Limbach Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Limbach provides commercial HVAC, plumbing, electrical and building-control construction and maintenance services through its Construction and Service segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $134.0 million | $120.5 million |
| Gross profit / margin | $20.0 million / 15.0% | $13.3 million / 11.0% |
| Operating income (loss) | $3.8 million | ($2.7 million) |
| Net income (loss) | $2.1 million | ($2.4 million) |
| Diluted EPS | $0.28 | ($0.60) |
| Cash used in operating activities | $4.1 million | $0.1 million |
- Revenue increased 11.1% year over year. Construction revenue rose 8.1% to $104.7 million; Service revenue rose 23.3% to $29.3 million.
- Gross margin improved to 15.0%. Construction gross profit was $13.3 million (12.7% of segment revenue); Service gross profit was $6.7 million (23.0%).
- SG&A was $16.0 million, up 2.4%, but declined to 12.0% of revenue from 13.0%. Net interest expense was $0.8 million.
- Cash and cash equivalents were $3.8 million at quarter-end. Working capital was $35.3 million and the current ratio was 1.25, compared with $22.8 million and 1.13 at year-end 2018.
- Debt totaled $36.7 million at March 31, 2019, versus $27.2 million at December 31, 2018. The old facilities included $10.5 million drawn on the revolver, $13.4 million on the term loan, $7.5 million on the bridge loan and $5.3 million of capital leases.
Changes and operating drivers
- The return to profitability reflected higher gross profit and margins, including the absence of substantial prior-year project write-downs. Q1 2018 included $3.7 million of Construction write-downs and a $0.9 million Service write-down.
- Q1 2019 included $1.6 million of gross-profit write-ups on two Construction projects, including a $1.2 million settlement of a final change order on a Michigan project, and $1.2 million of write-downs on three projects. No material Service project revisions were reported.
- Construction backlog increased to $557.6 million from $505.5 million at year-end; Service backlog was $53.8 million, versus $54.2 million. The company expected to recognize approximately $308.8 million, or 50.5% of total backlog, by year-end 2019.
Liquidity, outlook and risks
- Operating cash use increased to $4.1 million, mainly reflecting lower contract overbillings and accounts payable, plus higher underbillings. Management cited working-capital timing and project mix as key cash-flow drivers.
- On April 12, 2019, after quarter-end, Limbach refinanced the prior debt. The new arrangements include a $40 million term loan, a $25 million delayed-draw term loan for permitted acquisitions, and a $15 million revolving facility. The ABL facility was undrawn at closing, with $14 million available after a lender reserve. Both facilities mature April 12, 2022.
- The refinancing alleviated the previously reported substantial doubt about the company’s ability to continue as a going concern. Management said it expects positive operating cash flow over the remainder of 2019 and believes available funding and projected cash flows will cover working-capital and capital-expenditure needs for at least 12 months. No specific revenue or earnings guidance was provided.
- The new term loan carries interest at LIBOR (2.00% floor) plus 8.00%, or base rate (3.00% minimum) plus 7.00%; the ABL has lower stated margins. The facilities impose leverage and other covenants, restrict certain actions, and the term loan includes a prepayment make-whole. Lenders received warrants for up to 263,314 shares; none were exercisable at closing because the delayed-draw loan had not been drawn.
- Management reported ineffective disclosure controls due to a material weakness in project reviews and work-in-process accounting, particularly identification and timely accounting for project claims and pending change orders. Remediation is required under the refinancing covenant; missing the December 31, 2019 remediation target may trigger a fee and a 1.00% interest-margin increase.
- Construction contracts involve estimates, claims and unapproved change orders; revisions can affect recognized revenue and profit. Other disclosed exposures include $139.1 million of outstanding surety bonds and potential multiemployer-pension withdrawal liabilities, whose amount and timing could not be determined.
- A $30 million lawsuit settlement was paid by insurance in February 2019, with no company monetary exposure; the matter was dismissed April 28, 2019. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
- Seasonality and severe weather may shift project productivity and service demand. The filing reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the refinancing provides sufficient usable liquidity and whether the company complies with its new leverage, collateral and other covenants.
- Whether operating cash flow improves as management expects, given the quarter’s cash use and movements in contract billings, receivables and payables.
- Whether project-estimate controls improve and the material weakness is remediated on schedule, including the potential fee and interest increase if the stated milestone is missed.
- Whether backlog converts to revenue and cash as expected, and whether claims, change orders or project-cost revisions materially alter margins.
- The potential dilution from lender warrants and the extent of any future multiemployer-pension or surety-related obligations.