Limbach Holdings, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2023. Limbach provides HVAC, mechanical, electrical, plumbing, controls, construction, and maintenance services across U.S. regions. It reports two segments: General Contractor Relationships (GCR) and Owner Direct Relationships (ODR). Management is shifting toward ODR growth and more selective GCR project bidding.
Financial performance and position
- Q3 revenue: $127.8 million, up 4.4% year over year. GCR revenue was $61.9 million, down 1.1%; ODR was $65.8 million, up 10.3%.
- Q3 profitability: Gross profit was $31.2 million, up 25.7%, and gross margin was 24.5%, versus 20.3% a year earlier. Operating income was $9.8 million versus $5.4 million; net income was $7.2 million versus $3.6 million. Diluted EPS was $0.61 versus $0.34.
- Nine-month results: Revenue was $373.7 million, up 5.8%; gross profit was $86.0 million, up 33.3%, with a 23.0% gross margin versus 18.3%. Operating income was $22.0 million versus $6.1 million; net income was $15.5 million versus $3.0 million. Diluted EPS was $1.33 versus $0.28.
- Segment mix: Nine-month GCR revenue declined 5.3% to $190.3 million, while ODR revenue grew 20.3% to $183.3 million. Segment gross margins were 17.6% for GCR and 28.6% for ODR, compared with 13.3% and 24.8%, respectively, in 2022.
- Cash flow: Nine-month operating cash flow was $43.5 million, up from $23.0 million. Investing used $6.2 million and financing used $15.8 million; cash, cash equivalents, and restricted cash increased $21.4 million. Management attributed much of the operating cash improvement to collection timing, including $25.6 million of receipts related to resolved claims.
- Liquidity: September 30 cash and cash equivalents were $57.5 million. Net working capital was $77.7 million and the current ratio was 1.57, compared with $66.9 million and 1.42 at year-end 2022.
- Debt: Total reported debt was $22.3 million, including finance leases and a sale-leaseback financing liability; $10.0 million was outstanding on the revolving credit facility. The term loan was repaid in May using cash and revolver proceeds. The $50.0 million revolver had $35.8 million available after borrowings and letters of credit. The company reported compliance with financial covenants.
- Other balance-sheet items: Total assets were $285.2 million and total liabilities $171.1 million at September 30, versus $294.6 million and $199.1 million at December 31, 2022.
Material changes and operating developments
- Improved margins drove earnings growth despite modest consolidated revenue growth. Management cited higher-margin ODR mix and more selective GCR bidding; ODR also benefited from continued business expansion.
- Q3 gross profit included $3.1 million of material project estimate write-ups, including a $1.2 million prior-claim settlement, partly offset by $1.3 million of material project write-downs. Nine-month write-ups were $2.2 million, including the same $1.2 million settlement; write-downs totaled $1.2 million.
- SG&A rose 12.2% in Q3 and 11.3% for the nine-month period. The nine-month increase included higher payroll and stock compensation and $1.0 million of CEO transition costs. Stock-based compensation was $3.4 million for the nine months, versus $2.0 million.
- The July 2023 ACME acquisition expanded ODR industrial and manufacturing exposure. Consideration at closing was approximately $5.0 million, with potential earnout payments of up to $2.5 million. ACME contributed approximately $1.5 million of ODR revenue and $0.4 million of gross profit through September 30.
- Backlog at September 30 was $227.0 million for GCR, down from $302.9 million at year-end, and $157.7 million for ODR, up from $108.2 million. Remaining performance obligations were reported as $227.0 million for GCR and $138.1 million for ODR; these differ from backlog because of contract options and cancellable agreements. The filing estimates 27% of GCR backlog and 45% of ODR backlog will be recognized in the remainder of 2023; the separate RPO disclosure estimates 27% of GCR and 48% of ODR RPO will be recognized in that period.
Outlook, risks, and unusual items
- No numerical full-year revenue or earnings guidance is provided. Management reaffirmed priorities of improving profitability and operating cash flow, growing ODR, investing in employees, and improving GCR execution through selective project pursuit.
- Management expects elevated inflation, though at lower levels than in 2022, and continued supply-chain and equipment delays through 2023. It cited labor costs, higher interest rates, geopolitical uncertainty, and potential project delays or cancellations as risks. Disruptions could slow conversion of backlog to revenue.
- Cash flows remain exposed to working-capital swings and timing of project claims and back-charge settlements. Management believes existing cash, expected collections, and revolver availability are sufficient for requirements over at least the next 12 months, subject to lender availability and forecasts proving accurate.
- At September 30, surety bonds outstanding were approximately $99.7 million; management cited bonding capacity of $800 million. The company participates in about 40 multiemployer pension plans and cannot quantify possible future withdrawal liabilities.
- A California court referee awarded Bernards Bros. approximately $2.2 million; the company had accrued that amount and was evaluating appeal options. Other ordinary-course legal matters could be material individually or collectively, though management does not expect a material adverse effect.
- In September, the Delaware Court of Chancery validated specified 2022 stockholder actions; a related lawsuit was dismissed with prejudice as to the plaintiff. An application for attorneys’ fees and expenses remained under resolution.
- Subsequent event: on November 1, 2023, the company acquired Industrial Air, LLC for $13.5 million cash at closing, with a potential earnout of up to $6.5 million over two years.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Key facts investors should verify
- Whether the 2023 margin gains are sustainable and how much depended on project estimate revisions and the $1.2 million claim settlement.
- Whether ODR growth and backlog conversion can offset the decline in GCR backlog, including the distinction between backlog and remaining performance obligations.
- Cash-flow durability after the claim-related receipts and the impact of working-capital movements, collections, and contract settlements.
- Revolver utilization, interest-rate exposure, covenant headroom, and available borrowing capacity as acquisitions and operating needs evolve.
- Integration, results, and earnout exposure from ACME and the November Industrial Air acquisition.
- Resolution of the Bernards matter and fee application, potential multiemployer pension withdrawal exposure, and other contingent obligations.