Limbach Holdings, Inc. (NASDAQ:LMB) Q3 2023 Earnings Call Transcript
Limbach Holdings, Inc. (NASDAQ:LMB) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Greetings, and welcome to the Limbach Holdings Call to Discuss Third Quarter 2023 Results and Update on Current Operations. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeremy Hellman of the Equity Group. Thank you. You may begin.
Jeremy Hellman: Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings announced its third quarter 2023 results and filed its Form 10-Q for the period ended September 30, 2023. The company would also like to note that an updated investor presentation is available on the Investors section of the company website at www.limbachinc.com. Management will refer to select slides during today's call and encourages investors to review the presentation in its entirety. During this call, the company will be reviewing its financial results, providing an update on current market conditions. Today's discussion may contain forward-looking statements, and actual results may differ from any forecasts, projections or similar statements made during the earnings call.
Listeners are reminded to review the company's annual report on Form 10-K and quarterly reports on Form 10-Q for risk factors that may cause the actual results to differ from forward-looking statements made during the earnings call. Also, please note that during the question-and-answer session at the end of the call, we will only be taking questions from our analysts. With that, I'll turn the call over to Mike McCann, the President and Chief Executive Officer of Limbach Holdings. Please go ahead, Mike.
Mike McCann: Good morning. Welcome, everyone, and thanks for joining us. Joining me this morning is Jayme Brooks, our Executive Vice President and Chief Financial Officer. Turning to the third quarter. We continue to execute on all fronts and the result was continued margin expansion, which in turn led to solid growth in net income, adjusted EBITDA and cash flow. We continue to see our ODR transitions happening at a rapid pace. Recall that we're originally targeting a 50/50 revenue split by 2025. As we speak with you today, we appear on track to hit that target this year. And in doing so, this change in our business mix is driving the intended growth in gross margins, earnings and cash flow. As indicated in Slide 12 in our investor deck, we're now focused on shifting to a new target of at least 70% ODR.
Both of our segments are performing well, and we continue to shift our sales and marketing resources towards the ODR segment as the margin advantage for ODR segment during Q3 was 1,000 basis points compared with our GCR segment. The performance improvement in our GCR segment is a product of execution, project selection, which has been made easier due to our rapid shift to ODR and ability to be extraordinarily selective. Within our GCR segment results for this quarter, was the successful resolution of our largest legacy claim. The claim resolution resulted in a $1.2 million write-up and net cash to the company of $16 million. That leaves one less significant legacy claim open. Beyond the segment shift and in segment margin enhancement objectives, the third pillar of our strategy is scale for acquisitions.
We already completed the acquisition of ACME Industrial in July and are pleased to announce that we're able to close another deal this year. Subsequent to quarter-end, we announced the acquisition of Industrial Air based in Greensboro, North Carolina for $13.5 million in cash. We're very excited to add Industrial Air to the Limbach family. We are able to fund that deal with our cash on hand as our organic business continues to allow us to self-fund acquisitions. Recall that our acquisition program focused on both tuck-in deals as well as larger opportunities that we believe will allow us to build out our geographic presence. Industrial Air falls into the latter category, providing Limbach with a new presence in the attractive growing Carolinas market.
As shown on Slide 18 of our investor deck, Industrial Air hit the mark in all of our acquisition criteria. Strategic geographic location, strong ODR customer base, including a number of national-scale customers, and we believe an incredible opportunity for future value creation. Industrial Air also has their own line of products, including air handling units that are manufactured in-house. That gives us a decided advantage in being able to propose and deliver value-added solutions for customers without contending with supply chain choke points. Industrial Air also built a very ODR centric model and believe they are a really great fit for Limbach. We are very excited to have them aboard. With the deal closing on November 1, we expect Industrial Air to have a relatively minimal impact on 2023 revenues.
And EBITDA while 2024 should benefit from the inclusion of roughly $30 million of revenue and $4 million of EBITDA. We are pleased to have built a favorable earn-out economics into the deal structure which lowers our cost of capital and provides all parties with a great outcome if and when targets are met. I'll now pass it off to Jayme to provide some financial highlights, and then I'll return with a few comments on market conditions before we take your questions. Jayme?
Jayme Brooks: Thanks, Mike. Our press release and Form 10-Q, which was filed yesterday, both provide extensive details of our financials, so I'll focus on some key highlights. Starting with the income statement. During the third quarter, the ODR segment accounted for 51.5% of total consolidated revenue, up from 48.8% last year in Q3. ODR revenue during the quarter was up 10.3% from a year ago, while GCR revenue was essentially flat, resulting in consolidated top line growth of 4.4%. As Mike noted, we continue to see solid execution in the quarter. Consolidated gross margin during the third quarter benefited from the increasing contribution from our higher margin ODR segment, strong overall margin performance in both segments and a couple of onetime benefit that flows through the GCR segment.
These onetime benefits included the settlement of one of our outstanding claims which resulted in a gross margin benefit of $1.2 million. And then we also had another $1.2 million gross margin benefit during the quarter as a result of the early completion of a project due to a reduction in scope from the customer. These onetime benefits contributed $2.4 million to the higher-than-usual GCR gross margin of 19.3%. Excluding these two items, the GCR gross margin was still solid and exceeded our target range of 12% to 15% and our ODR gross margin stayed strong at 29.3%, which was similar to Q2. Consolidated gross margin was 24.5% for the quarter, and even if we were to back out the onetime benefit, we had very strong performance and record high gross margin.
SG&A expense was $21 million for the quarter or 16.4% of revenue, and was up modestly from $20.4 million in the second quarter and up from $18.7 million in the year ago period. The increase in SG&A expense was primarily related to a $1.4 million increase in payroll related expenses, a $600,000 increase in professional fees, including acquisition deal related fees, and a $300,000 increase in stock-based compensation expense. SG&A expense associated with the ACME transaction was approximately $300,000 from the purchase date through the end of the quarter. On prior calls, we have noted that we expect full year 2023 SG&A expense as a percentage of total revenue to have a similar annular run rate as 2022. As we have seen bottom line growth outpace our total revenue growth this year, currently projected SG&A expense is expected to land at the higher end of our targeted range of 15.5% to 16.5% of total revenue for the full year.
Now, turning to cash flow. We continue to have a strong balance sheet. At quarter end, our cash and cash equivalents balance was $57.5 million and we had $10 million outstanding on our revolver. We exited the quarter in a net cash position of $35.2 million compared to a net cash position of $23.6 million at the end of June and $4.2 million at the end of December 2022. Total operating cash flow during the third quarter was $17.2 million, compared with $10.4 million a year ago. Changes in working capital accounts had a $5.8 million positive impact on operating cash flow this quarter. The remaining $11.4 million of operating cash flow was the non-working capital component. As we’ve noted previously, our free cash flow from operations can be calculated by taking this non-working capital component and then subtracting CapEx, which totaled $221,000 in the quarter.
That leaves free cash flow at $11.2 million or around 82% of our adjusted EBITDA. The third quarter did include a couple of noteworthy cash items, starting with the net receipt of approximately $15.6 million from the settlement of a claim. This cash receipt was primarily offset by an increase in accounts receivable of $15.2 million in the changes of working capital mentioned earlier. We also used cash of $4.9 million in investing activities for the ACME acquisition. Subsequent to quarter end, as Mike noted, we used $13.5 million of our cash to fund the acquisition of Industrial Air, which still leaves us with a solid liquidity position. I’ll now hand it back to Mike.
Mike McCann: Thank you, Jayme. As we approach year end, we have good momentum. We’re executing well on our plan with demonstrated success in each of the three growth levers we have identified. That has allowed us to raise our adjusted EBITDA guidance for a second time this year. Recall when we began the year with a range of $33 million to $37 million, and then we subsequently raised that to a range of $38 million to $41 million last quarter. We are now increasing our adjusted EBITDA guidance again for 2023 to a range of $42 million to $45 million. The upward revision to our adjusted EBIT guidance this quarter is a function of our continued strong performance year-to-date, along with a small contribution from our two acquisitions during the second half of the year.
During the third quarter, we were once again able to record gross margins above the target range in both segments. Underpinning that performance with our rigorous project selection, excellent field execution, and overarching emphasis on delivering value-added solutions for our customers. Our adjusted EBITDA also benefited from two one-time GCR gross margin benefits of $2.4 million that were booked in the quarter as Jayme discussed earlier. We’re also reiterating our revenue guidance for 2023, which consists of total revenue for the year in the range of $490 million to $520 million. We believe overall conditions in our end markets remain supportive of our services. While much of the day to day headlines focus on macroeconomic conditions, Limbach continues to see strong demand due to the mission critical nature of our end markets.
As we continue our evolution of being an indispensable partner to building owners, our key customers continue to show that our services are essential and the spend is resilient. Leading customers in our alternative verticals have been successful in managing their operations and balance sheets. As of now, we have not seen interest rates make a significant dent in demand. As a reminder, with our ODR expansion, our business is less correlated with new construction than in the past. Over the past quarter, all of our vertical markets experienced strong demand. As an example of the last quarter, we saw healthcare spend from both our operational repair budget and long-term capital projects. In our industrial manufacturing vertical market, customers were focused on preparing for future capacity and there appears to be no shortage of opportunity.
Also, as a reminder, we spent a lot of time refining our model to be flexible and adaptive to a variety of market conditions. Central of that is a focus on customers with mission critical facilities. By providing high value solutions to those customers, we expect to be well positioned to serve their needs regardless of the prevailing economic wins. Focusing on supply chains for a moment. We do see some moderation in equipment lead times for off the shelf items. At the same time, complex equipment is still difficult to obtain with delivery times remaining elevated. So again, one of the many reasons we are very enthusiastic about the acquisition of Industrial Air. Heading into year end, we believe we have good momentum and look forward to closing the year strong.
As we head into 2024, we look forward to having ACME and Industrial Air provide full year contributions to our results and help propel our continued effort to maximizing our ODR opportunities. Based on our current views and expectations, we don’t want to underestimate what we believe is a large market opportunity that we continue to pursue. We continue to believe that we have the right platform, the right people, and the right strategy to continue to drive strong operating results. I also want to remind everyone that Slide 27 in our investor presentation includes additional modeling considerations. With that operator, please open the QA session.
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