Limbach Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2024
Filed with the SEC on Nov 5, 2024 and accepted by EDGAR at Nov 5, 2024, 16:16 ET.
Management's discussion and analysis
As filed, 67,619 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. See “Cautionary Note Regarding Forward Looking Statements” contained above in this Quarterly Report on Form 10-Q. The Company assumes no obligation to update any of these forward-looking statements, unless required to do so by applicable law.
Unless the context otherwise requires, a reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) contained in Part I, "Item 1. Financial Statements."
Overview
The Company is a building systems solution firm that partners with building owners and facilities managers who have mission critical mechanical (heating, ventilation and air conditioning), electrical, and plumbing infrastructure. The Company strives to be an indispensable partner to its customers by providing services that are essential to the operation of their businesses. The Company has more than 1,300 team members in 19 offices across the eastern United States. The Company’s team members uniquely combine engineering expertise with field installation skills to provide custom solutions that leverage its full life-cycle capabilities, which allows it to address both the operational and capital projects needs of its customers.
The Company’s core market sectors consist of the following customer base with mission-critical systems:
- Healthcare, including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities;
- Industrial and manufacturing, including automotive, energy and general manufacturing plants;
- Data Centers, including facilities composed of networked computers, storage systems and computing infrastructure that organizations use to assemble, process, store and disseminate large amounts of data;
- Life sciences, including organizations and companies whose work is centered around research and development focused on living things;
- Higher Education, including both public and private colleges, universities and research centers; and
- Cultural and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides and parks.
The Company operates in two segments, (i) ODR, in which the Company performs owner direct projects and/or provides maintenance or service primarily on mechanical, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers, and (ii) GCR, in which the Company generally manages new construction or renovation projects that involve primarily mechanical, plumbing, or electrical services awarded to the Company by general contractors or construction managers.
Key Components of Condensed Consolidated Statements of Operations
Revenue
The Company generates revenue principally from fixed-price construction contracts to deliver mechanical, plumbing, and electrical construction services to its customers. The duration of the Company’s contracts generally ranges from three months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in mechanical, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts.
The Company generally invoices customers monthly based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable.
Cost of Revenue
Cost of revenue primarily consists of the labor, equipment, material, subcontract and other job costs in connection with fulfilling the terms of the Company’s contracts. Labor costs consist of wages plus taxes, fringe benefits and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company's services, and the risks associated therewith, contract costs as a percentage of contract revenue have historically fluctuated, and this fluctuation is expected to continue in future periods.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company's business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Change in fair value of contingent consideration
The change in fair value of contingent consideration relates to the remeasurement of the contingent consideration arrangements resulting from each of the Jake Marshall, LLC (“JMLLC”), Coating Solutions, LLC (“CSLLC”) (together with JMLLC, the Jake Marshall Transaction), the ACME Transaction, the Industrial Air Transaction and the Kent Island Transaction. As a part of the total consideration for the Jake Marshall, ACME, Industrial Air and Kent Island transactions, the Company initially recognized $3.1 million, $1.5 million, $3.2 million and $4.4 million, respectively, in contingent consideration associated with their respective earnout payments. The carrying values of the Jake Marshall, ACME, Industrial Air and Kent Island Earnout Payments are subject to remeasurement at fair value at each reporting date through the end of the respective earnout periods with any changes in the fair value reported as a separate component of operating income in the condensed consolidated statements of operations. See Note 8 – Fair Value Measurements in the accompanying notes to the Company’s condensed consolidated financial statements for further information.
Amortization of Intangibles
Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. As a result of the ACME Transaction, the Company recognized, in the aggregate, an additional $2.8 million of intangible assets associated with customer relationships with third-party customers and the acquired trade name, inclusive of the impact of certain measurement period adjustments. In addition, as a result of the Industrial Air Transaction, the Company recognized, in the aggregate, an additional $8.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name, trademarks and intellectual property and the acquired backlog. Lastly, as a result of the Kent Island Transaction, the Company recognized, in the aggregate, an additional $10.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and the acquired backlog. Each of the Jake Marshall, ACME, Industrial Air and Kent Island-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date. See Note 5 – Goodwill and Intangible Assets for further information on the Company’s intangible assets.
Other (Expenses) Income
Other (expenses) income consists primarily of interest expense incurred in connection with the Company's debt, gains or losses associated with the disposition of property and equipment, changes in fair value of interest rate swaps, and interest income earned from its overnight repurchase agreements, money market investments, U.S. Treasury Bills and the Company's interest rate swap agreement. Deferred financing costs are amortized to interest expense using the effective interest method.
Provision for Income Taxes
The Company is taxed as a C corporation and its financial results include the effects of federal income taxes, which will be paid at the parent level.
The Company’s provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes.
Impact of Acquisitions
In order to provide a more meaningful period-over-period discussion of the Company’s operating results, the Company may discuss amounts generated or incurred (revenues, gross profit, selling, general and administrative expenses, and operating income) from companies acquired. The amounts discussed reflect the acquired companies’ operating results in the current reported period only for the time period these entities were not owned by the Company in the comparable prior reported period.
During 2023, the Company acquired two companies for total cash consideration of $15.3 million, net of cash acquired and inclusive of certain measurement period adjustments. On July 3, 2023, the Company completed an acquisition of Chattanooga, TN-based specialty industrial contractor, ACME, for a purchase price at closing of $5.0 million in cash. The transaction also provides for an earnout of up to $2.5 million potentially being paid out over the next two years. ACME specializes in performing industrial maintenance, capital project work, and emergency services for specialty chemical and manufacturing clients, and is a leading mechanical solutions provider for hydroelectric producers. On November 1, 2023, the Company completed an acquisition of Greensboro, NC-based specialty mechanical contractor, Industrial Air, for a purchase price at closing of $13.5 million in cash. The transaction also provides for an earnout of up to $6.5 million potentially being paid out over the next two years. Industrial Air serves industrial customers throughout the Southeast United States and along the Eastern seaboard, focusing on delivering engineered air handling systems, including air condition and air filtration, along with controls systems and maintenance work. In addition, Industrial Air manufactures a wide range of components for air conditioning and filtration systems.
On September 3, 2024, the Company completed an acquisition of Laurel, MD-based specialty mechanical contractor, Kent Island Mechanical, for a purchase price at closing of $15.0 million. The transaction also provides for an earnout of up to $5.0 million potentially being paid out over the next two years. Kent Island is a leading provider of building systems solutions in the Greater Washington, DC metro area, including suburban Maryland and Northern Virginia. Kent Island excels in designing, engineering, installing, servicing, and maintaining mechanical and plumbing systems for complex facilities. The acquisition expands the Company’s market share within its existing operating footprint, provides further exposure to an attractive customer base and supports the Company's continued ODR growth strategy.
Divestitures
In February 2022, the Company announced its strategic decision to wind down its Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. During 2023, the Company executed the closeout phases on its remaining Southern California business unit projects and has fully exited the Southern California region aside from certain operational warranty obligations. However, the Company is party to the terms of a sublease agreement for its leased premises in Southern California through April 2027 and remains obligated under the original lease for such office space in the event the sublessee fails to satisfy its obligations under the sublease agreement. See Note 12 – Leases in the accompanying notes to the Company’s condensed consolidated financial statements for further information on the Southern California Sublease.
Operating Segments
The Company manages and measures the performance of its business in two operating segments: ODR and GCR. These segments are reflective of how the Company’s CODM reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM comprises its President and Chief Executive Officer and Executive Vice President and Chief Financial Officer.
In accordance with ASC Topic 280 – Segment Reporting, the Company has elected to aggregate all of the ODR work performed at branches into one ODR reportable segment and all of the GCR work performed at branches into one GCR reportable segment. All transactions between segments are eliminated in consolidation.
Comparison of Results of Operations for the three months ended September 30, 2024 and 2023
The following table presents operating results for the three months ended September 30, 2024 and 2023 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared below:
(in thousands except for percentages)
| Statement of Operations Data: Revenue: | Three Months Ended September 30, 2024 | 2023 | ||||
|---|---|---|---|---|---|---|
| ODR | $93,007 | 69.4% | $65,832 | 51.5% | ||
| GCR | 40,913 | 30.6% | 61,936 | 48.5% | ||
| Total revenue | 133,920 | 100.0% | 127,768 | 100.0% | ||
| Gross profit: | ||||||
| ODR | 29,647 | 31.9% | (1) | 19,274 | 29.3% | (1) |
| GCR | 6,467 | 15.8% | (2) | 11,970 | 19.3% | (2) |
| Total gross profit | 36,114 | 27.0% | 31,244 | 24.5% | ||
| Selling, general and administrative(3) | 23,748 | 17.7% | 20,967 | 16.4% | ||
| Change in fair value of contingent consideration | 610 | 0.5% | 161 | 0.1% | ||
| Amortization of intangibles | 868 | 0.6% | 288 | 0.2% | ||
| Total operating income | 10,888 | 8.1% | 9,828 | 7.7% | ||
| Other (expenses) income | (10) | —% | 124 | 0.1% | ||
| Total income before income taxes | 10,878 | 8.1% | 9,952 | 7.8% | ||
| Income tax provision | 3,394 | 2.5% | 2,760 | 2.2% | ||
| Net income | $7,484 | 5.6% | $7,192 | 5.6% |
(1) As a percentage of ODR revenue.
(2) As a percentage of GCR revenue.
(3) Included within selling, general and administrative expenses was $1.6 million and $1.1 million of stock-based compensation expense for the three months ended September 30, 2024 and 2023, respectively.
Revenue
(in thousands except for percentages)
| Revenue: | Three Months Ended September 30, 2024 | 2023 | Increase/(Decrease) | |
|---|---|---|---|---|
| ODR | $93,007 | $65,832 | $27,175 | 41.3% |
| GCR | 40,913 | 61,936 | (21,023) | (33.9)% |
| Total revenue | $133,920 | $127,768 | $6,152 | 4.8% |
Revenue for the three months ended September 30, 2024 increased by $6.2 million compared to the three months ended September 30, 2023. ODR revenue increased by $27.2 million, or 41.3%, while GCR revenue decreased by $21.0 million, or 33.9%. The increase in period-over-period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business and, as a result of the Industrial Air Transaction. Industrial Air was not an acquired entity of the Company for the three months ended September 30, 2023. The decrease in period-over-period GCR segment revenue was primarily due to the Company’s continued focus on the execution of its mix-shift strategy to ODR.
Gross Profit
(in thousands except for percentages)
| Gross profit: | Three Months Ended September 30, 2024 | 2023 | Increase/(Decrease) | |
|---|---|---|---|---|
| ODR | $29,647 | $19,274 | $10,373 | 53.8% |
| GCR | 6,467 | 11,970 | (5,503) | (46.0)% |
| Total gross profit | $36,114 | $31,244 | $4,870 | 15.6% |
| Total gross profit as a percentage of total revenue | 27.0% | 24.5% |
The Company's gross profit for the three months ended September 30, 2024 increased by $4.9 million compared to the three months ended September 30, 2023. ODR gross profit increased $10.4 million, or 53.8%, due to the combination of an increase in revenue and higher margins driven by contract mix. GCR gross profit decreased $5.5 million, or 46.0%, primarily due to lower revenue and lower margins on project work period-over-period. The total gross profit percentage increased from 24.5% for the three months ended September 30, 2023 to 27.0% for the same period ended in 2024, mainly driven by the mix of higher margin ODR segment work, the Company becoming more selective when pursuing GCR work, and as a result of the Industrial Air Transaction. Industrial Air was not an acquired entity of the Company for the three months ended September 30, 2023.
During the three months ended September 30, 2024, the Company recorded revisions in its contract estimates for certain ODR and GCR projects; however, the Company did not record any gross profit write-ups or write-downs that had a net gross profit impact of $0.5 million or more. During the three months ended September 30, 2023, the Company recorded gross profit write-ups on three GCR projects for a total of $3.1 million, inclusive of a $1.2 million write-up related to the settlement of a past claim, and one GCR project gross profit write-down for $0.7 million and one ODR project gross profit write-down for $0.6 million.
Selling, General and Administrative
(in thousands except for percentages)
| Three Months Ended September 30, 2024 | 2023 | Increase/(Decrease) | ||
|---|---|---|---|---|
| Selling, general and administrative | $23,748 | $20,967 | $2,781 | 13.3% |
| Total selling, general and administrative as a percentage of total revenue | 17.7% | 16.4% |
The Company's SG&A expense for the three months ended September 30, 2024 increased by approximately $2.8 million compared to the three months ended September 30, 2023. The increase in SG&A expense was primarily due to approximately $1.0 million of SG&A expenses incurred within the Industrial Air entity during the three months ended September 30, 2024 that was not an acquired entity of the Company during the three months ended September 30, 2023. The Company’s SG&A expense for the three months ended September 30, 2024 also increased due to a $1.1 million increase in payroll related expenses, a $0.5 million increase in stock-based compensation expenses and a $0.4 million increase in professional services fees. As a result of these factors, SG&A expense as a percentage of revenue increased to 17.7% for the three months ended September 30, 2024 as compared to 16.4% for the three months ended September 30, 2023.
Change in Fair Value of Contingent Consideration
The change in fair value of the Earnout Payments contingent consideration was a $0.6 million and a $0.2 million loss for the three months ended September 30, 2024 and 2023, respectively. These increases to the contingent liability were primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangements as of September 30, 2024 and 2023. See Note 8 – Fair Value Measurements in the accompanying notes to the Company’s condensed consolidated financial statements for further information on the Company's earnout arrangements.
Amortization of Intangibles
(in thousands except for percentages)
| Three Months Ended September 30, 2024 | 2023 | Increase/(Decrease) | ||
|---|---|---|---|---|
| Amortization of intangibles | $868 | $288 | $580 | 201.4% |
Total amortization expense for the three months ended September 30, 2024 and 2023 was $0.9 million and $0.3 million, respectively. As a result of the Industrial Air and Kent Island acquisitions, the Company acquired certain intangible assets in which it recognized an increase of approximately $0.6 million of amortization expense period-over-period. See Note 5 - Goodwill and Intangible Assets for further information on the Company's intangible assets.
Other Expenses
(in thousands except for percentages)
| Other (expenses) income: | Three Months Ended September 30, 2024 | 2023 | Change | |
|---|---|---|---|---|
| Interest expense | $(468) | $(437) | $(31) | 7.1% |
| Interest income | 626 | 377 | 249 | 66.0% |
| Gain on disposition of property and equipment | 99 | 68 | 31 | 45.6% |
| (Loss) gain on change in fair value of interest rate swap | (267) | 116 | (383) | (330.2)% |
| Total other (expenses) income | $(10) | $124 | $(134) | 108.1% |
Total other expenses for the three months ended September 30, 2024 was less than $0.1 million as compared to total other income of $0.1 million for the three months ended September 30, 2023. The change period-over-period was primarily driven by a $0.4 million loss period-over-period associated with the Company's interest rate swap arrangement, partly offset by a $0.2 million increase in interest income related to the Company's overnight repurchase agreements, investments in U.S. Treasury Bills and money market funds.
Income Taxes
The Company recorded an income tax provision of $3.4 million for the three months ended September 30, 2024 compared to $2.8 million for the three months ended September 30, 2023. The effective tax rate was 31.2% and 27.7% for the three months ended September 30, 2024 and 2023, respectively. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate period-over-period was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items.
Comparison of Results of Operations for the nine months ended September 30, 2024 and 2023
The following table presents operating results for the nine months ended September 30, 2024 and 2023 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared below:
(in thousands except for percentages)
| Statement of Operations Data: Revenue: | Nine Months Ended September 30, 2024 | 2023 | ||||
|---|---|---|---|---|---|---|
| ODR | $250,017 | 66.6% | $183,330 | 49.1% | ||
| GCR | 125,114 | 33.4% | 190,329 | 50.9% | ||
| Total revenue | 375,131 | 100.0% | 373,659 | 100.0% | ||
| Gross profit: | ||||||
| ODR | 77,170 | 30.9% | (1) | 52,424 | 28.6% | (1) |
| GCR | 23,540 | 18.8% | (2) | 33,560 | 17.6% | (2) |
| Total gross profit | 100,710 | 26.8% | 85,984 | 23.0% | ||
| Selling, general and administrative(3) | 69,800 | 18.6% | 62,433 | 16.7% | ||
| Change in fair value of contingent consideration | 2,344 | 0.6% | 464 | 0.1% | ||
| Amortization of intangibles | 2,956 | 0.8% | 1,054 | 0.3% | ||
| Total operating income | 25,610 | 6.8% | 22,033 | 5.9% | ||
| Other income (expenses) | 885 | 0.2% | (1,121) | (0.3)% | ||
| Total income before income taxes | 26,495 | 7.1% | 20,912 | 5.6% | ||
| Income tax provision | 5,462 | 1.5% | 5,407 | 1.4% | ||
| Net income | $21,033 | 5.6% | $15,505 | 4.1% |
(1) As a percentage of ODR revenue.
(2) As a percentage of GCR revenue.
(3) Included within selling, general and administrative expenses was $4.3 million and $3.4 million of stock-based compensation expense for the nine months ended September 30, 2024 and 2023, respectively.
Revenue
(in thousands except for percentages)
| Revenue: | Nine Months Ended September 30, 2024 | 2023 | Increase/(Decrease) | |
|---|---|---|---|---|
| ODR | $250,017 | $183,330 | $66,687 | 36.4% |
| GCR | 125,114 | 190,329 | (65,215) | (34.3)% |
| Total revenue | $375,131 | $373,659 | $1,472 | 0.4% |
Revenue for the nine months ended September 30, 2024 increased by $1.5 million compared to the nine months ended September 30, 2023. ODR revenue increased by $66.7 million, or 36.4%, while GCR revenue decreased by $65.2 million, or 34.3%. The increase in period-over-period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business and as a result of the ACME and Industrial Air acquisitions. Certain of these entities were not acquired entities of the Company during the full nine months ended September 30, 2023. The decrease in period-over-period GCR segment revenue was primarily due to the Company’s continued focus on the execution of its mix-shift strategy to ODR.
Gross Profit
(in thousands except for percentages)
| Gross profit: | Nine Months Ended September 30, 2024 | 2023 | Increase/(Decrease) | |
|---|---|---|---|---|
| ODR | $77,170 | $52,424 | $24,746 | 47.2% |
| GCR | 23,540 | 33,560 | (10,020) | (29.9)% |
| Total gross profit | $100,710 | $85,984 | $14,726 | 17.1% |
| Total gross profit as a percentage of total revenue | 26.8% | 23.0% |
The Company's gross profit for the nine months ended September 30, 2024 increased by $14.7 million compared to the nine months ended September 30, 2023. ODR gross profit increased $24.7 million, or 47.2%, due to the combination of an increase in revenue and higher margins driven by contract mix. GCR gross profit decreased $10.0 million, or 29.9%, primarily due to lower revenue despite higher margins on project work period-over-period. The total gross profit percentage increased from 23.0% for the nine months ended September 30, 2023 to 26.8% for the same period ended in 2024, mainly driven by the mix of higher margin ODR segment work, the Company becoming more selective when pursuing GCR work, and as a result of the ACME and Industrial Air acquisitions.
The Company recorded revisions in its contract estimates for certain ODR and GCR projects. During the nine months ended September 30, 2024, the Company recorded gross profit write-ups on four ODR projects and two GCR projects for a total of $3.9 million and $1.5 million, respectively, and one GCR project gross profit write-down for a total of $0.6 million that had a net gross profit impact of $0.5 million or more. During the nine months ended September 30, 2023, the Company recorded gross profit write-ups on two GCR projects for a total of $2.2 million, inclusive of a $1.2 million write-up related to the settlement of a past claim, and one GCR project gross profit write-down for $0.5 million and one ODR project gross profit write-down for $0.7 million.
Selling, General and Administrative
(in thousands except for percentages)
| Nine Months Ended September 30, 2024 | 2023 | Increase/(Decrease) | ||
|---|---|---|---|---|
| Selling, general and administrative | $69,800 | $62,433 | $7,367 | 11.8% |
| Total selling, general and administrative as a percentage of total revenue | 18.6% | 16.7% |
The Company's SG&A expense for the nine months ended September 30, 2024 increased by approximately $7.4 million compared to the nine months ended September 30, 2023. The increase in SG&A expense was primarily due to approximately $3.7 million of collective SG&A expenses incurred within the ACME and Industrial Air entities during the nine months ended September 30, 2024 that were not acquired entities of the Company during the full nine months ended September 30, 2023. The Company’s SG&A expense for the nine months ended September 30, 2024 also increased due to a $2.9 million increase in payroll related expenses and a $0.9 million increase in stock-based compensation expenses. As a result of these factors, SG&A expense as a percentage of revenue increased to 18.6% for the nine months ended September 30, 2024 as compared to 16.7% for the nine months ended September 30, 2023.
Change in Fair Value of Contingent Consideration
The change in fair value of the Earnout Payments contingent consideration was a $2.3 million and a $0.5 million loss for the nine months ended September 30, 2024 and 2023, respectively. These increases to the contingent liability were primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangements as of September 30, 2024 and 2023. See Note 8 – Fair Value Measurements in the accompanying notes to the Company’s condensed consolidated financial statements for further information on the Company's earnout arrangements.
Amortization of Intangibles
(in thousands except for percentages)
| Nine Months Ended September 30, 2024 | 2023 | Increase/(Decrease) | ||
|---|---|---|---|---|
| Amortization of intangibles | $2,956 | $1,054 | $1,902 | 180.5% |
Total amortization expense for the nine months ended September 30, 2024 and 2023 was $3.0 million and $1.1 million, respectively. As a result of the ACME, Industrial Air and Kent Island acquisitions, the Company acquired certain intangible assets in which it recognized an increase of approximately $2.3 million of amortization expense period-over-period. See Note 5 - Goodwill and Intangible Assets for further information on the Company's intangible assets.
Other Expenses
(in thousands except for percentages)
| Other income (expenses): | Nine Months Ended September 30, 2024 | 2023 | Change | |
|---|---|---|---|---|
| Interest expense | $(1,375) | $(1,615) | $240 | (14.9)% |
| Interest income | 1,734 | 624 | 1,110 | 177.9% |
| Gain (loss) on disposition of property and equipment | 656 | 28 | 628 | 2,242.9% |
| (Loss) gain on change in fair value of interest rate swap | (130) | 153 | (283) | (185.0)% |
| Loss on early debt extinguishment | — | (311) | 311 | (100.0)% |
| Total other income (expenses) | $885 | $(1,121) | $2,006 | 178.9% |
Total other income for the nine months ended September 30, 2024 was $0.9 million as compared to total other expenses of $1.1 million for the nine months ended September 30, 2023. The change period-over-period was primarily driven by a $1.1 million increase in interest income related to the Company's overnight repurchase agreements, investments in U.S. Treasury Bills and money market funds, a $0.3 million loss on early debt extinguishment recognized during 2023 and a $0.2 million decrease in interest expense, which was the result of lower overall outstanding debt. In addition, during the nine months ended September 30, 2024, the Company recognized a gain of $0.7 million related to the sale of certain property and equipment compared to a less than $0.1 million loss recognized in 2023.
Income Taxes
The Company recorded an income tax provision of $5.5 million for the nine months ended September 30, 2024 compared to $5.4 million for the nine months ended September 30, 2023. The effective tax rate was 20.6% and 25.9% for the nine months ended September 30, 2024 and 2023, respectively. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate period-over-period was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items. In particular, the Company’s effective rate for the nine months ended September 30, 2024 and 2023 were materially impacted by “excess tax benefits on stock-based compensation” recognized discretely during the first quarter of each year. This benefit reduced the effective tax rate by 35.1% and 10.2% for the three months ended March 31, 2024 and 2023 respectively, with the impact varying in prior years. The increase in the 2024 effective rate reduction is primarily related to the higher stock price of the Company resulting in increased tax deductions for the Company upon vesting of equity incentive awards.
ODR and GCR Backlog Information
The Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company’s backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the Company’s backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. In addition to the Company's backlog, it has a substantial amount of contracts with short lead times that book-and-bill within the same reporting period and are not included in backlog. Additional information related to the Company’s remaining performance obligations is provided in Note 4.
The Company's ODR backlog as of September 30, 2024 was $209.8 million compared to $147.0 million at December 31, 2023. These amounts reflect unrecognized revenue expected to be recognized over the remaining terms of our service contracts and projects. Based on historical trends, the Company currently estimates that 37% of its ODR backlog as of September 30, 2024 will be recognized as revenue over the remainder of 2024. The Company believes its ODR backlog increased due to its continued focus on the accelerated growth of its ODR business.
In addition, the Company's GCR backlog as of September 30, 2024 was $161.5 million compared to $186.9 million at December 31, 2023. Projects are brought into backlog once the Company has been provided a written confirmation of award and the contract value has been established. At any point in time, the Company has a substantial volume of projects that are specifically identified and advanced in negotiations and/or documentation, however those projects are not booked as backlog until the Company has received written confirmation from the owner or the GC/CM of their intention to award the Company the contract and they have directed the Company to begin engineering, designing, incurring construction labor costs or procuring needed equipment and material. The Company’s GCR projects tend to be built over a 12- to 24-month schedule depending upon scope and complexity. Most major projects have a preconstruction planning phase which may require months of planning before actual construction commences. The Company is occasionally employed to deliver a “fast-track” project, where construction commences as the preconstruction planning work continues. As work on the Company’s projects progress, it increases or decreases backlog to take into account its estimate of the effects of changes in estimated quantities, changes in conditions, change orders and other variations from initially anticipated contract revenue, and the percentage of completion of the Company’s work on the projects. Based on historical trends, the Company currently estimates that 31% of its GCR backlog as of September 30, 2024 will be recognized as revenue over the remainder of 2024. Additionally, the reduction in GCR backlog has been intentional as the Company looks to focus on higher margin projects than historically, as well as its focus on smaller, higher margin owner direct projects.
Market Update
Although the Company has been experiencing strong demand, certain events continue to impact its business, including global economic conditions, the inflationary cost environment, elevated labor costs and disruption in its supply chain. The Company continued to experience elevated levels of cost inflation during 2023, which has continued into 2024, although at lower levels than experienced in 2023. These headwinds have been partially mitigated in 2023 and 2024 by pricing actions taken in response to the inflationary cost environment, supply chain productivity improvements and cost savings initiatives. The effects of inflation also have resulted in central banks raising short-term interest rates, which have remained at increased levels. Therefore, the Company has continued to experience an elevation in its interest expense relative to its outstanding borrowings. Also, the ongoing conflict between Russia and Ukraine, and the sanctions imposed in response to this conflict, have increased global economic and political uncertainty and the conflict in the Middle East may add to these issues.
While the impact of these factors remains uncertain, the Company continues to evaluate the extent to which they may impact its business, financial condition or results of operations. There can be no assurance that the Company's actions will serve to mitigate such impacts in future periods. Further, while the Company believes its remaining performance obligations are firm, and its customers have not provided the Company with indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in the Company's customers seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on the Company’s business, financial condition and/or results of operations.
Outlook for 2024
The Company continues to focus on creating value for building owners by targeting opportunities for long-term relationships with the vision of becoming an indispensable partner to building owners with mission-critical systems. For 2024, the key objectives of the Company’s strategy are to improve profitability and generate quality growth in its operations, to enable sustainable and efficient building environments, to continue investing in its workforce and to acquire strategically synergistic businesses.
In focusing on improved profitability and generating quality growth in its operation, the Company has dedicated and continues to dedicate, its resources toward the growth of its ODR segment as the scope of services provided within the Company’s ODR segment typically yield higher margins when compared to its GCR segment work. During fiscal year 2023, the Company eclipsed its ODR-related revenue target, generating a 50/50 segment revenue mix. For 2024, the Company reaffirms its focus on expanding the number and breadth of owner relationships that it serves on a direct basis and leveraging these expanded owner-direct relationships to deliver a broad suite of services. The Company believes it maintains a disciplined approach, capable of providing a full life-cycle of engineered solutions and craft expertise enabling it to be a one-stop-shop for building owners to maximize their investments in their mission-critical assets. In addition, the Company continues to make investments to expand its ODR revenue by increasing the value it can offer to building owners and continues to evaluate areas in which it could expand the breadth of its service offerings to better serve its clients. Employee development underpins the Company’s efforts to execute its 2024 strategy. The Company is actively concentrating managerial and sales resources on training and hiring experienced employees to sell and profitably perform ODR-related services. In many locations, the Company has added or enhanced its capabilities and the Company believes its investments and efforts have provided customer value and stimulated growth. The Company’s team members uniquely combine engineering expertise with field installation skills to provide custom solutions that leverage its full life-cycle capabilities, which allows it to address both the operational and capital projects needs of its customers.
In the Company’s GCR segment, its efforts continue to focus on improving project execution and profitability by pursuing opportunities that are smaller in size and shorter in duration than historically, and where it can leverage its captive design and engineering services. The Company believes that it is appropriate in the current contracting environment to reduce risk and exposure to large, complex, non-owner direct projects where the trend has been for such jobs to provide risks that are difficult to mitigate. Currently, management believes the historical industry pricing and associated risks for this type of work does not align with the Company’s stakeholders’ expectations, and therefore, the Company continues to take steps to actively reduce these risks as it looks at future job selection and as it completes current jobs.
Additionally, the Company believes that it can further increase its cash flow and operating income by acquiring strategically synergistic companies that will increase the Company’s geographic footprint, supplement the Company’s current business model, address capability gaps and enhance the breadth of its service offerings to better serve its clients. The Company has dedicated and continues to dedicate its resources to seek opportunities to acquire and integrate businesses that have attractive market positions, supports the Company ODR growth strategy, expands and/or supplements the Company’s current breadth of service offerings and is culturally compatible.
Given the broad suite of services offered to customers within the Company’s market concentrations, management uses a variety of factors to attempt to predict the outlook for the Company. The Company monitors key competitors and customers in order to gauge relative performance and the outlook for the future. The Company regularly performs detailed evaluations of the different market verticals in which it serves to proactively detect trends and to adapt its strategies accordingly, including potential triggers and actions to be taken under recessionary scenarios. In addition, the Company believes its backlog is indicative of future revenue and thus are a key measure of anticipated performance.
The Company continues to monitor the impact that the inflationary cost environment has on its cost structure. Although global supply chain and resource constraints have improved throughout the year, the Company’s performance may be impacted by future developments that are uncertain. In addition, geopolitical risks and macroeconomic events could cause disruptions to operations, supply chains and end markets, tightening credit conditions, higher interest rates, global banking uncertainty and the possibility of deteriorating overall economic conditions which could negatively impact the Company’s business.
Seasonality, Cyclicality and Quarterly Trends
Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and time-and-materials services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year.
Effect of Inflation and Tariffs
The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and increases. It is difficult to accurately measure the impact of inflation, tariffs and price escalation due to the imprecise nature of the estimates required. However, these effects are, at times, material to the Company’s results of operations and financial condition. During fiscal years 2023 and 2022, the Company experienced higher cost of materials on specific projects and delays in its supply chain for equipment and service vehicles from the manufacturers, and these higher costs and delays in its supply chain persisted in 2024. When appropriate, the Company includes cost escalation factors into its bids and proposals, as well as limit the acceptance time of its bid. In addition, the Company is often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on its projects. Notwithstanding these efforts, if the Company experiences significant disruptions to its supply chain, it may need to delay certain projects that would otherwise be accretive to its business, and this may also impact the conversion rate of its current backlog into revenue.
Liquidity and Capital Resources
Cash Flows
The Company's liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowings from commercial banks and institutional lenders.
The following table presents summary cash flow information for the periods indicated:
(in thousands)
| Net cash provided by (used in): | Nine Months Ended September 30, 2024 | 2023 |
|---|---|---|
| Operating activities | $17,494 | $43,460 |
| Investing activities | (17,725) | (6,233) |
| Financing activities | (8,439) | (15,803) |
| Net (decrease) increase in cash, cash equivalents and restricted cash | $(8,670) | $21,424 |
| Noncash investing and financing transactions: | ||
| Earnout liability associated with the Kent Island Transaction | $4,381 | $— |
| Earnout liability associated with the ACME Transaction | — | 1,121 |
| Right of use assets obtained in exchange for new operating lease liabilities | 4,776 | 1,043 |
| Right of use assets obtained in exchange for new finance lease liabilities | 3,095 | 4,062 |
| Right of use assets disposed or adjusted modifying operating lease liabilities | 988 | (643) |
| Right of use assets disposed or adjusted modifying finance lease liabilities | — | (77) |
| Interest paid | 1,413 | 1,482 |
| Cash paid for income taxes | $4,700 | $6,718 |
The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company's contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact its working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for credit losses where appropriate. The Company believes that its reserves for its expected credit losses are appropriate as of September 30, 2024 and December 31, 2023, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services, as well as impact project activity for the foreseeable future.
The Company's existing current backlog is projected to provide substantial coverage of forecasted revenue for one year from the date of the financial statement issuance. In addition to the Company's backlog, it has a substantial amount of contracts with short lead times that book-and-bill within the same reporting period and are not included in backlog. The Company's current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for at least the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for at least the next twelve months.
The following table represents the Company's summarized working capital information:
(in thousands, except ratios)
| September 30, 2024 | December 31, 2023 | |
|---|---|---|
| Current assets | $217,144 | $217,000 |
| Current liabilities | (138,205) | (145,148) |
| Net working capital | $78,939 | $71,852 |
| Current ratio (1) | 1.57 | 1.50 |
(1) Current ratio is calculated by dividing current assets by current liabilities.
As discussed above and in Note 6, as of September 30, 2024, the Company was in compliance with all financial maintenance covenants as required by its credit facility.
Cash Flows Provided by Operating Activities
The following is a summary of the significant sources (uses) of cash from operating activities:
(in thousands)
| Cash flows from operating activities: | Nine Months Ended September 30, 2024 | 2023 | Cash Inflow (outflow) |
|---|---|---|---|
| Net income | $21,033 | $15,505 | $5,528 |
| Non-cash operating activities(1) | 17,246 | 12,816 | 4,430 |
| Changes in operating assets and liabilities: | |||
| Accounts receivable | 4,283 | 21,896 | (17,613) |
| Contract assets | (1,115) | 14,014 | (15,129) |
| Other current assets | (395) | (1,459) | 1,064 |
| Accounts payable, including retainage | (18,418) | (18,703) | 285 |
| Prepaid income taxes | — | 95 | (95) |
| Accrued taxes payable | 1,311 | (1,386) | 2,697 |
| Contract liabilities | 10 | 2,312 | (2,302) |
| Operating lease liabilities | (2,895) | (2,803) | (92) |
| Accrued expenses and other current liabilities | (1,446) | 1,997 | (3,443) |
| Payment of contingent consideration liability in excess of acquisition-date fair value | (2,175) | (1,224) | (951) |
| Other long-term liabilities | 55 | 400 | (345) |
| Cash (used in) provided by working capital | (20,785) | 15,139 | (35,924) |
| Net cash provided by operating activities | $17,494 | $43,460 | $(25,966) |
(1) Represents non-cash activity associated with depreciation and amortization, provision for credit losses, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, gain or loss on sale of property and equipment, changes in fair value of contingent consideration and changes in the fair value of the Company's interest rate swap.
During the nine months ended September 30, 2024, the Company generated $17.5 million in cash for its operating activities, which consisted of net income of $21.0 million and certain non-cash adjustments of $17.2 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and the change in fair value of contingent consideration), partly offset by cash used in working capital of $20.8 million. During the nine months ended September 30, 2023, the Company generated $43.5 million from its operating activities, which consisted of cash provided by working capital of $15.1 million, $12.8 million of non-cash adjustments (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and the change in fair value of contingent consideration) and net income for the period of $15.5 million.
The decrease in operating cash flows during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was primarily attributable to a $17.4 million period-over-period cash outflow related to the aggregate change in the Company's contract assets and liabilities and a $17.6 million change in accounts receivable. The decrease in the Company's overbilled position was due to the timing of contract billings and the recognition of contract revenue, as well as the successful resolution of certain prior year outstanding claims. The change in accounts receivable period-over-period was due to the timing of cash receipts. These cash outflows were partially offset by a $5.5 million increase in net income and a $4.4 million increase on non-cash operating activities, primarily related to depreciation and amortization and the changes in fair value on the Company's contingent consideration arrangements.
Cash Flows Used in Investing Activities
Cash flows used in investing activities were $17.7 million and $6.2 million for the nine months ended September 30, 2024 and 2023, respectively. Cash used in investing activities for the nine months ended September 30, 2024 included a cash outflow of $12.7 million associated with the Kent Island Transaction, net of cash acquired, and $6.2 million in cash outflows related to the purchase of property and equipment, which was primarily associated with the purchase of certain rental equipment to expand customer service offerings. These cash outflows were partially offset by $1.2 million in proceeds from the sale of property and equipment. Cash used in investing activities for the nine months ended September 30, 2023 of $4.9 million represented cash outflows associated with the ACME Transaction, net of cash acquired. In addition, cash used in investing activities for the nine months ended September 30, 2023 included $1.7 million, which was used to purchase property and equipment, partially offset by $0.4 million in proceeds from the sale of property and equipment.
Aside from the rental equipment purchased during 2024, the majority of the Company's cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements.
Cash Flows Used in Financing Activities
Cash flows used in financing activities were $8.4 million for the nine months ended September 30, 2024 compared to $15.8 million for the nine months ended September 30, 2023. During the nine months ended September 30, 2024, the Company paid approximately $5.2 million in taxes related to the net share settlement of equity awards, $2.3 million for payments on finance leases and made $3.5 million in aggregate payments to the former owners of JMLLC, CSLLC and ACME related to their respective 2023 earnout arrangements, of which $1.3 million was recognized as a cash outflow from financing activities. These cash financing outflows were partially offset by $0.4 million associated with proceeds from employee contributions to the ESPP.
For the nine months ended September 30, 2023, as a result of the execution of the Second A&R Wintrust Credit Agreement, the Company paid off the remaining principal portion of the A&R Wintrust Term Loan of $19.0 million. Prior to the termination of the A&R Wintrust Term Loan, the Company made principal payments of $2.4 million, consisting of monthly installment payments of $0.6 million. In addition, the Company paid approximately $0.8 million in taxes related to net share settlement of equity awards, $2.0 million for payments on finance leases and made a $3.0 million payment to the former owners of JMLLC and CSLLC related to the 2022 Earnout Period, of which $1.7 million was recognized as a cash outflow from financing activities. These cash financing outflows were partially offset by $10.0 million in proceeds from borrowings under the Second A&R Wintrust Revolving Loan and $0.4 million associated with proceeds from contributions to the ESPP.
The following table reflects our available funding capacity, subject to covenant restrictions, as of September 30, 2024:
(in thousands)
| Cash & cash equivalents(1) | $51,163 | |
| Credit agreement: | ||
| Second A&R Wintrust Revolving Loan | $50,000 | |
| Outstanding borrowings on the Second A&R Wintrust Revolving Loan | (10,000) | |
| Outstanding letters of credit | (4,265) | |
| Net credit agreement capacity available | 35,735 | |
| Total available funding capacity | $86,898 |
(1) The Company considers all highly liquid investments purchased with a maturity of 90 days or less on the date of purchase to be cash equivalents. Cash equivalents as of September 30, 2024 consisted of certain overnight repurchase agreements and money market investments.
Cash Flow Summary
Management continued to devote additional resources to its billing and collection efforts during the nine months ended September 30, 2024. Management continues to expect that growth in our ODR business, which is less sensitive to the cash flow issues presented by large GCR projects, should positively impact our cash flow trends.
Provided that the Company’s lenders continue to provide working capital funding, the Company believes based on its current forecast that its current cash and cash equivalents of $51.2 million as of September 30, 2024, cash payments to be received from existing and new customers, and availability of borrowing under the Second A&R Wintrust Revolving Loan (pursuant to which we had $35.7 million of availability as of September 30, 2024) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
Debt and Related Obligations
Long-term debt consists of the following obligations as of:
(in thousands)
| September 30, 2024 | December 31, 2023 | |
|---|---|---|
| A&R Wintrust Revolving Loans | 10,000 | 10,000 |
| Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96% to 8.60% through 2031 | 8,146 | 7,347 |
| Financing liability | 5,351 | 5,351 |
| Total debt | 23,497 | 22,698 |
| Less - Current portion of long-term debt | (2,626) | (2,680) |
| Less - Unamortized discount and debt issuance costs | (374) | (387) |
| Long-term debt | $20,497 | $19,631 |
See Note 6 for further discussion.
Surety Bonding
In connection with its business, the Company is occasionally required to provide various types of surety bonds that provide an additional measure of security to its customers for its performance under certain government and private sector contracts. The Company’s ability to obtain surety bonds depends upon its capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of the Company’s backlog that it has currently bonded and their current underwriting standards, which may change from time-to-time. The bonds, if any, the Company provides typically reflect the contract value. As of September 30, 2024 and December 31, 2023, the Company had approximately $62.8 million and $90.9 million in surety bonds outstanding, respectively. The Company believes that its $800.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which we believe have limited bonding capacity. See Note 13 for further discussion.
Insurance and Self-Insurance
The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets.
The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities. See Note 13 for further discussion.
Multiemployer Pension Plans
The Company participates in approximately 40 MEPPs that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, the Company is responsible with the other participating employers for any plan underfunding. The Company’s contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve its funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by the Company may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers.
An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP.
The Company could also be obligated to make payments to MEPPs if it either ceases to have an obligation to contribute to the MEPP or significantly reduces its contributions to the MEPP because it reduces the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal the Company’s proportionate share of the MEPPs’ unfunded vested benefits. The Company believes that certain of the MEPPs in which it participates may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, the Company is unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether its participation in these MEPPs could have a material adverse impact on its financial condition, results of operations or liquidity.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves, income tax valuation allowances, fair value of contingent consideration arrangements and contingencies. If the underlying estimates and assumptions upon which the condensed consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying consolidated financial statements.
Management believes there have been no significant changes during the three months ended September 30, 2024, to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 – Significant Accounting Policies in the accompanying notes to the Company’s consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023.
Recent Accounting Pronouncements
See Note 2 to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Market risk
As filed, 256 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); therefore, pursuant to Item 305(e) of Regulation S-K, we are not required to provide the information required by this Item.
Controls and procedures
As filed, 1,727 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation as of September 30, 2024, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
Risk factors
As filed, 160 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2024-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2024-07-01 to 2024-09-30 | $133.9m | us-gaap:Revenues |
| Revenue | 9 months2024-01-01 to 2024-09-30 | $375.1m | us-gaap:Revenues |
| Cost of revenue | 3 months2024-07-01 to 2024-09-30 | $97.8m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months2024-01-01 to 2024-09-30 | $274.4m | us-gaap:CostOfRevenue |
| Gross profit | 3 months2024-07-01 to 2024-09-30 | $36.1m | us-gaap:GrossProfit |
| Gross profit | 9 months2024-01-01 to 2024-09-30 | $100.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months2024-07-01 to 2024-09-30 | $23.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months2024-01-01 to 2024-09-30 | $69.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months2024-07-01 to 2024-09-30 | $10.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2024-01-01 to 2024-09-30 | $25.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2024-07-01 to 2024-09-30 | $468.0k | us-gaap:InterestExpenseNonoperating |
| Interest expense | 9 months2024-01-01 to 2024-09-30 | $1.4m | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months2024-07-01 to 2024-09-30 | $3.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2024-01-01 to 2024-09-30 | $5.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-07-01 to 2024-09-30 | $7.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months2024-01-01 to 2024-09-30 | $21.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2024-07-01 to 2024-09-30 | $0.62 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2024-01-01 to 2024-09-30 | $1.75 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2024-07-01 to 2024-09-30 | $0.66 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2024-01-01 to 2024-09-30 | $1.87 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2024-07-01 to 2024-09-30 | 12,027,021 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2024-01-01 to 2024-09-30 | 11,998,750 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2024-01-01 to 2024-09-30 | $17.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2024-01-01 to 2024-09-30 | $6.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2024-09-30 | $51.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2024-09-30 | $217.1m | us-gaap:AssetsCurrent |
| Total assets | At period end2024-09-30 | $324.4m | us-gaap:Assets |
| Current liabilities | At period end2024-09-30 | $138.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2024-09-30 | $182.2m | us-gaap:Liabilities |
| Current portion of debt | At period end2024-09-30 | $2.6m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | At period end2024-09-30 | $142.2m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001628280-24-045297. Last ingested by Listed: Oct 24, 2026, 15:07 ET. Listed shows no prices and gives no investment advice.