Limbach Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Limbach provides building systems construction and maintenance services through General Contractor Relationships (GCR) and Owner Direct Relationships (ODR). Figures are unaudited and in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $129.2 | $163.9 | $363.5 | $437.8 |
| Gross profit / margin | $24.5 / 18.9% | $24.2 / 14.8% | $60.4 / 16.6% | $62.7 / 14.3% |
| Operating income | $6.1 | $7.0 | $7.4 | $14.6 |
| Net income | $4.0 | $2.5 | $2.4 | $5.4 |
| Diluted EPS | $0.38 | $0.31 | $0.24 | $0.68 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(16.8) | $35.2 |
- Quarterly segment mix: GCR revenue fell 31.1% to $90.0 million, while ODR revenue grew 17.6% to $39.2 million. ODR delivered $11.7 million gross profit at a 29.8% margin; GCR delivered $12.8 million at a 14.2% margin.
- Liquidity at September 30: Cash and cash equivalents were $33.3 million; net working capital was $66.6 million and the current ratio was 1.47. Available funding capacity was $54.9 million, including $21.6 million of undrawn revolving capacity after letters of credit.
- Debt: Total debt was $31.8 million, including $26.5 million under the Wintrust term loan; there were no revolver borrowings. The company reported compliance with its financial covenants. The Wintrust facilities mature in February 2026; the term loan rate was 4.25% at quarter-end.
- Balance sheet: Total assets were $265.7 million and stockholders’ equity was $83.0 million. Cash declined from $42.1 million at December 31, 2020.
Changes versus comparable periods
- Q3 revenue declined $34.7 million (21.2%) year over year, primarily reflecting planned lower Southern California activity and declines across much of GCR. The smaller ODR segment grew, but did not offset GCR’s decline.
- Despite lower quarterly revenue, gross profit rose $0.3 million and gross margin increased to 18.9%, mainly from a greater contribution of higher-margin ODR work. SG&A rose 7.4% to $18.3 million, increasing to 14.2% of revenue from 10.4%.
- Q3 operating income declined $0.9 million. Net income increased to $4.0 million, helped by lower interest expense and the absence of the prior-year $1.4 million warrant-liability loss.
- For the first nine months, revenue fell 17.0% and operating income fell 49.3%; net income declined to $2.4 million from $5.4 million. Higher ODR gross profit and improved overall gross margin partly offset lower GCR activity and higher SG&A.
- Operating cash flow swung to an outflow of $16.8 million from an inflow of $35.2 million, principally due to working-capital use, including changes in contract assets and liabilities and accrued expenses.
Outlook, commentary, and risks
- Management said cash, expected operating receipts, and available Wintrust borrowing capacity were expected to meet working-capital and capital-expenditure needs for at least 12 months. This is management’s assessment, not numerical earnings guidance.
- At September 30, backlog was $345.5 million in GCR and $69.4 million in ODR, compared with $393.5 million and $50.9 million, respectively, at year-end 2020. Management expected approximately $117.9 million of total backlog revenue to be recognized by year-end 2021. Remaining performance obligations were $345.5 million for GCR and $52.8 million for ODR; management estimated 25% and 37%, respectively, would be recognized during the rest of 2021.
- COVID-19 effects, supply-chain disruption, material shortages, higher commodity prices, and delayed equipment and vehicle deliveries could affect project timing, costs, and backlog conversion. Management reported only modest sourcing disruptions to date but expected elevated costs and delays to persist through the remainder of 2021.
- Federal-contractor vaccination requirements and OSHA’s announced emergency standard could affect labor availability, retention, costs, and the ability to pursue certain work. Severe weather, customer spending constraints, project-estimate changes, and collection timing are additional operating uncertainties.
- Contract estimate revisions produced net gross-profit write-downs of $1.3 million for the first nine months, versus $4.2 million in 2020. Gross-profit recognition depends on estimates of total contract costs; claims and unapproved change orders included in contract assets and liabilities had a net estimated realizable value of $39.2 million.
- The company completed an interim impairment assessment after a decline in its share price and market capitalization. It recorded no goodwill or trade-name impairment; reported valuation headroom was $33.3 million for ODR goodwill and $1.0 million for the trade name.
- In February 2021, Limbach refinanced its prior debt with a $30 million term loan and a $25 million revolving facility, and recorded a $2.0 million early-extinguishment loss. It also raised approximately $22.8 million net through a February stock offering. Public, private, and additional merger warrants expired in July.
- Notable contingencies include approximately $230.7 million of surety bonds outstanding, potential exposure from multiemployer pension plans (not quantified clearly in the filing), self-insurance obligations, and litigation. Management said it had not accrued losses for two disputed California cases because loss was neither probable nor reasonably estimable; one case sought damages exceeding $3.0 million and another approximately $1.0 million. A Michigan arbitration was settled confidentially, with the claimant paying Limbach.
Important facts for investors to verify
- Whether GCR revenue and margins stabilize, and whether ODR growth and its higher margins can continue to offset lower construction activity.
- Whether negative operating cash flow reverses as contract billing, collections, and working-capital balances normalize.
- Backlog conversion timing, including the expected year-end revenue, and the quality and collectability of contract assets, retainage, claims, and unapproved change orders.
- Ability to manage material inflation, supply delays, labor availability, vaccine-related requirements, and project cost-estimate revisions without further margin pressure.
- Debt covenant headroom and liquidity under the Wintrust facilities, alongside potential surety, pension, self-insurance, and litigation exposures.