Limbach Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Limbach provides construction and maintenance services focused on HVAC, plumbing, electrical and building systems, through Construction and Service segments. Financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $135.1 | $121.3 | $395.1 | $354.3 |
| Gross profit / margin | $10.7 / 7.9% | $15.4 / 12.7% | $39.8 / 10.1% | $44.7 / 12.6% |
| Operating income (loss) | ($2.9) | $1.0 | ($3.9) | $0.9 |
| Net income (loss) | ($3.5) | $0.1 | ($5.2) | ($0.4) |
| Net loss attributable to common stockholders | ($3.5) | ($0.9) | ($7.3) | ($1.9) |
| Interest expense, net | $0.8 | $0.5 | $2.4 | $1.6 |
- Revenue grew 11.3% in Q3 and 11.5% year to date. Construction accounted for most of the increase; Q3 Construction revenue rose 14.2%, while Service revenue increased 0.6%.
- Construction gross profit fell to $5.0 million in Q3 from $10.1 million a year earlier. Service gross profit rose to $5.7 million from $5.3 million. For the nine-month period, Construction gross profit declined to $23.7 million from $30.0 million, while Service gross profit increased to $16.0 million from $14.7 million.
- At September 30, cash was $0.5 million, total debt $39.6 million, and current liabilities exceeded current assets by $2.2 million; the current ratio was 0.99. Total assets were $258.7 million and stockholders’ equity was $42.5 million.
- Nine-month operating cash flow was positive $2.2 million, compared with negative $5.3 million in 2017. Investing used $3.3 million and financing provided $1.0 million; cash declined $0.1 million to $0.5 million. Operating cash flow included significant working-capital movements associated with the insured legal settlement described below.
- Reported available funding capacity at September 30 was $9.1 million, including $0.5 million cash and $8.6 million of net revolver availability. The revolver had $12.0 million drawn against a $25.0 million facility, with $4.4 million of letters of credit outstanding.
Material changes and unusual items
- Management attributed the earnings deterioration primarily to project delays, inefficiencies and rework in the Mid-Atlantic region. Q3 contract-estimate revisions reduced gross profit by $9.0 million on construction projects and $0.6 million on a service project. For the nine months, write-downs were $18.0 million for construction and $1.5 million for service; $17.0 million of construction write-downs and all service write-downs related to Mid-Atlantic projects. The company also recorded year-to-date gross-profit write-ups of $2.6 million in construction and $0.6 million in service.
- The company is pursuing claims and change orders for project-related costs but had not recognized possible recoveries. Management said recoveries, if any, were unlikely before 2019 and might not be realized.
- A lawsuit settlement of $30.0 million was agreed in October 2018 and is to be paid by insurance carriers, with no expected monetary exposure to Limbach. The receivable from insurers and accrued payment were both recorded on the September 30 balance sheet, materially affecting other current assets and accrued liabilities.
- The remaining 280,000 shares of preferred stock were repurchased in January 2018 for $10.0 million, funded by a $10.0 million Bridge Term Loan. The preferred stock was retired; the loan’s September 30 balance was $8.0 million and matures April 12, 2019.
- Construction backlog was $435.8 million at September 30, versus $426.7 million at December 31, 2017; Service backlog was $51.7 million, versus $34.7 million. Management expected approximately $112.3 million of total backlog to be recognized by year-end 2018. Backlog is not a GAAP measure and may change or be canceled.
Outlook, liquidity, risks and controls
- Going concern and debt covenants: At September 30, the senior leverage ratio was 4.33 against a maximum of 2.75, and the fixed-charge coverage ratio was 0.49 against a minimum of 1.15. The lenders requested alternative financing. On November 19, 2018, they granted a conditional, temporary waiver through November 30, provided no new defaults occur; they were not obligated to complete a restructuring by that date and retained rights to terminate working-capital funding or demand repayment afterward. The filing states these conditions raise substantial doubt about Limbach’s ability to continue as a going concern.
- The proposed restructuring was expected to accelerate maturity of the revolver and term loan to March 31, 2020, reduce revolver commitments in stages, impose new financial tests and refinancing milestones, and increase rates by 2% if a restructured agreement was not in place after the waiver period. These were expected terms, not a completed refinancing. A financial institution was seeking to arrange a $30 million revolver and up to $50 million in term debt, but financing remained subject to underwriting and syndication, with no firm commitment. Management said liquidity would be adequate if the amendment and contemplated refinancing were completed.
- Management planned Mid-Atlantic leadership changes, reduced pursuit of major complex construction projects in that market through June 30, 2019, and a reduction in craft labor from more than 350 employees to 175–225 by December 2018. These steps address the project delays, cost overruns and rework; results and cash effects remain uncertain.
- No formal earnings guidance was provided. The filing notes weather and project timing can affect results, and construction revenue and profitability depend on estimates of costs to complete. Surety bonds outstanding were approximately $90.8 million; the company reported bonding capacity of $700 million. Participation in approximately 40 multiemployer pension plans may create additional contributions or withdrawal liabilities, which the company could not quantify.
- Disclosure controls were deemed ineffective at September 30 because of previously reported material weaknesses involving contract administration/work-in-process review and job-cost accrual controls. Management identified an additional deficiency in accounting for certain pending change orders, with an immaterial effect on reported revenue, net income and backlog; it was aggregated with the existing contract-administration weakness. Remediation efforts were ongoing.
- A planned acquisition under a September 2018 stock purchase agreement was terminated by the seller on November 18, 2018.
Important facts for investors to verify
- Whether the temporary waiver was followed by a signed restructuring and completed refinancing, and whether lenders continued working-capital support.
- Actual progress, cost-to-complete estimates and recoveries on Mid-Atlantic projects, including the status and collectability of claims and change orders.
- Cash conversion and working-capital trends, particularly receivables, contract overbillings, accrued liabilities and the insured $30.0 million settlement entries.
- Whether backlog converts to revenue and cash as expected, and whether the planned Mid-Atlantic staffing and project-selection changes improve margins.
- Remediation and independent validation of the material weaknesses in contract administration, pending change orders and job-cost accruals.