Fiscal Quarter thereafter, maximum of 3.00 to 1.00

[[GREPCENT_TABLE]]
[["","\u2022","Consolidated Fixed Charge Coverage Ratio"]]
[[/GREPCENT_TABLE]]

- Fiscal Quarter Ending December 31, 2022 and each Fiscal Quarter thereafter, minimum of 1.25 to 1.00.

​

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.

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The Company was in compliance with all financial covenants as of December 31, 2022, with the reported consolidated leverage ratio of 2.38 to 1.00 and the reported consolidated fixed charge coverage ratio of 1.76 to 1.00.

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See Note 11 of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K for further discussion on the Company’s Debt.

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 December 31, 2022, the capacity under our current bonding arrangement was at least $750 million, with approximately $175 million of projects being bonded. We are confident that our balance sheet and working capital position are sufficient to allow us to continue to access bonding capacity necessary to pursue and deliver projects.

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.

Off Balance Sheet Arrangements

Currently our only off balance sheet arrangements are those discussed above under “Bonding Capacity” and those which arise in the normal course of business. These arrangements are not reasonably likely to have an effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. See Note 17 of Notes to Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

See Note 2 of the Notes to the Financial Statements (Part IV, Item 15 of this Form  10-K) for further discussion.