Limbach Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Limbach provides commercial HVAC, plumbing, electrical and building-services work through Construction and Service segments. Financial statements are unaudited; 2019 comparatives were recast for accounting standards.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $135.2m | $132.6m | $274.0m | $266.4m |
| Gross profit / margin | $20.3m / 15.0% | $17.7m / 13.3% | $38.6m / 14.1% | $37.3m / 14.0% |
| Operating income | $6.3m | $0.4m | $7.6m | $3.8m |
| Net income (loss) | $2.9m | $(1.3)m | $2.9m | $0.6m |
| Diluted EPS | $0.37 | $(0.17) | $0.37 | $0.07 |
| Operating cash flow | Not presented quarterly | $22.5m | $(15.7)m |
- Q2 revenue increased 1.9%; six-month revenue increased 2.9%. Service revenue grew 5.0% in Q2 and 2.5% for the half.
- Q2 gross margin improved mainly on segment mix and more favorable pricing. For the first half, Service gross profit rose 12.0%, while Construction gross profit declined 1.7%.
- Q2 SG&A fell $3.3m to $13.8m; first-half SG&A fell $2.6m to $30.6m. Cost reductions included lower travel, professional fees and presale engineering expense.
- Interest expense was $2.1m in Q2 and $4.3m for the half, higher year over year largely due to costly refinanced debt. The term loan rate was 13.0% at June 30.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $28.8m at June 30, 2020, versus $8.3m at year-end 2019. Net working capital was $42.8m; the current ratio was 1.26.
- Balance-sheet debt carrying value was $43.9m, including $6.4m current and $37.5m long-term debt; the stated debt obligations before unamortized discount and issuance costs totaled $47.3m. The term loan matures April 2022, with $1.0m quarterly amortization beginning in Q3 2020.
- The $15m ABL revolver had no borrowings. After letters of credit, reported net availability was $10.5m; cash plus net availability totaled $39.3m. A minimum $10m loan-party liquidity covenant applies.
- Operating cash flow benefited from contract liabilities and other working-capital movements, including a $16.3m increase in contract liabilities and $9.4m in accrued expenses/current liabilities; accounts payable and retainage used $19.5m.
Changes, outlook and risks
- COVID-19 caused temporary project shutdowns, most notably in New England, and restricted access to some service customers’ buildings. The company said suspended projects had resumed by May, with Service activity beginning to improve in July. It temporarily furloughed or reduced schedules, reduced headcount and discretionary spending, and reinstated certain positions and benefits in July.
- Management’s June reforecast assumed a measured recovery beginning in May and a return to normal revenue and gross-profit levels in Q4 2020. Management expected covenant compliance for the next 12 months and said available liquidity and forecast cash flows should cover requirements; it warned that renewed shutdowns or a weaker economy could threaten covenant compliance and liquidity. This is management’s forecast, not a guarantee.
- Construction backlog was $408.8m at June 30, down from $504.2m at year-end; Service backlog was $61.8m, up from $57.0m. The company expected to recognize about $275.9m of total backlog by year-end. Remaining performance obligations were $408.8m Construction and $46.6m Service; the Service figure differs from backlog because some cancellable agreements are excluded.
- Project-estimate revisions reduced gross profit by a net $4.0m for the first half: $5.2m of write-downs offset by $1.2m of write-ups. Q2 included $1.5m of write-downs on four construction projects.
- Contract assets included $39.4m of claims and unapproved change orders, whose recovery and timing depend on customer agreement and may involve dispute resolution. Other disclosed matters include lawsuits seeking more than $0.4m, $3.0m and approximately $1.0m; management intends to defend them and does not quantify a clear expected financial exposure.
- Surety bonds outstanding were $128.6m. The company participates in about 40 multiemployer pension plans and says potential withdrawal liability cannot be determined; some plans were reported in critical status.
- The CARES Act enabled a $1.6m tax refund from NOL carrybacks and deferred certain payroll taxes. Management cited COVID-19 duration, recession risk, project delays and customer access to capital as material uncertainties.
Important facts for investors to verify
- Whether Q4 recovery assumptions and project/service restarts materialized, and how further COVID-related restrictions affected work.
- Construction backlog conversion, cancellations and margin performance, including resolution and collection of claims and unapproved change orders.
- Compliance with the monthly leverage and liquidity covenants, and the effect of scheduled principal amortization and the 13% term-loan rate on cash and interest expense.
- Whether operating cash generation persists after the favorable working-capital movements reported in the first half.
- Developments and potential exposure in the disclosed litigation, surety obligations and multiemployer pension plans.