Limbach Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Limbach provides building systems design, construction, installation, and maintenance services. Its General Contractor Relationships (GCR) segment handles construction and renovation work; Owner Direct Relationships (ODR) provides services directly to building owners and managers.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $121.0m | $135.2m | $234.4m | $274.0m |
| Gross profit / margin | $18.7m / 15.4% | $20.3m / 15.0% | $35.9m / 15.3% | $38.6m / 14.1% |
| Operating income / margin | $1.4m / 1.1% | $6.3m / 4.7% | $1.3m / 0.6% | $7.6m / 2.8% |
| Net income (loss) | $0.7m | $2.9m | $(1.6)m | $2.9m |
| Net interest expense | $0.5m | $2.1m | $1.7m | $4.3m |
Q2 revenue fell 10.5% year over year, primarily from a 17.4% decline in GCR; ODR revenue rose 14.4%. For the first half, GCR revenue fell 20.0%, while ODR rose 5.9%. ODR’s higher-margin work lifted consolidated gross margin, but lower GCR volume and higher SG&A weighed on operating income. First-half results also included a $2.0m loss on early debt extinguishment.
- Cash flow: Operating activities used $24.6m in the first half of 2021, versus $22.5m provided in 2020. The outflow reflected working-capital movements, including higher receivables and contract assets and lower contract liabilities and accrued expenses. Investing activities used $0.1m; financing activities provided $10.3m.
- Liquidity: At June 30, cash and cash equivalents were $27.7m, restricted cash $0.1m, working capital $61.8m, and the current ratio 1.45. The company reported $21.6m of available revolving capacity after outstanding letters of credit, for total available funding capacity of $49.3m.
- Debt: Total debt was $33.5m, including $28.0m outstanding under the Wintrust term loan and $5.5m of finance leases. The $25.0m Wintrust revolving facility had no borrowings; $3.4m of letters of credit were outstanding. The term loan’s stated rate was 4.25% at quarter-end. The company said it was in compliance with Wintrust financial covenants.
- Equity: February’s public offering and warrant exercises generated approximately $22.8m and $2.0m, respectively, in reported financing proceeds. Shares outstanding increased to 10.25m at June 30 from 7.93m at year-end.
Material changes and operating developments
- Q2 GCR revenue declined $18.4m, while ODR increased $4.2m. GCR operating results turned to a $0.2m loss from $4.2m income; ODR operating income was $2.3m versus $2.5m.
- Q2 SG&A increased 25.3% to $17.2m, including higher payroll, professional fees, rent, travel, and stock-based compensation. First-half SG&A rose 12.5% to $34.4m.
- The February 2021 refinancing replaced the prior, higher-cost debt with Wintrust facilities, including a $30.0m term loan and a $25.0m revolving facility. The refinancing reduced interest expense but generated the one-time extinguishment loss. A December 2020 collateral-coverage covenant breach had been waived before the refinancing.
- Backlog at June 30 was $378.9m for GCR and $60.6m for ODR, compared with $393.5m and $50.9m, respectively, at December 31. The company expected to recognize approximately $211.0m of total backlog by year-end. Remaining performance obligations were $378.9m for GCR and $44.2m for ODR; these exclude certain cancellable ODR arrangements and are not identical to backlog.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management said cash, expected operating receipts, and available revolving borrowings should fund working-capital and capital-expenditure needs for at least the next 12 months, assuming continued lender availability.
- Management reported higher material costs and supply-chain delays in the first half of 2021 and expected these pressures to persist through 2021. Disruptions could delay projects and slow backlog conversion.
- COVID-19 remained an uncertain operating risk. Management cited the Delta variant as a potential cause of project delays or cancellations, site-access restrictions, renewed government restrictions, weaker customer spending, and collection challenges.
- First-half net gross-profit write-downs on contract estimates were $1.7m, compared with $3.4m in 2020. Claims and unapproved change orders included in contract assets and liabilities had an estimated net realizable value of $40.1m; resolution may require litigation or other dispute proceedings.
- Outstanding surety bonds were approximately $265.3m. The company participates in about 40 multiemployer pension plans, some reported to be in critical status; potential withdrawal liabilities could not be quantified. Legal matters included a California subcontractor dispute seeking damages exceeding $3.0m and another claim of approximately $1.0m; management believed the proceedings would not materially adversely affect the company.
- Public, private, and additional merger warrants expired by their terms on July 20, 2021, after quarter-end. Management reported effective disclosure controls and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether operating cash flow improves as billing, collection, contract liabilities, and project mix change; first-half cash use was substantial.
- Whether GCR revenue and margins stabilize, and whether ODR growth can offset lower construction activity and elevated SG&A.
- Whether inflation and supply constraints affect project costs, completion timing, and conversion of backlog into revenue.
- Ongoing covenant compliance, available revolver capacity, and the effect of debt amortization and variable interest rates on liquidity.
- Recoverability and timing of contract assets, retainage, claims, and unapproved change orders, alongside exposure from litigation, surety obligations, and multiemployer pension plans.