Limbach Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. Limbach provides HVAC, plumbing, electrical and building-controls construction and maintenance through its Construction and Service segments. Comparative 2019 results are recast for accounting-standard adoption.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $163.9 million | $148.1 million | $437.8 million | $414.5 million |
| Gross profit / margin | $24.2 million / 14.8% | $18.4 million / 12.4% | $62.7 million / 14.3% | $55.7 million / 13.4% |
| Operating income / margin | $7.0 million / 4.3% | $1.7 million / 1.1% | $14.6 million / 3.3% | $5.5 million / 1.3% |
| Net income (loss) | $2.5 million | ($3.0 million) | $5.4 million | ($2.4 million) |
| Diluted EPS | $0.31 | ($0.39) | $0.68 | ($0.32) |
- Revenue rose 10.6% in Q3 and 5.6% for the nine-month period. Both segments grew; Service gross profit increased on more favorable project pricing, while improved Construction results reflected growth and project mix.
- Nine-month operating cash flow was $35.2 million, versus cash used of $17.6 million in 2019. Management attributed the improvement principally to higher contract liabilities and accrued expenses, a shift toward overbilling, and other working-capital movements; accounts-receivable growth of $19.8 million partially offset those sources.
- Cash and cash equivalents were $39.6 million, up from $8.3 million at year-end 2019. Working capital was $50.7 million and the current ratio was 1.27, compared with $38.5 million and 1.25, respectively.
- Debt obligations included a $40.0 million refinancing term loan and $6.954 million of finance leases. Balance-sheet current and long-term debt totaled $44.1 million after discounts and issuance costs. The term loan’s stated rate was 13.0% at September 30, 2020; nine-month net interest expense was $6.4 million.
- The $15 million revolving facility had no borrowings at quarter-end; after $3.405 million in letters of credit, reported net availability was $10.595 million. Cash plus that availability totaled $50.2 million. The company reported compliance with debt covenants at September 30.
Material changes and operating context
- Q3 revenue increased in both segments, with Construction up 10.2% and Service up 12.3%. Management cited growth in Michigan, Ohio and New England, partly offset by COVID-related project shutdowns in Florida and project completions or planned reductions in other regions.
- Q3 gross margin improved to 14.8% from 12.4%; nine-month gross margin rose to 14.3% from 13.4%. Nine-month SG&A declined 4.2% to $47.6 million and fell to 10.9% of revenue from 12.0%, reflecting cost reductions that partly offset higher payroll and incentive compensation.
- Construction backlog was $407.5 million at September 30, down from $504.2 million at year-end 2019; Service backlog was $61.8 million, up from $57.0 million. Remaining performance obligations were $407.5 million for Construction and $47.6 million for Service. The filing estimates $135.5 million of total backlog revenue recognition by year-end 2020.
Outlook, risks and unusual items
- Management’s COVID-19 reforecast assumed a measured recovery beginning in May and a return to normal revenue and gross-profit levels in Q4 2020. Management said the pandemic’s duration and effects remained uncertain, particularly given renewed increases in reported cases, and warned that renewed shutdowns or a severe downturn could adversely affect results, liquidity and covenant compliance.
- Management expected cash, operating cash generation and available borrowing capacity to meet capital and working-capital needs for at least 12 months, and projected covenant compliance over that period. It cautioned that materially weaker conditions or renewed shutdowns could cause covenant failure and, if lenders accelerated debt, a potential inability to meet obligations.
- Project-estimate revisions included Q3 gross-profit write-downs of $2.4 million on five Construction projects and a $0.4 million write-up. For the nine months, project revisions included $7.5 million of write-downs and $1.6 million of write-ups. Claims and unapproved change orders had estimated net realizable value of $38.0 million; approval or recovery is uncertain and may require dispute resolution.
- A $1.371 million Q3 loss from remeasuring the lender warrants’ fair value reduced earnings; the nine-month loss was $1.312 million. The warrant liability was $1.7 million at quarter-end. The 2019 comparison included a $4.359 million goodwill impairment, which did not recur in 2020.
- Legal matters include claims seeking damages of more than $3.0 million, approximately $1.0 million and approximately $1.7 million, plus an arbitration demand seeking more than $0.4 million. Limbach disputes the claims and says it intends to defend them. The company had $105.3 million of surety bonds outstanding and participates in approximately 40 multiemployer pension plans; potential withdrawal liabilities cannot be determined.
- COVID response measures included furloughs, reductions in force, spending cuts and temporary salary reductions; management reported that several temporary measures were reversed or relaxed in July as work returned. Disclosure controls were deemed effective, and no material change in internal control was identified.
Important facts for investors to verify
- Whether Q4 recovery assumptions were achieved and how subsequent COVID disruptions affected projects, Service demand, cash generation and covenants.
- Whether receivables, contract assets, retainage and the $38.0 million of claims/change orders were collected, approved or otherwise resolved.
- Whether Construction backlog converted to revenue and margin as expected, given its decline from year-end and the material project write-downs.
- Debt service capacity under the 13.0% term-loan rate, future covenant thresholds, borrowing availability and the April 2022 loan maturity.
- Developments in the disclosed litigation, surety exposure and multiemployer pension plans, including any material change in potential liabilities.