Limbach Holdings, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2017. Limbach provides commercial HVAC, plumbing, electrical, building-controls, construction and facility services through Construction and Service segments. Comparisons with 2016 require caution: 2017 is the “Successor” period after the July 2016 business combination, while 2016 is the “Predecessor” period, with different accounting bases and tax treatment.
Financial results and liquidity
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $117.8 million; +21.9% year over year | $233.0 million; +19.8% |
| Gross profit / margin | $15.5 million / 13.2%, versus 13.6% | $29.3 million / 12.6%, versus 13.0% |
| Operating income (loss) | $1.7 million | $(0.1) million, versus $5.2 million income |
| Net income (loss) | $0.7 million; $0.4 million attributable to common stockholders | $(0.5) million; $(1.0) million attributable to common stockholders |
| EPS | Basic $0.06; diluted $0.05 | Basic and diluted $(0.14) |
| Operating cash flow | $0.3 million for the six months, versus $1.1 million in 2016 |
Cash and cash equivalents were $0.7 million at June 30, down from $7.4 million at year-end 2016. Net working capital was $27.1 million and the current ratio was 1.25. Total debt was $23.7 million, including $19.1 million on the term loan; no revolver balance was outstanding at quarter-end. Revolver availability was $20.8 million after letters of credit. The company reported compliance with its credit covenants.
Six-month investing cash outflow was $1.6 million and financing cash outflow was $5.4 million. The company repaid $3.4 million of term debt, including a voluntary $1.9 million payment, and made $0.8 million of capital-lease payments.
Material changes versus the prior comparable period
- Revenue grew in both segments. Q2 Construction revenue rose 24.4% and Service revenue 11.9%; for the first half, increases were 18.1% and 27.7%, respectively.
- Profitability weakened despite sales growth: first-half operating results shifted to a small loss. SG&A rose 36% to $27.4 million, including approximately $4.2 million in public-company accounting, legal and consulting costs, plus branch cost increases. Acquisition-related intangible amortization was $2.0 million for the half.
- Gross margin declined, which management attributed mainly to project mix, including a large lower-margin construction project nearing completion and growth in larger owner-direct service projects.
- Construction backlog increased to $469.3 million from $390.2 million at December 31, 2016; Service backlog was $44.5 million versus $44.1 million. The company expected to recognize approximately $243.5 million of June backlog by year-end.
Outlook, commentary, risks and unusual items
- No formal earnings guidance was provided. Management said cash, customer collections and available revolver capacity were expected to meet working-capital and capital-expenditure needs for at least 12 months, and expected billing and collection trends to improve as projects mature.
- On July 14, 2017, after quarter-end, the company repurchased and retired 120,000 preferred shares for approximately $4.1 million, funded by revolver borrowings. It also obtained a six-month option to repurchase some or all of the holder’s remaining 280,000 shares at 130% of liquidation value plus accrued unpaid dividends.
- Management identified two continuing material weaknesses in internal controls: insufficiently precise and timely accounting/reporting controls, including journal-entry access review and staffing, and inadequate processes to accrue project goods and services received but not yet invoiced. Remediation steps included hiring, consulting support and control enhancements; controls were still reported ineffective as of June 30.
- Risks include estimation of costs and revenue on percentage-of-completion contracts, disputed claims and unapproved change orders, working-capital volatility, weather and project delays, and customer credit exposure. The company had $85.4 million of surety bonds outstanding and cited potential multiemployer pension-plan funding or withdrawal liabilities that it could not quantify. Energy-savings guarantees totaled $84,000 for 2017 and $42,000 for 2018; no material liability was recorded.
- A shareholder class and derivative action concerning the 2016 business combination was dismissed with prejudice on August 3, 2017; the plaintiff had 30 days to appeal. The company said ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether revenue growth converts into sustained operating profit and cash generation, especially as the large lower-margin project nears completion.
- Current cash, revolver availability and debt after the post-quarter preferred-stock repurchase and related revolver borrowing.
- Progress in remediating the disclosed material weaknesses and whether project-cost accruals and financial reporting controls become effective.
- Backlog conversion, project estimates, claims/change-order recoverability and customer collections.
- Potential obligations from preferred-stock dividends/redemption, surety bonds and multiemployer pension plans.