Limbach Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Limbach provides commercial HVAC, plumbing, electrical and building-services work through Construction and Service segments. The company completed its acquisition of Limbach Holdings LLC in July 2016. Accordingly, Q1 2017 “Successor” results and Q1 2016 “Predecessor” results use different accounting bases and are not fully comparable; the predecessor was also a pass-through entity for income taxes.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $115.2 million | $97.8 million |
| Gross profit / margin | $13.8 million / 12.0% | $12.1 million / 12.4% |
| Operating income (loss) | ($1.8 million) | $2.3 million |
| Net income (loss) | ($1.2 million) | $1.5 million |
| Net loss attributable to common stockholders / EPS | ($1.45 million) / ($0.19) | Not presented on a comparable basis |
| Cash from operating activities | ($4.7 million) | ($7.0 million) |
| Cash from investing activities | ($0.6 million) | ($0.7 million) |
| Cash from financing activities | $4.2 million | $1.7 million |
- Revenue grew 17.8% year over year: Construction revenue rose 12.1% to $91.5 million, while Service revenue increased 46.5% to $23.7 million.
- Gross profit increased 13.4%, but gross margin declined to 12.0%, primarily reflecting project mix. Service gross margin decreased to 20.3% from 21.2%.
- SG&A rose 48.0% to $14.6 million, or 12.6% of revenue, from $9.8 million, or 10.1%. Management cited public-company and professional-service costs, branch cost increases, $839,000 of added salary and benefits from new hires, a $242,000 bad-debt charge related to a bankrupt customer, and $130,000 of additional Florida rent.
- Q1 2017 included $1.0 million of acquired-intangible amortization, which was absent in the predecessor period. The company recorded a $1.1 million deferred tax benefit and no current tax provision.
Financial position and liquidity
- At March 31, 2017, cash and cash equivalents were $6.3 million; current assets were $148.0 million and current liabilities $115.0 million. Net working capital was $33.0 million and the current ratio was 1.29, versus 1.22 at year-end 2016.
- Total debt was $33.0 million, including $6.0 million drawn on the revolver, a $21.75 million term loan, $1.5 million of insurance-premium financing and capital leases. The term loan rate was 4.77%; the revolver rate was 6.75%. Revolver availability was $14.8 million, net of outstanding borrowings and letters of credit.
- The company reported compliance with its credit-agreement financial covenants. The agreement includes leverage and other covenants, collateral over substantially all assets of the borrowing subsidiary, and restrictions on certain transactions.
- Operating cash use improved from $7.0 million to $4.7 million. The company cited collections and a $6.2 million decrease in receivables, partly offset by lower contract overbillings and reduced accrued liabilities. Capital expenditures were $0.6 million.
- Management said cash, expected customer receipts and available revolver capacity were sufficient for working-capital and capital-expenditure needs for at least the next 12 months. This is management’s assessment, not formal earnings guidance.
Changes, outlook and risks
- Segment operating income was $1.7 million for Construction and $1.4 million for Service, offset by $4.8 million of corporate operating costs. Construction operating income fell from $3.3 million; Service operating income rose from $0.5 million.
- Construction backlog was $373.1 million at quarter-end, down from $390.2 million at December 31, 2016; Service backlog was $42.9 million, down from $44.1 million. Management expected to recognize approximately $283.9 million of Construction backlog by year-end 2017. Backlog is not a GAAP measure and may change, including through cancellations and change orders.
- No formal revenue or earnings guidance is provided. Management noted that weather and seasonal patterns can affect productivity and demand, with building-owner activity typically higher in the third and fourth quarters. It also said billing and collections were expected to improve as projects mature.
- Construction revenue recognition depends on estimates of costs and project completion. At March 31, unresolved claims and unapproved change orders totaled $7.5 million, recorded at estimated net realizable value; revisions to recoverability estimates are possible. The company reported $123.1 million of outstanding surety bonds.
- Potential exposures include energy-savings guarantees (no liability recorded; management did not expect material payments), multiemployer pension plans—including plans reported as “critical” status—and ordinary-course litigation. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- A shareholder class-action and derivative lawsuit challenges aspects of the 2016 business combination and seeks, among other relief, rescission and damages. The company is defending the case and believes it is without merit.
- Management concluded disclosure controls were ineffective because of two material weaknesses: insufficiently precise and timely financial-reporting controls and inadequate accrual controls for project costs and services received but not invoiced. Remediation efforts included hiring accounting personnel, using outside consultants, improving branch processes and establishing a Disclosure Committee.
Important facts for investors to verify
- How much of the reported revenue growth and margin movement reflects underlying operating trends versus acquisition accounting and the non-comparable successor/predecessor periods.
- Whether management remediates the two material weaknesses, particularly project-cost accruals and the financial close and review process.
- Cash conversion, receivable collections, contract asset and liability movements, and the company’s ability to maintain covenant compliance and sufficient revolver availability.
- Construction backlog conversion and changes in project awards, claims, change orders and estimated contract costs.
- The status and potential financial impact of the shareholder lawsuit, pension-plan exposure, surety obligations and energy-savings guarantees.
- The terms and accumulated dividends on the 8% cumulative redeemable convertible preferred stock, including its six-year redemption obligation and potential dilution on conversion.