Limbach Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Limbach provides building systems design, construction, maintenance and related services, primarily in the U.S. Its segments are General Contractor Relationships (GCR) and Owner Direct Relationships (ODR). Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $124.9 | $116.1 | $245.9 | $230.9 |
| Gross profit / margin | $28.5 / 22.8% | $21.3 / 18.4% | $54.7 / 22.3% | $39.7 / 17.2% |
| Operating income / margin | $7.6 / 6.0% | $1.5 / 1.3% | $12.2 / 5.0% | $0.7 / 0.3% |
| Net income (loss) | $5.3 | $0.9 | $8.3 | $(0.7) |
| Diluted EPS | $0.46 | $0.08 | $0.73 | $(0.06) |
- Q2 revenue increased 7.5% year over year. ODR revenue grew 18.1% to $58.8 million, while GCR revenue was nearly flat at $66.1 million. For the first half, ODR grew 26.8% to $117.5 million, while GCR declined 7.1% to $128.4 million.
- Gross margin improvement reflected higher-margin ODR work and more selective GCR project bidding. Q2 gross profit rose 33.7%; for the first half, it rose 38.0%. Segment gross margins were 17.1% for GCR and 29.3% for ODR in Q2, versus 13.1% and 25.4%, respectively, a year earlier.
- Q2 SG&A increased 9.2% to $20.4 million; first-half SG&A increased 10.8% to $41.5 million. First-half increases included payroll, CEO transition costs and stock compensation.
Cash flow, debt and liquidity
- First-half operating cash flow was $26.3 million, versus $12.6 million in 2022. The company attributed the improvement in part to receivables collections, including a $10 million receipt related to a claim resolution; working-capital movements can make cash flow variable.
- First-half investing cash outflow was $1.2 million, including $1.5 million of capital expenditures. Financing cash outflow was $15.2 million. Cash, cash equivalents and restricted cash increased $9.9 million to $46.0 million; cash and cash equivalents alone were $45.9 million.
- At June 30, current assets were $199.2 million and current liabilities $127.3 million; working capital was $71.9 million and the current ratio was 1.57. Total debt, including finance leases and the Pontiac financing liability, was $22.3 million. The company had $10.0 million drawn on its $50 million revolving facility and $35.8 million of net available revolver capacity after letters of credit.
- The prior term loan was repaid in connection with a May 2023 refinancing. The company reported compliance with its credit facility’s financial covenants at quarter-end and said available cash, expected operating cash flow and borrowing capacity should cover requirements for at least 12 months. Interest rates on revolving borrowings are variable.
Backlog, outlook and management commentary
- Backlog at June 30 was $260.2 million for GCR, down from $302.9 million at December 31, 2022, and $133.0 million for ODR, up from $108.2 million. Management estimated approximately $231.5 million of total backlog would be recognized as revenue in the remainder of 2023.
- Remaining performance obligations were $260.2 million for GCR and $113.6 million for ODR. Management estimated 52% of GCR and 65% of ODR remaining performance obligations would be recognized during the rest of 2023. Backlog and remaining performance obligations are not identical measures.
- Management emphasized ODR growth, higher-margin work, improved project execution, workforce investment and cash flow. It is intentionally reducing exposure to large, complex GCR projects and pursuing smaller, shorter-duration work it considers more attractive. The filing does not provide numerical full-year revenue or earnings guidance.
- Management expects elevated cost inflation and supply-chain delays to continue during 2023, though at lower inflation levels than in 2022. Pricing, productivity improvements and cost-saving actions may partly offset these pressures. Higher interest rates are expected to increase interest expense; delayed critical equipment could delay projects or lead customers to terminate agreements.
Notable items, risks and contingencies
- The company recorded a $0.3 million loss on early debt extinguishment in Q2. It paid a $3.0 million 2022 acquisition earnout in April and estimated exposure of approximately $2.7 million for the 2023 earnout at June 30.
- A California referee awarded Bernards Bros. approximately $2.2 million in a dispute over a subcontract proposal. The company had accrued the estimated loss and was evaluating appeal options.
- The company reported approximately $117.5 million of surety bonds outstanding and participates in about 40 multiemployer pension plans. Some plans are in “critical” status; potential withdrawal liability cannot be determined from the filing.
- The company is winding down its Southern California operations, with project closeout expected in 2023, but remains responsible under a premises lease through 2027 if its subtenant does not perform. A Pontiac property sale-leaseback is accounted for as a financing transaction, including a long-term lease commitment.
- On July 3, 2023, Limbach acquired ACME Industrial Piping for $5 million in cash, with a potential earnout of up to $2.5 million.
- The company also petitioned the Delaware Court of Chancery to validate certain 2022 stockholder actions after identifying that the meeting record date exceeded the statutory limit by one day. Management said there were no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether improved margins and ODR growth continue, and whether GCR backlog declines affect future revenue.
- How much first-half operating cash flow reflects sustainable operations versus collection timing and the one-time $10 million claim receipt.
- Variable-rate borrowing costs, covenant headroom and liquidity after the ACME acquisition and any earnout payments.
- Resolution and payment timing for the Bernards award, the 2023 acquisition earnout, and any exposure from claims, surety obligations or multiemployer pension plans.
- Progress on the Delaware validation petition and the Southern California lease/sublease obligations.