Orion Group Holdings Inc (ORN) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 and affiliates.
Overview
Orion Group Holdings, Inc. and subsidiaries (hereafter collectively referred to as the “Company”), is a leading specialty construction company serving the infrastructure, industrial, and building sectors, providing services both on and off the water in the continental United States, Alaska, Hawaii, Canada and the Caribbean Basin through our marine segment and our concrete segment. Our marine segment provides construction and dredging services including marine transportation facility construction, marine pipeline construction, marine environmental structures construction, dredging of waterways, channels and ports, environmental dredging, design, and specialty services related to marine construction, fabrication, and dredging. Our concrete segment provides turnkey concrete construction services including concrete surface place and finish, site preparation, layout, forming, and rebar placement for large commercial, structural and other associated business areas. We are headquartered in Houston, Texas with regional offices throughout our operating areas.
Our contracts are obtained primarily through competitive bidding in response to “requests for proposals” by federal, state and local agencies and through negotiation and competitive bidding with private parties and general contractors. Our bidding activity and strategies are affected by factors such as our backlog, current utilization of equipment and other resources, job location, our ability to obtain necessary surety bonds and competitive considerations. The timing and location of awarded contracts may result in unpredictable fluctuations in the results of our operations.
Most of our revenue is derived from fixed-price contracts. We record revenue on construction contracts over time, measured by the percentage of actual contract costs incurred to date to total estimated costs for each contract. There are a number of factors that can create variability in contract performance and therefore impact the results of our operations.
The most significant of these include the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | completeness and accuracy of the original bid; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | increases in commodity prices such as concrete, steel and fuel; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | customer delays, work stoppages, and other costs due to weather and environmental restrictions; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | subcontractor performance; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | unforeseen site conditions; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | availability and skill level of workers; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a change in availability and proximity of equipment and materials. |
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All of these factors can have a negative impact on our contract performance, which can adversely affect the timing of revenue recognition and ultimate contract profitability. We plan our operations and bidding activity with these factors in mind and they generally have not had a material adverse impact on the results of our operations in the past.
2024 Recap and 2025 Outlook
In 2024, we recorded revenues of $796.4 million, an increase of 11.9% as compared with 2023. $521.3 million of total revenue was attributable to our marine segment and the remaining $275.1 million to our concrete segment. Our net loss was $1.6 million, as compared with net loss of $17.9 million in the prior year. In addition, we ended 2024 with a consolidated backlog of $729.1 million.
Looking to 2025, we will continue to execute our strategic plan focused on developing opportunities across the infrastructure, industrial, and building sectors.
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. 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. In addition, 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:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Continuing need to repair and improve degrading U.S. marine infrastructure; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Navy infrastructure investments; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Long-term demand from downstream energy-related companies will be driven by larger capital projects, as well as maintenance call-out work; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 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; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Possible work opportunities generated by the Water Resources Reform and Development Act (the “WRRDA Act”) authorizing expenditures for the conservation and development of the nation’s waterways as well as addressing funding deficiencies within the Harbor Maintenance Trust Fund; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 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; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Funding for highways and transportation under successor Acts to the Fixing America’s Surface Transportation Act; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Nearly $7 billion of federal funding provided by the US Army Core of Engineers (“USACE”) in connection with disaster recovery in Texas; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Opportunities related to the Infrastructure Investment and Jobs Act (“IIJA”). |
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, interest rates, 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’s major metropolitan areas,
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and expanding suburbs continue to be leading locations 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;
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Continued investment in warehouse/distribution and data center space in our core markets; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Geographic expansion outside of Texas; and |
●Potential opportunities related to the 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 periods of economic uncertainty.
Backlog as of the periods ended below are as follows (in millions):
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2024 | September 30, 2024 | June 30, 2024 | March 31, 2024 | December 31, 2023 | |||||||||
| Marine segment | | $ | 582.8 | | $ | 537.0 | | $ | 567.1 | | $ | 569.9 | | $ | 602.5 |
| Concrete segment | | 146.3 | | 153.5 | | 191.3 | | 186.7 | | 159.7 | |||||
| Consolidated | | $ | 729.1 | | $ | 690.5 | | $ | 758.4 | | $ | 756.6 | | $ | 762.2 |
We are optimistic in our end-markets and in the opportunities that are emerging across our various marketplaces as evidenced by the $1.2 billion of quoted bids outstanding at quarter end. Of this amount, approximately $248 million was either awarded to us and contracted, or awarded and pending contract, subsequent to December 31, 2024.
These estimates are subject to fluctuations based upon the scope of services to be provided, as well as factors affecting the time required to complete the project. Backlog is not necessarily indicative of future results. In addition to our backlog under contract, we also have a substantial number of projects in negotiation or pending award at any given time. Delays in decisions on pending awards also have a negative impact on the timing and amount by which we are able to increase backlog.
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Income Statement Comparisons
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Year ended December 31, | ||||||||||||||
| | 2024 | 2023 | 2022 | |||||||||||||
| | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||
| | | (dollar amounts in thousands) | | |||||||||||||
| Contract revenues | | $ | 796,394 | 100.0 | % | $ | 711,778 | 100.0 | % | $ | 748,322 | 100.0 | % | |||
| Cost of contract revenues | | 705,234 | 88.6 | % | 650,115 | 91.3 | % | 697,580 | 93.2 | % | ||||||
| Gross profit | | 91,160 | 11.4 | % | 61,663 | 8.7 | % | 50,742 | 6.8 | % | ||||||
| Selling, general and administrative expenses | | 82,537 | 10.4 | % | 69,431 | 9.8 | % | 62,503 | 8.4 | % | ||||||
| Amortization of intangible assets | | | — | | — | % | | 427 | | 0.1 | % | | 1,239 | | 0.2 | % |
| Gain on disposal of assets, net | | | (2,898) | | (0.4) | % | | (8,455) | | (1.2) | % | | (4,970) | | (0.7) | % |
| Intangible asset impairment loss | | | — | | — | % | | 6,890 | | 1.0 | % | | — | | — | % |
| Operating income (loss) | | 11,521 | 1.4 | % | (6,630) | (1.0) | % | (8,030) | (1.1) | % | ||||||
| Other (expense) income: | | | | | ||||||||||||
| Other income | | 357 | — | % | 641 | 0.1 | % | 199 | — | % | ||||||
| Interest income | | 207 | — | % | 103 | — | % | 104 | — | % | ||||||
| Interest expense | | (13,381) | (1.6) | % | (11,659) | (1.6) | % | (4,456) | (0.6) | % | ||||||
| Other expense, net | | (12,817) | (1.6) | % | (10,915) | (1.5) | % | (4,153) | (0.6) | % | ||||||
| Loss before income tax expense | | (1,296) | (0.2) | % | (17,545) | (2.5) | % | (12,183) | (1.6) | % | ||||||
| Income tax expense | | 348 | — | % | 330 | — | % | 429 | 0.1 | % | ||||||
| Net loss | | $ | (1,644) | (0.2) | % | $ | (17,875) | (2.5) | % | $ | (12,612) | (1.7) | % |
Year ended December 31, 2024 compared with year ended December 31, 2023
Contract Revenues. Contract revenues for the year ended December 31, 2024 of $796.4 million increased $84.6 million or 11.9% as compared to $711.8 million in the prior year period. The increase was primarily due to an increase in marine segment revenue related to the Pearl Harbor drydock project, partially offset by lower concrete segment revenue due to disciplined bidding standards to win quality work at attractive margins.
Gross Profit. Gross profit was $91.2 million for the year ended December 31, 2024 compared to $61.7 million in the prior year period, an increase of $29.5 million or 47.8%. Gross profit in the year ended December 31, 2024 was 11.4% of total contract revenues as compared to 8.7% in the prior year period. The increase in gross profit dollars and margin was primarily driven by improved pricing of projects in both segments stemming from higher quality projects and improved execution.
Selling, General and Administrative Expense. Selling, General and Administrative (“SG&A”) expenses were $82.5 million for the year ended December 31, 2024 compared to $69.4 million in the prior year period, an increase of $13.1 million or 18.9%. As a percentage of total contract revenues, SG&A expenses increased from 9.8% to 10.4%. The increase in SG&A dollars and percentage reflect an increase in IT, compensation, business development spending, and higher legal costs related to pursuing project-related claims.
Gain on Disposal of Assets, net. During the year ended December 31, 2024 and 2023 we realized $2.9 million and $8.5 million, respectively, of net gains on disposal of assets. The year ended December 31, 2023, included a gain of $5.2 million related to the sale-leaseback of our Port Lavaca South Yard property in Texas.
Other Expense, net. Other expense primarily reflects interest on our borrowings of $13.4 million and $11.7 million in the years ended December 31, 2024 and 2023, respectively, partially offset by interest income and non-operating gains or losses.
Income Tax Expense. We recorded tax expense of $0.3 million in both the year ended December 31, 2024 and in the prior year period. Our effective tax rate for the year ended December 31, 2024 was (26.9)%, which differs from the federal statutory rate of 21% primarily due to the tax impact from the valuation allowance for current year activity, the statue expiration of an uncertain tax position, state income taxes and the non-deductibility of other permanent items.
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Year ended December 31, 2023 compared with year ended December 31, 2022
Contract Revenues. Contract revenues for the year ended December 31, 2023 of $711.8 million decreased $36.5 million or 4.9% as compared to $748.3 million in the prior year period. The decrease was primarily due to weather and customer delays in both businesses in the first quarter of 2023 and a reduction of concrete segment revenue in central Texas, partially offset by an increase in marine revenue primarily related to the Pearl Harbor Project.
Gross Profit. Gross profit was $61.7 million for the year ended December 31, 2023, compared to $50.7 million in the prior year period, an increase of $11.0 million or 21.5%. Gross profit was 8.7% of total contract revenues in the year ended December 31, 2023, compared to 6.8% in the prior year period. The increase in gross profit dollars and margin was primarily due to actions to manage costs during project delays, including reallocating equipment, reducing the size of the fleet, headcount reductions, and realizing margin improvements in the concrete business that reflected our margin improvement initiatives.
Selling, General and Administrative Expenses. SG&A expenses were $69.4 million for the year ended December 31, 2023, compared to $62.5 million in the prior year period, an increase of $6.9 million, or 11.1%. As a percentage of total contract revenues, SG&A expenses increased from 8.4% to 9.8% for the year ended December 31, 2023 and December 31, 2022, respectively. The increase in SG&A dollars and percentage was primarily due to the decrease in concrete segment revenue, an increase in bonus expense as a result of our strong performance relative to the budget and the addition of strategic new leadership positions in the year ended December 31, 2023, partially offset by lower consulting expense related to the completion of the management transition.
Gain on Disposal of Assets, net. During the year ended December 31, 2023 and 2022, we realized $8.5 million and $5.0 million, respectively, of net gains on disposal of assets. Included in the current year amount is a net gain of $5.2 million related to the sale-leaseback of our Port Lavaca South Yard property in Texas. See Note 11 of the Notes to the Financial Statements in this Form 10-K for a further description of the sale of property.
Intangible Asset Impairment Loss. During the year ended December 31, 2023, we recorded a $6.9 million intangible asset impairment loss due to our strategic decision to rebrand the concrete segment under the Orion banner. The segment had previously operated under its prior name, TAS Concrete Construction, since its acquisition in 2015. The rebranding reflects a strategic initiative to integrate our different service offerings under one banner to leverage Orion’s brand reputation and to deliver greater value and seamless execution for our customers. See Note 8 of the Notes to the Financial Statements in this Form 10-K for a further discussion of the intangible asset impairment loss.
Other Expense, net. Other expense, net primarily reflects interest on our borrowings, partially offset by interest income and non-operating gains or losses. Interest expense for the year ended December 31, 2023 of $11.7 million increased $7.2 million, as compared to $4.5 million in the prior year period. This increase was primarily due to an increase in the weighted average interest rate from 6.23% in the prior year period to 12.00% in the current year period as a result of the terms of our new Credit Agreement with White Oak and an increase in the weighted average debt outstanding in the current year period as compared to the prior year period.
Income Tax Expense. We recorded tax expense of $0.3 million in the year ended December 31, 2023, compared to tax expense of $0.4 million in the prior year period. Our effective tax rate for the year ended December 31, 2023 was (1.9)%, 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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Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment, segment revenues as a percentage of consolidated revenues and segment operating income (loss) as a percentage of segment revenues.
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Year ended December 31, | ||||||||||||||
| | | | 2024 | | 2023 | | 2022 | ||||||||||
| | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||
| | | | (dollar amounts in thousands) | ||||||||||||||
| Contract revenues | | | | | | | | | | | | | | | | | |
| Marine segment | | | | | | | | | | | | | | | | | |
| Public sector | | | $ | 403,428 | | 77.4 | % | $ | 292,088 | | 73.8 | % | $ | 237,363 | | 70.0 | % |
| Private sector | | | | 117,822 | | 22.6 | % | | 103,829 | | 26.2 | % | | 101,850 | | 30.0 | % |
| Marine segment total | | | $ | 521,250 | | 100.0 | % | $ | 395,917 | | 100.0 | % | $ | 339,213 | | 100.0 | % |
| Concrete segment | | | | | | | | | | | | | | | |||
| Public sector | | | $ | 28,193 | | 10.2 | % | $ | 20,297 | | 6.4 | % | $ | 30,284 | | 7.4 | % |
| Private sector | | | | 246,951 | | 89.8 | % | | 295,564 | | 93.6 | % | | 378,825 | | 92.6 | % |
| Concrete segment total | | | $ | 275,144 | | 100.0 | % | $ | 315,861 | | 100.0 | % | $ | 409,109 | | 100.0 | % |
| Total | | | $ | 796,394 | | | $ | 711,778 | | | $ | 748,322 | | | |||
| | | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | | | | ||||||||||||
| Marine segment | | | $ | 2,318 | 0.4 | % | $ | 3,670 | 0.9 | % | $ | 9,787 | 2.9 | % | |||
| Concrete segment | | | 9,203 | 3.3 | % | (10,300) | (3.3) | % | (17,817) | (4.4) | % | ||||||
| Total | | | $ | 11,521 | | | | $ | (6,630) | | | | $ | (8,030) | | | |
Year ended December 31, 2024 compared with year ended December 31, 2023
Marine Segment
Revenues for our marine segment for the year ended December 31, 2024 were $521.3 million compared to $395.9 million for the year ended December 31, 2023, an increase of $125.4 million, or 31.7%. The increase was primarily related to the Pearl Harbor Project.
Operating income for our marine segment for the year ended December 31, 2024 was $2.3 million, compared to $3.7 million for the year ended December 31, 2023, a decrease in operating income of $1.4 million. Adjusted for the gain on the Port Lavaca South Yard property sale-leaseback in Texas that occurred during the year ended December 31, 2023, operating loss for the year ended December 31, 2023 was $1.5 million. This $3.8 million increase in operating income was primarily due to margin improvements stemming from higher quality projects and improved execution.
Concrete Segment
Revenues for our concrete segment for the year ended December 31, 2024 were $275.1 million compared to $315.9 million for the year ended December 31, 2023, a decrease of $40.8 million, or 12.9%. This decrease was primarily due to disciplined bidding standards to win quality work at attractive margins.
Operating income for our concrete segment for the year ended December 31, 2024 was $9.2 million, compared to an operating loss of $10.3 million for the year ended December 31, 2023, an increase of $19.5 million. This increase was primarily due to winning higher margin jobs due to disciplined bidding standards and improved execution.
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Year ended December 31, 2023 compared with year ended December 31, 2022
Marine Segment
Revenues for our marine segment for the year ended December 31, 2023 were $395.9 million compared to $339.2 million for the year ended December 31, 2022, an increase of $56.7 million, or 16.7%. The increase was primarily related to the Pearl Harbor Project.
Operating income for our marine segment for the year ended December 31, 2023 was $3.7 million, compared to operating income of $9.8 million for the year ended December 31, 2022, a decrease of $6.1 million. Adjusted for the $5.2 million gain on the Port Lavaca South Yard property sale-leaseback in Texas, operating loss for the year ended December 31, 2023 was $1.5 million or a decrease of $11.3 million. This decrease in operating income was primarily due to lower equipment utilization, and higher SG&A in the current year.
Concrete Segment
Revenues for our concrete segment for the year ended December 31, 2023 were $315.9 million compared to $409.1 million for the year ended December 31, 2022, a decrease of $93.2 million, or 22.8%. This decrease was primarily due to a reduction of revenue resulting from winding down operations in Central Texas.
Operating loss for our concrete segment for the year ended December 31, 2023 was $10.3 million, compared to $17.8 million for the year ended December 31, 2022, a decrease in operating loss of $7.5 million. Adjusted for the $6.9 million intangible asset impairment loss on the TAS Commercial Concrete tradename, operating loss for the year ended December 31, 2023 was $3.4 million, or a decrease in operating loss of $14.4 million. This decrease in operating loss was primarily due to lower indirect costs due to winding down operations in Central Texas.
Liquidity and Capital Resources
Changes in working capital are normal within our business given the varying mix in size, scope, seasonality and timing of delivery of our projects. At December 31, 2024, our working capital was $78.2 million, as compared to $55.9 million at December 31, 2023. As of December 31, 2024, we had unrestricted cash on hand of $28.3 million. Our borrowing availability under our revolving portion of our Credit Agreement at December 31, 2024 was approximately $26.7 million.
Our primary liquidity needs are to finance our working capital and fund capital expenditures. Historically, our source of liquidity has been cash provided by our operating activities, sale of underutilized assets, and borrowings under our credit facilities. The assessment of our liquidity requires us to make estimates of future activity and judgments about whether we are compliant with financial covenant calculations under our debt and other agreements and have adequate liquidity to operate. Significant assumptions used in our forecasted model of liquidity include forecasted sales, costs, and capital expenditures, as well as expected timing and proceeds of planned real estate transactions.
Recent Developments
On September 12, 2024, we completed the sale of 5,589,000 shares of common stock, including 729,000 shares of common stock pursuant to an option granted to the underwriters, in an underwritten public offering. We received net proceeds of approximately $26.4 million, after deducting underwriting discounts and other estimated offering expenses payable by us. The net proceeds were used for working capital and for general corporate purposes, including repayment of borrowings under the Credit Agreement.
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The following table provides information regarding our cash flows and our capital expenditures for the years ending December 31, 2024, 2023 and 2022:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
| | | | | | | | | | |
| | 2024 | | 2023 | | 2022 | ||||
| Net loss | | $ | (1,644) | $ | (17,875) | $ | (12,612) | ||
| Adjustments to remove non-cash and non-operating items | | | 36,018 | | | 32,641 | | | 27,413 |
| Cash flow from net income after adjusting for non-cash and non-operating items | | | 34,374 | | | 14,766 | | | 14,801 |
| Change in operating assets and liabilities (working capital) | | | (21,698) | | | 2,412 | | | (5,236) |
| Cash flows provided by operating activities | | $ | 12,676 | | $ | 17,178 | | $ | 9,565 |
| Cash flows (used in) provided by investing activities | | $ | (11,482) | | $ | 2,170 | | $ | (9,704) |
| Cash flows (used in) provided by financing activities | | $ | (3,816) | | $ | 7,806 | | $ | (8,370) |
| | | | | | | | | | |
| Capital expenditures (included in investing activities above) | | $ | (14,091) | | $ | (8,909) | | $ | (14,584) |
Operating Activities.
During 2024, we generated approximately $12.7 million from cash in our operating activities. The net cash inflow is comprised of $34.4 million of cash inflows from net income, after adjusting for non-cash items and $21.7 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 Consolidated Statements of Cash Flows, were primarily driven by $19.6 million of cash outflows pursuant to the relative timing and significance of project progression and billings during the period, a $8.7 million decrease in operating lease liabilities and $0.4 million of other outflows, partially offset by a $7.0 million cash inflow related to an increase in our net position of accounts receivable and accounts payable plus accrued liabilities during the period.
During 2023, we generated approximately $17.2 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 $2.4 million of cash inflows related to changes in net working capital. The changes in net working capital, which are reflected as changes in operating assets and liabilities in our Consolidated Statements of Cash Flows, were primarily driven by a $21.4 million inflow related to an increase in our net position of accounts receivable and accounts payable plus accrued liabilities during the period, partially offset by a $11.3 million outflow pursuant to the relative timing and significance of project progression and billings during the period, a $6.8 million decrease in operating lease liabilities during the period, and $0.9 million of other cash outflows.
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.
Investing Activities.
Capital asset additions and betterments to our fleet were $14.1 million in 2024, as compared with $8.9 million and $14.6 million in 2023 and 2022, respectively. Proceeds from the sale of property and equipment were $2.6 million in 2024, as compared with $11.1 million and $4.9 million in 2023 and 2022, respectively. Included in the year ended December 31, 2023 is $8.1 million of proceeds related to the sale-leaseback of the Port Lavaca South Yard property in Texas.
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Financing Activities.
During the year ended December 31, 2024, we had proceeds from an offering of common stock of $26.4 million, borrowings and repayments of $72.6 million on the White Oak revolving credit line, repayments of $15.0 million on the White Oak term loan, payments on finance lease liabilities of $8.9 million, payments made on failed sale-leaseback arrangements of $5.8 million, $0.5 million of payments related to tax withholding for share-based compensation, repayments of $0.5 million on other debt, loan costs of $0.4 million and a cash inflow of $0.9 million for proceeds from the exercise of stock options.
During the year ended December 31, 2023, we had borrowings of $5.0 million from our prior credit agreement, $38.0 million from the term loan portion of our new Credit Agreement and borrowings of $64.0 million on the revolving credit line under our new Credit Agreement, repayments of $40.0 million on our prior credit agreement, repayments of $64.0 million on the revolving credit line under our new Credit Agreement, proceeds from failed sales-leasebacks of $14.7 million, proceeds of $2.4 million related to the Port Lavaca land sale-leaseback financing, loan costs of $6.5 million, payments on finance lease liabilities of $4.8 million and a cash outflow of $0.5 million for payments related to tax withholdings for share-based compensation.
During the year ended December 31, 2022, we drew down $24.0 million from our revolving line of credit under our prior credit agreement. During the year ended December 31, 2022, we repaid $28.0 million on our revolving line of credit under our prior credit agreement, had payments of $3.0 million on finance lease liabilities and incurred $0.7 million of loan costs related to the ninth amendment to our prior credit agreement.
Sources of Capital
On May 15, 2023, we entered into a new three-year $103.0 million Credit Agreement with White Oak, which includes a $65.0 million asset based revolving credit line and a $38.0 million fixed asset term loan. Please see Note 10 of the Notes to the Consolidated Financial Statements for further discussion.
Amendment No. 6 to the Credit Agreement
Please see “Note 21 – Subsequent Event” in our audited consolidated financial statements for a detailed description of Amendment No. 6 to the Credit Agreement.
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, 2024, the capacity under our current bonding arrangement was at least $1.1 billion, with approximately $588 million of projects being bonded. While we believe that our current bonding capacity is sufficient to satisfy current demand for our services, any new major project opportunities may require us to seek additional bonding capacity in the future. We believe our balance sheet and working capital position will allow us to access additional bonding capacity as needed in the future.
Effect of Inflation
We are subject to the effects of inflation through increases in the cost of raw materials, and other items such as fuel, concrete and steel. Due to the relative short-term duration of our projects, we are generally able to include anticipated cost increases in the pricing of our bids.
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.
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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:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Revenue Recognition from Construction Contracts; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Long Lived Assets; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Income Taxes. |
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 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 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.
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. We estimate variable consideration based on our assessment of the most likely amount to which we expect 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 our evaluation of its compliance with the terms of the contract and the extent to which we performed in accordance therewith but does not guarantee collection in full.
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
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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 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.