Greetings. Welcome to Limbach Holdings third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If you would like to ask a question, please press star one on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Jeremy Hellman with The Equity Group. Thank you. You may begin.
Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings announced its third quarter of 2021 results and filed its Form 10-Q for the fiscal quarter ending September 30, 2021. During this call, the company will be reviewing those results and providing an update on current market conditions. Today's discussion may contain forward-looking statements, and actual results may differ from any forecasts, projections, or similar statements made during the earnings call. Listeners are reminded to review the company's annual report on Form 10-K and quarterly reports on Form 10-Q for risk factors that may cause the actual results to differ from forward-looking statements made during the earnings call. With that, I'll turn the call over to Charlie Bacon, the President and Chief Executive Officer of Limbach Holdings. Please go ahead, Charlie.
Good morning, everyone, and thanks for joining us. Joining me today is our CFO, Jayme Brooks, our COO, Mike McCann, and Executive Vice President Matt Kach is also on hand for Q&A session, which will follow our prepared remarks. Those of you who have followed our company know we have been pointing to the third quarter as a major inflection point in our business, and I'm extremely proud of the results we reported. Specifically, our ODR segment revenue growth was 17.6% year-on-year and 17.2% sequentially. Our ODR gross margins of 29.8% were up 190 basis points year-on-year and 55 basis points sequentially. GCR gross margins of 14.2% were delivered up 280 basis points year-on-year and 403 basis points sequentially.
Our net income of $4 million is the largest since we went public five years ago, and that was primarily the result of excellent gross margin performance in the quarter and our refinancing, which was completed in Q1. As good as many of the indicators are from the quarter, we firmly believe we have further room for growth. The strategic plan we put in place two years ago centered on improving our bottom line profitability. Progress towards that goal was slowed as we grappled with the impacts of the pandemic and with that receding, the results we reported last night are strong evidence that our leaders are executing well on our strategic plan. I also wanna thank all of the staff here at the company for their hard and smart work. We have incredible talent in our offices and in the field.
The entire team are rowing together, and we're realizing these positive outcomes. Very proud of all the people here that work at Limbach. I think we're doing a terrific job. Our ODR segment continues to grow, helping improve our consolidated gross margin, while we also believe tempering the overall risk profile of our business. Our GCR segment is also performing well as our shifted focus to bottom line profitability is delivering the intended results. Within our ODR segment, our bookings actively remained strong and accelerated through the third quarter, with September our strongest month of the year. The maintenance base continued to grow, and as a reminder, maintenance contracts typically can lead to higher margin, quick-hitting small capital project work, often performed on a T&M basis along with emergency repairs. That work normally results in total revenues for Limbach in excess of the recurring maintenance contracts.
Turning to our GCR segment, the risk management initiatives we began two years ago to improve our performance continued to take hold as successful project closeouts helped drive segment margin of 14.2% in the quarter. When we propose on projects, our expectation is that once the dust has settled, projects will earn gross margins at or above the level at which we proposed. Our emphasis on quality project selection coupled with consistent execution in the field is resulting in improved segment profitability, and we intend to continue that performance. There may be some variability in GCR segment gross margin quarter- to- quarter, but we expect the broader margin improvement to continue and remind everyone that annual or 12-month trailing numbers and margins offer the best lens for which to monitor our GCR segment performance. With that, I'll hand it off to Jayme for her financial highlights.
Thanks, Charlie. Our earnings press release and our Form 10-Q contain a thorough review of our financials. With that in mind, I will focus my discussion on a few key points that merit further review. First is cash flow. Cash from operating activities for the quarter was $7.8 million, and cash and cash equivalents was $33.3 million. On the last call, we had questions around forecasting our cash flow and had spent some time discussing how we can explain the dynamics of our cash flows, as our industry has somewhat unique aspects in how work is billed compared with a company that sells a product, for example. In addition, our cash flows, much like our operating results, are best viewed on an annual or trailing twelve-month basis due to the quarter-to-quarter swings that can occur as a function of project life cycles.
Broadly, the most significant impact on our cash flows quarter- to- quarter are accounts receivable, accounts payable, and the over and under billings, which are included in our contracts, liabilities, and assets accounts. As we commence work on a project, we often look to bill ahead for portions of that work. When we are successful in doing so, we develop an overbilled position. At December 31st of last year, we were in a net overbilled position of around $14.1 million. That was cash that we collected on work not yet performed, setting aside the DSO on those billings. By September 30th of this year, that reversed, and we were in a net underbilled position of $3.3 million.
Setting aside the timing of payments for those incurred costs, that was basically cash that we paid in advance of being able to bill our customer due to a host of reasons, which is typically normal course for the operations perspective. Both of these amounts can be found in note three of our Form 10-Q. In looking at that time period from December 31, 2020 to September 30th, 2021, this shift from a net overbilled position to a net underbilled position is a $17.4 million fluctuation of cash, which we model and monitor internally based on our individual project cash flows. Our over and under billings are influenced by a range of things from project type and life cycle to the customers we are doing work for, along with other external market dynamics, such as the supply chain impact for materials and equipment.
As such, unfortunately, there is no good way for investors to model the fluctuations in these accounts and how their impact is on cash. However, there are several items on our cash flow statement that are more easily modeled, such as depreciation and amortization, non-cash operating lease expense, interest expense, taxes, and stock comp. Non-recurring items such as the Q1 loss on debt extinguishment and the upcoming payment in Q4 of $3.2 million for the deferred payroll taxes under the CARES Act, which we have discussed before, should also be fairly straightforward to model. Next, I wanna highlight our gross margin, as this is where the impact of our efforts to drive more of a balanced business mix show in our financial statements. In the third quarter, our consolidated gross margin was 18.9%, which is an excellent result.
Both of our segments performed at margin levels exceeding the ranges we have noted before with ODR gross margin for the quarter at 29.8% compared with our target range of 25%-28% and 27.9% in the third quarter last year. GCR gross margin was 14.2% compared with 11.4% in the same period last year. This quarter's results also compared favorably versus our estimated range of 10.5%-11.5%. As Charlie noted, GCR gross margin benefited from a number of successful project closeouts in the quarter. We continue to view the target margin ranges we have laid out as reasonable for modeling purposes in 2022.
In ODR, we are optimistic that 2022 will see more larger projects in the mix as we believe building owners will have growth in their CapEx spend. As that work comes on, we would expect our segment margins to soften a bit as larger projects tend to carry lower relative margins. We are also closely monitoring our supply chains, which Mike will discuss in more detail in a moment. In GCR, our margins can be a bit more volatile due to the timing of project completions and starts, along with external factors such as weather and supply chain impacts. While we have succeeded in booking projects and improved margins relative to a year or two ago, we still feel it is prudent to conservatively model the segment in the 10.5%-11.5% gross margin range. Lastly, I wanna touch on SG&A.
Our SG&A expense ticked up $1.3 million compared with the third quarter last year. Last year's third quarter was a period of somewhat reduced SG&A expense as we were still not in full back to the office mode, and thus expense categories such as travel and entertainment were running at a lower rate. Additionally, in 2021, we've continued to make investments in our ODR expansion, such as the opening of our new national office in order to attract additional healthcare ODR business in getting out to see our customers. Before handing the call off to Mike, I want to discuss the potential headwinds going into the fourth quarter. Over the past few months, we have noticed an increase in our healthcare claims per participant compared to 2021 full year plan. As we are self-insured, the increased claims have had a direct impact on our operating results.
We continue to monitor our healthcare costs and note that if this trend continues into the fourth quarter, we could have an unfavorable impact on the quarter and full year operating results. Additionally, Mike will touch on the vaccine mandates, but I did want to note that the compliance costs to meet the vaccine mandates could also unfavorably impact our fourth quarter and our full year results. I'll now pass the call back to Mike.
Thanks, Jayme. In light of the broader market conditions with respect to supply chains, I wanna provide some color on how we are reacting to those issues. First, commodities. Pressure on raw material pricing and availability has leveled off. It doesn't appear that we're at significant risk in the existing book of business, and the new business is taking into account the potential risk of a return to inflationary period. Of note, when we bid projects, we make sure customers know our pricing is only good for seven days, and keeping that limitation on pricing has helped us mitigate our risk. Next is labor. The impact of a tightening labor market has not likely been felt in full.
We've been managing labor carefully, so perhaps there's some opportunity emerged from having left some capacity available. We believe our biggest near-term risk is one shared across the industry, which is the impending vaccine mandates. Currently, any federal work requires 100% vaccination for all parties working on a project, but we really don't do that much federal work. For Limbach, the larger risk is the OSHA requirement that any private business with over 100 employees have everyone vaccinated or be tested weekly. We're keeping a close watch on whether or not the courts will allow this to go into effect and are developing plans with the expectations that the mandates will go into effect. On equipment, it is a risk point for us in Q4, as it could impact our ability to incur cost and drive percent complete, which drives revenue recognition.
Without key equipment, some work could be forced into a holding pattern, and we are very focused on doing all that we can to procure the equipment we need on the schedule we need it. Lastly, I wanna reinforce that we are staying focused on all our standard risk management processes, along with stronger data reporting that we incorporated into the business over the past 24 months. It is clearly paying off with the results we realized in Q3. I'll now pass the call back to Charlie.
As I noted at the start of our call, we had a really good third quarter and are successfully executing on our plan despite the ongoing COVID-19 impacts. I am disappointed with the year-to-date numbers, but Q3's results reinforce what's possible. Our ODR transformation is continuing, with that segment growing nicely and doing so with healthy margins. In terms of market dynamics for that segment, our business mix has continued to favor operating capital spend rather than large growth capital work. Given everyone's awareness of the supply chain issues in our economy, building owners are accurately aware of the need to make sure their existing equipment is properly maintained, and that benefits us. I want to share two other points, the market forecast and our expansion of the ODR services. The September AIA Billing Index continues to indicate expansion at 56.6.
The Dodge Momentum Index hit a 14-year high of 47% increase over the same period last year. The FMI fourth quarter forecast presents a forward view of continued growth with nonresidential building sectors growing through 2025, with healthcare, our largest sector, indicating very strong growth over the period. The FMI report also reinforces the growth in the Southeast U.S., where we are looking at expansion opportunities. With ODR services, we have been successful with launching a new service known as Program Management Services, specifically focused on the national and regional healthcare providers. This service assists customers to develop their capital projects. Early entry will allow us to better serve our customer base and better position us to secure more business following the planning cycle of a project. During the quarter, we sold these services to several major national customers, including two new significant customers.
Looking ahead to 2022, the various indicators we track indicate continued market strength. This positive macro backdrop allows us an ample opportunity to continue being selective in our project proposals with a focus on securing work at attractive margins while optimizing our available resources. In our GCR business, we knew rightsizing our operations would include negative headwind of a revenue decline. With that said, we have seen our margins and profitability improve, which is the ultimate goal of the strategy. Also, recapping some comments I made earlier, our ODR bookings during the third quarter were good and accelerated in September. We're really pleased with the volume and quality of the opportunities in front of us. Lastly, we are reaffirming our guidance for 2021 with revenues in the range from $480 million-$510 million, with adjusted EBITDA of $23 million-$25 million.
With that, we'll take your questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Rob Brown with Lake Street Capital. Please proceed.
Good morning, Charlie. Good morning, Jayme. Nice job on the quarter.
Hi, Rob.
Good morning, Rob.
Thank you.
Just wanted to kinda clarify your comments about Q4 and some of the cost pressures that you're seeing in healthcare and the vaccine mandates. Is that in your guidance and kinda commentary about being on the low end of the EBITDA range? Or would that be incremental to what you're talking about?
That would be incremental. We're just looking at kind of what we know today, and that's what is in our guidance. That's it. We just wanna make them, you know, investors aware that those are headwinds that we're looking at, but we're not able to put any kind of parameters around those right now.
Okay, good. Got it. The margin kind of expansion that's sort of implied in your project business. You know, how's the visibility on that right now in terms of Q4? If you give some commentary into next year, how is the margin expansion visibility sort of for the rest of the year?
Rob, thanks for that question. You know, the biggest thing that we've really been focusing on the last nine months is to make sure that we get our mix between Owner Direct and GCR, and really been pushing that. We're excited about our sales in Q3 from ODR. That mix, along with similar performance that we're looking for going forward is really the mix that we're looking to obtain.
Okay, great. You have pretty positive comments about the growth rates into next year. You know, how does that order book sort of play out and when, you know, how much visibility will you have in the next year, sort of, at this point, and how much of your sort of view is or I guess how much of your expectations out there is sort of in the backlog at this point?
The ODR sale is picking up, Rob. You know, it's just fantastic news. We've seen a trend the whole year in a positive way. You know, we're looking at ODR growth, you know, going right into next year. We don't see that letting up. When you look at GCR, we continue to look at, you know, maximizing our return on people. As I've said in the past, we're looking, you know, not so much. That's not really the growth story. It's kind of profit story. We're gonna maximize our margins on GCR. When I look at the pipeline, the pipeline, you know, it certainly appears strong. By the indices we track, and I made those statements about the recent reports, all very positive for, you know, 2022, 2023, 2024.
I think just the supply and demand curves are really gonna allow us to continue to maximize the bottom line off GCR. You know, where we see opportunities in the business to grow it, meaning we have very successful execution, we will look for growth. Quite frankly, in some of our business units, you know, we've not fared that well. There's gonna be a shift, you know, really to focus in on ODR, which is this very high margin. Quite frankly, those branches have a great track record of executing ODR. It's gonna be a mix of, I'd say, growth on ODR and, you know, modest, opportunity on GCR. I think we have pretty good visibility on next year.
Okay, thank you. I'll turn it over.
Our next question is from Jon Old with Longmeadow Investors. Please proceed.
Hi, everyone. Thanks, and congrats on the results. I wonder if you could, Charlie, update us on claims collection and, sort of the acquisition program.
Sure. Good morning, Jon. Charlie h ere, s o on the claims collection bit, you know, we've made some progress on two of the projects, that, you know, we're definitely moving forward in the right direction, and we're really pleased with it. We had one project that was extended, a federal project. It's kind of interesting. I think we've worked it smartly. We've submitted a total of three claims. All of those claims have been resolved, but the project is gonna be about two years late, and we're going in with a fourth. The progress is steady, and as a result, we didn't maybe see some of the problems we've seen in the past where we just couldn't get resolution early.
Another particular project, which is a private project, is in kind of final negotiations right now, so we'll have to see how that continues to play out. We're holding firm. We're not backing off, and we're looking for, you know, strong settlements. Some of the big ones that we're dealing with are continuing to drag out, and that's just what's interesting when you step back and look at one particular opportunity. The general contractor is going, you know, after monies that are probably 10x the size of our claim, and it involves all the contractors. It's not just us. We're working hand in glove with them to continue to progress that, but it's gonna continue to take a while to resolve. We're seeing progress on several fronts. I sure wish it would move faster on the other fronts.
Again, I look at it as future cash to come into the company. On the acquisition front, we remain active. Actually, I'd like to have Matt make a comment or two. Go ahead, Matt.
Jon, good morning. Yeah, I think Charlie's quick comment there is certainly appropriate. The market, I think, broadly speaking, has leveled off in terms of overall activity, you know, given the anticipated capital gains tax rate changes at the end of the year. I think everybody who was gonna try and get something done this year probably launched over the summer or into the early fall. If you wanna use the inbound broker-driven or banker-driven activity as a measure of the health of the market, it's probably where you would expect at this point. Obviously, you know, if somebody's launching now, they don't anticipate getting anything done by the end of the year.
What we are seeing, again, broadly, is that even for folks who may not have been in a rush, there is a level, I think, of just emotional fatigue for a lot of these business owners and folks who a year ago might not have really seriously considered you know, evaluating a transaction, I think are having a change of heart. We're seeing a market that is certainly receptive to Limbach. I continue to think we got a very good story to tell, and a good brand to market, and it's sort of manifesting itself in some very interesting opportunities at various stages of discussion.
You know, we're sort of always in this perpetual cycle of bringing opportunities into the queue, evaluating them, you know, putting some on the back burner, moving past others, and then really focusing on a couple. We're gonna continue to remain disciplined, but we do, you know, see some things that we like. The challenge obviously is threading the needle between seller willingness to engage, our, you know, feelings about our underlying performance in the market and getting our arms around commodity price exposure, equipment availability, and COVID vaccine mandates both at Limbach and elsewhere, and then feeling like we've got the right cultural compatibility.
We've certainly set up for ourselves a process and a structure that requires, you know, some degree of precision and firing on all cylinders before we're at a point where we fall in love. You know, we're open-minded to falling in love and would certainly like to get something done if it's the right opportunity.
Jon, I just wanna add a couple other points to Matt's comments. We continue to hunt and, you know, we're mainly focused on the Southeast United States. We think that's the area, region we really need to expand into. We're also looking at, you know, either an existing sector or possibly a new sector that has strong growth potential, b ut all of it has to complement our ODR expansion plan. You know, Matt's done a great job at nurturing some opportunities. As he said, we're at various stages of discussion.
Okay, thanks.
Our next question is from Chip Brown with Stifel. Please proceed.
Good morning, guys. Thanks for taking my call. My question is regarding the ODR service segment expansion. You made some comments on the Nashville office and how it impacts on SG&A. Any light that you can shed on the impacts to working cap, what we can expect going forward in terms of capital constraints?
Yeah. It's a minor SG&A investment. I'm sorry, it was Chip Brown?
Yeah.
Yeah. Good morning, Chip. Thanks for the question. It was a minor investment, but we brought on board a very talented person. We're gonna walk before we run. We have added another professional to that staff. We're selling. It's working better than expected, actually. It's ahead of plan from our original view on how to get into this. Our objective to add program management services, I just want to explain, it's a little bit different than our core service, but it's something I did for 21 years of my career. I did a lot of program management in the past, before Jordy Lindbach.
It's an opportunity for us to really develop value propositions for a client to spend CapEx to develop their project, and then we get the knowledge early on what's going to happen, which positions us later for another further ODR play with the actual CapEx spend. We actually secured three new clients during the quarter. These are major players based in Nashville. We're quite excited. From a SG&A perspective, we just have two people there, and they're doing a great job, and they'll be feeding work to the rest of the company. We didn't open up a you know big office or anything like that. It's a very modest investment. I hope that provides some color on what we did in Nashville.
Yeah, thank you. I appreciate it. Can we expect, I mean this to be cash flow accretive within the next year or so?
Oh, yeah. Oh, yes. Absolutely.
Thank you. Appreciate it.
As a reminder, star one on your telephone keypad if you would like to ask a question. Our next question is from Mike Hughes with SGF Capital. Please proceed.
Good morning. Thanks for taking my questions. First, I wanted to follow up on the M&A discussion. Can you give a range of multiples that you're looking at this point?
Mike, our target range is in the area of, you know, ±4.5x trailing EBITDA over the last couple of years for target companies. That's, you know, prior to any potential synergy opportunities, either on the front end from a revenue and gross profit point of view or in terms of backend administrative efficiencies.
Okay. The ODR business last quarter you indicated would grow by 25% this year, which implies a full year of $159 million. Year- to- date, you've done $101 million. To get to that goal that you put out there last quarter, you'd need to do close to $60 million this quarter, up from a just reported $39 million. Can you just kind of comment on that potential?
Sure. Like I said earlier, we had very strong sales in the third quarter, which we needed to see in order to fuel the fourth quarter revenue. You know, I think the $159 million is probably a bit of a stretch for the quarter, but we do expect it to grow over Q3, s o we're gonna wrap up the year nicely in terms of growth year-over-year. Yeah, and as I said earlier, I was a bit disappointed in terms of you know, how the beginning of the year went, which impacted sales and resulting revenue, b ut from the standpoint of the strength of Q3, and we don't see that letting up in Q4, you know, it's kinda teeing up even a nice start to the year with Q1.
The sales, the way that works, which is very different than GCR. The ODR sales are rather immediate. It's we sell it, we book it, and we execute it. Seeing that strong third quarter fuels the following quarter, right? The fourth quarter. On the sales right now, the pipeline there seems to be just continued pent-up demand. A lot of customers are focused on fixing existing equipment, which is great for us from a T&M perspective and emergency work. We're seeing one of our best years ever on the T&M front. We don't expect that to lighten up, especially because of the supply chain issues.
Okay. You just hit on one of my concerns with that segment, pent-up demand. I'm just wondering, you know, how much of this is just business that was pushed to the right and you're gonna have very robust results at ODR for a few quarters, and then it kind of rolls over? Just maybe address that issue.
One of the things that a service business, an indicator of its strength, is the sale of preventative maintenance contracts. We're having a record year. Now, what does that mean? Once you sell a preventative maintenance contract, you're in with the customer. We have right now about an 88% renewal rate annually. They're evergreen contracts. When you look at selling that maintenance contract, you start getting a multiplier effect of revenue, and it's very high margin. To see this year's growth, it's gonna be our best year ever of preventative maintenance contracts, right? It's not just the emergency work, it's actually setting up the future to have an expanding core service business. We're quite excited about that.
We did spend, you know, more money on sales resources over the past two years to get that momentum going, and it's paying off. Actually, we don't see it letting up. The way I'd like you to look at it, Mike, I still think it's the tip of the iceberg. There's so much growth potential in the ODR segment. When you start looking at our footprint and market penetration, there's so much more opportunity for us to expand. I don't see us letting up. We're gonna continue to invest in the expansion of ODR. We believe that's where we should really, really invest.
Okay. You expect the revenue for that segment to increase sequentially into the fourth quarter from the $39 million you just reported for the September quarter. Do you have enough visibility to commit to that segment being up in the March quarter versus the December quarter?
Right now, as far as the fourth quarter, we expect a growth in revenue in the fourth quarter, and we have visibility on that, a nd I'm sorry, the second part of that question.
Do you have visibility into the March quarter thinking it will be up sequentially from the December quarter?
Yeah. I think, you know, right now the pipeline of sales appears to be strong, right? We sell it, we perform it. Through the course of this year, we've seen a continued ramp up of sales activity through the year, and the third quarter was better than the second quarter, second quarter was better than the first quarter.
Right.
We don't expect that to slow down. Again, I think we've invested with the right, you know, I call them feet on the street. The expansion, I don't expect it to let up. The only concerns we have right now, again, is supply chain matters, which is no different than any other business today. We're making our customers aware of it. The interesting part of that, instead of ordering maybe new equipment, they wanna move forward with the chiller, but instead they're saying, "Well, you know what? Put Band-Aids on the existing chiller." Which is great for us because we have our techs in their buildings and they're spending money and we're reaping the revenue at very high margins. We're working it as best we can in terms of opportunity.
Mike, do you have any other thoughts about that in terms of opportunity on the supply chain side?
Yeah. I think from the other thing too that we've seen from both segments is, you know, the supply chain has become more complicated and we've really worked internally to make sure that we are managing that properly through communication and awareness. The one thing we've definitely seen from our customers is they're turning to us, especially from a trusted relationship perspective, to look for more of a turnkey approach. You know, maybe in the past they would've bought parts and smarts or pieces, now they're looking for somebody to kinda manage that for them. We see opportunity as we go forward, and especially we've seen now for more of a turnkey approach now as opposed to what we've seen in the past.
Okay. Turning to the GCR side of the business, the backlog has declined for a few quarters now, which I appreciate your discipline on bidding. When does that bottom out? Do you have an idea?
The GCR perspective, and I think Charlie touched upon this a little bit too. We're really making sure that we're maximizing outcomes. You know, we've got a business where we're trying to make sure that we perform the best that we can in places that we've historically performed. We're really watching the quality of the gross profit and making sure that we're not growing and impacting that. I think it's very dependent on market, markets that we're working on. It depends on opportunity. We're trying to be smart from really making sure that resources are paired with opportunities. Our key is once we hit a certain level in a certain market, that will turn to a growth pattern in that market.
I wanna reinforce that. When we look at our existing business, all the business units, we have a disciplined eye right now that if they have proven to us that they can execute and deliver the great margins, we do expect them to grow. We're being extremely disciplined on the pricing. We're saying, you know, either up a margin, supply chain is in our favor, go for it. We might lose something, and that's okay 'cause there's plenty of opportunity out there, and the indices that we have are indicating it's not gonna let up. In certain business units where, you know, they've had some challenges in the past, we're making tough calls and pulling back and really focusing in on ODR. In one particular branch we had a...
We looked at what they were doing with the GCR side and we just said, "You know what? What if we just deploy the SG&A dollars over to ODR? You're really killing it on that side of the equation, and let's back off the GCR." To recap, where we're performing well, we expect to see expansion. Where we're not performing well, we're actually going to contract, and I think that's smart, it's strategic. Then moving back to ODR, you know, continue the forward growth, you know, in every location on the ODR front. The nice thing about ODR is just besides it being very high margin and cash flow is much better, it's just not human capital intensive compared to building a new building. It just doesn't require as many people.
The labor conditions out there, we think it's just a smart play.
Okay. Just the mention of cash flow being better on the ODR side of the business, and I know you discussed this earlier in the call, but what does cash flow look like over the next twelve months? Because if you look at 2019 operating cash flow was roughly negative $1 million, then you had a huge 2020 at $40 million, then year- to -ate it's negative $17 million. You sum all that up, it averages about $7 million, which isn't very good conversion on the EBITDA you've reported. What does that look like going forward? What do you aspire to?
Yeah, that's why we kind of took the time to go through the detail that we really have the fluctuations in our billing cycle and how we do work with regards to over bills and under bills. The best way to model, as we, you know, kind of laid out, is you need to just, you know, what's the targeted adjusted EBITDA. From there, you know, for example, for Q3, we had, you know, the tax of $1.6, we had interest of about $0.5. We had debt around $2.1 and CapEx running around $0.3. If you look at, you know, those kind of impacts to cash against the adjusted EBITDA, that basically kind of will give you a ballpark figure of cash before working capital adjustments.
It's the working capital adjustment piece, as I spent the time going through that, you know, it's we have insight internally, but we're not giving guidance on that and it's too difficult. There's not enough information for investors necessary to model that, fluctuations in some of those accounts.
Mike, I just wanna comment on just Jon Old asked a question earlier about claims and where we stand. We did consume a lot of cash during that claim period, or those projects as we were working through them. They were delayed, and we're obviously seeking recovery to get that cash back into the balance sheet or onto the balance sheet. You know, that's another thing to be thinking about. The good news is, if you look at the business over the past, you know, 18- 24 months, we haven't had any new major claims. All of, you know, what we suffered in the past was some decisions on jobs that, you know, just went south, not because of us, but we were caught up in just problems with the owner or problems with the general contractor and other specialty contractors.
We had to lay out that cash years ago. This past 18-24 months, we're not seeing that. I think it's the discipline we've put back into the business. We got the recovery of the cash from the old claims that, you know, is a future period activity, b ut also we're not seeing that outlay that we saw in the past 'cause we're just being a lot smarter over the past 24 months of what we're taking on. I hope that helps.
Well, I appreciate the variability from quarter- to- quarter modeling working capital, but, you know, operating cash flow is converted at about a 30% rate to EBITDA if we look at 2019 and 2020 and year- to- date. I would think that you'd be able to put a metric out there, "Hey, we wanna convert at a 50, 60, 70% rate." You know, maybe we outsiders can't model that, but I would suggest that you maybe put a number out there because, you know, the one thing missing in the story right now is the operating cash flow year- to- date has been very poor as you've outlined. That's just a suggestion. Last question. You filed a shelf in the middle of September.
Was that just re-upping an existing shelf, or would you actually issue shares at these levels?
Yeah, that was what I just call kind of good housekeeping in the sense of putting up a shelf. We had warrants that were issued under the other shelf, and so there was no availability on it. We needed to put, you know, just to have something out there.
Okay, thank you.
Thank you, Mike.
Our next question is a follow-up from Jon Old with Longmeadow Investors. Please proceed.
Thanks. Yeah, thanks. I just wanna sort of flip that last question on its head a little bit. Given the, I mean, you're in a net cash position, and, you know, depending on what metric you look at, I mean, I think our valuation is in many cases a third to even more, even less than the big public peers. Are you in a position at this point where you could modify your credit agreement to allow yourself to buy back stock?
No, at this point, we're still in a position of keeping with our agreement with the bank.
Will that change at some point? I mean, what-
Mike, it's-
It could, yeah. I mean, we're not even a year-
It certainly could change.
Yeah, we're not even a year into, you know, the agreement, so it's definitely something we could consider going forward. At this point, we're new with the relationship.
Okay, thanks.
Our next question is a follow-up from Chip Brown with Stifel. Please proceed.
Hi. Just I wanted based on the two prior questions, would the negative impacts to working cap this quarter or during the trailing nine months, was that predominantly with the over/under billing? Was that just obviously, that's the GCR segment. Can we expect those negative impacts? Any light on the negative impacts from the segment or the service segment? Or is that predominantly just all on the construction and install side on the working cap?
Yeah. Wait, I mean, say it, you want it specific to each segment?
Yes, specific. I think you guys don't break out the working cap or assets in terms of segments.
Correct.
With the negative impact at the end of September to working cap on the over/under billing side, that's obviously just. Is that GCR driven? for the-
Primarily.
What? Primarily? Okay.
It's primarily.
What are the capital constraints on the service side then with expansions like in Nashville and what should we expect going forward? I mean, you had made comments in the past, Charlie, that I appreciate that you had grown too fast. Where is the fine line there in terms of
Yeah. Well, okay. When you look at the GCR work, right, we've taken on some very large projects in the past, and we still will continue to take on large projects in the business units that have a great track record of execution. Those jobs could, you know, cause fluctuations in working capital in our cash position, you know, as projects start up. We look to get to that overbilled position. I mean, that's a primary goal. What we have done over the past, you know, 18 months is we've actually backed off those big jobs, and we're taking on smaller work. The opportunity to get to that overbilled position doesn't necessarily. It's not as great compared to a very large scale project.
By the way, we think from a, you know, midterm, long-term health perspective, that's the smart way to go about it. The big jobs, you know, if they're going well, it's great, but if they go the other way, it could really impact our position. When you have the smaller projects, and we're talking $1 million-$5 million jobs versus a, you know, $40 million or $50 million contract, you don't see the fluctuations. We're able to stay ahead of it. They don't tend to get in trouble. You get in and get out. It's kind of just a smarter business platform. On the ODR segment, you know, you just generally what we're doing there is we actually ask for 50% down payment on some of the deals. Once in a while we get it.
I think the smarter buyers basically say, "No, I'm not gonna do that." Basically, that's the larger, sophisticated customers. The smaller customers, they'll agree to that 50% upfront payment. We're constantly pushing to improve cash position. The other thing, Chip, I just wanna reinforce, that Nashville opportunity is a very, very small investment. We just think it was a very smart play. Our largest sector is healthcare, and Nashville is the hotbed of where decisions are made for the for-profit healthcare customer base. We're really excited. The individual that we actually brought on was someone who worked for me at my former company, and he's done an excellent job in the number of months he's been here. Like I said earlier, he's ahead of his sales projection.
Back to the positive cash flow, I think, you know, by the early part of next year, it will definitely be positive. I mean, the sales are there. It's great to see what he's already delivered, and it's at very high margin. We're pretty pumped up about it.
I appreciate it. As we approach your target of in 2025 with a 50/50 mix with service and install, can we expect the working cap to kind of smooth out? I mean, just for modeling purposes. I hope that makes sense.
Yeah, that makes sense, because right now we're sitting, like Charlie mentioned, we're, you know, 70% are GCR, and that's where we see the fluctuations more so with regards to the life cycle of the cash over the project. Yeah, as we get more towards the ODR, it will balance out.
What can we expect in terms of capital outlay from the ODR perspective? Any light there?
It's actually a very small capital outlay, right? Because when you're looking at an ODR business, you're basically talking about a service tech in a van, and he's got some equipment in that van, right? So we have the leases that come through. From a people perspective, you know, we are adding staff in terms of sales and management as we grow that business, b ut it's not as, you know, intensive compared to construction.
The CapEx. Yeah.
With CapEx.
It's not a CapEx.
Yeah. I mean, on the GCR side, you know, we have plants that produce sheet metal, and obviously that's, you know, big outlays from the standpoint of maintaining those plants, although I think we work that very efficiently. The, you know, ODR business really doesn't require that kind of plant activity. It's just not as intensive, which another reason why we like it so much.
Great. Thank you.
We have reached the end of our question and answer session. I would like to turn it back over to management for closing comments.
Well, listen, everyone, thank you for joining us today. We're obviously very proud of the quarter. It's a clear indication of, you know, what we can do as we go forward. We appreciate everybody's patience with management as we continue to work through some challenging times, but we're starting to see the fruits of our labor, and I think our strategy is spot on, and we're gonna continue to aggressively execute that. We look forward to meeting with you again and with our end of year results and thank you.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.