Limbach Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless otherwise stated, amounts are in millions of dollars. Limbach provides commercial construction and building-system services through Construction and Service segments.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $132.8, down 4.9% year over year | $266.7, up 2.5% |
| Gross profit / margin | $17.4 / 13.1%, versus $15.8 / 11.3% | $37.4 / 14.0%, versus $29.1 / 11.2% |
| Operating income (loss) | $0.1, versus $1.8 | $4.0, versus a $0.9 loss |
| Net income (loss) | $(1.5), or $(0.20) per share, versus $0.7 | $0.6, or $0.08 per share, versus a $1.7 loss |
| Operating cash flow | Not presented separately for the quarter | $(15.7), versus $0.7 provided |
Q2 Construction revenue fell 7.7% while Service revenue rose 7.9%. For the first half, Construction revenue was nearly flat (down 0.4%) and Service revenue increased 15.3%. Gross margin improved in both segments, but higher SG&A and financing costs weighed on results. Q2 SG&A rose 24.8% to $17.1 million; management cited higher payroll and benefits, new hires, and retention bonuses.
Financial position and liquidity
- At June 30, cash and cash equivalents were $1.0 million; working capital was $41.6 million and the current ratio was 1.29, compared with $22.8 million and 1.13 at year-end 2018.
- Debt totaled $45.8 million before $3.6 million of unamortized discounts and issuance costs; balance-sheet current and long-term debt were $2.2 million and $40.0 million, respectively. The refinancing term loan was $40.0 million at a 10.54% rate at quarter-end; capital leases were $5.6 million.
- April refinancing replaced prior debt with a $40 million term loan, a $25 million delayed-draw term commitment for permitted acquisitions, and a $15 million asset-based revolver. No delayed-draw or revolver borrowings were outstanding at June 30. Reported net ABL availability was $9.8 million after lender reserve and letters of credit; total available funding capacity, including cash, was $10.8 million.
- Operating cash use reflected working-capital movements, including higher receivables and underbillings, lower payables and overbillings. The reported $30.1 million reduction in other current assets largely reflects the insurance-funded lawsuit settlement and does not by itself indicate recurring operating cash generation.
Material changes and unusual items
- Gross profit rose despite lower Q2 revenue. Six-month results benefited from fewer and smaller project write-downs than in the prior year, improved margins, and a $1.4 million write-up following settlement of a significant Michigan project.
- For the first half, construction estimate revisions included $3.0 million of gross profit write-ups and $3.5 million of write-downs; service revisions included a $0.3 million write-up and a $0.3 million write-down. Q2 included $1.9 million of write-downs on three Southern California construction projects.
- Interest expense was $2.4 million for the first half, up from $1.6 million. The company recorded a $0.5 million loss on extinguishing prior debt and a $0.1 million loss from a change in warrant fair value.
- A $30 million lawsuit settlement was paid by insurance carriers in February 2019; the matter was dismissed in April, and the company reported no monetary exposure.
Outlook, risks and contingencies
- Management expected operating cash flow to turn positive over the remainder of 2019, citing expected revenue recovery after the seasonally low first quarter, higher billings and collections, and improving project margins. Management stated that available liquidity and financing were expected to support operations for at least 12 months. These are expectations, not guarantees.
- Total backlog at June 30 was $586.2 million: Construction $536.8 million, up from $505.5 million at year-end; Service $49.4 million, down from $54.2 million. The company expected to recognize approximately $239.5 million, or 40.9% of backlog, by year-end. Backlog is not a GAAP measure and contracts may be canceled.
- Management noted that project margins and cash flows can vary with contract mix, billing and collection timing, project starts, estimates, and weather. Claims and unapproved change orders involve judgment and may not be fully recoverable. A pending Southern California construction claim/change-order situation contributed to unbilled costs.
- The refinancing carries restrictive covenants, a 4.00-to-1.00 total leverage limit through September 30, 2019, and a potential 1.00 percentage-point interest-margin increase and fee if the material weakness is not remediated by December 31, 2019. The company reported covenant compliance at June 30.
- Disclosure controls were deemed ineffective because of a material weakness in project reviews and work-in-process controls, particularly around claims and pending change orders. Management described remediation steps, but the weakness remained outstanding. The refinancing agreement requires remediation by December 31, 2020.
- Surety bonds outstanding were $98.3 million. The company participates in approximately 40 multiemployer pension plans; some were reported as critical status, and potential withdrawal liabilities could not be estimated. Management reported no known significant liability at the filing date.
Key facts for investors to verify
- Whether operating cash flow improved as management expected, and whether receivables, underbillings, and collections normalized.
- Progress on remediating project-accounting controls and the material weakness, including compliance with the refinancing agreement’s deadlines and pricing provisions.
- Compliance with leverage and other debt covenants, actual borrowing availability, and the cost and terms of the high-rate refinancing debt.
- Realization of Construction and Service backlog, particularly the recoverability of claims and pending change orders and the profitability of Southern California projects.
- Potential exposure from multiemployer pension plans, surety obligations, and contract cancellations or other contingencies.