Limbach Holdings, Inc. Q4 FY2020 Earnings Call

Greetings, and welcome to Limbach Holdings Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Hellman of The Equity Group. Thank you, sir. Please go ahead.

Thank you very much, and good morning, everyone. Yesterday afternoon, Limbach Holdings announced its 2020 fourth quarter full year results and filed its Form 10-K for the fiscal year ended December 31, 2020. Today, the company will be reviewing those results and providing an update on current market conditions. The company may also refer to a slide presentation accompanying this earnings call. The presentation can be found in the Investors section of the company's website at www.limbachinc.com. The company encourages everyone to review the forward-looking statement disclosure on Slide 2 of the presentation. With that, I'll turn the call over to Charlie Bacon, the President, Chief Executive Officer of Limbach Holdings.

Good morning and welcome, everyone, and thanks for joining us. We're excited to review our results with you and to take your questions. Joining me today is our Chief Financial Officer, Jayme Brooks; and for the first time our Chief Operating Officer, Mike McCann. I thought it would be great to have Mike joining us today to provide more insight into our operational side of the business as we head into 2021. He has partnered with Jayme and I at the top of the organization. He has made some terrific contributions to operational execution, and I want to introduce him to our investors. More from Mike to come. Before I go any further, I want to echo my message of thanks from last quarter to the approximately 1,700 employees at Limbach. Our success in 2020 was driven by our incredible group of people. You truly rose to the challenge, and I could not be more proud of all of you and what we have accomplished. We were focused on staying safe, collecting cash, and finding new business during the pandemic. It worked. Limbach recorded a strong year of profitable operations in 2020, and continued to have substantial year-over-year growth of our owner-direct segment in the fourth quarter, which is the core foundation of our strategic plan. We entered 2021 with substantially improved capital structure following our successful refinancing, which occurred subsequent to the close of the fiscal year. As a result of the company's significantly reduced interest rates and a lower overall level of funded debt, we expect to realize approximately $4 million of reduced cash interest expense in fiscal 2021 compared to 2020. When combined with our recent capital raise, we hold a strong position to execute on many key initiatives, including the acceleration of our owner-direct strategy, digital transformation, and pursuit of strategic growth. Although we saw some deceleration in the fourth quarter due to a pause in decision-making by business owners, we believe that was due in large part to the COVID resurgence that took place towards the end of the year. We anticipate that to be temporary and with millions of vaccine doses being given daily, we are optimistic that we will be transitioning to a post-COVID environment. In the near term, the dynamic might drive some fluctuations in revenue, but we don't believe it's a reflection of broader or more enduring market trends. A supporting proof of that thinking is The American Institute of Architects Billings Index. The recently released ABI score of 53.3 is up dramatically from the prior 12-month average of 41.4. The AIA’s other key measure, the new project inquiries score jumped to 61.2. Scores above 50 indicate expansion. When designers are busy, that drives opportunity for firms like Limbach. From a macro level, the pandemic has impacted the various non-residential construction sectors differently, all of which reaffirms the soundness of our focus on diversity of end markets, geography, services, and customers. We continue to see strength in large CapEx budgets in several of our core end markets, including data centers, pharmaceutical R&D facilities, and healthcare facilities. Our new emerging sector, indoor farming and controlled agriculture remains an attractive growth opportunity for which we're well positioned. Several significant projects that we are tracking in other sectors that were deferred due to COVID are now back in our pipeline, as customers are starting to see the dust clear from the pandemic. Across end markets and tied to the pandemic, there continues to be a meaningful amount of opportunity in evaluating and enhancing indoor air quality and building airflow. Our professional services group, Limbach Collaborative Services, is focused on guiding customers through the development and implementation of retrofits through engineered-driven solutions. We believe the ability to apply design and engineering-driven approaches to these opportunities is a huge differentiator when paired with our field capabilities. Broadly speaking, we've experienced the steady progression of sales activity levels as we exit the first quarter. From the start of the year until now, our assessment is that the activity levels have been on an upward trend. The first quarter is seasonally Limbach’s slowest quarter, and we don't expect 2021 will be significantly different in that regard. From a construction perspective, as we've repeatedly stated over the last year, we are focused on quality over quantity. As we forecast into 2021, we've secured accounts for approximately 90% of our projected construction revenue and gross profit, which is a good position to be in at this point in the year. Looking at our 2021 forecast, a larger portion of our construction backlog will burn in the second half of the year compared to the first half. Also, I want to note that none of these assumptions include any figures related to claims resolution. In service and owner-direct, our coverage of revenue and gross profit forecast is less complete on a percentage basis. However, that's somewhat a function of how the business model works in that segment. Many of these opportunities are sold and executed within a single reporting period or otherwise come and go on timelines that are much shorter than what we experience in the Construction segment. Even when the sales pipeline is full and the current sales pipeline looks encouraging, there is naturally less revenue visibility because of the shorter project life cycles. There is just greater velocity, which is good. With that said, we are certainly not waiting for the phone to ring. We've got over 1,100 existing preventative maintenance customer relationships to tap into, and we believe there's plenty of room for revenue and profit growth there. So, with that, let's move on to review our financial performance.

Please follow along in the company's presentation, starting on Slide 4. For the full year, total revenue increased by 2.7% to $568 million. Construction segment revenue increased 0.6% year-over-year, while Service segment revenue increased 10.5%. Our resulting split is 77.6% Construction and 22.4% Service. While the revenue split may fluctuate from quarter to quarter, depending on our project flows and the pace of sales activity, over time, we do expect Service to contribute more to the overall business than it has historically. And we're still focused on driving towards the 50:50 revenue split when we look at several years. For 2020, gross margin improved 130 basis points to 14.3%. This is driven primarily by the increased proportion of revenues from the Service segment as well as continued expansion in Service gross margin. Gross margin expanded to 28.5% for the year compared with 24.7% in 2019. As we continue to optimize project selection, we are focused on additional gross margin expansion on the new work we are selling. Overall, our gross profit increased 13.2% to $81.4 million. Last year, we held SG&A relatively level at $63.6 million compared with $63.2 million a year ago. We benefited from aggressive cost-cutting in Q2 related to COVID-19, but we added back certain of those expenses along with the recovery in business activity over the summer. In the second half of the year, however, those savings were offset by a $6 million increase in performance-based compensation expense due to the company’s strong performance in 2020. Keep in mind, in 2019, the company did not accrue any amounts for the incentive compensation program due to the company not meeting performance criteria for that year. As a result, SG&A for 2020 understates the current run rate. We have strategically increased investment in the expansion of our owner-direct and services business and expect to return to a more normalized environment for expense lines such as travel and entertainment. Between growth in gross profits and flat SG&A, operating income improved to $17.2 million, up from $8.1 million in the prior year. For the year, adjusted EBITDA was $25.1 million, which was an approximately 50% improvement from $16.8 million in 2019. Net income was $5.8 million or $0.72 per diluted share, versus a loss of $1.8 million or $0.23 per diluted share in 2019. Moving to Slide 5. Fourth quarter revenue was down 6.1% to $130.4 million as compared to the prior year. That decline was due to a 14% decrease in Construction segment revenue to $95.1 million. We mainly attribute that to activity levels that were somewhat reduced by COVID, which really spiked into the end of 2020 and into January. While jobs continued in certain branches, workforce levels were reduced by 150 to 200 heads, or as much as 10% due to workers needing to quarantine at times. The net result was a slowdown in the pace of effective projects and assets on revenue. That work will still be performed and the revenue recognized, which is not on the same schedule as we had anticipated. So, it is not a last opportunity. Service segment revenue continues to demonstrate growth, offsetting some of the slippage in Construction, gaining 24.8% to $35.3 million for the fourth quarter of 2020. Although we recorded solid service growth in the quarter, COVID was also a headwind in that segment. We view any lost revenue there as pent-up demand as building mechanical systems still need to be serviced and repaired. In those limited situations that we couldn't get into the buildings, there will still be a need for service work. And as things are now opening up, we expect to do that work. Gross margin for the fourth quarter of 2020 was 14.3% compared to 11.7% in the prior year period. Construction segment gross margin in dollar terms decreased by $1.7 million as a result of a decrease in revenue, although project write-downs were less this quarter when compared to the same period in the prior year. As a result, Construction segment gross margin was 7.4% for the fourth quarter of 2020, compared to 7.9% for the prior year period. Service segment gross margin was 32.8% compared to 26.3% in the prior year as the service work project mix trended towards larger jobs, which carried higher pricing. On a dollar basis, total gross profit in the fourth quarter of 2020 was $18.7 million compared with $16.2 million for the prior year period. Fourth quarter 2020 SG&A expense was $16 million compared to $13.5 million in the prior year periods. The increase in SG&A expense was primarily due to the reversal of $4.3 million of accrued performance-based compensation expense for the nine months ended September 30, 2019 in the fourth quarter of 2019, due to the company not meeting the performance criteria for that year. This also provided a benefit of $4.3 million to adjusted EBITDA for the fourth quarter of 2019 when comparing it to adjusted EBITDA of $4.5 million for the fourth quarter of 2020. Slide 6 highlights our balance sheet and working capital. The company had no borrowings against its $14 million revolver credit facility as of December 31, 2020, other than for standby letters of credit totaling $3.4 million. Cash and cash equivalents stood at $42.1 million. Subsequent to the year-end, we raised approximately $23 million through a common stock equity offering. Debt issuance, together with some modest warrant exercises, increased our share count to 10.2 million as of February 10, 2021. Our pro forma equity capitalization table is on Slide 7. At the end of February, we closed on a refinancing of our credit facility. The new term loan carries a much lower interest rate and we expect the annual cash interest savings to be approximately $4 million in 2021. A comparison of the new credit facility with our old facility can be found on Slide 8. Lastly, I want to touch on margins going forward from a qualitative perspective. We expect our owner-direct strategy and our push for a 50/50 business mix to create an upward trend in our gross margin and also our adjusted EBITDA. I want to remind everyone that that shift takes time and may not be linear quarter-to-quarter. In addition to the pickup as the business mix, we are also focused on simply booking construction projects that have better margins. That means walking away from opportunities that don't fit our desired return profile. In any given quarter, we may be working on projects that were booked a year or more ago, so even as we secure higher margin work now, reported margins will lag. Just a reminder, it'll take some quarters to fully realize it in our financials, and the best way to gauge our progress is to focus on full-year-over-year results. I'll hand it off to Mike now.

Thanks, Jayme. I want to spend some time discussing our project selection as the primary determiner of our success as a business. Our strategy is built upon shifting to a more balanced revenue stream between general contractors and building owners. We're also focused on diversifying our revenue by increasing the number of transactions. In the past, our revenue was very dependent upon large construction projects that lasted multiple years. The shorter duration projects and smaller size of contracts will enable the company to better manage risk factors and drive higher gross margins. We've already seen these results in the work that we booked in the last 18 months. Our sales and marketing efforts have been refocused toward building owners, leveraging our maintenance relationships in the base, as well as targeting new owners with large capital programs. In addition, Limbach is looking to better leverage existing relationships through servicing new geographies with professional services and expanding additional offerings. The company has been very careful to ensure the overall strategies are complemented by both sales and operational risk management practices. Over the past 18 months, the company instituted new risk management practices relative to sales pursuits. It's been clearly communicated to our staff that sales efforts must match our owner-direct expansion strategy. We are evolving the sales culture of the company from a transactional-based construction project focus to a solutions-based owner-direct account management focus. We expect individual project sales pursuits to be an outcome of cultivating those accounts. Once the sales pursuit is identified, there's a rigorous risk management process in place to ensure the operational capabilities of the team and location match the opportunity presented. Due to the fact that we've established relationships with the major stakeholders prior to the sale, we have much better leverage once the project is sold or the services rendered, improving profitability. Evidence is reflected in the owner-direct profit margins, which will continue to improve, reaching 28.5% in 2020. I want to wrap up with a comment on our backlog and sales pipeline, which is highlighted in Slide 9. From a macro perspective, activities are improving. Over the first few months of 2021 we've seen an increase in proactive OpenX spending. Large capital projects appear to be funded, yet building owners are slow to release projects. We anticipate this pent-up demand will be realized over the next few months and will result in a multitude of sales opportunities for Limbach. We have recently seen deferred projects starting to get back on schedule, and overall pipeline activity is healthy. Q4 softness had some impact as well, but even given a normal level of Q4 sales activity, our focus on project selection was expected to result in backlog moderation. Given where our project calendar for 2021 stands now, we expect our second half work to exceed the first half work, and that dynamic will be more pronounced than it has been in the past.

Thanks, Mike, and again, thanks for joining us this morning. As you've heard throughout our prepared remarks, we are optimistic that the pandemic will be behind us, but we all know that can change quickly. As I've stated before, it became clear that our services are essential during pandemics, but we look forward to having the pandemic behind us. With that in mind, as we have done in the past, we think it's prudent to hold off on providing guidance for now, and we'll revisit that when we report Q1 results. Before we move to Q&A, let me touch on a few final issues starting with the impacts of the new administration in Washington, D.C. The government's injection of a massive amount of stimulus via the recently passed stimulus bill appears to have created more opportunities for Limbach while also diverting our competition to projects that we're not interested in. One example is the funding being provided to schools, which is set at $125 billion for public schools and $2.75 billion for private schools. Updating ventilation systems is specifically cited as an area where funds should be utilized. There is also funding that will benefit the healthcare industry, which is our largest end market. Funds are being made available for healthcare data center modernizations, and to replace revenues, especially in hospitals, while a variety of day-to-day medical procedures were crowded out by COVID patients. Overall, there is a massive sum of money going into the economy as a whole, and all branches and all of our branches are and will be actively pursuing opportunities that make sense for Limbach. We're also actively monitoring the much-discussed upcoming infrastructure package. Apparently, there will be elements of green investment, and building system retrofits to reduce energy and water consumption may also be part of the package. If that is the case, we are well-positioned to take advantage of those opportunities and will further accelerate our owner-direct expansion. As mentioned earlier, we are well-positioned with the refinancing behind us and the recent equity raise, which means we are primed and ready to be offensive. We're focused on sales and marketing efforts, and we’ll proceed with clarity as it pertains to profit-driven and risk-appropriate project selection. The diversity of our operations continues to serve us well, as several of our key end markets are very active, offsetting relative weaknesses in others. We also continue to prioritize innovation by evaluating emerging opportunities. Indoor farming is a great example of this. We established an early foothold in that space, and now, as the industry gains momentum, we expect to win more work there. Indoor farming is a perfect market opportunity to provide all of our services, including the annuity income maintenance services. We also believe this sector will expand beyond just CBD production. Lastly, returning again to our balance sheet and our desire to play offense, I want to touch on mergers and acquisitions before opening up the call to your questions. We'll be guided by our ability to identify and diligence opportunities that meet our acquisition criteria with respect to our business model, market position and valuation. Our parameters are narrow in certain respects and consistent with the business model objectives we've described for Limbach. Our timeline will be dictated by our underwriting requirements and not the other way around. The performance of many potential target companies during the 2020 period presents both challenges and opportunities in an M&A context. While we're not starting from scratch from our perspective – when it comes to prospecting – we do need to get comfortable understanding the last 15 months, even in the case of businesses we've known for several years. With that, we're available to take your questions.

Thanks. The floor is now open for questions. Our first question is coming from Rob Brown of Lake Street Capital Market. Please go ahead.

Good morning.

Good morning, Rob.

Good morning, Rob.

Just wanted to get a little more color on the pipeline and maybe particularly on owner-direct. I think you talked about a fair number of projects that were funded but haven't been launched yet, and maybe you can just provide some insight into what you see in the pipeline at the moment and how you see that developing over the year?

Yes. Sure. When you look back at Q4, we continued to book work, but some of the projects that we were tracking and talking to our customers about, they just weren't making some decisions the way we had expected. What's interesting over the past really since mid-February coming into March is there has been a tremendous uptick, and I don't know if that's because of confidence due to the vaccines, the election, we all understand who's sitting in the White House and what that could mean for us. But the spigot has opened back up, which is just wonderful to see. So, decisions are coming forward, and this includes some projects that we were tracking that were put on the back burner that all of a sudden, we're just having conversations with the customers. They're ready to move forward again. So, the pipeline has opened back up, Rob, and that's great to see.

Okay, great. And then you talked kind of directly about margin improvement. What’s your view on where EBITDA margin can go as your strategy plays out over the next three to four years? Where do you think the EBITDA margin could go?

When you look at both segments, particularly the owner-direct strategy segment, the growth in margin has been terrific, and we hit 28.5% last year. We think the range of 25% to 28% is where we should be going forward. Is there room for improvement? Possibly, but that's obviously great news for us. On the Construction segment, we are laser-focused on quality of earnings, not so much top-line growth—it's all about execution. Mike McCann, our Chief Operating Officer, has done a splendid job at introducing risk management processes over the past 1.5 years. We think there is another 150 basis points to 200 basis points we can pull out of Construction, if not more, as we continue to improve our selection and execution. So, regarding EBITDA, we believe there's another 150 basis points to 200 basis points that we could see here in the near term as improvements.

Okay, great. Thank you. And then lastly, just a few trends in the industry. Has COVID changed the view on kind of digital transformation and some of the sustainability efforts? I guess not even just COVID, but the environment. How has that been changing, and what are you seeing in terms of customer interest in those segments?

Look, from a COVID perspective, I think we've all learned a lot from it. What we're excited about is our virtual tech approach, which is really not necessarily showing up in a building, but doing service calls remotely, which we're ramping up. That's one area. We were actually looking at that prior to the COVID impact, but it accelerated with COVID because we couldn't get into certain buildings during March, April, and May. The benefit of that will drive down costs for owners as they won't need to pay for our transportation time; it's just a phone call. We believe that could lead to a very nice subscription service-type model. We’re still in the process of developing that. From a green or sustainability perspective, I'm not sure that's coming purely out of COVID, but clearly the administration is pushing for that. We do a tremendous amount of energy retrofits, and we've been doing it for decades. So, we're waiting patiently to see what comes out of this infrastructure bill. But over the past week, I think we've all heard a lot about sustainability. Just last night, one of our associations shared information on the concept of the infrastructure bill, which mentioned around $130 billion out of a $3 trillion budget dedicated to energy improvements and sustainability. It’s not completely defined yet, but if there are great incentives for building retrofits, that will be perfect for us since we have all of those owner relationships. We know their buildings and can help them leverage these incentives. We're pretty excited about what that may mean for us, but I'm guessing that any revenue from this would likely be seen in 2022 or 2023, not so much in 2021. Rob, did that answer your question?

Yes. Yes, it did. Thank you. I'll turn it over.

Thank you, Rob.

Thank you. Our next question is coming from Gerry Sweeney of ROTH Capital. Please go ahead.

Hey, good morning, Jayme, Charlie, and Mike. Thanks for taking my call.

Good morning, Gerry.

Question, and hopefully I can articulate this appropriately. On the labor side, we have service and we have construction. It sounds like activity is reengaging. How do we look at labor on the service side? Obviously, in the past, finding qualified labor was an issue when the market accelerated a couple of years ago. Are you facing the same issues or potential issues on the service side? Or do you think those employees will remain more permanent? You don’t necessarily have to go to union halls, etc. How do we look at that on a go-forward basis?

I think it's a good question, Gerry. When you think about our growth that we're looking at, Mike, do you want to respond to that?

Sure. Thanks, Gerry. I think a couple of things. Overall, we have stable labor levels both from a construction and owner-direct perspective. The other interesting thing that we've done is we wanted to deploy our best talent, and we've been able to utilize our talent across both perspectives, both owner-direct and construction. So, we've been able to leverage our talent, which has really been helpful to maximize returns and stabilize as we shift.

Got it. And then sticking with the service side, Charlie, you mentioned, I think, 1,100 preventative maintenance contracts. If that grows—I'm going to throw a number out there: let's say 1,500—we don't need to put a timeframe on it, because that's not really the point of the question. But, as those preventative maintenance contracts expand, is there an opportunity to absorb overhead and increase margin potential for the segment? Or is that a potential?

Well, I think the way to look at it, Gerry, 1,500 seems to be a reasonable target actually over the next couple of years. We've already put a lot of resources in place to sell these preventative agreements, and it's paying off. The beauty of having these preventative maintenance contracts is that they form the foundation of a core service business. You get that pull-through, and it's just amazing. You're in the building and something breaks, or they decide they want to replace something. Now we've got some new technology that we're deploying to help them with asset management, and we’ll be able to assist with their capital planning. So, while looking at SG&A, we could reduce that on the owner-direct side, I would suggest to you that our gross profit margins at 28.5%, this past year, are quite strong, indicating that range should be from 25% to 28%. That’s a good range for us. However, we're not going to back off. This is our future. It's all about expanding owner-direct, which is high margin and provides good cash flow. As we continue to grow and aim for 1,500, we plan to keep extending our sales force as well as execution force and management to grow that segment. There could be some savings on SG&A, but I believe it would be prudent to keep investing and expanding.

Okay, I got it. I’ll look at it more as an opportunity to pull through more business, which I understand. But that's helped a lot. I was just more curious on that front. And then I think you described the Construction side, indicating 150 to 200 basis points. Is that on the margin side primarily a function of older contracts moving through backlog and being replaced with new contracts at higher margins? Or is there some execution change going on internally to drive some of that as well?

Thanks, Gerry. I'll take this one. I think it's both sides of it. Project selection has been critical for us; we're being very disciplined to ensure we don't overcommit our capacity. On the other hand, we have rigorous procedures and processes in place to maximize the opportunity once we secure a project. So, I'd say it's really on both sides of the spectrum—we're focused on both aspects.

Gerry, I'm adding something to that response. What's interesting about the risk management processes we've implemented and the quality of earnings over the past year is that we have no new substantial claims going into this year. It’s great to see. We do have some legacy issues that we continue to work on, but we have not seen any new significant claims come into play here. I just want to clarify something. We’re pursuing COVID recovery where we see the opportunity; we were impacted on some of our projects due to COVID work rules, logistics, and things like that. As for execution, we're not engaging in projects that could hold us back. Mike has excelled in orchestrating our focus on smaller work—get in, get out, make good margin, and collect our cash—it’s working.

Yes, absolutely. Sometimes a better focus on pricing and project selection can drive better margins.

Yes.

So, you sound very confident in that 150 to 200 basis point improvement. I was just curious where that confidence came from; that's all.

Yes, I believe we have answered that question for sure.

Yes, perfect. That’s all from me. I appreciate it. Thank you.

All right, Gerry, thanks.

Thank you. Our next question is coming from Adam Thalhimer of Thompson Davis. Please go ahead.

Hey, good morning. Thanks for taking the questions.

Hi, Adam.

Good morning.

Charlie, I'm really interested in your comments regarding the decision-making firming up mid-February into March. Are those projects for the 2021 construction season, or when would those jobs start?

Well, it's a combination of both construction and owner-direct work. There’s a real uptick. For the owner-direct work, that will happen this year, it's very short-cycle work; some of them are larger, and could take a couple of months for planning, equipment procurement, and execution. But a lot of what we're looking at now will burn this year. For the construction segment, some projects are ahead of schedule, and we have significant customers who have started discussing getting projects underway, which is great news. What does 'let's go' mean? There's still planning involved, and it could take several months to organize everything, so we'll likely see more revenue in the second half of the year. We do expect our construction revenue in the second half to ramp up compared to the first half due to backlog and the pipeline for sales.

Okay. Is there an issue with equipment availability? I have heard that in other construction segments.

Adam, we haven't seen that necessarily. I think a lot depends on the size and duration of the work. Currently, from an equipment perspective, we've seen ebbs and flows from the manufacturers, but it's not a factor that we’ve encountered in our business so far.

Okay, good. And then just lastly, regarding IAQ projects, I'm trying to figure out if this is a fad? Once the vaccine rolls out, do you think those requests will fade away, or do you think they are durable and will be present in the next couple of years?

I'm sorry, Adam, are you referring to pharmaceutical?

No, indoor air quality.

Yes, I think indoor air quality requests are here to stay. I believe parents in K-12 will continue to pressure school boards to ensure that buildings are safe. We’re currently working with a couple of school districts on upgrades and using funds received for indoor air quality improvements. We're observing districts pushing towards upgrading these systems, and as things open up, we’re confident there will be increased demand for these improvements. However, I think we will see some variations in 2022 and 2023 as we navigate this landscape. Ultimately, there will be a legacy mindset around ensuring good indoor air quality. In office buildings, everyone is trying to figure out how to restack and reprogram these spaces, particularly in light of remote work conditions. There may also be adjustments required in how indoor environments are structured and outfitted to ensure adequate air quality. So, while there may be some lag in demand, projects will arise in connection with this requirement.

Yes, Adam, I think what's interesting is that in 2020, many reactively made decisions regarding indoor air quality. However, as we move into 2021, more proactive and larger projects that address air quality will emerge as we see organizations returning to their buildings. We're seeing a change in approach moving from reactive to proactive.

Interesting. Okay, thanks for your time.

You bet. Thank you.

Thank you. Our next question is coming from Jon Old of Long Meadow Investors. Please go ahead.

Hi, good morning, everybody. Thanks for the call today.

Good morning, Jon.

A quick question for Jayme. So, the cash interest expense savings are clear. I'm curious whether cash interest going forward will mirror the GAAP results. There was a lot of extra amortization in prior years, so I'm hoping our GAAP savings—if GAAP equals cash, the savings will be significant. I wanted to get your comments on that.

Yes, you're correct in that. However, when looking at the interest expense line item, keep in mind that you've got debt issuance costs—the amendment costs are all in relation to that line item. So, last year, when looking at the $8.6 million in interest expense, you can kind of model about two-thirds of that being actual cash interest, while the other portion includes the debt issuance costs and other amortized costs.

Right. But going forward, if your cash interest is around 4% of $30 million, that's $1.2 million—would that approximate the reported GAAP interest?

We haven’t put that exact number out there. You can model it based on the fees in the agreement, along with the principal paydown and new lower interest rate.

Right. Okay. And just another question regarding the large amount of net write-downs this year. Shouldn't that be coming to an end? Maybe that's for Mike—what does that look like for 2021? I think we would have moved through most of the old legacy projects that were creating the problems.

I think the key with that is that we’ve really focused on risk management in terms of sales pursuits. It can take time to burn off these issues, but the risk management practices we’ve implemented will yield better consistency going forward.

Okay. But shouldn't that number be close to zero? I mean, once you feel like you've gotten all your risk management and discipline in place with respect to projects, shouldn't that be close to zero going forward?

When you look at the nature of our business, net write-ups and write-downs are simply part of what we do. However, what we've seen coming out, particularly with some of the major projects that were problematic have been resolved. I'm very pleased—I can report that the big airport terminal project in L.A. was extended by about four months due to COVID requirements, which stopped the progress. However, they received their certificate of occupancy in February, which is positive. So, regarding the attention on net write-ups and downs, the significant legacy issues are wrapping up, and we've communicated that the risk management protocols have done well with reduced claims to start 2021. I would anticipate seeing net write-ups moving forward, with occasional write-downs as we navigate this landscape.

No, I get where you’re coming from; I just meant overall on that basis.

Yes, the labor conditions, as I've noted in previous calls, are under control. However, on large, long-duration projects, even if we execute well, we’re susceptible to others' circumstances, which can lead to claim situations. We haven't seen new claims arise, and most of the legacy stuff is resolved. There are minor COVID impact claims we're pursuing, but we're focusing on smaller projects to help manage risks moving forward.

Okay. Last question for me. You've now raised a significant amount of cash. You’ve got the debt refinance, some money coming in from warrant proceeds, etc. So, you’re clearly positioned well for some M&A activities. I wanted some more color on your M&A pipeline and what you expect to accomplish this year. I know you can’t force these things, and pricing must align, but what are your expectations regarding the M&A pipeline for this year?

Sure. We had priorities last year that we had to tackle. Our goals were debt refinancing, and we decided to raise capital to reinforce our balance sheet. Now, we're focused on where we can go with acquisitions. Over the past couple of years, we maintained relationships with certain businesses that we're excited to re-engage with in an aggressive manner. We're actively reviewing those discussions now, but we need clarity on their operations after a tumultuous year due to COVID. We're optimistic about our prospects, but we must find the right opportunities at the right valuation.

Okay. Thank you very much.

Thank you, Jon.

I’m showing no additional questions in the queue at this time. I would like to turn the floor back over to management for closing comments.

Thank you everyone for joining us today. We're very proud of our achievements in 2020. It was a successful year for the company, and we've laid a foundation for continued progress. I'm excited about all the moves we've made and look forward to discussing Q1 results with you soon. All the best.

Ladies and gentlemen, thank you for your participation and interest in Limbach Holdings. You may disconnect your lines at this time and have a wonderful day.