Limbach Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Limbach provides commercial HVAC, plumbing, electrical and building-controls construction and facility services through its Construction and Service segments. The 10-Q was filed June 15, 2020, after the company relied on the SEC’s COVID-19 filing extension, citing pandemic-related disruption and difficulty compiling and reviewing information on time.
Financial performance
| Metric | Q1 2020 | Q1 2019, recast |
|---|---|---|
| Revenue | $138.8 million | $133.7 million |
| Gross profit / margin | $18.2 million / 13.1% | $19.6 million / 14.7% |
| Operating income / margin | $1.3 million / 0.9% | $3.4 million / 2.5% |
| Interest expense, net | $2.2 million | $0.8 million |
| Net income (loss) | $(0.1) million | $1.8 million |
| Operating cash flow | $3.5 million | $(4.1) million |
Construction revenue rose 4.8% to $109.5 million, while Service revenue was essentially unchanged at $29.3 million. Construction gross profit fell 15.0% to $11.0 million; Service gross profit increased 8.0% to $7.2 million. The consolidated gross margin decline reflected adverse construction project estimate revisions, partly offset by Service performance.
At March 31, cash and cash equivalents were $10.7 million; working capital was $39.8 million and the current ratio was 1.25. Total current liabilities were $159.6 million. Debt was $47.2 million before unamortized discount and issuance costs; balance-sheet debt net of those costs was $43.4 million. The $41.0 million refinancing term loan carried a 13.0% interest rate. The company reported $10.5 million of net available revolving capacity after letters of credit, for total available funding capacity of $21.2 million.
Investing cash outflow was $0.5 million and financing cash outflow was $0.7 million. Operating cash flow benefited from contract assets, contract liabilities and accrued expenses, and was partially offset by receivable and payable movements. Cash and restricted cash totaled $10.8 million at quarter-end.
Changes versus the prior period
- Revenue increased 3.8%, driven by Construction; Service revenue was flat.
- Gross profit declined 7.1%, and operating income fell from $3.4 million to $1.3 million.
- Higher interest expense, primarily following the 2019 refinancing and related financing-cost amortization, contributed to the shift from net income to a small net loss.
- Operating cash flow improved by $7.6 million year over year, from a use of cash to a source of cash.
- Construction backlog was $472.3 million, down from $504.2 million at year-end; Service backlog was $62.6 million, up from $57.0 million.
Outlook, risks and unusual items
- COVID-19: Project suspensions and building-access restrictions affected both segments, with New England the only region where all construction activity was prohibited for a period. Most suspended projects had resumed by May, according to management. The company implemented furloughs, reduced schedules and staffing, a hiring freeze, spending cuts, rent deferrals and selected salary reductions. It reported a measured recovery assumption beginning in May, with revenue and gross profit returning to normal levels in Q4 2020. This was a management forecast, not formal guidance; management cautioned that actual pandemic effects were highly uncertain and could materially harm results, liquidity and prospects.
- Management said its reforecast indicated covenant compliance for the next 12 months and that cash, expected operating receipts and borrowing availability should fund requirements over that period. It warned that extended shutdowns or a material economic deterioration could jeopardize covenant compliance and, if lenders accelerated debt, the company might lack funds to repay it.
- COVID-related contract estimate revisions included $3.2 million of gross-profit write-downs on six construction projects, partly offset by $1.0 million of write-ups on two projects. Four write-downs, totaling $2.5 million, were in Southern California.
- The CARES Act tax provisions supported a $1.6 million refund from carrying back net operating losses; the refund was included in income tax receivable. The quarter’s income tax benefit was $0.6 million.
- Remaining performance obligations were $519.6 million: $472.3 million Construction and $47.3 million Service. Management expected 57% and 91%, respectively, to be recognized during 2020; timing is not entirely within the company’s control.
- Debt terms include restrictive covenants and a minimum loan-party liquidity requirement of $10 million. The company disclosed a prior 2019 leverage covenant breach that was waived. It reported compliance with required covenants at March 31, 2020.
- Outstanding surety bonds were $148.6 million. The company participates in about 40 multiemployer pension plans and said potential withdrawal liabilities cannot presently be determined. Disclosed litigation includes a California claim seeking damages exceeding $3.0 million and arbitration claims, including the company’s counterclaim for more than $1.0 million.
- Management concluded disclosure controls were effective and reported no material change in internal control during the quarter. The 2019 comparative financial information was recast for adoption of revenue-recognition and lease-accounting standards.
Important facts for investors to verify
- Whether pandemic-related shutdowns, building-access limits and cost actions matched the assumed recovery path and Q4 normalization.
- Actual covenant headroom and liquidity, including compliance with the $10 million minimum liquidity test and availability under the revolving facility.
- Whether construction project cost estimates, claims and change orders produce further margin revisions or cash-collection delays.
- Debt service burden and refinancing terms: the 13.0% term-loan rate, scheduled amortization beginning in Q3 2020, and the facility’s 2022 maturity.
- The fair-value disclosure for the CB warrant liability is inconsistent within the supplied filing text: one passage reports $0.4 million at March 31, while another reports $0.2 million. Confirm the reported balance and associated valuation change in the filed financial statements.
- Developments in the Bernards and Lanzo matters, surety exposure, and potential multiemployer pension-plan obligations.