Limbach Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 14, 2019. Limbach provides commercial HVAC, plumbing, electrical and building-control construction and facility services across U.S. regions. Results are reported in Construction and Service segments. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $147.8 | $135.1 | $414.5 | $395.1 |
| Gross profit | $17.8 | $10.7 | $55.2 | $39.8 |
| Gross margin | 12.0% | 7.9% | 13.3% | 10.1% |
| Operating income (loss) | $1.1 | $(2.9) | $5.0 | $(3.9) |
| Net loss | $(3.4) | $(3.5) | $(2.8) | $(5.2) |
| Basic and diluted loss per share | $(0.44) | $(0.46) | $(0.36) | $(0.97) |
| Cash from (used in) operations | Not provided for quarter | Not provided for quarter | $(17.6) | $2.2 |
Q3 revenue grew 9.4%; Service revenue rose 15.7% and Construction revenue 7.9%. Nine-month revenue rose 4.9%, with Service up 15.4% and Construction up 2.4%. Segment gross profit improved in both periods. Nine-month 2018 common-stockholder loss per share also reflected preferred-stock dividends and a redemption premium.
SG&A increased 24.3% in Q3 to $16.6 million and 16.4% year to date to $49.7 million; SG&A rose to 11.2% of revenue in Q3 and 12.0% year to date. Management cited payroll, hiring, retention and incentive-compensation costs. Interest expense rose to $1.8 million in Q3 and $4.2 million year to date, reflecting higher debt balances, rates and financing-cost amortization.
Balance sheet, cash flow and debt
- At September 30, cash and cash equivalents were $0.8 million; restricted cash was $0.1 million. Net working capital was $40.3 million and the current ratio was 1.26, compared with $22.8 million and 1.13 at year-end 2018.
- Nine-month operating cash use was $17.6 million, versus $2.2 million provided in 2018. The filing attributes the outflow largely to higher receivables and underbillings, lower overbillings, and working-capital movements; underbillings included Southern California and Mid-Atlantic work with claims and change orders pending. The 2019 cash-flow comparison also reflects settlement-related balance-sheet movements; the $30 million lawsuit settlement was paid by insurers.
- Gross debt was $46.4 million, including a $40 million refinancing term loan and $6.0 million of capital leases; reported long-term debt, net of current maturities and discounts, was $39.6 million. The term loan carried a 10.18% rate at September 30 and matures in April 2022. The $15 million ABL revolver had no borrowings at quarter-end; disclosed net capacity after lender reserve and letters of credit was $9.8 million. Cash plus that capacity totaled $10.5 million.
- The April 2019 refinancing replaced prior facilities with a $40 million term loan, a $25 million delayed-draw term commitment and a $15 million ABL facility. The delayed-draw commitment was undrawn at September 30. Capital leases and letters of credit also affect liquidity and borrowing capacity.
Material developments, outlook and risks
- Goodwill impairment: Limbach recorded a non-cash $4.4 million impairment, eliminating Construction goodwill; Service goodwill remained $6.1 million. Management cited reduced construction forecasts and planned reductions in large, working-capital-intensive projects, negative operating cash flow, covenant pressure and a significant stock-price decline. The service reporting unit’s estimated fair value exceeded carrying value by 101%.
- Project-estimate variability: Q3 estimate revisions included $0.6 million of gross-profit write-ups and $3.7 million of write-downs. For the first nine months, write-ups totaled $3.6 million and write-downs $6.9 million across construction and service projects. Southern California accounted for most of the construction write-downs.
- Debt covenant events: The company’s 4.00-to-1.00 total-leverage limit was breached for August 2019, when the ratio was 4.61; the September ratio was 2.85 and compliant. Lenders waived the August breach, reserving rights over future compliance. November 14 amendments waived the August breach, increased the refinancing-loan rate by 3 percentage points effective October 1, revised leverage limits and imposed minimum loan-party liquidity of $10 million beginning with month-ends on or after November 30. The refinancing amendment also provides for a $0.4 million waiver fee and a $1.0 million fee added to term-loan principal; the ABL waiver fee is $7,500.
- Management outlook: No quantified revenue or earnings guidance is provided. Management expected operating cash flow to turn positive during the remainder of 2019 as billings were issued and collected, margins improved and service activity grew. It said refinancing resources and projected cash flows should fund operations and capital needs for at least 12 months; this outlook depends on collections, project execution and covenant compliance.
- Construction backlog was $516.8 million at September 30, up from $505.5 million at year-end 2018; Service backlog was $44.8 million, down from $54.2 million. Management expected $136.3 million, or 24.3% of total backlog, to be recognized by year-end 2019. Backlog is not a GAAP measure and contracts may be canceled.
- Controls and contingencies: Disclosure controls were deemed ineffective due to a material weakness in project reviews and work-in-process accounting, particularly identification and timely accounting for claims and pending change orders. Remediation efforts included additional accounting staff, training and revised controls; the refinancing agreement requires remediation by December 31, 2020 and provides for possible fees and a rate increase if not completed by December 31, 2019. The company also participates in about 40 multiemployer pension plans and cannot determine potential future withdrawal liabilities. Management said ordinary-course litigation was not expected to have a material adverse effect. The $30 million fatal-accident settlement was insured and dismissed in April 2019.
Investor verification priorities
- Monitor operating cash conversion, receivable collections and the recovery or billing of underbilled project costs, especially claims and change orders.
- Check subsequent leverage and minimum-liquidity covenant compliance, availability under the ABL, and the effect of amended borrowing costs and fees.
- Track project-level estimates and margins, particularly Southern California, and whether the construction forecast changes further affect goodwill or earnings.
- Verify progress and lender acceptance of remediation of the material weakness, including any related fee or interest-rate consequences.
- Reconcile reported backlog conversion and Service backlog trends with actual revenue, margins and cash generation.