Limbach Holdings, Inc. — Q1 2022 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2022. Limbach provides building-system construction, maintenance and related services through General Contractor Relationships (GCR) and Owner Direct Relationships (ODR).
Key financial results
- Revenue: $114.8 million, up 1.3% from $113.3 million. Gross profit was $18.3 million, up 6.4%; gross margin was 16.0%, versus 15.2%.
- Segment mix: GCR revenue declined 15.2% to $71.9 million; ODR revenue rose 50.3% to $42.9 million. GCR gross margin increased to 11.6% from 11.1%; ODR gross margin fell to 23.3% from 27.4%.
- Operating results: SG&A increased 9.3% to $18.7 million, or 16.3% of revenue versus 15.1%. Operating loss was $0.8 million, compared with $0.02 million. Net loss improved to $1.5 million from $2.3 million; diluted loss per share was $0.15 versus $0.25.
- Cash flow: Operating cash use was $3.0 million, improved from $17.4 million used in Q1 2021. The quarter’s working-capital use was $6.1 million, including a $19.7 million cash outflow from receivables. Investing activities used $0.1 million; financing provided $6.7 million.
- Liquidity: Cash and cash equivalents were $18.1 million. Working capital was $68.4 million and the current ratio was 1.48. The company reported $12.3 million of available revolver capacity after $9.4 million of borrowings and $3.3 million of letters of credit.
- Debt: Total debt, including finance leases, was $47.7 million, versus $40.0 million at year-end 2021; $13.2 million was classified as current. The term loan balance was $33.0 million. The company said it complied with all financial maintenance covenants.
- Contract indicators: Backlog was $447.6 million ($340.7 million GCR and $106.9 million ODR), compared with $435.2 million at December 31, 2021. The company expected to recognize approximately $294.7 million by year-end 2022. Remaining performance obligations were $431.1 million; these differ from backlog, including because some cancellable ODR agreements are excluded.
Material changes and management commentary
- ODR growth, including contribution from the Jake Marshall acquisition, more than offset lower GCR revenue. Management attributed GCR declines mainly to Michigan, Mid-Atlantic and Southern California, and said it was emphasizing smaller, shorter projects where it can leverage design and engineering capabilities.
- The company announced it would wind down and fully exit Southern California during 2022. Supply-chain and equipment-delivery delays pushed some revenue into future periods. Management expected material-cost increases and supply-chain delays to persist through the rest of 2022.
- Net contract-estimate gross-profit write-downs, including immaterial revisions, were $1.4 million versus $0.5 million in Q1 2021.
- The Jake Marshall acquisition closed in December 2021 for $21.3 million cash at closing, with up to $6.0 million of additional earnouts subject to performance conditions. Q1 results included acquired-entity revenue of $4.5 million in GCR and $7.2 million in ODR.
- A Pittsburgh office lease was terminated effective March 31, 2022. The company recorded a $0.8 million loss and agreed to pay a roughly $0.7 million termination fee in 16 monthly installments. It also expanded its Southern California sublease and recorded $0.2 million of related income in Q1.
Outlook, risks and contingencies
- Liquidity outlook: Management stated that cash, anticipated customer receipts and revolver availability were expected to cover working-capital and capital-expenditure needs for at least the next 12 months. It also said existing backlog was expected to provide substantial coverage of forecast GCR revenue for one year. These are management expectations, not a quantified earnings forecast; the filing provides no specific revenue or earnings guidance.
- Operating risks: Supply-chain disruption, equipment shortages, inflation and commodity-price volatility may delay projects, increase costs and affect backlog conversion. Weather, seasonality, labor availability and customer vaccination requirements may also affect results.
- Working capital and contracts: Cash flow is sensitive to billing and collection timing, receivables, contract assets and liabilities, project mix and days sales outstanding. Contract assets include retainage and claims or unapproved change orders; estimated net realizable value for such claims and change orders was $39.9 million at quarter-end, and resolution or billing may be delayed, including by disputes.
- Contingencies: The company had $134.9 million of surety bonds outstanding and is substantially self-insured for certain claims. It participates in approximately 40 multiemployer pension plans; potential withdrawal liabilities cannot be determined. Disclosed disputes include claims exceeding $3.0 million and approximately $1.0 million, plus an arbitration involving an allegation of just over $0.3 million in project overbilling. The company disputes the claims and had not accrued losses, stating that loss was not probable or reasonably estimable.
- Subsequent event: On May 5, 2022, the company amended and waived provisions of its credit agreement, including changes to EBITDA, excess-cash-flow, funded-debt and disposition definitions. Review the amendment for its effects on covenant calculations and flexibility.
Important facts for investors to verify
- Whether Q1’s strong ODR growth and improved consolidated gross margin can continue, given lower ODR segment margin and GCR revenue contraction.
- Whether receivables and contract balances convert to cash as expected, and whether claims, change orders and retainage are resolved and billed without significant delay.
- How supply-chain delays, material inflation and the Southern California exit affect project profitability, backlog conversion and the $294.7 million year-end revenue expectation from backlog.
- Debt levels, revolver availability and covenant headroom after the May 5 credit-agreement amendment, including the contingent Jake Marshall earnouts.
- Potential financial exposure from litigation, surety obligations, self-insurance and multiemployer pension plans.