Limbach - Earnings Call - Q4 2021
March 17, 2022
Transcript
Speaker 0
Greetings. Welcome to the Limbach Holdings Fourth Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.
I will now turn the conference over to Jeremy Hellbent of The Equity Group. Thank you. You may begin.
Speaker 1
Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings announced its fourth quarter and full year twenty twenty one results and filed its Form 10 ks for the fiscal year ended 12/31/2021. 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 and actual results may differ from any forecast, projections or similar statements made during the earnings call. Listeners are reminded to review the company's annual report on Form 10 ks 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.
Speaker 2
Good morning, everyone, and thanks for joining us. Joining me today is our Chief Financial Officer, Jamie Brooks our Chief Operating Officer, Mike McCann and our Acquisition and Capital Markets Executive Vice President, Matthew Katz. We closed out 2021 with a strong fourth quarter despite the ongoing challenges of operating through a pandemic and dealing with acute supply chain issues that are impacting our industry. Our fourth quarter results built on the excellent third quarter we reported in November and continue to demonstrate the successful execution of the strategy we've laid out for our stakeholders over the last two years. With the year now complete, we can report that we met financial guidance we presented last May for both consolidated revenue and adjusted EBITDA.
Mike and Jamie will discuss our financial results in more detail, but for now I'd like to point out a few financial highlights from the fourth quarter. ODR revenue grew by 10.6% compared to the prior year quarter and ODR backlog grew by 92.5% with year on year sales up over 25%. ODR gross margin was 28.5% above our modeling range of 25% to 28%. GCR gross margin was 16.4%, well above our modeling range of 10.5% to 11.5%. And our consolidated gross margin was 20.1%.
Ultimately, our focus on growing the ODR business while concurrently rationalizing the GCR business to focus on higher margin work is all about driving bottom line profitability. Our segment results bear this out as GCR segment revenues declined 20.6% for the full year, yet gross profit improved by approximately $300,000 As we've said previously, over the near term, we're prepared to trade lower GCR revenue for higher GCR gross profit dollars and that's what we saw in the fourth quarter. Fourth quarter net income of $4,300,000 set another company record as did adjusted EBITDA of $9,500,000 for the quarter. Full year adjusted EBITDA was $23,300,000 which fell within guidance despite being impacted by both supply chain and employee quarantines. The impact of the pandemic on our employees and their ability to work started improving in February, but supply chain issues are persisting and Mike will comment later on our actions to combat the industry wide problem.
Our ODR segment continues to focus on growth and to contribute a larger share of our total revenue helping improve consolidated gross margin while also tempering the overall risk profile of the business. The GCR segment also continues to perform with the focus on bottom line profitability delivering the intended results. I'm extremely proud of everyone's hard work at the company as it directly contributed to the company's success. From the craft workers and service technicians to the branch and corporate leadership teams, we delivered on our financial plan and achieved many of last year's strategic initiatives despite the ongoing headwinds of the pandemic. To recap the year, we delivered another strong safety year with several units having zero incidents.
From the field and in the office, we keep pushing the safety and wellness agenda and our employees and their families greatly appreciate it. We improved margins across the board as previously stated. We refinanced our debt, greatly reducing our cost of debt capital. We commenced our acquisition strategy and executed our first acquisition in December. This strategic acquisition allows us to expand into the industrial and manufacturing sectors and moved us into a new geographic region in Tennessee and surrounding Southern states.
The acquisition also provides us with access to a sophisticated prefabrication capability in our ODR customer base that features strong recurring revenue. We resolved one of our major claims, which Jamie will comment on later. We staff back up in 2021 after cutbacks in 2020 due to the uncertainties from the pandemic. These investments support the transformational ODR growth strategy. We also started a new offering program management services, which are specifically focused on our healthcare market sector along with a new office in Nashville, the nexus of the for profit healthcare industry.
While we had a number of strong results from some of our business units, one fell short of expectations. We addressed the underperforming unit and Mike will comment later on those actions. With that, I'll hand this off to Jamie.
Speaker 3
Thanks, Charlie. Our earnings press release and our Form 10 ks contain a detailed review of our financials. And with that in mind, I will focus my discussion on some key areas. I'll start with gross margins. During the fourth quarter, we realized an ODR margin of 28.5%, which was slightly above the 25% to 28% range we think is appropriate for modeling purposes.
Gross margin was down 130 basis points sequentially from the third quarter and we attribute that to project and service mix. As noted on prior calls, it has been our expectation that ODR margins would revert to the lower end of the range. As the business mix within the ODR segment shifts toward a greater contribution from mid sized and large ODR projects. Those projects carry comparatively lower margins with maintenance contracts and time and material work. DCR margin was 16.4% in the fourth quarter and 13% for the full year, which is well ahead of the 10.5% to 11.5% range we have previously discussed.
The GCR gross margin in Q4 should not be extrapolated out as the quarter benefited from an ideal mix of project cycle timing and the positive impact of a disputed claim that settled for $1,300,000 above the amount that was carried on the book resulting in a write up. Within our GCR segment, we have referenced in the past that we have disputed claims on several projects where we incurred delays and financial impacts due to others. We continue to aggressively pursue the other outstanding disputes and the timing of dispute resolution on these claims is always a challenge. However, on a positive note, we recorded no new significant disputed claims in 2021. Gross margin results for the full year were also positively impacted by a continued focus on project selection and the emphasis on profitability yielding more consistent performance.
As such, our business continues to be best evaluated over a twelve month period or longer. And our current thinking is that a gross margin range of 11% to 12% represents a conservative starting point for modeling in the GCR segments. Our SG and A expense for the fourth quarter was $18,800,000 and $71,400,000 for the fiscal year or 14.6% of revenue. Full year SG and A increased $7,800,000 from the prior year due primarily to increases in stock compensation, rent expense, professional fees and travel and entertainment expense consistent with resuming our normal business operations. The increase was also due to staffing back up critical functions that were cut at the height of the pandemic.
This includes marketing, training and other administrative functions. We also raised the bar in human resources in 2021 by recruiting a top tier HR executive to support the critical function of human capital which is in short supply. We also incurred professional fees in 2021 associated with the four zero four B stock compliance and the acquisition of Jake Marshall in the fourth quarter. For modeling purposes, keeping SG and A as a percentage of revenue around the same level is a reasonable way to look at it, while we continue to grow our ODR segment. Turning to the balance sheet and cash flow.
At December 31, balance sheet continues to be strong. We ended the year with cash of $14,500,000 and reduced our total outstanding debt amount by $5,400,000 from 2020. We also had an additional borrowing capacity of $21,600,000 through our line of credit. Total cash balances for the year decreased 27,700,000 of which $24,200,000 was from the uses of cash in operating activities. Operating activities for the fourth quarter consumed $7,500,000 of cash and if you recall $3,200,000 of that was related to the December 31 cash payment of half of the deferred payroll taxes from the CARES Act that was signed back in 2020.
We will also be required to pay the remaining half of the deferred payroll taxes by 12/31/2022. Another large driver for the fourth quarter CAF usage was the increase in our net under billing position. As we discussed on the Q3 call, the timing of project life cycles and the mix of project size versus the ODR and GCR impacts cash in both a positive and negative way depending on where the projects are in their life cycle. At the 2020, we had an overbill balance of $46,000,000 which had a very positive impact on cash at that time. At the 2021, we had an overbill balance of $26,300,000 The reduction in the overbill position during 2021 was the result of us being able to bill ahead with our customers for work that had yet to be performed at the 2020.
During 2021, we incurred costs associated with these projects. Since we already billed and received cash for those costs in the prior period, these costs are a direct reduction of cash in the period that the work was performed and expenses were paid. As a result of these overbillings coming down in 2021, our cash is reduced by $19,700,000 As we shift our business to ODR work and smaller project work, we don't expect to return to the higher overbill levels as experienced in 2020. However, we continue to stress the importance of cash culture within our organization and when possible try to negotiate favorable billing terms with our customers. Additionally, our cash is also impacted by our under billings.
We had under billings of $31,900,000 at the 2020 and $47,400,000 at the 2021. This increase in under billing position is again impacted by the timing of project life cycles. A large portion of the increase in our under billing was the result of the lag time it takes to convert claims and unapproved change order work that we have incurred costs on into billings. As a result of this timing and the increase in under billings, we use cash of $15,500,000 in 2021. We expect majority of our claims and unapproved change orders to convert to billings within one year.
However, those that require some form of dispute resolution may delay the timing of the conversion beyond one year. We believe this lag time is standard practice in construction and is impacted by various factors and will continue to fluctuate. Cash from financing activities provided net cash of $15,900,000 This included equity raise in February 2021 that provided $22,800,000 and that was offset by the pay down of $5,400,000 of our total debt. While cash from investing activities used cash of $19,300,000 The usage was primarily due to the acquisition of Jake Marshall in the fourth quarter. The Jake Marshall acquisition was funded by $10,000,000 of our own cash on hand and $10,000,000 of term loan borrowings in the fourth quarter.
I'll now pass the call to Mike.
Speaker 4
Thanks, Jamie, and good morning. First, I want to acknowledge all the Limbach employees for their outstanding work during the fourth quarter and all of last year. We set ambitious goals both financially and strategically and we accomplished the majority of those. I'm very proud of our team members. Supply chain issues continue to be at the forefront of many people's minds.
So I want to provide some color on how we're reacting to those issues. Our primary challenge is with equipment deliveries. In the ODR segment, much of our work consists of installing equipment like chillers and air handlers. Lead times for chillers have nearly doubled compared to what they were pre pandemic. In addition to extended lead times, there's also been an increase in missed delivery schedules.
Scheduling adjustments due to unforeseen delays in equipment deliveries results in reduced efficiency and cost and added cost. In talking with our suppliers and manufacturers, we don't expect relief on production and delivery times until late twenty twenty two and into early twenty twenty three. We're responding to these market conditions by adding in varying levels of contingency into our scheduling. Given the reality we're seeing in the field, it makes sense to expect and plan for these disruptions, which we expect to slowly resolve over the course of the year. We are also urging our customers to make their equipment selection decisions as quickly as possible.
And where necessary, we're supporting customers in identifying and evaluating equipment alternatives. When I look at the ongoing impacts of this, I see revenue shifting from the first half to the second half of the year. One interesting benefit we've realized from the supply chain issues is that our time and material services have experienced a 44% increase year over year. That trend seems to be continuing into 2022. Because new equipment isn't immediately available, owners are investing in their existing older equipment.
That's not always a long term solution. Old equipment ultimately fails and that supports emergency repair and unplanned work. 2021 was our best year yet for preventative maintenance contract sales. We added sales resources after backing off investments in 2020. These resources tend to take a year to produce and we are now seeing those investments pay off.
We believe we're well positioned going into 2022 to see growth in the ODR segment due to increased sales resources, intensified strategic sales focus on building owners, which is resulting in an expanding maintenance space. From a backlog perspective, our sales for the fourth quarter picked up in both our ODR and GCR segments. At the year end, ODR backlog was $98,000,000 and GCR backlog was $337,000,000 Charlie will comment later on the sales activity, but we believe supply and demand remains in our favor at this point, allowing us to remain selective in the work that we take on. In terms of our going forward operational strategies, our focus is squarely on GCR project selection, bottom line profitability and improving our cash flows. We're continuing to focus on aggressively growing the ODR segment and maximize the return of our people in the GCR segment.
As the recent results show, this has been a successful strategy and we're going to continue to operate this way. On the bright side, the labor picture has improved moving through the first quarter. The Omicron variant has dropped off considerably. We were impacted by workers needing to quarantine in Q4 and into January, but the situation has improved through February and into March. Among the business units, we did have one important development to share that occurred subsequent to year end.
In February, after thorough evaluation of the business unit, including local market conditions and outlook, we made a strategic decision to wind down operations in Southern California due to its strain on financial and human capital resources. The performance of that business was inconsistent and consumed cash from our other higher performing operations. We have been reducing our footprint of that business over the last couple of years as we work to turn the business around, but ultimately determined a full exit made the most sense. We expect to be fully exited from that business in 2022. As of 12/31/2021, the Southern California branch had less than $10,000,000 of remaining backlog to perform.
Our other key focus is the integration of Jake Marshall into Limbach. Integration is proceeding well and the team is on target from a plan and timeline perspective. Among the opportunities and capabilities we're leveraging in both directions are Limbach shared services such as design and engineering and Jake Marshall's prefabrication expertise. As an example, we've identified a project in the Midwest we're about to begin. We believe we may be able to prefabricate over 70% of our piping assemblies at J.
Marshall, which would improve our operating margins on that project. Let me hand this over to Matt for comments on our acquisition activities.
Speaker 5
Thanks, Mike. So first, let me take a moment to further comment on J. Marshall and then I'll pivot to acquisition activity in the M and A environment more broadly. First, with respect to Jake Marshall, the business has really only been a part of the Limbaugh family now for a few months. But in that short time, the team in Chattanooga has just been terrific, and we really couldn't have asked for a better partnership.
There's been no shortage of learning opportunities going in both directions, as Mike explained. And there's also no shortage of business opportunities in that market. That's proven to be consistent with how we expected the year to develop coming out of the industrial cycle trough in early 'twenty one. It's very busy there, and the team continues to sell really good work. And just the market environment in the Tennessee footprint generally is as strong as I think it's really ever been, and we continue to feel really good about being there and the opportunities that, that market presents.
So stepping back and looking at the M and A environment more broadly, in general, across the universe, we're seeing strong levels of activity in what I would describe as the prospecting phase, the exploratory phase and also the nurturing phase vis a vis potential acquisition candidates. It feels like a really healthy but balanced market right now. Not everything that we're looking at is going to get to the finish line, but the volume of interesting businesses that we are exploring and speaking with is really as strong as I can ever remember having experienced. We are pretty picky acquirers, and not every great business is going to turn out to be a great business for Limbaugh. But we like being busy, and we certainly are at the moment.
And we're pleased to be looking at businesses with this quality and led by folks that really share the same core values as we do. So expect to continue to be busy through the first and second quarters and into the back half of the year.
Speaker 2
Thanks, Ben. I'm going to close with some comments on our sales activity and then we'll open it up for questions. Recall that a year ago, there was a significant pause in activity as everyone was still feeling their way through how to operate in the pandemic. Proposal activity thus far in 2022 is well above what we were seeing at this time last year. And in response, we continue to evaluate needed sales resources in the markets that offer the most attractive returns.
With the global supply chain issues, we have seen a nice increase in time and material work as aging equipment requires additional maintenance. Until the supply chain issue is resolved, we expect to see a strong contribution from time and material work. While the T and M revenue is good news, the supply chain matters continue to impact our ability to secure quick hitting equipment change out projects if a customer is locked into certain specified equipment. As of right now, we see this beginning really an issue into early twenty twenty three. Looking at 2022 thus far, LIVOCC has been awarded several major building project contracts totaling approximately $95,000,000 which will be executed on into 2024, including a new pharmaceutical research and development facility in Boston and two central utility plants, one in Washington, D.
C. And the other in Marco Island, Florida. Also included in the total is $22,000,000 of new awards secured by Jake Marshall for various industrial and institutional projects in the Tennessee market. This is quite a nice start for the year. In the OER segment, our maintenance base continues to grow.
And as a reminder, those maintenance contracts can lead to other higher margin, quick hitting small capital projects, which are often performed on a T and M basis along with emergency repairs. When I refer to investment to strategically grow our ODR segment, a key element is the maintenance contracts growth. Turning to the GCR segment, we're focused on those branches with demonstrated success delivering GCR work and we're looking to maximize their contributions and continue their growth. In branches that don't meet the criteria for continued GCR exposure, we're working aggressively to reposition those assets, including our staff to pursue a higher margin ODR model. In closing, 2021 was a year of major transformation for Limbach and in many respects, the culmination of a significant strategic shift for the company.
That process is not totally complete, but much of the heavy lifting has been done as our third and fourth quarter bottom line results suggest. We believe we entered 2022 well positioned, but also very mindful of the macroeconomic and geopolitical issues at hand. Throughout our prepared remarks, you've heard us talk about being smart deploying our assets in pursuit of the best returns, both as a durable way of managing the business and also response to current market conditions. The non residential construction industry at large is enjoying solid demand that we expect to continue, but supply has yet to catch up with that demand. We are fortunate to have a diverse service offering, a diverse geographic footprint and a diverse set of market sectors.
Our largest sector healthcare, which includes pharmaceutical and biotech laboratories and manufacturing facilities continues to present a solid pipeline of projects both large and small. And now with our new program management services, we look to benefit with earlier engagement to expand our ODR relationships further upstream as capital projects are defined. Among other verticals, we see continued demand for data centers as an area of opportunity. Another highlight is our broader entry into the industrial manufacturing sector with the J. Marshall acquisition.
They have a substantial prospect list, especially with the automobile EV plants that are underway in Tennessee. We also remain bullish on the indoor agriculture sector. I want to emphasize that with the current supply chain challenges, the sectors that I referenced and the opportunities they present are mainly centered on building backlog for 2023 and 2024. We look forward to 2022 and as Mike mentioned, it appears the second half of the year will be stronger than the first half of the year due to the supply chain limitations along with labor challenges similar to what we experienced in 2021. And we intend to detail our formal financial guidance when we issue our first quarter results in May.
With that, we're available to take your questions.
Speaker 0
Thank you. Our first question is from Rob Brown with Lake Street Capital. Please proceed.
Speaker 6
Good morning.
Speaker 2
Good morning, Rob.
Speaker 6
Kind of on the current environment, just wanted to get a sense of are you seeing projects just shifting out, but you maintain your projects, but the timing gets delayed a little bit? Or do you see projects, really new starts getting delayed? Or what's the impact of sort of supply chain issues at this point?
Speaker 4
Rob, thanks for the question. It's interesting. I think this partially relates to our shift to in general, the biggest factor right now in our industry is definitely equipment. We had commodity type questions that were twelve to eighteen months ago. But right now it's equipment.
And the equipment lead times are nearly doubled what they were before. That especially impacts on the owner direct work, which tends to be equipment driven versus the larger GCR work, which has equipment but has an additional labor component that the owner direct work tends to be at less risk. So we're really closely watching equipment lead times. I think at some point here, as I mentioned, they will start to have some relief on those. But I think from an owner direct percent on owner direct side, there's older equipment that has to be replaced.
So I think any deferred capital expenditures that happen, we're finally in a position now where those expenditures those building owners have to make those investments. It's just a matter of getting the equipment in order for them to make those investments. It's kind of the position that we're in right now. Larger projects, we continue to be very selective. I think price certainty is from a perspective on larger GCR work is definitely on the forefront of a lot of building owners' minds.
So completely equipment driven really at this point and we're really closely watching it.
Speaker 6
That's great color. Thank you. And then you talked about being selective on projects. How is the margin profile of new projects looking at this point? Do feel you like that margin can continue to improve sort of on average or do you feel like it's stable?
How would you characterize it, I guess, specifically around GCR?
Speaker 2
Yes. Look, I think the better returns that we're presenting now are a result of what we've done over the past couple of years between risk management, proper selection of projects, higher quality jobs. But we've been pushing the margins. On the OER front, we continue to push and it's going be interesting to see the results over the next couple of years as we really educate our sales force to go for it and just increase the margin by 200 basis points, give it a shot. On the GCR side, we are pretty much holding firm on certain levels of margin.
Of course, we always look at the risk and opportunity, but we are pushing hard to beat that range that we're providing for modeling purposes. And we're winning work on a regular basis. We're losing some work and some people get disappointed that we lost the project, but we're like, no, that's fine. Let's deploy our human capital on the projects where we can get the greatest return. So that's the way we're looking at it right now, Ron, is to just really get the greatest return off of our great people that work for this company.
It's almost demoralizing for our staff when they get on a job that maybe doesn't give us a good return and it becomes a tougher project. And I think our staff are pretty pumped up that we're holding firm, that we want them to get on healthy projects that are going to have really strong outcomes. And yes, we lose one, that's okay. Let's go after the next one. And quite frankly, the market is that busy.
We can be selective and that's what we're doing.
Speaker 6
Excellent. Thank you. I'll turn it
Speaker 2
over. Thanks,
Speaker 0
Our next question comes from Chip Moore with EFN. Please proceed.
Speaker 7
Hey, good morning. Thanks for taking the question, guys. Good morning, Chip. Wanted to ask about GCR margins. Obviously, very strong this quarter, and you called out some of the mix in the claim settlement.
Maybe you can expand on that and help us think about a normalized margin just for the quarter. But then for the year, 13%, very strong. You talked about 11% to 12 now as conservative starting point. What are some of the puts and takes there and potential to outperform?
Speaker 2
Yes. On the claim resolution, we were quite pleased. We held firm. We were hoping to get that resolved quicker, but we held our ground. And we left that claim situation quite frankly in a very good position, very proud of the people that negotiated that.
They did a great job. And we've got several more that we're working on. So that created some nice upside to the business, no doubt. So that pushed the margin up. But I think the modeling between 1112%, and we increased it slightly for a conservative view from previous modeling guidance.
But we think that's the proper way to look at it right now. And as our quarters go by, we'll provide further updates on our progress. But when I look at again, I'm going to reinforce this, a couple of years ago, we put the risk management processes in place for better project selection. We're pushing the margins up. We want to continue to execute and execute well and deliver improving margins.
But I think from a modeling perspective, Chip, we think the 11% to 12% is the way to go right now.
Speaker 7
Got it. That's helpful. And maybe if
Speaker 6
I shift to some of
Speaker 7
the supply chain impacts, I guess, particularly on the ODR side, you talked about the lead times for chillers and air hammers and things like this. Did that hold back sales materially at all this quarter? And then as we think about sort of that second half weighting this year, any color you can give us there would be helpful.
Speaker 2
Sure. So first of all, on sales with Supply Chain, what's kind of interesting right now, we're using that to our advantage at pushing our customer base to make decisions. In other words, if in the past, you might have a customer take three or four months to make a decision on a piece of equipment and to go forward with a retrofit. Now we're urging them, look, we need to lock this in at the pricing today because the pricing will go up plus we don't know what's going to happen with manufacturing. Could it improve or could it get worse?
So that's actually working in our favor to get decisions quicker. Unfortunately, though, if I look back at late half of Q3 into Q4, there was about $20,000,000 of revenue, approximately $20,000,000 of revenue of higher margin work that got pushed forward because we couldn't get the equipment, they missed their delivery dates and that was unfortunate that we could have a much better year last year. But from a standpoint of kind of that continuation of the supply chain problem, we don't expect that to improve until early maybe late this year or early twenty twenty three. We just had a senior management call with Johnson Controls, who's a major equipment supplier for us last week. We had four of their senior executives on the call.
One person in particular responsible for equipment production. And he reinforced the issue of anything custom, you're looking at a year to get anything custom. So if we sell a project today that is custom piece of equipment, it's going to revenue next year. As far as some positive news though, he did share that they're starting to catch up with standard equipment, meaning off the shelf equipment. It's not back anywhere near what it was pre pandemic, but they're starting to see kind of logjam ease a bit and they're starting to catch up with demand.
So that was really positive news for us. We're going to have to talk to our customer base that they have a need for an equipment switch out or for that matter even new construction. We're going to try to convince them to go with the off the shelf product as opposed to a custom piece of equipment. Unfortunately, in many cases with some of the sophisticated projects we work on, it has to be custom. But where we can push for the alternative, we're going to be doing that.
So again, it's supply chain is kind of interesting. We're taking advantage of it in certain respects. It's also pushing our T and M up, as we mentioned in our prepared remarks. We're pushing clients to make decisions quicker. But unfortunately, some of that work is going to continue to lag as we wait for the equipment to come in.
Speaker 7
Understood. No, that's super helpful. And maybe if
Speaker 6
I could sneak just one last one in. You did talk about Jake Marshall and some of
Speaker 7
the opportunities you're seeing there. I know it's early, but I think you also called out some of the building in the auto sector.
Speaker 6
Are you actively bidding on some of those opportunities?
Speaker 2
Well, first of all, Jake Marshall is very busy, which is great. And it was great to see them pick up $22,000,000 of new work here at the beginning of the year, which was just awesome to see. There is the Ford plant that's being built down there, that's a $6,000,000,000 investment. That's currently kind of in planning. And when it goes into construction with areas that we'd be interested in, we will look at it.
We'll price it appropriately. If we could pick some of it up, that'd be great. But Tennessee seems to be a hotspot of activity right now. We're pretty excited about it, whether it's things like the EV plant for Ford or all the ancillary plants that go around a big production facility like that. There's going to be quite a bit of opportunity.
So the answer is we're looking at it. And if we can find the right opportunity, right margins that we're looking for, we'll take it on.
Speaker 7
Perfect. All right. Thanks very much.
Speaker 2
Thank you. Sure.
Speaker 0
Our next question is from John Old with Longmeadow Investors. Please proceed.
Speaker 8
Hi, everyone. Thanks for the call and congrats on the fourth quarter. Charlie, was just curious, do you see the GCR segment after sort of the rationalization in the last year and purposeful decline for margin expansion? Do you see that leveling out now? Or do you think that will continue?
So do you think the business sort of stays flat or grows a little bit going forward? Or is it you're to continue to
Speaker 2
Great question, John. Thank you for asking it. When we look at the business, first of all, you got to understand our mission at this point is to keep growing that ODR piece as aggressively as we can. I was very pleased with the sales. We're up 25% year on year for the ODR segment.
The GCR segment, we're really looking at each business unit rationalizing their execution. Can they produce the margin? Can they produce the cash that we need them to? So in the branches that have been very successful over the years, whether it's building small or large scale projects, we're going to continue. And the branches that we look at them and they're saying, I can get some GCR work, but it's at this margin and it's going to be maybe negative cash flow, we're just not doing it.
And one particular branch we looked at last year, we just decided, look, just go straight ODR, straight ODR. You're going to do so much better. And it didn't take long in that conversation to just work through the math and show them the numbers and everybody agreed. So we shifted those assets over to ODR, including the SG and A. So as we go forward, I could see GCR in certain business units continuing to grow.
In other units, we're going to continue to contract or maybe even stop. There's no question about it. ODR produces much better margin, much better bottom line and positive cash flow. It's just much better. Mike, do you have anything else you'd like to share on that?
Speaker 4
No, I would agree. It's I think when we look at the return in the gross profit margins, our employees from a strategic perspective, we're on a journey here to make sure that we're putting our people in a position to be most successful. And I think when you step back a couple of years is we talked about doing we talked about the mix of the business. In 2021, it was really about making the necessary SG and A adds from a sales perspective. And really in 2021 from a sales focus, we're focused on maintenance base, we're focused on introducing ourselves to new customers and we feel like we're positioned going into 2022 once we've already been introduced to those customers to sell an expanded suite of services as well.
So this is a journey that we're on. And as Charlie mentioned, project selection and obviously trying to make sure we have the greatest return and we have our people in the best position is ultimately what we're focused on.
Speaker 2
John, I want to tell you a quick story and for everybody on the call that I think is really important because it demonstrates the importance of GCR as well, but more importantly ODR. So it's Disney and you've heard us talk about Disney in the past. Back in I think it was 2010, we had an opportunity to do the mine train ride renovation. And it was a small project $2,000,000 ended up wrapping up at about $4,000,000 value. There were a lot of change orders, got paid well, it all worked out well.
And I ended up having dinner with the Head of Imagineering for Disney after that project. And I was shocked to hear how impressed they were. Maybe I shouldn't have been so shocked, but they were thrilled with what we did for them. And I don't have time to get into all the details, but we really did some creative stuff for them. So you fast forward today, we're still working for Imagineering, whether it's at the Magic Kingdom or over at EPCOT.
But we're now working for the four divisions within Disney that maintain all the facilities throughout their properties in Orlando. So it started off with a small little opportunity, has now expanded into good sized GCR work, where we are working for general contractors, but Disney is pretty much telling the GC use our services. And now it's grown into this great presence on the property for all of this other maintenance renovation retrofit type work and it's become a nice part of our business. So the reason I share the story is that's the model. So GCR, what's important about it is we get involved on a project, make sure we understand who the owner is and then let's figure out how we can start leveraging that relationship with that owner, listen to them and start providing more and more services, much better margin, much better cash flow.
So again, the program is important, GCR, ODR. But I also have to emphasize that without GCR in certain business units, there's so much opportunity in those markets where we just we go direct, we don't need the GC, we're just knocking on the doors of buildings, getting ourselves introduced and developing those long term relationships. And I'm quite frankly extremely pleased with what we've done over the past couple of years. It's really, really starting to blossom.
Speaker 8
Great. Thanks for that color. And then just following up on cash flow, Jamie. Obviously, the last two years were one year was way balanced to the positive last year to negative. Going forward, do you think cash flow will more closely approximate the existing results?
In other words, EBITDA conversion to cash flow will be more normalized in 2022 and going forward?
Speaker 3
Yes, thanks. So trying to give more color on that and really explaining the overbill and underbill. And so as Charlie mentioned, from a risk perspective as we shift to ODR, as well as we're shifting to ODR, it's not as volatile. So as we work towards that fifty-fifty split, we expect and anticipate that will be more of neutral billings. So that's helpful from the cash flow perspective.
So I think a good way to look at the cash flow from like kind of our daily operations from the business is to using net income as an approximation and then from there we do have the debt payments that we need to make. But then we also have our revolver as well that we can work off of that we have nothing borrowed on at this point. So I think that's probably the best way as we're making that shift and we have that volatility right now between the billings being overbilled and underbilled that kind of gets you comfortable where the cash is going to land.
Speaker 8
Okay. All right. Appreciate it. And then Matt, maybe you could just give us a little more color on the acquisition activity, what you guys expect going forward, maybe one or two deals a year, what that means to the company if you can execute that over a long period of time and really provide a tremendous growth boost to the business?
Speaker 5
Sure. So let me give you some color here. And then I think as we move through the quarter and into the next call after Q1, we'll provide some incremental comments on top of what I can pass along here. But yes, clearly, and we've said this before, I think the Jake Marshall transaction in December is a really good prototype for the type of business, that we're looking to pursue and the type of partnership we'd like to form in terms of location, scale, capability, size, that sort of thing. So the criteria, we've been through before, again, businesses with revenue between probably 30,000,000 and 75,000,000 with EBITDA margins in, call it, 8% to 10% range.
So these are transactions that have an enterprise value of roughly 15,000,000 to $25,000,000 I think that's a good digestible bite size for us over an eighteen to twenty four month, maybe thirty six month period. And those businesses can be impactful to the bottom line. They're large enough to make a difference. They look like many of our other branches, but they're also small enough for us to feel comfortable with the people, with the operations, with the diligence requirements and resources and with the ability to finance the transactions and get those transactions closed. So when I look at the environment right now and the opportunities in the market that fit that profile, there are a lot of them.
They're very interesting. I think people are relieved to be largely on the other side of the pandemic. I think the capital gains tax voodoo that we went through last year has mitigated, but has sort of sharpened people's perspectives and feelings about really getting ahead of succession planning and estate planning. And I think that's good for the acquirer universe as we look at opportunities in the market. Getting one or two of those deals done this year, next year, I think, is a reasonable pace and a reasonable aspiration.
Because again, we are trying to manage the internal resources, the capital resources that we've got with the availability in the marketplace. One of the great, I think, sort of obvious discoveries hiding in plain sight from the J. Marshall deal was just the breadth and depth of resources that we have at Limbaugh to work with me, to support me, to be available for integration, for extracting value out of the businesses that we partner with. And we want to make sure that we sort of manage that balance, given that a lot of those folks also have day jobs. So I'm thinking about the strategy right now as one to two deals this year bleeding into next year.
And if we've got the ability and the scale to ramp that up and add another transaction and get two to three deals that are that size, that would be great. But as I think about the near term environment and the near term horizon of, call it, again, twenty four to thirty six months, I think the right pace is probably plus or minus two deals a year at that scale.
Speaker 8
Thank you so much.
Speaker 0
Our next question is from George Milas with MKH Management. Please proceed.
Speaker 9
I'm fairly new to the story. So I'm trying to understand the ODR segment grew roughly 10% this year, but I believe you said sales were up 25%. The backlog is clearly growing and has increased very much. Do you expect to see operating leverage on the ODR business in 2022? Or are you going to continue this sort of strong investment, particularly in the SG and A and on the sales side to keep the growth going long term?
Speaker 2
Yes. George, thanks for the question. So our view of ODR right now is it's just a huge part of our future. Again, for all the right economic reasons, it's amazing what it does for returns and cash production. So when you look at what we did this past year, a little over 10% growth, I did make a comment about supply chain, $20,000,000 of revenue kind of pushed forward.
And that's one of the reasons why the backlog is actually much larger because we still have to burn that work. But the sales themselves were up by 25%, which is a great indicator of the future and we're not going to back off. So where we see the opportunity to continue to expand in our different marketplaces and add staff to grow it, we're going to do that. The other part is on the acquisition front, what Matt was just touching on, our intent right now is to look for businesses that have a reasonable representation of ODR revenue. Jake Marshall did that for us.
I believe that was roughly 60% revenue was ODR. And so we're going continue to look for businesses that can add to that mix. Our goal by 2025 is to see our mix of 50% GCR, 50% ODR. Yes, Does that help,
Speaker 9
very much. Thank you. And then just a quick question on the contract assets and liability and the overbilling and underbilling. And is that something that as investors we should be worried about and the fluctuations are so significant? Or is this just part of the business and over time, it sort of take care of itself?
Speaker 2
So when you look at over and under billings, that's an ongoing thing for the industry. Just it's the nature of what we do. And a lot of it has to do with timing, George. You could have one month where we're much better, next month could be a bit worse. It depends upon kind of the cycle of a project.
So now let's go back to the strategy. The strategy right now is to continue to be very selective on GCR where we feel that we're going to see much better outcomes both in terms of profit and cash flow, which means strong billings. But we're also shifting this mix to ODR. And ODR tends to have a nice either neutral billing to a slight uptick on a regular basis. So as we continue the evolution of the business and transformation to more ODR, we expect it to smooth out and not have that lumpiness, if you want to call it that.
I hope that helps, George.
Speaker 9
Okay. Okay, very good. Thank you.
Speaker 0
Our next question is from Chip Brown, Private Investor. Please proceed.
Speaker 1
Good morning, guys. Hey, my question is regards to you guys winding down or shutting down Southern California. To my knowledge that relationship is an ODR relationship with Disney, correct?
Speaker 2
No, no. We've done very little work at Anaheim. I think we did some air handler change outs. We tried getting in there. We didn't have much success.
No, the majority of our work is all at good old Orlando.
Speaker 1
Okay, perfect. Thank you.
Speaker 2
Thanks for the question, Chip.
Speaker 0
That concludes our question and answer session. I would like to turn the call back over to management for closing comments.
Speaker 2
I want to thank everybody for joining us this morning. We were very proud of the quarter and the year for that matter. We look forward to speaking to you again when we report the first quarter results in May. If you have any additional questions, please reach out to Matt Katz or our Investor Relations firm, The Equity Group. Their contact information can be found on our Investor page on our website.
Thank you again for your interest in Lobach.
Speaker 0
Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.