Limbach Holdings, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Limbach completed its acquisition of Limbach Holdings LLC on July 20, 2016. Consequently, the filing presents a pre-acquisition “Predecessor” period and a post-acquisition “Successor” period using different accounting bases; they are not directly comparable. Where annual comparisons are shown below, they combine those two 2016 periods as the company does in its MD&A.
Business context and operating performance
Limbach is a U.S. commercial specialty contractor providing HVAC, plumbing, electrical, building-controls, construction, and facility-maintenance services. It reports Construction and Service segments. The company emphasizes integrated design-build capabilities, maintenance relationships, and growth in healthcare, education, sports and amusement, and transportation markets.
- Revenue: Combined 2016 revenue was $447.0 million, up 34.9% from $331.4 million in 2015. Construction revenue rose 33.3% to $364.8 million; Service revenue rose 42.3% to $82.2 million.
- Gross profit and margins: Combined gross profit was $55.7 million, up 22.6%. Gross margin declined to about 12.5% from 13.7%, which management attributed mainly to project mix, including a large lower-margin construction project. Construction gross margin was about 10.5% versus 11.7%; Service was 21.3% versus 23.0%.
- Operating expenses and income: Combined SG&A was $48.4 million, up 28.3%, reflecting public-company and transaction-related expenses, increased professional fees, and staffing. Combined operating income was approximately $4.1 million, down 46.2% from $7.6 million.
- Profit: The Successor period recorded a $4.6 million pretax loss and a $0.7 million net loss; common-stockholder loss was $1.1 million, or $0.19 per share. The Predecessor reported $2.6 million net income for January 1–July 19, 2016. The filing’s unaudited full-year pro forma presentation reports 2016 revenue of $447.0 million and a $0.6 million loss attributable to common shareholders; it is not a substitute for comparable audited annual results.
- Cash flow: Operating activities provided $4.8 million across the two 2016 reporting periods, versus $0.6 million in 2015. Investing activities used $15.5 million combined, including acquisition-related cash outflow; financing activities provided $12.2 million combined. Cash-flow comparisons are affected by the acquisition and reporting-period split.
- Liquidity: At year-end, cash was $7.4 million, working capital $28.5 million, and the current ratio 1.22, compared with $26.9 million and 1.31 at year-end 2015. Management said cash, customer receipts, and available revolver capacity were expected to cover working-capital and capital-expenditure needs for at least 12 months.
- Debt: Year-end debt and capital-lease obligations totaled $26.3 million, including a $22.5 million term loan and $3.7 million of capital leases. The company had $21.6 million of available revolver capacity and was in compliance with credit covenants. It repaid a 16% subordinated loan in December using proceeds from a common-stock offering; the repayment generated a $2.2 million extinguishment loss.
- Backlog: Construction backlog was $390.2 million, up from $355.4 million; Service backlog was $44.1 million, up from $22.7 million. Management estimated 67% of construction backlog and 94.4% of Service backlog would be recognized in 2017. Backlog is not a GAAP measure and may change or be canceled.
Material changes and unusual items
- The July 20 business combination created a new accounting basis, including $10.5 million of goodwill and $20.9 million of acquired identifiable intangible assets. Successor amortization expense was $3.1 million.
- The company became a taxable C corporation after the combination. A $3.9 million income-tax benefit in the Successor period included release of a $2.4 million valuation allowance.
- A December 2016 public offering generated approximately $17.2 million of net proceeds to the company and funded repayment of the subordinated loan.
- A construction-project estimate revision reduced the Successor-period project value by $2.1 million. The filing says cumulative estimate changes across all projects were not material.
- Receivables rose to $114.0 million from $85.4 million. Management cited higher revenue volume and unbilled contract balances associated with large guaranteed-maximum-price projects and delayed change-order approvals.
Outlook, risks, and contingencies
- Management cited industry forecasts anticipating growth in its principal markets and said it expects steady sales and improved margin opportunities. The filing provides no specific numerical earnings or revenue guidance.
- Key operating risks include cost overruns and inaccurate percentage-of-completion estimates, project delays or cancellations, labor availability and disputes, subcontractor and supplier performance, customer payment delays, weather, competition, and dependence on bonding capacity. One customer represented approximately 24% of Successor-period revenue and 11% of the preceding 2016 Predecessor period; no customer exceeded 10% in 2015.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of two material weaknesses: an insufficiently developed accounting and reporting control environment, and inadequate processes to accrue for goods and services received at project sites but not yet invoiced. Remediation included hiring accounting personnel, engaging consultants, and improving controls and accrual procedures.
- The company participates in approximately 50 multiemployer pension plans, some of which it believes are underfunded or in critical or endangered status. It recorded no liability for potential plan underfunding or withdrawal liability and said the amount and timing of any future liability could not be determined.
- A shareholder class-action and derivative lawsuit challenged the business combination and sought, among other relief, rescission and damages. Defendants intended to contest the claims and considered them without merit.
- Ohio energy-savings contracts carry guarantees; stated guarantee amounts for 2017 and 2018 were $0.3 million and $0.2 million, respectively. No liability was recorded, and management did not expect material losses. The company also had $121.7 million of surety bonds outstanding and $7.9 million of unresolved change orders and claims recorded at estimated net realizable value.
Most important facts for investors to verify
- Review the acquisition’s accounting effects and use the filing’s pro forma figures cautiously; the reported Predecessor and Successor periods are not directly comparable.
- Track remediation of the two material weaknesses, particularly project-cost accruals and the financial close and review process.
- Assess gross-margin trends, project mix, large-project execution, and whether backlog converts to revenue and cash as estimated.
- Monitor receivables, unbilled contract assets, change-order approvals, and the company’s ability to sustain positive operating cash flow.
- Evaluate customer concentration, covenant compliance, revolver availability, and the effects of variable-rate debt and scheduled repayments.
- Follow the shareholder litigation and potential multiemployer pension-plan contribution or withdrawal liabilities.