Limbach Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; amounts below are in millions unless stated otherwise. Limbach is a U.S. specialty contractor providing construction and facility services focused on HVAC, plumbing, electrical and building systems.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $139.5 | $117.8 | $260.1 | $233.0 |
| Gross profit | $15.8 | $15.5 | $29.1 | $29.3 |
| Gross margin | 11.3% | 13.2% | 11.2% | 12.6% |
| Operating income (loss) | $1.8 | $1.7 | $(0.9) | $(0.1) |
| Net income (loss) | $0.7 | $0.7 | $(1.7) | $(0.5) |
| Net income (loss) per common share, diluted | $0.09 | $0.05 | $(0.51) | $(0.14) |
Q2 revenue increased 18.4% year over year, led by Construction growth of 18.2% and Service growth of 19.3%. Gross profit rose slightly, but gross margin fell as project estimate revisions reduced Construction profitability. For the first half, revenue rose 11.6%, while gross profit declined and operating and net losses widened. The first-half common-stockholder loss also reflects a $2.2 million premium paid to redeem preferred shares and preferred dividends.
- Cash flow: First-half operating cash flow was $0.7 million, versus $0.3 million in 2017. Investing used $2.0 million; financing provided $0.9 million. Cash declined $0.4 million to $0.3 million.
- Liquidity: Current assets were $175.0 million and current liabilities $155.7 million, leaving working capital of $19.3 million, down from $30.8 million at year-end 2017. The current ratio declined to 1.12 from 1.23.
- Debt: Total debt was $34.9 million, up from $27.1 million at December 31, 2017. This included an $8.2 million Bridge Term Loan due April 2019. Revolver availability, net of letters of credit, was $14.5 million.
- Backlog: Construction backlog was $445.3 million and Service backlog $47.2 million at June 30, up from $426.7 million and $34.7 million, respectively, at year-end. Management expected to recognize approximately $217.4 million of total backlog by the end of 2018.
Material changes and notable items
- Q2 Construction gross profit declined 13.5% to $9.5 million, while Service gross profit rose 38.1% to $6.3 million. For the six months, Construction gross profit fell 5.8% and Service gross profit increased 10.0%.
- Management recorded first-half gross-profit write-downs of $8.0 million across nine construction projects and $0.9 million on one service project. Write-ups partly offset these amounts: $2.4 million for Construction and $0.6 million for Service. Management is pursuing recoveries but recorded none; it said potential recoveries may not occur until 2019, if at all.
- The Company borrowed $10.0 million under the Bridge Term Loan to repurchase its remaining 280,000 preferred shares for $10.0 million, including accrued dividends. The preferred shares were retired.
- SG&A increased 7.0% in Q2 and 7.3% for the first half, partly reflecting branch hiring, salary and benefit costs, and stock-based compensation. Interest expense rose with higher borrowings and the Bridge Term Loan.
Outlook, risks and contingencies
- Covenants: The senior leverage ratio was 2.62, within the 2.75 maximum. The fixed charge coverage ratio was 0.97, below the 1.15 minimum. The lender waived the June 30 breach. An August 13 amendment retained the 1.15 minimum through December 31, 2018 and set a 1.25 minimum thereafter. Management believed it would comply in future quarters.
- Management said cash, customer receipts and revolver availability should cover working-capital and capital-expenditure needs for at least 12 months. This depends on collections, project execution and continued access to credit.
- Backlog is not a GAAP measure and may change; many contracts can be canceled, generally with recovery of costs incurred to date. Results are subject to weather, project timing, contract estimates, material prices and working-capital fluctuations. No formal earnings guidance is provided in the filing.
- A lawsuit involving a vehicle collision, injuries and a fatality was amended to include punitive-damages claims. The Company could not estimate a loss range; it stated punitive damages, if awarded, could be material, while also stating it did not believe the matter would materially affect the Company.
- The Company reported two material weaknesses in internal controls: contract administration/work-in-process review and execution of job-cost accrual controls. Disclosure controls were deemed ineffective as of June 30. The August lender amendment requires consultant review of remediation progress and a limited examination of Mid-Atlantic operations and contract administration.
- The Company participates in approximately 40 multiemployer pension plans, some described as critical status; future contribution increases or withdrawal liabilities are uncertain. It also had $108.4 million of surety bonds outstanding.
- Management had not estimated the impact of adopting the new revenue standard, expected January 1, 2019 using the modified retrospective method.
Investor verification priorities
- Track performance and margin recovery on the Mid-Atlantic projects behind the write-downs, and whether claimed recoveries are realized.
- Confirm compliance with the amended fixed-charge coverage covenant and monitor liquidity, collections, revolver availability and the April 2019 Bridge Term Loan maturity.
- Assess backlog conversion, cancellations and the expected timing of the $217.4 million scheduled for recognition by year-end 2018.
- Monitor remediation of the two material weaknesses and the results of the required consultant and branch reviews.
- Follow developments in the fatality-related lawsuit, including any punitive-damages exposure, and potential multiemployer pension-plan obligations.