Limbach Holdings, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Limbach provides commercial HVAC, plumbing, electrical, building-controls, construction, and facility-maintenance services through Construction and Service segments.
Financial results
| Metric | FY2017 | FY2016 comparable combined periods* |
|---|---|---|
| Revenue | $485.7 million | $447.0 million |
| Gross profit / margin | $65.6 million / 13.5% | $55.7 million / 12.5% |
| Operating income | $6.0 million / 1.2% | $4.1 million / 0.9% |
| Net income (loss) | $0.7 million | $(1.4) million |
| Operating cash flow | $(4.1) million | $4.8 million |
*The filing combines 2016 Successor and Predecessor periods for comparison. Because the July 2016 business combination created a new accounting basis, those periods are not fully comparable with 2017.
- Revenue rose 8.7% on the combined-period comparison: Construction increased 7.3% to $391.4 million and Service increased 14.8% to $94.4 million. Service represented 19.4% of revenue.
- Gross margin improved from 12.5% to 13.5%, which management attributed to improved project execution, favorable contract terms, market pricing, and Service mix. Construction gross margin was 11.4%; Service was 22.1%.
- Net income was $0.7 million, but preferred dividends and the premium on a partial preferred-stock redemption resulted in a $0.9 million net loss attributable to common stockholders, or $(0.13) per share.
- Cash and cash equivalents were $0.6 million, down from $7.4 million. Net working capital was $30.8 million and the current ratio was 1.23.
- Total debt, including capital leases, was $27.1 million; $6.4 million was classified as current. The company reported $17.6 million outstanding on its term loan, $5.7 million on its revolver, and $15.9 million of available revolver capacity after letters of credit. Interest rates at year-end were 5.62% on the term loan and 7.50% on the revolver.
- Construction backlog rose to $426.7 million from $390.2 million; Service backlog declined to $34.7 million from $44.1 million. Management expected approximately $302.0 million of Construction backlog and about 90% of Service backlog to be recognized in 2018.
Changes, outlook, and notable items
- Operating cash flow turned negative, primarily reflecting receivables growth and project billing timing, including cash usage as major projects wound down. Management said billing and collections were increasing and expected cash flow to improve as newer projects matured.
- Management stated that cash, expected customer collections, and available revolver capacity should meet working-capital and capital-expenditure needs for at least 12 months. This outlook depends on collections and continued access to borrowing.
- SG&A increased 15.7% to $56.0 million, including $1.7 million of stock-based compensation, $1.4 million of incremental public-company costs, and higher staffing and occupancy costs.
- The company recorded a $1.7 million tax expense to remeasure deferred tax balances after the Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%. The reported effective tax rate was 81.6%, so the low level of pretax earnings and tax items materially affected net income.
- Construction contract estimates produced $4.2 million of cumulative write-downs on three projects, partly offset by $5.1 million of gross-profit write-ups across five projects. Revenue recognition depends on cost-to-cost estimates, and later estimate changes can reverse previously reported profits.
- Two material weaknesses made disclosure controls and internal control over financial reporting ineffective at year-end. Contract-administration/work-in-process control issues resulted in $566,000 of net favorable gross-profit and pretax-income adjustments; job-cost accrual control issues resulted in $160,000 of net unfavorable adjustments. Management described remediation plans, including additional training, oversight, and access reviews.
- In January 2018, the company borrowed $10 million under a new term loan to repurchase its remaining 280,000 preferred shares for $9.1 million plus $0.9 million of accrued dividends. The loan matures April 2019. A March 2018 credit amendment increased the letter-of-credit sublimit and changed the EBITDA definition.
- A Florida lawsuit involving a fatal vehicle collision was amended after year-end to include punitive-damages claims that are not insured. The company could not estimate a loss range; it said any punitive award could be material. It also participates in approximately 40 multiemployer pension plans, some believed to be underfunded, with potential future contribution or withdrawal-liability exposure that was not quantified.
- No specific revenue or earnings guidance was provided. Management cited expected steady sales and improved margin opportunities, while noting risks from project timing, labor availability and costs, weather, competition, contract overruns, customer concentration, and variable-rate debt.
Important facts for investors to verify
- Whether operating cash flow and collections improved after year-end, and whether working-capital needs remain within available borrowing capacity.
- Progress in remediating both material weaknesses and the effect of any further project-accounting or accrual adjustments.
- Actual margins and cash conversion on the large Construction backlog; backlog may be changed, delayed, or canceled and is not a guarantee of profitable revenue.
- Debt service, covenant compliance, and refinancing or repayment needs for the $10 million term loan due in April 2019.
- Developments in the punitive-damages litigation and any changes in the company’s assessment of multiemployer pension exposure.
- Customer concentration: one Construction customer accounted for approximately 15% of FY2017 revenue. Also verify the effect of the preferred-stock repurchase and associated borrowing on common-stockholder returns.