Limbach Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Limbach provides commercial HVAC, plumbing, electrical and building-services contracting through Construction and Service segments. The company’s July 2016 business combination created “Predecessor” and “Successor” reporting periods with different accounting bases; comparisons with 2016 are therefore not fully comparable. Amounts below are in U.S. dollars.
Financial results
| Metric | Q3 2017 | 2017 nine months |
|---|---|---|
| Revenue | $121.3 million | $354.3 million |
| Gross profit / margin | $15.4 million / 12.7% | $44.7 million / 12.6% |
| Operating income / margin | $1.0 million / 0.8% | $0.9 million / 0.3% |
| Net income (loss) | $0.1 million | ($0.4 million) |
| Net income (loss) attributable to common stockholders | ($0.9 million) | ($1.9 million) |
| Basic and diluted EPS | ($0.12) | ($0.25) |
| Cash from operating activities | Not separately stated in the filing excerpt | ($5.3 million) |
Q3 common-stockholder loss includes $149,000 of preferred dividends and an $847,000 premium paid on the partial preferred-stock redemption. Nine-month results include $631,000 of preferred dividends and the same redemption premium.
At September 30, cash and cash equivalents were $0.8 million; restricted cash was $0.1 million. Current assets were $153.7 million and current liabilities $117.2 million, yielding working capital of $36.5 million and a 1.31 current ratio. Total debt was $34.8 million, including $12.2 million drawn on the revolver, $18.4 million on the term loan, and capital leases and insurance financing. Revolver availability was approximately $8.5 million after letters of credit.
Changes versus prior comparable periods
- Management’s combined-period comparison reports Q3 revenue up 2.1% (about $2.5 million) versus the corresponding 2016 periods combined. Service revenue rose 23.0%, while Construction revenue declined 2.3%.
- For the nine months, revenue increased 13.1% to $354.3 million versus the combined 2016 periods. Construction revenue rose 10.3% and Service revenue rose 25.9%.
- Gross margin softened: 12.7% in Q3 versus 12.9% for the combined 2016 comparison; nine-month margin was 12.6% versus 13.0%. The filing attributes the decline mainly to project mix and project cost overruns.
- Nine-month operating income was $0.9 million, compared with $4.5 million for the Predecessor period plus $0.4 million for the 2016 Successor period. Higher SG&A, including public-company and growth-related costs, contributed to lower operating profitability.
- Cash fell $6.6 million from year-end 2016 to $0.8 million. Operating cash outflow reflected slower collections, lower contract overbillings and lower accrued expenses. Net working capital improved from $28.5 million at year-end 2016.
Outlook, risks and unusual items
- Contract performance: Management recorded project gross-profit write-downs of $3.1 million for the nine months, including $2.5 million on a delayed government project, $0.6 million on another delayed project and $0.5 million on a historic-building renovation. It also recorded $1.8 million of write-ups on a transit project. Potential recoveries on certain write-downs were uncertain and not recognized; affected projects were expected to finish in 2018.
- Backlog: Construction backlog was $454.3 million at September 30, up from $390.2 million at December 31, 2016; Service backlog was $37.9 million, down from $44.1 million. Management expected to recognize approximately $120 million of backlog by year-end 2017. Backlog is not a GAAP measure and may change or be canceled.
- Liquidity outlook: Management said cash, customer receipts and available revolver capacity should meet working-capital and capital-expenditure needs for at least 12 months. It expected collections to improve as projects mature and retention is collected. These expectations depend on working-capital and collection trends.
- Debt covenant: The company breached its senior leverage covenant at quarter-end: actual ratio was 2.55 against a maximum of 2.50, following a delayed customer payment and higher-than-forecast revolver borrowing. The lender waived its call right for this breach but reserved rights regarding future compliance. Management expected future compliance.
- Controls: Management concluded disclosure controls were ineffective due to two material weaknesses: insufficient accounting/reporting review capacity and controls, and inadequate accrual processes for project goods and services received but not yet invoiced. Remediation was underway, with outside accounting support and added personnel.
- Contingencies: A shareholder class-action appeal remained pending after dismissal with prejudice; the parties were in settlement discussions. The company had $98.8 million of surety bonds outstanding and described potential multiemployer pension withdrawal liabilities as uncertain and not quantifiable. Management reported no material adverse effect expected from ordinary-course litigation.
- No formal earnings guidance is provided in the filing. The company identified weather, project execution and contract-estimate changes as factors that can affect results.
Important facts for investors to verify
- Whether the lender waiver and subsequent results support compliance with the senior leverage covenant in future quarters.
- Whether delayed receivables were collected and operating cash flow and cash balances improved after quarter-end.
- Actual final costs, completion timing and any recoveries for the projects with contract write-downs.
- Whether backlog converts to revenue and margin as expected, particularly the large construction awards and the data-center project.
- Progress in remediating the two material weaknesses, and whether future filings report effective controls.
- Potential cash and dilution implications of the remaining preferred stock, warrants and unrecognized RSU compensation.