Limbach Holdings, Inc. — Q1 2018 Form 10-Q
Business and period: Limbach provides HVAC, plumbing and electrical construction and facility services through its Construction and Service segments. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $120.5 | $115.2; up 4.7% |
| Gross profit / margin | $13.3 / 11.0% | $13.8 / 11.9% |
| Operating loss | $(2.7) | $(1.8) |
| Net loss | $(2.4) | $(1.2) |
| Loss attributable to common stockholders / diluted loss per share | $(4.5) / $(0.60) | $(1.5) / $(0.19) |
| Cash used in operating activities | $(0.1) | $(4.7) |
| Cash and cash equivalents at period end | $0.4 | $0.6 at Dec. 31, 2017 |
| Total debt at period end | $42.8 | $27.1 at Dec. 31, 2017 |
| Working capital / current ratio | $32.4 / 1.25 | $30.8 / 1.23 at Dec. 31, 2017 |
- Construction revenue rose 5.8% to $96.8 million; Service revenue was essentially unchanged at $23.7 million. Construction gross profit increased to $9.3 million, while Service gross profit fell 16.7% to $4.0 million.
- Gross profit included estimated contract write-downs of $3.7 million across five construction projects and $0.9 million on one service project, partly offset by $1.5 million of construction project write-ups. The company recognized no potential recoveries.
- SG&A increased 7.5% to $15.7 million, including $0.5 million of stock-based compensation and higher branch salary and benefit costs. Amortization declined to $0.3 million from $1.0 million. Net interest expense increased to $0.8 million, reflecting higher borrowings.
- Common-stockholder loss includes a $2.2 million premium paid to redeem preferred stock and preferred dividends. The company repurchased its remaining 280,000 preferred shares for $10.0 million, funded with a new Bridge Term Loan.
- Operating cash use improved year over year, mainly as receivables and contract underbillings declined and overbillings increased; lower accounts payable partly offset these benefits. Investing cash use was $0.7 million and financing cash provided was $0.5 million.
Balance sheet, debt and liquidity
- At March 31, 2018, total assets were $209.5 million, total liabilities $165.4 million and stockholders’ equity $44.1 million. Cash was $0.4 million; revolving credit availability was $9.3 million, or $9.7 million of total available funding including cash.
- Total debt of $42.8 million comprised $12.1 million on the revolver, $9.8 million on the Bridge Term Loan, $16.9 million on the Credit Agreement term loan and $4.1 million of capital leases. The Bridge Term Loan matures April 2019; the existing facility term loan and revolver mature July 2021.
- The senior leverage ratio was 3.01 against a maximum of 2.75, breaching the covenant at quarter-end; the fixed charge coverage ratio was 1.33. The lender waived the resulting default and adjusted the June 2018 fixed-charge covenant to 1.15, while reserving rights for future compliance. A $1.2 million excess-cash-flow payment was due by May 1, 2018.
- Management stated that cash, expected customer receipts and available revolver capacity should meet working-capital and capital-expenditure needs for at least 12 months, and expected covenant compliance in future quarters. This is management’s assessment, not formal earnings guidance.
Outlook, changes and material risks
- Construction backlog was $413.9 million at March 31, down from $426.7 million at year-end; Service backlog increased to $38.6 million from $34.7 million. Management expected to recognize approximately $291.0 million of total backlog by year-end 2018. First-quarter construction awards were below backlog burn, though management anticipated additions from design-build/design-assist work.
- Management attributed the covenant breach primarily to project write-downs and customer payments received shortly after quarter-end, which required greater revolver borrowing at March 31. It said possible recovery remedies on some write-downs may not be realized until 2019, if at all.
- Risks include contract-cost estimation and recovery of disputed claims or change orders, working-capital and collection variability, seasonal weather effects, and interest and covenant exposure. Contracts may be canceled, and backlog is not a GAAP measure or a guarantee of revenue.
- A lawsuit involving a vehicle collision includes newly permitted punitive-damages claims; the company cannot estimate a loss range, and any punitive award could be material. Management said ordinary-course litigation was not expected to have a material adverse effect.
- The company had approximately $86.0 million of surety bonds outstanding and participates in about 40 multiemployer pension plans. Withdrawal or underfunding liabilities are uncertain and cannot be estimated from the filing.
- Disclosure controls were deemed ineffective due to two previously reported material weaknesses: contract administration/work-in-process review and job-cost accrual controls. Remediation efforts were underway. The filing reported no material changes to previously disclosed risk factors.
- The company was evaluating adoption of the new revenue standard, expected January 1, 2019 using the modified retrospective method, but could not yet estimate its financial-statement impact. Management had not begun assessing the new lease standard’s impact.
Investor verification priorities
- Track covenant compliance, lender waivers and amendments, the $1.2 million excess-cash-flow payment, and remaining revolver availability.
- Assess whether project write-downs recur and whether any recoveries are ultimately achieved; compare contract execution and gross margins by segment.
- Monitor customer collections, operating cash flow, working-capital movements and backlog conversion against management’s year-end expectation.
- Review progress in remediating the two material weaknesses and any changes in control effectiveness.
- Follow developments in the punitive-damages litigation and potential multiemployer pension or surety obligations.