Limbach Holdings, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Limbach provides building-system construction and maintenance services, including HVAC, plumbing, electrical and controls, through Construction and Service segments.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $568.2 million | $553.3 million |
| Gross profit / margin | $81.4 million / 14.3% | $71.9 million / 13.0% |
| Operating income / margin | $17.2 million / 3.0% | $8.1 million / 1.5% |
| Net income (loss) | $5.8 million | $(1.8) million |
| Diluted earnings (loss) per share | $0.72 | $(0.23) |
| Cash from operating activities | $39.8 million | $(0.9) million |
- Construction revenue was $441.0 million, up 0.6%; segment gross margin increased to 10.2% from 9.9%.
- Service revenue grew 10.5% to $127.2 million; segment gross margin rose to 28.5% from 24.7%. Management attributed overall margin improvement largely to the higher-margin Service mix and better Construction project execution.
- At year-end, cash and cash equivalents were $42.1 million; working capital was $49.1 million and the current ratio was 1.33. Total debt, including finance leases, was $45.5 million, including $39.0 million outstanding under the term loan. The revolver was undrawn; reported available funding capacity, net of letters of credit, was $52.7 million.
- Capital expenditures were approximately $1.5 million. Interest expense was $8.6 million, up from $6.3 million in 2019; the year also included a $1.6 million noncash loss from revaluing warrant liabilities.
Material changes and notable items
- Revenue increased 2.7%, but the business mix shifted toward Service, which grew faster than Construction. Operating income more than doubled, and the company returned to profitability from a 2019 net loss.
- Operating cash flow improved substantially, supported by lower accounts receivable and contract assets, partly offset by lower accounts payable. Cash at year-end increased to $42.1 million from $8.3 million.
- Construction backlog fell to $393.5 million from $504.2 million; Service backlog declined to $50.9 million from $57.0 million. Management said the Construction reduction was intentional, reflecting a shift toward smaller, higher-margin and owner-direct work. It estimated 65% of Construction and 95% of Service remaining performance obligations at year-end would be recognized in 2021.
- Construction project estimate revisions resulted in $10.4 million of gross-profit write-downs in 2020, versus $12.4 million in 2019. Limbach is pursuing recovery of certain delay- and disruption-related costs but had not recognized potential recoveries.
Outlook, risks and contingencies
- Management provided no specific numeric revenue or earnings guidance. Its stated 2021 priorities were to improve profitability and operating cash flow, preserve liquidity, expand owner-direct construction and service work, and avoid or reduce exposure to large, complex projects with unfavorable risk/reward.
- COVID-19 temporarily delayed some projects, reduced productivity and weakened customer demand for certain maintenance and capital work. Activity stabilized during 2020, but management said continuing pandemic and economic effects could materially affect results, liquidity and operations; the ultimate impact was not reliably estimable.
- Management cited rising material prices and possible inflation as pressures on project economics. Other significant risks include labor availability and costs, customer concentration, cost overruns, delayed awards and collections, and variability in claims and change-order recoveries. One Construction customer represented about 14% of 2020 consolidated revenue.
- At year-end, $33.6 million of contract assets related to claims and unapproved change orders. Recovery and timing are uncertain and may require dispute resolution. The company also reported several contested legal matters, including claims seeking damages of approximately $0.4 million, $1.0 million, $1.7 million and more than $3.0 million; Limbach disputed the allegations.
- Limbach failed its December 2020 collateral-coverage covenant by approximately $1.1 million; lenders waived the resulting default in February 2021, while reserving rights regarding future compliance. The 2019 term loan carried a 13% rate at year-end. In February 2021, the company refinanced that debt with a new $30 million term loan and $25 million revolving facility, both maturing in 2026, and completed an equity offering with approximately $23 million in net proceeds, including the over-allotment.
- Contributions to approximately 40 multiemployer pension plans were $16.1 million in 2020. Some plans were reported as underfunded or in critical or endangered status; potential future contribution increases or withdrawal liabilities were not quantified.
- The independent auditor issued an unqualified opinion on the financial statements and identified construction-contract variable consideration and estimated costs to complete as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Whether the February 2021 refinancing and equity proceeds provide adequate liquidity, and whether the company remains in compliance with its new debt covenants.
- Whether claims and unapproved change orders are collected, particularly the $33.6 million contract-asset balance, and whether further project losses or estimate revisions arise.
- Whether backlog converts into profitable revenue as estimated, given the substantial Construction backlog decline and ongoing COVID-19 and materials-cost uncertainty.
- Whether Service growth and improved gross margins persist, and how much revenue and profit remain dependent on the largest Construction customer.
- The funding condition of multiemployer pension plans and any resulting increases in contributions or withdrawal liabilities.