Limbach Holdings, Inc. annual report, FY2019

Limbach Holdings, Inc. — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; filed May 12, 2020. The company provides HVAC, plumbing, electrical, building-controls, construction, and maintenance services through Construction and Service segments. Comparisons below are with FY 2018.

Financial performance

Metric	FY 2019	FY 2018
Revenue	$553.3 million	$546.5 million
Gross profit / margin	$71.9 million / 13.0%	$59.4 million / 10.9%
Operating income	$8.1 million	$1.1 million
Net loss	$1.8 million	$1.8 million
Net loss per share, diluted	$0.23	$0.52
Cash from (used in) operations	$(0.9) million	$25.3 million

• Revenue rose 1.2%. Construction revenue was essentially flat at $438.2 million; Service revenue increased 6.3% to $115.1 million.
• Gross profit increased 20.9%. Construction gross margin improved to 9.9% from 8.4%; Service margin rose to 24.7% from 21.0%. Management cited fewer project write-downs than in 2018, project mix, and favorable Service pricing and volume.
• SG&A rose 10.6% to $63.2 million, including higher salaries and benefits and incentive compensation. Interest expense increased to $6.3 million from $3.3 million.
• FY 2019 included a $4.4 million noncash Construction goodwill impairment and a $0.5 million debt-extinguishment loss. Net loss was nearly unchanged from 2018, while 2018 common-stockholder loss also included preferred-stock dividends and a redemption premium.
• Cash and cash equivalents were $8.3 million at year-end. Net working capital was $38.5 million, with a 1.25 current ratio. Total debt was $47.6 million, including $41.0 million under the refinancing term loan and $6.6 million in finance leases; the loan carried a 13.0% rate at year-end. The ABL revolver was undrawn.
• Reported available funding capacity was $19.0 million, comprising cash and net available ABL capacity after letters of credit. The separate $25 million delayed-draw term facility was intended for permitted acquisitions and was undrawn.

Material changes and operating indicators

• Operating cash flow swung from $25.3 million provided in 2018 to $0.9 million used in 2019, mainly reflecting a $13.4 million increase in contract assets and a $6.4 million decrease in contract liabilities. Contract assets included $38.4 million of claims and unapproved change orders, up from $23.1 million at the start of 2019.
• Construction backlog was $504.2 million versus $505.5 million a year earlier; Service backlog was $57.0 million versus $54.2 million. Management estimated 68% of Construction backlog and 96% of Service backlog would be recognized in 2020. Remaining performance obligations were $504.2 million for Construction and $41.9 million for Service; Service backlog is higher partly because some cancelable options are excluded from remaining performance obligations.
• Material 2019 project estimate revisions included $12.4 million in gross-profit write-downs and $4.7 million in write-ups. Most of the cited Construction write-downs were in Southern California. The company said it was pursuing recovery remedies for delay and disruption costs but had not recognized potential recoveries.
• One Construction customer accounted for about 10% of 2019 consolidated revenue, compared with one customer at about 18% in 2018.

Outlook, risks, and contingencies

• Management’s 2020 priorities were profitability, operating cash flow and liquidity, owner-direct work, and avoiding or reducing exposure to large, complex projects it viewed as carrying difficult-to-mitigate risks. It provided no firm quantified full-year guidance.
• COVID-19 disruptions began after year-end and therefore are not reflected in FY 2019 results. By the filing date, project suspensions and building-access restrictions had affected operations. Management’s reforecast assumed recovery beginning in May and a return to normal revenue and gross-profit levels in Q4 2020; it cautioned that actual effects could be materially worse and could not be reliably estimated.
• Management reported cost actions including furloughs, reduced schedules and workforce reductions, a hiring freeze, suspended discretionary spending, and selected management salary reductions. Management projected covenant compliance under its COVID-19 reforecast, but warned extended shutdowns or a material downturn could cause covenant failure and leave insufficient working capital if lenders accelerated debt.
• The refinancing arrangements carry a minimum liquidity covenant of $10 million. Liquidity was $8.7 million at November 30, 2019; lenders waived that breach. The company reported compliance with covenants at December 31, 2019. The filing also describes prior leverage-covenant violations and waivers.
• Key risks include volatile project costs and estimates, claims and change-order recoveries, customer and project concentration, labor availability and union obligations, subcontractor performance, bonding and insurance capacity, variable-rate debt, restrictive covenants, and potential multiemployer pension-plan liabilities. Pension contributions were $44.6 million in 2019; some participating plans were underfunded or in critical status. No liability for multiemployer-plan underfunding was recorded.
• Disclosed legal matters included a Lanzo arbitration claim exceeding $0.4 million, with Limbach counterclaims exceeding $1.0 million, and a Bernards Bros. suit seeking more than $3.0 million. Outcomes were unresolved in the filing. A separate $30 million injury-related settlement was paid by insurance carriers, with no company monetary exposure reported.
• Management said a 2018 material weakness in project-review and work-in-process controls was remediated during 2019 and that controls were effective at year-end. The independent auditor did not attest to internal-control effectiveness.

Important facts for investors to verify

• Whether COVID-19 project delays, cost pressures, and customer funding decisions differed materially from management’s assumed Q4 2020 recovery.
• Collections and approvals on the $38.4 million of claims and unapproved change orders, and their effect on operating cash flow and covenant liquidity.
• Current covenant headroom, borrowing availability, loan pricing, and the precise maturity terms: the filing gives differing maturity dates for the refinancing term loan in separate sections.
• Progress and financial effects of Southern California project claims, estimate revisions, and the disclosed litigation and arbitration matters.
• Potential future contribution increases or withdrawal liabilities from underfunded multiemployer pension plans.