Limbach(LMB) - 2022 Q4 - Annual Report

Part I Item 1. Business Limbach Holdings, Inc. delivers building systems solutions, focusing on ODR growth and winding down Southern California operations - Limbach Holdings, Inc. provides comprehensive building systems solutions, including design, prefabrication, installation, management, and maintenance of HVAC, mechanical, electrical, plumbing, and controls systems[23] - The company serves institutions with mission-critical infrastructures such as data centers, healthcare, industrial and light manufacturing, cultural and entertainment, higher education, and life science facilities[23] - The company operates in two segments: General Contractor Relationships (GCR) for new construction/renovation projects and Owner Direct Relationships (ODR) for direct construction, maintenance, and services to building owners[28] - Strategic decision to wind down Southern California GCR and ODR operations in February 2022 to align geographic focus and reduce losses, with full exit expected in 2023[27] Segments The company operates in GCR and ODR segments, with GCR revenue decreasing and ODR revenue increasing in 2022 Segment Revenue and Gross Profit (2022 vs. 2021) | Segment | 2022 Revenue (Millions) | 2021 Revenue (Millions) | YoY Change (%) | 2022 Gross Profit (%) | 2021 Gross Profit (%) | |:--------|:------------------------|:------------------------|:---------------|:----------------------|:----------------------| | GCR | $280.4 | $350.0 | -19.9% | 13.8% | 13.0% | | ODR | $216.4 | $140.3 | +54.2% | 25.5% | 28.9% | - GCR revenue decrease was primarily due to a continued focus on improving project execution and profitability by pursuing smaller, shorter-duration opportunities leveraging captive design and engineering services[29] - ODR revenue increase was primarily due to the company's continued focus on accelerated growth of its ODR business, including establishing long-term relationships with building owners and converting GCR projects into ODR opportunities[30][31] Limbach Collaborative Services LCS provides in-house engineering, estimating, and virtual design services, enhancing efficiency and cost-effectiveness - LCS provides captive engineering capabilities, estimating, and virtual design services to business units, building owners, and clients in both GCR and ODR segments[36] - LCS maintains seven registered professional engineers and approximately 31 estimators and designers, acting as the engineer of record for Design/Build specialty contractor projects[37] - The Limbach Modeling and Production System (LMPS) is a proprietary BIM tool used for virtual MEP system construction, conflict avoidance, rework elimination, and maximizing off-site prefabrication[37] Strategy The company's strategy focuses on value creation for building owners, emphasizing ODR growth, GCR margin enhancement, and strategic acquisitions - The company's core strategy is to become an indispensable partner to building owners with mission-critical systems, focusing on profitability, quality growth, workforce investment, and strategic acquisitions[38][39] - Principal focus is accelerated growth of the ODR segment, expanding direct owner relationships, and leveraging these to deliver a broad suite of services, including digital solutions like data analytics and energy management[39][40] - In the GCR segment, the strategy is to improve project execution and profitability by pursuing smaller, shorter-duration opportunities that leverage captive design and engineering services[41] - The company aims for fully integrated operations, offering design, construction, and maintenance for HVAC, plumbing, and electrical services across all business units, including MEP Prime services[45] - Growth through acquisitions targets strategically synergistic companies to increase geographic footprint, supplement business models, address capability gaps, and enhance service offerings[47] GCR and ODR Backlog GCR backlog decreased by 10.17% to $302.9 million, while ODR backlog increased by 10.41% to $108.2 million in 2022 Backlog Summary (as of December 31) | Segment | 2022 Backlog (Millions) | 2021 Backlog (Millions) | YoY Change (%) | Estimated 2023 Revenue Recognition (%) | |:--------|:------------------------|:------------------------|:---------------|:---------------------------------------| | GCR | $302.9 | $337.2 | -10.17% | 68% | | ODR | $108.2 | $98.0 | +10.41% | 92% | - The reduction in GCR backlog is intentional, reflecting a focus on higher-margin projects and smaller, owner-direct projects[49] - Backlog includes estimated revenue on uncompleted contracts, including unexercised contract options, and is subject to adjustments and cancellations[49] Customers The company aims to expand direct relationships with building owners, with one GCR customer accounting for 11% of 2022 consolidated revenue - Customer base primarily consists of building owners and their third-party representatives, general contractors, and construction managers[52] - Strategic goal is to grow direct relationships with building owners, leading to long-term maintenance services and smaller repair/installation projects[53] Significant GCR Segment Customers (% of Consolidated Revenue) | Year | Customer 1 | Customer 2 | |:-----|:-----------|:-----------| | 2022 | 11% | - | | 2021 | 17% | 12% | Competition The HVAC, plumbing, electrical, and maintenance industry is highly competitive and fragmented, with competition based on price, quality, and expertise - The HVAC, plumbing, electrical, and maintenance industry is highly competitive and fragmented, with numerous regional and national firms[55] - Key competitive factors include price, reputation for quality, ability to reduce customer costs, experience, financial strength, surety bonding capacity, local market knowledge, and customer relationships[55] - Challenges include price-based competition from smaller firms, increased competition from in-house service providers, and the impact of new technologies and vertical consolidation[86][87] Materials & Equipment The company faces price and availability fluctuations for materials and equipment, with COVID-19 disruptions negatively impacting the GCR segment in 2022 - The company purchases materials (sheet metal, steel, copper piping, electrical conduit, wire) and equipment from numerous sources, subject to price and availability fluctuations[56] - Economic disruptions from COVID-19, including supply chain issues, production delays, and escalating commodity prices, have negatively impacted the business, especially the GCR segment, in 2022[56] - In response, the company is managing through enhanced labor planning, project scheduling, increased pricing, and leveraging supplier/customer relationships, but the impact of these disruptions and geopolitical tensions (Ukraine conflict) remains uncertain[56] Human Capital The company prioritizes attracting and retaining skilled employees through competitive pay, benefits, career development, and a strong safety culture - As of December 31, 2022, the company had approximately 1,500 employees, including 400 full-time salaried and 1,100 craft employees, some union-represented[59] - The company's core purpose is 'to create great opportunities for people,' driven by core values: We CARE, We Act with INTEGRITY, We Are INNOVATIVE, We Are ACCOUNTABLE[60][61][66] - Investments in human capital include competitive compensation/benefits, career development, safety and wellness programs, and diversity and inclusion initiatives like the Embrace Forum and Employee Resource Groups (WICS, Unidos)[44][63][64][65][69][71][72] - The 'Hearts and Minds Commitment to Safety' program, established in 2013, emphasizes personal responsibility for safety and has earned the Ohio business unit OSHA-Voluntary Protection Programs Star Site recognition[69][70] Seasonality Operations are affected by seasonality, with severe weather impacting construction productivity and maintenance service demand - Severe weather, especially in northern climates, can slow construction productivity, shifting revenue and gross profit recognition[73] - Maintenance operations are impacted by weather: mild weather reduces demand, while severe weather increases demand for maintenance and time-and-materials services[73] Impact of the COVID-19 Pandemic COVID-19 continued to cause significant economic disruptions in 2022, negatively impacting the GCR segment through project delays and reduced labor productivity - COVID-19 caused significant global disruption, including economic slowdown, supply chain impacts, and escalating commodity prices[74][76] - In 2022, these disruptions led to significantly extended lead times, increased fuel and material costs, project delays, and reduced labor productivity and efficiency, particularly in the GCR segment[76] - The company is responding with enhanced labor planning, project scheduling, increased pricing, and leveraging supplier/customer relationships, but the full extent of future impacts remains unpredictable[76][77] Government and Environmental Regulations The company is subject to various federal, state, and local environmental, safety, health, labor, and government contracting regulations - The company is subject to federal, state, and local laws and regulations concerning environment, workplace safety, wage and hour, immigration, and government contracting[78] - Compliance costs are generally passed on to customers, but future changes in regulations or non-compliance could lead to significant additional costs, penalties, or restrictions on business[79][80] - Contracts with public authorities often impose additional requirements, including labor relations and subcontracting with disadvantaged businesses[78] Climate Change and Sustainability The company is committed to sustainability and improving its environmental footprint, recognizing its role in reducing customers' climate impact - The company is committed to sustainability and improving its environmental footprint, operating in a manner that protects health and safety[81] - Focus on environmental stewardship drives efforts to become more energy-efficient and helps customers reduce energy consumption and carbon footprint by replacing aging systems[81] - Increasing scrutiny and changing expectations from investors and customers regarding ESG practices may impose additional costs or expose the company to reputational risks[161][162] Available Information The company makes its annual, quarterly, and current reports available free of charge on its investor relations website after SEC filing - The company's annual, quarterly, and current reports on Forms 10-K, 10-Q, and 8-K, respectively, are available free of charge on its website: https://www.limbachinc.com[83](index=83&type=chunk) Item 1A. Risk Factors The company faces significant risks across its business, industry, and common stock ownership, including competition, operational challenges, and external factors - The company's business involves significant risks and uncertainties, including intense competition, challenges in managing operational size and costs, and dependence on a limited number of customers[17][18][86][88][89] - Operational risks include potential cost overruns in contracts, delays in customer payments, unsatisfactory safety performance, inability to properly utilize the workforce, and labor disputes[19][91][111][112][113][115][116] - External risks include rising inflation and/or interest rates, deterioration of the U.S. economy, the ongoing military conflict between Ukraine and Russia, and the adverse effects of future climate change[20][136][137][156] - Risks related to common stock ownership include price volatility, potential dilution from future equity issuances, and provisions in organizational documents that could delay or prevent a change in control[170][173][176] Risks Related to Our Business and Industry The company faces intense competition, operational management challenges, customer dependence, and financial risks from cost overruns and payment delays - Intense industry competition, especially on price, could reduce market share and profit, with challenges from smaller competitors and in-house service providers[86][87] - Dependence on a limited number of customers (one GCR customer accounted for 11% of 2022 revenue) and the unpredictable nature of contract backlog pose risks to business and results of operations[89][90] - Cost overruns in fixed-price contracts, delays in customer payments, and failure to recover on claims against project participants can lead to reduced profits or losses[91][98][99] - Risks associated with human capital include inability to attract/retain qualified personnel, labor disputes (union and open shop operations), and potential negative impacts from strikes or work stoppages[115][116][119] - External economic and geopolitical risks include rising inflation and interest rates, potential U.S. economy deterioration, and the unstable market conditions caused by the Ukraine-Russia conflict, which could increase costs and disrupt supply chains[136][137] - Compliance with environmental, safety, health, and government contracting regulations, as well as the evolving landscape of climate change and ESG expectations, could impose significant costs and reputational risks[156][161][166][168] Risks Related to Ownership of Our Common Stock Common stock price may be volatile, future equity issuances could cause dilution, and anti-takeover provisions could delay a change in control - The market price of common stock has been and may continue to be volatile, influenced by operational results, analyst recommendations, economic conditions, and industry trends[170] - Future sales of substantial amounts of common stock or additional equity issuances could lead to dilution and a decline in stock price[171][173] - The company has not declared dividends on common stock and does not anticipate doing so in the foreseeable future[175] - Organizational documents include provisions (e.g., classified board, restrictions on stockholder actions, undesignated preferred stock) that could delay or prevent a change in control, potentially affecting the common stock price[176][177] Risks Related to Ownership of Our Warrants Warrant terms can be amended by majority holders, and the company may redeem unexpired warrants, potentially rendering them worthless - Terms of the $15 Exercise Price Warrants can be amended with the approval of a majority of holders, potentially increasing exercise price, converting to stock/cash, shortening exercise period, or decreasing warrant shares[179][180] - The company may redeem unexpired $15 Exercise Price Warrants at $0.01 per warrant if common stock price exceeds $24.00 for 20 trading days within a 30-day period, potentially making them worthless[181][182] General Risk Factors Failures in controls, legal proceedings, force majeure events, and changes in tax laws could materially impact the company's financial condition - Failure or circumvention of disclosure controls and procedures or internal controls over financial reporting could seriously harm financial condition, results of operations, and business[183][184] - Actual and potential claims, lawsuits, and proceedings (e.g., personal injury, breach of contract, employment law violations) could reduce profitability and liquidity, and weaken financial condition[185] - Force majeure events (natural disasters, terrorist actions) and deliberate malicious acts could damage facilities, disrupt operations, injure personnel, and result in liability[186][187] - Changes in federal or state tax laws or regulations could increase the tax burden and adversely affect financial position, results of operations, cash flows, and liquidity[188] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments to report Item 2. Properties As of December 31, 2022, the company maintains its principal executive offices in Warrendale, Pennsylvania, and operates 17 leased offices across the eastern U.S. - The company's principal executive offices are in Warrendale, Pennsylvania, and it operates 17 leased offices throughout the eastern United States[190] - All business units support both GCR and ODR operating segments, and current facilities are deemed suitable and adequate for current needs[190] - In September 2022, Limbach Company LLC consummated a sale and leaseback transaction for its Pontiac, Michigan property, entering into a lease agreement for the facility[191] - The company entered into an amendment in Q1 2022 to expand a sublease agreement for its Southern California leased space, despite winding down operations in that region[192] Item 3. Legal Proceedings The company refers to Note 13 – Commitments and Contingencies for information regarding its legal proceedings - Information on legal proceedings is provided in Note 13 – Commitments and Contingencies[193] Item 4. Mine Safety Disclosures The company states that mine safety disclosures are not applicable - Mine Safety Disclosures are not applicable to the company[194] Information About Our Executive Officers Executive officers include Charles A. Bacon, III (President, CEO, and Director), Jayme L. Brooks (EVP and CFO), and Michael M. McCann (EVP and COO) Executive Officers | Name | Age | Title | |:--------------------|:----|:---------------------------------------| | Charles A. Bacon, III | 62 | President, Chief Executive Officer and Director | | Jayme L. Brooks | 52 | Executive Vice President and Chief Financial Officer | | Michael M. McCann | 41 | Executive Vice President and Chief Operating Officer | - Charles A. Bacon, III will step down as President and CEO on March 28, 2023, and Michael M. McCann will be appointed as his successor[195] - Jayme L. Brooks has served as Executive Vice President and CFO since October 2019, with prior experience at Capstone Turbine Corporation[196] - Michael M. McCann has been Executive Vice President and COO since November 2019, having joined the company in 2010[197] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on The Nasdaq Capital Market under 'LMB', with a $2.0 million share repurchase program completed by December 31, 2022 - The company's common stock is traded on The Nasdaq Capital Market under the symbol 'LMB'[199] - As of March 7, 2023, there were 41 holders of record for common stock and 10,449,689 shares outstanding[5][200] - In September 2022, the Board approved a $2.0 million share repurchase program, valid through September 29, 2023[201] Share Repurchase Program Activity (Q4 2022) | Period | Shares Purchased | Average Price Per Share | Approximate Dollar Value Remaining | |:------------------------|:-----------------|:------------------------|:-----------------------------------| | November 1 - 30, 2022 | 78,116 | $10.50 | $1,177,742 | | December 1 - 31, 2022 | 101,536 | $11.57 | $5,540 | | Total (as of Dec 31, 2022) | 179,652 | $11.10 | $5,540 | Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews the company's business, financial statements, and operating results for 2022 and 2021, highlighting strategic shifts and the 2023 outlook - The company is an integrated building systems solutions firm specializing in HVAC, mechanical, electrical, plumbing, and control systems for commercial, institutional, and light industrial markets[205] - Strategic decision to wind down Southern California GCR and ODR operations in February 2022 to improve geographic focus and reduce losses, with full exit expected in 2023[206] - The company operates in two segments: GCR (new construction/renovation) and ODR (owner-direct projects/maintenance), with a primary focus on accelerating ODR growth[207][241][242] - Economic disruptions, including supply chain issues, production delays, and escalating commodity prices, negatively impacted the business in 2022, particularly the GCR segment[223][238] - Outlook for 2023 focuses on improving profitability and operating cash flows, emphasizing ODR-related work, investing in the workforce, and improving GCR project execution through selective pursuit of higher-margin projects[240][241][242][245] Overview Limbach Holdings, Inc. is an integrated building systems solutions firm specializing in mission-critical systems across various sectors, operating through GCR and ODR segments - Limbach Holdings, Inc. is an integrated building systems solutions firm with expertise in design, prefabrication, installation, management, and maintenance of HVAC, mechanical, electrical, plumbing, and control systems[205] - The company operates primarily in the Northeast, Mid-Atlantic, Southeast, and Midwest regions of the United States[205] - Core market sectors include healthcare, data centers, industrial and light manufacturing, higher education, cultural and entertainment, and life science facilities, all with mission-critical systems[207] - The company operates in two segments: General Contractor Relationships (GCR) and Owner Direct Relationships (ODR), performing work under fixed price, modified fixed price, and time and material contracts[207] Key Components of Consolidated Statements of Operations Revenue is primarily from fixed-price construction contracts, with costs including labor and materials, and SG&A covering administrative and compliance expenses - Revenue is primarily generated from fixed-price construction contracts (HVAC, plumbing, electrical) recognized using the cost-to-cost method, and time and materials service contracts recognized as services are performed[208] - Cost of revenue comprises labor, equipment, material, subcontract, and other job costs, including estimated contract losses[210] - Selling, General and Administrative (SG&A) expenses include personnel costs for administrative, estimating, HR, safety, IT, legal, finance, and accounting, as well as public company compliance costs[211][212] - Change in fair value of contingent consideration relates to the remeasurement of earnout payments from the Jake Marshall Transaction[213] - Amortization of intangibles includes periodic non-cash charges for favorable leasehold interests and customer relationships, with an additional $5.7 million recognized from the Jake Marshall Transaction[214] - Other (expenses) income primarily consists of interest expense, losses on lease termination or debt extinguishment, and changes in fair value of interest rate swaps and warrant liability[215] - The company is taxed as a C corporation, and its income tax provision is calculated based on the estimated annual effective tax rate using the asset and liability method[216][217] Operating Segments The company manages its business in GCR and ODR segments, with performance evaluated based on income from operations after allocating corporate expenses - The company operates in two segments: General Contractor Relationships (GCR) and Owner Direct Relationships (ODR)[218] - The Chief Operating Decision Maker (CODM) evaluates performance based on income from operations after allocating corporate office operating expenses[219] - Interest expense is not allocated to segments due to corporate management of debt service[219] Comparison of Results of Operations for the years ended December 31, 2022 and 2021 Total revenue increased by 1.3% to $496.8 million in 2022, driven by a 54.2% surge in ODR revenue, resulting in a net income of $6.8 million Consolidated Statement of Operations Data (2022 vs. 2021) | Metric | 2022 (Thousands) | 2021 (Thousands) | YoY Change (%) | |:-------------------------------------------|:-----------------|:-----------------|:---------------| | Total Revenue | $496,782 | $490,351 | 1.3% | | GCR Revenue | $280,379 | $350,015 | -19.9% | | ODR Revenue | $216,403 | $140,336 | 54.2% | | Total Gross Profit | $93,741 | $85,910 | 9.1% | | GCR Gross Profit % | 13.8% | 13.0% | +0.8 pp | | ODR Gross Profit % | 25.5% | 28.9% | -3.4 pp | | Total Selling, General and Administrative | $77,879 | $71,436 | 9.0% | | Change in fair value of contingent consideration | $2,285 | $0 | N/A | | Amortization of intangibles | $1,567 | $484 | 223.8% | | Total Operating Income | $12,010 | $13,990 | -14.2% | | Net Income | $6,799 | $6,714 | 1.3% | | Basic EPS | $0.65 | $0.67 | -3.0% | | Diluted EPS | $0.64 | $0.66 | -3.0% | - GCR revenue decreased due to a focus on smaller, higher-margin projects and the wind-down of Southern California operations, while ODR revenue increased due to accelerated growth initiatives and the Jake Marshall Transaction[222] - Total gross profit percentage increased from 17.5% to 18.9%, mainly driven by a mix shift towards higher-margin ODR segment work and a $1.3 million gross profit write-up from a prior claim settlement[224] - SG&A expense increased primarily due to costs from the Jake Marshall Transaction ($5.9 million) and an estimated loss contingency accrual ($2.2 million)[227] - Amortization of intangibles increased significantly by $1.1 million (223.8%) due to intangible assets acquired in the Jake Marshall Transaction[229] - Other expenses decreased due to refinancing higher interest rate debt, a prior year loss on early debt extinguishment, and a gain on interest rate swap, partially offset by a loss on early termination of an operating lease[231] GCR and ODR Backlog Information GCR backlog decreased by 10.17% to $302.9 million, while ODR backlog increased by 10.41% to $108.2 million as of December 31, 2022 - Backlog represents estimated revenue on uncompleted contracts, including unexercised contract options, and is subject to unexpected adjustments and cancellations[233] Backlog Summary (as of December 31) | Segment | 2022 Backlog (Millions) | 2021 Backlog (Millions) | YoY Change (%) | Estimated 2023 Revenue Recognition (%) | |:--------|:------------------------|:------------------------|:---------------|:---------------------------------------| | GCR | $302.9 | $337.2 | -10.17% | 68% | | ODR | $108.2 | $98.0 | +10.41% | 92% | - The reduction in GCR backlog is intentional, reflecting a strategic shift to focus on higher-margin, smaller owner-direct projects[234] - ODR backlog increased due to the company's continued focus on accelerated growth in its ODR business[235] COVID-19 and Market Update COVID-19 continued to cause significant economic disruptions in 2022, negatively impacting the GCR segment through project delays and reduced labor productivity - COVID-19 caused significant global disruption, including economic slowdown, supply chain impacts, and escalating commodity prices, which continued to negatively impact the business in 2022[236][238] - Disruptions in 2022 manifested as significantly extended lead times, increased fuel and material costs, project delays, and reduced labor productivity and efficiency, particularly within the GCR segment[238] - The company is taking steps to mitigate impacts through enhanced labor planning, project scheduling, increased pricing, and leveraging relationships, but the evolving nature of these circumstances and the Ukraine conflict add uncertainty[238][239] Outlook for 2023 For 2023, the company plans to focus on improving profitability and operating cash flows, emphasizing ODR growth and selective GCR project execution - The 2023 outlook focuses on improving profitability, operating cash flows, and maintaining sufficient liquidity[240] - Continued focus on ODR-related work, emphasizing dedicated account relationships and expanding owner-direct offerings, including digital solutions[240][241][242] - Investment in the workforce through training and hiring experienced employees to support ODR growth[240][242] - Improve GCR project execution and profitability by remaining selective and reducing exposure to large, complex, non-owner direct projects due to misaligned industry pricing and risks[240][245] Seasonality, Cyclicality and Quarterly Trends Operations are subject to seasonality, with severe weather impacting construction productivity and maintenance demand, and mild cyclicality in capital projects - Severe weather, particularly in northern climates, can slow construction productivity, shifting revenue and gross profit recognition to later periods[246] - Mild weather tends to reduce demand for maintenance services, while severe weather may increase demand for maintenance and time-and-materials services[246] - The company's operations experience mild cyclicality, with increased maintenance and capital projects typically in the third and fourth calendar quarters[246] Effect of Inflation and Tariffs The company faces fluctuating material and equipment prices due to inflation, tariffs, and supply chain disruptions, which are expected to persist in 2023 - Prices for materials (steel, pipe, copper) and equipment are subject to fluctuations and increases due to inflation, tariffs, and supply chain disruptions[247] - Higher material costs and supply chain delays for equipment and service vehicles were experienced in 2022 and are expected to persist in 2023[247] - Mitigation strategies include incorporating cost escalation factors into bids, limiting bid acceptance time, and entering into fixed-price purchase orders[247] Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Limbach Holdings, Inc. is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[297] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2022 and 2021, including balance sheets, statements of operations, equity, cash flows, and comprehensive notes - The section includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Stockholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[300] - The financial statements present fairly, in all material respects, the financial position as of December 31, 2022 and 2021, and results of operations and cash flows for the two years ended December 31, 2022, in conformity with GAAP[303] - A critical audit matter identified was the evaluation of variable consideration and estimated costs at completion for fixed-price construction-type contracts due to high subjectivity and significant auditor judgment[307][308][309][310][311] Report of Independent Registered Public Accounting Firm Crowe LLP issued an unqualified opinion on the company's consolidated financial statements, highlighting variable consideration and estimated costs for fixed-price contracts as a critical audit matter - Crowe LLP issued an unqualified opinion, stating the financial statements present fairly the company's financial position and results of operations for the periods ended December 31, 2022 and 2021[303] - The critical audit matter identified was the evaluation of variable consideration and estimated costs at completion for fixed-price construction-type contracts, due to the significant judgment and estimates required[307][308][309][310][311] Consolidated Balance Sheets Total assets increased to $294.6 million in 2022, driven by higher cash and accounts receivable, while total liabilities also rose to $199.1 million Consolidated Balance Sheet Summary (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | |:---------------------------|:-------------|:-------------| | Total Assets | $294,556 | $267,512 | | Current Assets | $225,990 | $192,906 | | Cash and cash equivalents | $36,001 | $14,476 | | Accounts receivable, net | $124,442 | $89,327 | | Contract assets | $61,453 | $83,863 | | Total Liabilities | $199,114 | $179,674 | | Current Liabilities | $159,085 | $129,742 | | Accounts payable, incl. retainage | $75,122 | $63,840 | | Contract liabilities | $44,007 | $26,712 | | Long-term debt | $21,528 | $29,816 | | Total Stockholders' Equity | $95,442 | $87,838 | - Cash and cash equivalents increased significantly from $14.5 million in 2021 to $36.0 million in 2022[315] - Accounts receivable, net, increased by $35.1 million, while contract assets decreased by $22.4 million[315] - Long-term debt decreased from $29.8 million in 2021 to $21.5 million in 2022[315] Consolidated Statements of Operations Net income slightly increased to $6.8 million in 2022 on $496.8 million total revenue, with gross profit improving to 18.9% despite higher operating expenses Consolidated Statements of Operations Summary (in thousands, except per share data) | Metric | 2022 | 2021 | |:-------------------------------------------|:---------|:---------| | Revenue | $496,782 | $490,351 | | Cost of revenue | $403,041 | $404,441 | | Gross profit | $93,741 | $85,910 | | Selling, general and administrative | $77,879 | $71,436 | | Change in fair value of contingent consideration | $2,285 | $0 | | Amortization of intangibles | $1,567 | $484 | | Operating income | $12,010 | $13,990 | | Total other expenses | $(2,402) | $(4,513) | | Income before income taxes | $9,608 | $9,477 | | Income tax provision | $2,809 | $2,763 | | Net income | $6,799 | $6,714 | | Basic EPS | $0.65 | $0.67 | | Diluted EPS | $0.64 | $0.66 | - Gross profit increased by $7.8 million (9.1%) year-over-year, while operating income decreased by $1.98 million (14.2%)[318] - Other expenses decreased significantly from $(4.5) million in 2021 to $(2.4) million in 2022, primarily due to the absence of a loss on early debt extinguishment in 2022[318] Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $95.4 million in 2022, driven by net income and stock-based compensation, partially offset by share repurchases Consolidated Statements of Stockholders' Equity Summary (in thousands, except share amounts) | Metric | Dec 31, 2022 | Dec 31, 2021 | |:----------------------------------------|:-------------|:-------------| | Balance at January 1 | $87,838 | $53,732 | | Net income | $6,799 | $6,714 | | Additional paid-in capital | $87,809 | $85,004 | | Treasury stock, at cost | $(2,000) | $0 | | Retained earnings | $9,632 | $2,833 | | Total Stockholders' Equity | $95,442 | $87,838 | | Common stock shares outstanding (end of year) | 10,291,758 | 10,304,242 | - The increase in stockholders' equity was primarily due to net income and stock-based compensation, partially offset by share repurchases[320] - The company repurchased 179,652 shares of common stock for $2.0 million under its Share Repurchase Program in 2022[320] Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $35.4 million in 2022, driven by changes in contract assets and liabilities Consolidated Statements of Cash Flows Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | |:---------------------------------------|:---------|:----------| | Net cash provided by (used in) operating activities | $35,373 | $(24,233) | | Net cash used in investing activities | $(495) | $(19,303) | | Net cash (used in) provided by financing activities | $(13,353) | $15,865 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $21,525 | $(27,671) | | Cash, cash equivalents and restricted cash, end of year | $36,114 | $14,589 | - Operating cash flows increased by $59.6 million year-over-year, primarily driven by a $75.2 million cash inflow from changes in contract assets and liabilities and a $16.9 million change in accounts payable[253][322] - Investing activities in 2021 included $19.0 million for the Jake Marshall Transaction, which was not present in 2022[256][322] - Financing activities in 2022 included $13.4 million in principal debt payments and $2.0 million in common stock repurchases, partially offset by $5.4 million from a sale-leaseback transaction[258][322] Notes to Consolidated Financial Statements These notes provide detailed disclosures on the company's business, accounting policies, acquisitions, revenue recognition, assets, debt, equity, and various commitments and contingencies Note 1 – Business and Organization Limbach Holdings, Inc. is a Delaware corporation providing building systems solutions for mission-critical infrastructure, operating in GCR and ODR segments - Limbach Holdings, Inc. is a building systems solutions firm specializing in design, prefabrication, installation, management, and maintenance of HVAC, mechanical, electrical, plumbing, and controls systems[326] - The company serves customers in diverse industries with mission-critical infrastructures, including data centers, healthcare, industrial, higher education, cultural/entertainment, and life science facilities[326] - Operations are divided into two segments: GCR (new construction/renovation for general contractors) and ODR (owner-direct projects/maintenance services)[327] Note 2 – Significant Accounting Policies The company's financial statements adhere to GAAP, requiring significant estimates for revenue recognition, fair value, and insurance reserves, with specific policies for cash, receivables, and goodwill impairment - Financial statements are prepared in accordance with GAAP, requiring significant estimates and assumptions for revenue recognition, fair value accounting, insurance reserves, and income tax valuation allowances[328][330] - Revenue from construction-type contracts is recognized over time using the cost-to-cost method, while service contracts are recognized as services are performed or on a straight-line basis[347][349] - Variable consideration (e.g., pending change orders, claims) is included in the transaction price only if it is probable that a significant future revenue reversal will not occur[341][342][343] - The company adopted ASU 2021-08 (Business Combinations) early in December 2021 and ASU 2016-13 (Credit Losses) on January 1, 2023, with no material impact on financial position or results[379][380] - Goodwill and indefinite-lived intangible assets are tested for impairment annually (October 1) or more frequently if indicators arise, using qualitative or quantitative assessments[358] Note 3 – Acquisitions On December 2, 2021, the company acquired JMLLC and CSLLC for $21.3 million cash plus potential earnouts, recognizing $5.2 million in goodwill and $5.7 million in intangible assets - The Jake Marshall Transaction closed on December 2, 2021, with the acquisition of JMLLC and CSLLC, expanding the company's market share[389] - Total consideration was $21.3 million cash at closing, plus potential earnout payments up to $6.0 million based on gross profit targets for 2022 and 2023[390] - The acquisition resulted in the recognition of $5.2 million in goodwill, allocated to the ODR segment, and $5.7 million in intangible assets (customer relationships, trade name, backlog)[392][393] Note 4 – Revenue from Contracts with Customers Contract assets decreased by $22.4 million to $61.5 million in 2022, while contract liabilities increased by $17.3 million to $44.0 million, shifting to a net overbilling position - Revenue from construction-type contracts is recognized using the cost-to-cost method, and from time and materials contracts as services are performed[394] Contract Assets and Liabilities (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | Change (YoY) | |:---------------------------|:-------------|:-------------|:-------------| | Total Contract Assets | $61,453 | $83,863 | $(22,410) | | Total Contract Liabilities | $44,007 | $26,712 | $17,295 | | Net (overbilling) underbilling | $(10,233) | $21,154 | $(31,387) | - In 2022, the company recorded material gross profit write-ups of $3.0 million on three GCR projects and write-downs of $2.8 million on four GCR projects, resulting in a net positive impact of $0.5 million or more[402] Remaining Performance Obligations (as of Dec 31, 2022) | Segment | Amount (Millions) | Estimated 2023 Revenue Recognition (%) | |:--------|:------------------|:---------------------------------------| | GCR | $302.9 | 68% | | ODR | $90.0 | 90% | Note 5 – Goodwill and Intangible Assets Goodwill remained at $11.4 million in 2022 with no impairment, while definite-lived intangible assets totaled $5.4 million net, amortized over 0.5 to 8.0 years - Goodwill was $11.4 million as of December 31, 2022 and 2021, entirely associated with the ODR segment[406][411] - A quantitative impairment assessment in Q4 2022 for the ODR reporting unit showed $47.2 million (194%) headroom, resulting in no goodwill impairment[408] Net Intangible Assets (excluding goodwill, in thousands) | Asset Type | Dec 31, 2022 | Dec 31, 2021 | |:-----------------------------------------|:-------------|:-------------| | Total amortized intangible assets | $5,380 | $6,947 | | Total unamortized intangible assets (Limbach trade name) | $9,960 | $9,960 | | Total | $15,340 | $16,907 | - Total amortization expense for definite-lived intangible assets was $1.6 million in 2022, up from $0.5 million in 2021, largely due to assets acquired in the Jake Marshall Transaction[415] Estimated Amortization Expense for Definite-Lived Intangibles (in thousands) | Year | Estimated Amortization Expense | |:-----|:-------------------------------| | 2023 | $1,211 | | 2024 | $867 | | 2025 | $830 | | 2026 | $800 | | 2027 | $776 | | 2028 and thereafter | $896 | | Total | $5,380 | Note 6 – Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities totaled $24.9 million in 2022, including $9.7 million for bonus/commissions and a $2.2 million estimated loss contingency Accrued Expenses and Other Current Liabilities (in thousands) | Category | Dec 31, 2022 | Dec 31, 2021 | |:---------------------------------------|:-------------|:-------------| | Accrued payroll and related liabilities | $4,545 | $8,169 | | Accrued bonus and commissions | $9,682 | $7,352 | | Accrued insurance liabilities | $715 | $719 | | Accrued job costs | $1,913 | $3,772 | | Assurance-type warranty liabilities | $1,581 | $3,310 | | Estimated loss contingency | $2,182 | $0 | | Earnout Payments accrued, current | $2,859 | $0 | | Other accrued liabilities | $1,465 | $1,122 | | Total | $24,942 | $24,444 | - Assurance-type warranty liabilities decreased by $1.7 million in 2022, with accruals for new warranties at $0.3 million and settlements at $1.5 million[418][419] - An estimated loss contingency of $2.2 million was recorded in 2022, related to a legal proceeding[418][481] Note 7 – Debt Total debt decreased to $31.8 million in 2022, including the A&R Wintrust Term Loan and a $5.4 million financing liability from a sale-leaseback transaction Long-Term Debt Obligations (in thousands) | Obligation | Dec 31, 2022 | Dec 31, 2021 | |:-----------------------------------------|:-------------|:-------------| | A&R Wintrust Term Loan | $21,453 | $34,881 | | Finance leases | $4,954 | $5,132 | | Financing liability (Sale-Leaseback) | $5,351 | $0 | | Total Debt | $31,758 | $40,013 | | Less - Current portion | $(9,564) | $(9,879) | | Less - Unamortized discount & issuance costs | $(666) | $(318) | | Long-term debt | $21,528 | $29,816 | - The company refinanced its debt in February 2021, resulting in a $2.0 million loss on early extinguishment of debt[421] - The A&R Wintrust Credit Agreement (amended in December 2021) provides a $35.5 million term loan and a $25 million revolving credit facility, with the term loan bearing interest at Term SOFR plus a margin[435][436] - A sale-leaseback transaction for the Pontiac Facility in September 2022 was accounted for as a $5.4 million financing liability, with a 25-year term[445][449][451] - An interest rate swap agreement was entered in July 2022 with a notional amount of $10.0 million and a fixed rate of 3.12% to manage variable-rate debt risk[441] - As of December 31, 2022, the company was in compliance with all financial maintenance covenants under its credit facility[252] Note 8 – Equity The company's authorized capital includes 100 million common shares and 1 million preferred shares, with 1,229,643 warrants outstanding and a $2.0 million share repurchase program completed in 2022 - The company's certificate of incorporation authorizes 100,000,000 shares of common stock and 1,000,000 shares of preferred stock[452] Outstanding Warrants (as of December 31) | Warrant Type | 2022 Shares | 2021 Shares | |:-----------------------------|:------------|:------------| | $15 Exercise Price Sponsor Warrants | 600,000 | 600,000 | | Merger Warrants | 629,643 | 629,643 | | Total | 1,229,643 | 1,229,643 | - The 2022 Amended and Restated Omnibus Incentive Plan authorizes 2,600,000 shares for equity awards[457] - A $2.0 million Share Repurchase Program was approved in September 2022, with $2.0 million repurchased by December 31, 2022[459] - The Employee Stock Purchase Plan (ESPP) issued 37,490 shares in 2022 and 25,068 shares in 2021, with 406,617 shares remaining available[460] - In February 2021, the company completed a public offering, selling 2,051,025 shares of common stock (including over-allotment option) for net proceeds of approximately $22.8 million[461] Note 9 – Fair Value Measurements The A&R Wintrust Term Loan's fair value was $21.5 million, contingent earnout payments were $5.4 million (Level 3), and an interest rate swap had a $0.3 million gain (Level 2) in 2022 - The carrying amounts of financial instruments like cash, accounts receivable, and accounts payable approximate fair value due to their short-term maturities[462] - The fair value of the A&R Wintrust Term Loan was $21.5 million at December 31, 2022, determined using discounted estimated future cash flows (Level 3 inputs)[462] - Contingent earnout payments from the Jake Marshall Transaction were valued at $5.4 million (Level 3) at December 31, 2022, resulting in a $2.3 million loss from fair value remeasurement in 2022[463][464] - An interest rate swap, classified as a Level 2 measurement, had a fair value of $0.3 million (gain) at December 31, 2022[465] Note 10 – Earning per Share Basic EPS for 2022 was $0.65 and diluted EPS was $0.64, with out-of-the-money warrants excluded from diluted calculations Earnings Per Share (EPS) Summary | Metric | 2022 | 2021 | |:-------------------------------------|:------------|:------------| | Net income (thousands) | $6,799 | $6,714 | | Weighted average shares outstanding – basic | 10,425,119 | 10,013,117 | | Weighted average shares outstanding – diluted | 10,676,534 | 10,231,637 | | Basic EPS | $0.65 | $0.67 | | Diluted EPS | $0.64 | $0.66 | - Out-of-the-money warrants (1,229,643 in 2022) and certain performance/market-based RSUs were excluded from diluted EPS calculations as they were antidilutive[469] Note 11 – Income Taxes The income tax provision was $2.8 million for both 2022 and 2021, with an effective tax rate of 29.2% and net deferred tax assets of $4.8 million Income Tax Provision (in thousands) | Category | 2022 | 2021 | |:---------------------|:-------|:-------| | Total current tax provision | $3,308 | $1,006 | | Total deferred tax provision | $(499) | $1,757 | | Income tax provision | $2,809 | $2,763 | Effective Tax Rate Reconciliation | Factor | 2022 | 2021 | |:-------------------------------------|:------|:------| | Federal statutory income tax rate | 21.0% | 21.0% | | State income taxes, net of federal tax effect | 6.4% | 7.0% | | Stock based compensation – restricted stock | 1.4% | (1.1)%| | Return to provision adjustment | (0.1)%| 1.2% | | Permanent differences | 1.3% | 1.9% | | Tax credits | (0.9)%| (0.8)%| | Effective tax rate | 29.2% | 29.2% | Net Deferred Tax Asset (in thousands) | Category | Dec 31, 2022 | Dec 31, 2021 | |:---------------------|:-------------|:-------------| | Total deferred tax assets | $13,081 | $13,541 | | Total deferred tax liabilities | $(8,252) | $(9,211) | | Net deferred tax asset | $4,829 | $4,330 | - No valuation allowance was deemed necessary against deferred tax assets, and there were no unrecognized tax benefits or net operating loss carryforwards[473][474][475] Note 12 – Operating Segments The company operates in GCR and ODR segments, with GCR revenue at $280.4 million and ODR revenue at $216.4 million in 2022 - The company operates in two segments: General Contractor Relationships (GCR) and Owner Direct Relationships (ODR)[476] - Performance is evaluated by the Chief Operating Decision Maker (CODM) based on income from operations after allocating corporate office operating expenses; interest expense is not allocated[477][478] Segment Revenue and Gross Profit (in thousands) | Metric | 2022 | 2021 | |:------------|:---------|:---------| | GCR Revenue | $280,379 | $350,015 | | ODR Revenue | $216,403 | $140,336 | | GCR Gross Profit | $38,622 | $45,409 | | ODR Gross Profit | $55,119 | $40,501 | - One GCR segment customer accounted for approximately 11% of consolidated total revenue in 2022, down from two customers accounting for 17% and 12% in 2021[479] Note 13 – Commitments and Contingencies The company faces ongoing legal proceedings, provides $129.6 million in surety bonds, and is self-insured for various claims, contributing to multiemployer pension plans - The company is continually engaged in legal proceedings, arbitrations, and litigation arising in the ordinary course of business[480] - A complaint filed against the Southern California business unit alleges damages exceeding $3.0 million; an estimated loss contingency was recorded as of December 31, 2022[481] - Surety bonds outstanding were approximately $129.6 million as of December 31, 2022, securing payment and performance obligations[484] - The company is substantially self-insured for workers' compensation, general liability, medical, and dental claims, with liabilities accrued based on known facts and historical trends[486][488] Self-Insurance Liability (in thousands) | Category | Dec 31, 2022 | Dec 31, 2021 | |:---------------------------------------|:-------------|:-------------| | Current liability — workers' compensation and general liability | $158 | $184 | | Current liability — medical and dental | $557 | $456 | | Non-current liability | $343 | $451 | | Total liability | $1,058 | $1,091 | | Restricted cash | $113 | $113 | - The company contributes to approxima