(Exact name of registrant as specified in its charter)
iDelaware, USA
i46-5399422
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i797 Commonwealth Drive,
iWarrendale,
iPennsylvania
i15086
(Address of principal executive offices)
(Zip
Code)
1-i412-i359-2100
(Registrant’s telephone number,
including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
iCommon
Stock, par value $0.0001 per share
iLMB
iThe Nasdaq Stock Market LLC
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
iAccelerated
filer
☒
Non-accelerated filer
☐
Smaller reporting company
i☒
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
As of November 8, 2022, there were i10,471,410
shares of the registrant’s common stock, $0.0001 par value per share, outstanding.
This Quarterly Report on Form 10-Q, including all documents incorporated by reference, contains forward-looking statements regarding Limbach Holdings, Inc. (the “Company,”“Limbach”“we” or “our”) and represents our expectations and beliefs concerning future events. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties. The forward-looking
statements included herein or incorporated herein by reference include or may include, but are not limited to, (and you should read carefully) statements that are predictive in nature, depend upon or refer to future events or conditions, or use or contain words, terms, phrases, or expressions such as “achieve,”“forecast,”, “plan,”“propose,”“strategy,”“envision,”“hope,”“will,”“continue,”“potential,”“expect,”“believe,”“anticipate,”“project,”“estimate,”“predict,”“intend,”“should,”“could,”“may,”“might,” or similar words, terms, phrases or expressions or the negative of any of these terms. Any statements in this Quarterly Report on Form 10-Q that are not based upon historical fact are forward-looking statements and represent our best judgment as to what may occur
in the future.
These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and the Company management’s' current expectations, forecasts and assumptions, and involve a number of judgments, known and unknown risks and uncertainties and other factors, many of which are outside the control of the Company and its directors, officers and affiliates. Accordingly, forward-looking statements should not be relied upon as representing the Company's views as of any subsequent date. The Company does not undertake any obligations to update,
add or to otherwise correct any forward-looking statements contained herein to reflect events or circumstances after the date they were made, whether as a result of new information, future events, inaccuracies that become apparent after the date hereof or otherwise, except as may be required under applicable securities laws.
As a result of a number of known and unknown risks and uncertainties, the Company's results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include (i) intense competition in our industry; (ii) ineffective management of the size and cost of our operations; (iii) our dependence on a limited number of customers; (iv) unexpected adjustments to our backlog or cancellations of order in our backlog; (v) cost
of overruns under our contracts; (vi) timing of the award and performance of new contracts; (vii) significant costs in excess of the original project scope and contract amount without having an approved change order; (viii) our failure to adequately recover on claims brought by us against contractors, project owners or other project participants for additional contract costs; (ix) risks associated with placing significant decision making powers with our subsidiaries' management; (x) acquisitions, divestitures, and other
strategic transactions could fail to achieve financial or strategic objectives, disrupt our ongoing business, and adversely impact our results of operations; (xi) unanticipated or unknown liability arising in connection with acquisitions or divestitures; (xii) design errors and omissions in connection with Design/Build and Design/Assist contracts; (xiii) delays and/or defaults in customer payments; (xiv) unsatisfactory safety performance; (xv) our inability to properly utilize our workforce; (xvi) labor disputes with unions representing our employees; (xvii) strikes or work stoppages; (xviii) loss of service from certain key personnel; (xix) operational inefficiencies due to our inability to attract and retain qualified managers, employees, joint venture partners, subcontractors and suppliers; (xx) misconduct by our employees, subcontractors or partners, or our overall failure
to comply with laws or regulations; (xxi) our dependence on subcontracts and suppliers of equipment and materials; (xxii) price increases in materials; (xxiii) changes in energy prices; (xxiv) our inability to identify and contract with qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform as subcontractors; (xxv) reputational harm arising from our participation in construction joint ventures; (xxvi) any difficulties in the financial and surety markets; (xxvii) our inability to obtain necessary insurance due to difficulties in the insurance markets; (xxviii) our use of the cost-to-cost method of accounting could result in a reduction or reversal of previously recorded revenue or profits; (xxix) impairment charges for goodwill and intangible assets; (xxx) unexpected expenses arising from contractual warranty obligations; (xxxi) increased costs or limited
supplies of raw materials and products used in our operations arising from recent and potential changes in U.S. trade policies and retaliatory responses from other countries; (xxxii) rising inflation and/or interest rates, or deterioration of the United States economy and conflicts around the world; (xxxiii) increased debt service obligations due to our variable rate indebtedness; (xxxiv) failure to remain in compliance with covenants under our debt and credit agreements or service our indebtedness; (xxxv) our inability to generate sufficient cash flow to meet all of our existing or potential future debt service obligations; (xxxvi) significant expenses and liabilities arising under our obligation to contribute to multiemployer pension plans; (xxxvii) a pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or suppliers; (xxxvii) COVID-19 vaccination mandates applicable to us and certain of
our employees, causing our inability to pursue certain work, an increase in attrition rates or absenteeism within our labor force, challenges securing future labor needs, inefficiencies connected to employee turnover, and costs associated with implementation and on-going compliance; (xxxviii) future climate change; (xxxiv) adverse weather conditions, which may harm our business and financial results ; (xxxv) information technology system failures, network disruptions or cyber security breaches; (xxxvi) changes in laws, regulations or requirements, or a material failure of any of our subsidiaries or us to comply
with
any of them; (xxxvii) becoming barred from future government contracts due to violations of the applicable rules and regulations; (xxxviii) costs associated with compliance with environmental, safety and health regulations; (xxxix) our failure to comply with immigration laws and labor regulations; (xl) disruptions due to the conflict in Ukraine; and (xli) those factors described under Part I, Item 1A “Risk Factors” of the Company’s most recent Annual Report on Form 10-K.
Common stock, $ii0.0001/
par value; ii100,000,000/ shares authorized,
ii10,447,660/ issued and outstanding as of September 30,
2022 and ii10,304,242/ at December 31,
2021
i1
i1
Additional paid-in capital
i87,045
i85,004
Retained
Earnings
i5,824
i2,833
Total
stockholders’ equity
i92,870
i87,838
Total
liabilities and stockholders’ equity
$
i280,747
$
i267,512
The
accompanying notes are an integral part of these condensed consolidated financial statements
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – iBusiness
and Organization
Limbach Holdings, Inc. (the “Company,”“we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering
and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company's customers operate in diverse industries including, but not limited to, healthcare, life sciences, data centers, industrial and light manufacturing, entertainment, education and government. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States.
The Company operates in itwo
segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material
contracts over periods of typically less than itwo years.
Note 2 – iSignificant Accounting Policies
i
Basis
of Presentation
References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC (“LC LLC”), Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”) for all periods presented, unless otherwise indicated. All intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the requirements of Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Readers of this report should refer to the consolidated financial statements and the notes thereto included in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”)
on March 16, 2022.
i
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates
and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves, fair value of contingent consideration arrangements and contingencies. If the underlying estimates and assumptions upon which the condensed consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying condensed consolidated financial statements.
i
Unaudited
Interim Financial Information
The accompanying interim Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the periods presented are unaudited. Also, within the notes to the condensed consolidated financial statements, the Company has
included unaudited information for these interim periods. These unaudited interim condensed consolidated
financial statements have been prepared in accordance with GAAP. In the Company's opinion, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of September 30, 2022, its results of operations and equity for the three and nine months ended September 30, 2022 and 2021 and its cash flows for the nine months ended September 30, 2022 and 2021. The results for the three and nine months ended September 30,
2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the Company's audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 16, 2022, but is presented as condensed and does not contain all of the footnote disclosures from the annual financial statements.
i
Recently
Adopted Accounting Standards
In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which creates an exception to the general recognition and measurement principle for contract assets and contract liabilities from contracts
with customers acquired in a business combination. Under this exception, an acquirer applies ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities on the acquisition date. ASC 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date. The changes are effective for annual periods beginning after December 15, 2022. The Company early adopted
ASU 2021-08 in December 2021. The contract assets and contract liabilities associated with the Jake Marshall Transaction (as defined below) have been valued in accordance with this standard.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information
to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The guidance is effective for smaller reporting companies on January 1, 2023 with early adoption permitted. The adoption of this standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. Based on its historical experience, the Company does not expect that this pronouncement will have a significant impact in its condensed consolidated financial statements or on the estimate of the allowance for doubtful accounts.
The FASB has issued ASU
2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 is effective between March 12, 2020 and December 31, 2022.
In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):
Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. An entity may elect to apply the amendments in this update from the beginning of an interim period beginning as of March 12, 2020, through December 31, 2022. The Company has evaluated the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its condensed consolidated financial statements and has determined that these
pronouncements will not have a significant impact. As discussed in Note 6, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts
in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements.
On December 2, 2021 (the “Effective Date”), the Company and LFS entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with JMLLC, CSLLC (together with JMLLC, the “Acquired Companies” and each an “Acquired Company”) and the owners of the Acquired Companies
(collectively, the “Sellers”), pursuant to which LFS purchased all of the outstanding membership interests in the Acquired Companies from the Sellers (the transactions contemplated by the Purchase Agreement collectively being the “Jake Marshall Transaction”). The Jake Marshall Transaction closed on the Effective Date. As a result of the Jake Marshall Transaction, each of the Acquired Companies became wholly-owned indirect subsidiaries of the Company. The acquisition expands the Company’s market share within its existing product and service lines.
Total consideration paid by the
Company for the Jake Marshall Transaction at closing was $i21.3 million (the “Closing Purchase Price”), consisting of cash paid to the Sellers, net of adjustments for working capital. Of the consideration paid to the Sellers, $i1.0 million
is being held in escrow for indemnification purposes. The purchase price is subject to customary post-closing adjustments. In addition, the Sellers may receive up to an aggregate of $i6.0 million in cash, consisting of iitwo/
tranches of $ii3.0/ million,
as defined in the Purchase Agreement, if the gross profit of the Acquired Companies equals or exceeds $ii10.0/ million
in (i) the approximately ii13/ month period from
closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) fiscal year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, however, that the gross profit of the Acquired Companies is less than $ii10.0/ million,
but exceeds $ii8.0/ million,
during any of the 2022 Earnout Period or 2023 Earnout Period, the $ii3.0/ million
amount will be prorated for such period.
Allocation of Purchase Price. The Jake Marshall Transaction was accounted for as a business combination using the acquisition method. The following table summarizes the final purchase price and estimated fair values of assets acquired and liabilities assumed as of the Effective Date, with any excess of purchase price over estimated fair value of the identified net assets acquired recorded as goodwill. As a result of the acquisition, the Company recognized $ii5.2/ million
of goodwill, all of which was allocated to the ODR segment and fully deductible for tax purposes. Such goodwill primarily related to anticipated future earnings. iThe following table summarizes the final allocation of the fair value of the assets and liabilities of the Jake Marshall Transaction as of the Effective Date by the Company.
The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from isix
months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts.
The
Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the
related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle.
Contract
assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings. The components of the contract asset balances as of the respective dates were as follows:
Retainage
receivable represents amounts invoiced to customers where payments have been partially withheld, typically i10%, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the
Company makes progress towards completion.
Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when either: (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but
a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable
that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings.
The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the condensed consolidated balance sheets was $i39.0 million
and $i38.1 million as of September 30, 2022 and December 31, 2021, respectively. The Company currently anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond
one year.
Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows:
Billings
in excess of costs represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue.
Provisions for losses are recognized in the condensed consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence
indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue.
i
The net (overbilling) underbilling position for contracts in process consisted of the following:
The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended September 30, 2022, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $i0.5 million
or more. During the nine months ended September 30, 2022, the Company recorded material gross profit write-ups on itwo GCR projects for a total of $i2.0 million
and itwo material GCR project gross profit write-downs for a total of $i1.1 million. During the three
months ended September 30, 2021, the Company recorded material gross profit write-downs on itwo GCR projects for a total of $i1.1 million
and a gross profit write-up on ione GCR project for a total of $i0.6 million that had a net gross profit impact of $i0.5 million
or more. During the nine months ended September 30, 2021, the Company recorded material gross profit write-downs on ifive GCR projects for a total of $i4.0 million
and a gross profit write-up of $i0.7 million on ione GCR project.
Remaining
Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions.
As of September 30, 2022, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts
were $i332.8 million and $i106.5 million, respectively. The
Company currently estimates that i26% and i40% of its GCR and ODR remaining performance obligations as of September 30,
2022, respectively, will be recognized as revenue during the remainder of 2022, with the substantial majority of remaining performance obligations to be recognized within i24 months, although the timing of the Company's performance is not always under its control.
Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the
Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer.
Goodwill was $ii11.4/
million as of September 30, 2022 and December 31, 2021 and is entirely associated with the Company's ODR segment. The Company tests its goodwill and indefinite-lived intangible assets allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible asset are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances
leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed.
Total
amortized and unamortized assets, excluding goodwill
$
i20,570
$
(i4,847)
$
i15,723
(1)The
Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry.
Total
amortized and unamortized assets, excluding goodwill
$
i20,570
$
(i3,663)
$
i16,907
Total
amortization expense for the Company's definite-lived intangible assets was $i0.4 million and $i1.2 million
for the three and nine months ended September 30, 2022, respectively, and $i0.1 million and $i0.3 million
for the three and nine months ended September 30, 2021, respectively.
Note 6 – iDebt
i
Long-term
debt consists of the following obligations as of:
A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026
i23,310
i34,881
A&R
Wintrust Revolving Loan
i—
i—
Finance
leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from i3.96% to i6.45% through 2026
i5,174
i5,132
Financing
liability
i5,393
i—
Total
debt
i33,877
i40,013
Less
- Current portion of long-term debt
(i9,719)
(i9,879)
Less
- Unamortized discount and debt issuance costs
(i685)
(i318)
Long-term
debt
$
i23,473
$
i29,816
/
On
February 24, 2021 (the “2021 Refinancing Date”), the Company refinanced its 2019 Refinancing Term Loan (as defined below) and 2019 Revolving Credit Facility (as defined below) with proceeds from the issuance of the Wintrust Term Loan (as defined below) (the “2021 Refinancing”). As a result of the 2021 Refinancing, the Company prepaid all principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements (as defined below) and terminated its 2019 Refinancing Term Loan, 2019 Refinancing Revolving Credit Facility and the CB Warrants (as defined below). In addition, on the 2021 Refinancing Date, the Company recognized a loss
on the early extinguishment of debt of $i2.0 million, which consisted of the write-off of $i2.6 million
of unamortized discount and financing costs, the reversal of the $i2.0 million CB warrants (defined below) liability and the prepayment penalty and other extinguishment costs of $i1.4 million.
2019 Refinancing Agreement - 2019 Term Loans
On April 12, 2019 (the “2019 Refinancing Closing Date”), LFS entered into a financing agreement (the “2019 Refinancing Agreement”) with the lenders thereto and Cortland Capital Market Services LLC, as collateral agent and administrative agent and CB Agent Services LLC (“CB”), as origination agent. The 2019 Refinancing Agreement consisted of (i) a $i40.0 million term loan (the
“2019 Refinancing Term Loan”) and (ii) a new $i25.0 million multi-draw delayed draw term loan (the “2019 Delayed Draw Term Loan” and, collectively with the 2019 Refinancing Term Loan, the “2019 Term Loans”). On November
14,
2019, the Company entered into an amendment to the 2019 Refinancing Agreement which, among other things, amended the interest rate and certain covenants in the 2019 Refinancing Agreement.
Prior to its refinancing in February 2021, the 2019 Refinancing Agreement would have matured on April 12, 2022. Required amortization was $i1.0 million per quarter and commenced
with the fiscal quarter ending September 30, 2020. There was an unused line fee of i2.0% per annum on the undrawn portion of the 2019 Delayed Draw Term Loan, and there was a make-whole premium on prepayments made prior to the i19-month
anniversary of the 2019 Refinancing Closing Date. This make-whole provision guaranteed that the Company would pay no less than i18 months’ applicable interest to the lenders under the 2019 Refinancing Agreement.
The interest rate on borrowings under the 2019 Refinancing Agreement was, at the option of LFS and its subsidiaries, either LIBOR (with a i2.00%
floor) plus i11.00% or a base rate (with a i3.00% minimum) plus i10.00%.
At the 2021 Refinancing Date, the interest rate in effect on the 2019 Refinancing Term Loan was i13.00%.
2019 Refinancing Agreement - CB Warrants
In connection with the 2019 Refinancing Agreement, on the 2019 Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the “CB Warrants”) to purchase up to a maximum of i263,314
shares of the Company's common stock at an exercise price of $i7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants were exercisable at any given time were equal to: (i) the product of (x) the number of shares equal to i2%
of the Company’s issued and outstanding shares of common stock on the 2019 Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of the 2019 Refinancing Closing Date through the 2021 Refinancing Date, ino amounts had been drawn on the 2019 Delayed Draw Term Loan, so ino
portion of the CB Warrants were exercisable. The CB Warrants were to be exercised for cash or on a “cashless basis,” subject to certain adjustments, at any time after the 2019 Refinancing Closing Date until the expiration of such warrant at 5:00 p.m., New York time, on the earlier of (i) the five (i5) year anniversary of the 2019 Refinancing Closing Date, or (ii) the liquidation of the Company.
For the period from January 1, 2021 through the 2021 Refinancing
Date, the Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of $i0.1 million and recorded an additional $i0.1 million
of interest expense for the amortization of the debt issuance costs.
2019 ABL Credit Agreement
On the 2019 Refinancing Closing Date, LFS also entered into a financing agreement with the lenders thereto and Citizens Bank, N.A., as collateral agent, administrative agent and origination agent (the “2019 ABL Credit Agreement” and, together with the 2019 Refinancing Agreement, the “Refinancing Agreements”). The 2019 ABL Credit Agreement consisted of a $i15.0
million revolving credit facility (the “2019 Revolving Credit Facility”). Proceeds of the 2019 Revolving Credit Facility were to be used for general corporate purposes. On the 2019 Refinancing Closing Date, the Company entered into an amendment to the 2019 ABL Credit Agreement (as amended, 2019 ABL Credit Amendment Number One and Waiver), which amended certain provisions under the 2019 ABL Credit Agreement.
The interest rate on borrowings under the 2019 ABL Credit Agreement was, at the option of LFS and its subsidiaries, either LIBOR (with a i2.0%
floor) plus an applicable margin ranging from i3.00% to i3.50% or a base rate (with a i3.0%
minimum) plus an applicable margin ranging from i2.00% to i2.50%. At the 2021 Refinancing Date, the interest rate in effect on the 2019 ABL Credit Agreement was
i5.25%.
As of the 2021 Refinancing Date, the Company had irrevocable letters of credit in the amount of $i3.4 million
with its lender to secure obligations under its self-insurance program. Prior to its refinancing in February 2021, the 2019 ABL Agreement would have matured in April 2022.
Wintrust Term and Revolving Loans
On the 2021 Refinancing Date, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among the LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust
as lead arranger and sole book runner.
In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $i30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $i25.0 million
senior secured revolving credit facility with a $i5.0 million
sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust
Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans.
The Wintrust Revolving Loan initially bore interest, at LFS’s option, at either LIBOR (with a i0.25% floor) plus i3.5%
or a base rate (with a i3.0% floor) plus i0.50%, subject to a i50
basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of the LFS and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan initially bore interest, at LFS’s option, at either LIBOR (with a i0.25%
floor) plus i4.0% or a base rate (with a i3.0% floor) plus i1.00%,
subject to a i50 (for LIBOR) or i75 (for base rate) basis point step-down based on the Senior Leverage Ratio.
LFS
was initially required to make principal payments on the Wintrust Term Loan in $i0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026.
In conjunction with the Jake Marshall Transaction, the
Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $i35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $i25 million
senior secured revolving credit facility with a $i5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $i35.5 million
in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended to: (i) permit the Company to undertake the Jake Marshall Transaction, (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), (iii) allow for the Earnout Payments under the Jake Marshall Transaction, and (iv) make other corresponding changes to the A&R Credit Agreement.
The A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either Term SOFR (as defined in the A&R Credit Agreement) (with a i0.15%
floor) plus i3.60%, i3.76% or i3.92%
for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a i3.0% floor) plus i0.50%,
subject to a i50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bears interest,
at LFS’s option, at either Term SOFR (with a i0.15% floor) plus i4.10%, i4.26%
or i4.42% for a tenor of one month, three months or six months, respectively, or a base rate (with a i3.0% floor) plus i1.00%,
subject to a i50 (for Term SOFR) or i75 (for base rate) basis point step-down based on the Senior Leverage Ratio. At September 30,
2022 and 2021, the interest rate in effect on the non-hedged portion of the Wintrust Term Loan was i7.25% and i4.25%,
respectively. For the three and nine months ended September 30, 2022, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of i6.35% and i5.08%,
respectively.
In July 2022, the Company entered into an interest rate swap agreement to manage the risk associated with a portion of its variable-rate long-term debt. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The new swap agreement became effective on July 14, 2022 and will terminate on July 31, 2027. The notional amount of the swap agreement is $i10.0 million
with a fixed interest rate of i3.12%. If the one-month SOFR (as defined in the A&R Credit Agreement) is above the fixed rate, the counterparty pays the Company, and if the one-month SOFR is less the fixed rate, the Company pays the counterparty, the difference between the fixed rate of i3.12%
and one-month SOFR. The Company has not designated this instrument as a hedge for accounting purposes. As a result, the change in fair value of the derivative instrument is recognized directly in earnings on the Company's condensed consolidated statements of operations as a gain or loss on interest rate swap. Refer to Note 8 for further information regarding this interest rate swap.
The A&R Wintrust Term Loan is payable through a combination of (i) monthly installments of approximately $i0.6 million
due on the last business day of each month commencing on December 31, 2021, (ii) annual Excess Cash Flow payments as defined in the A&R Wintrust Credit Agreement, which are due 120 days after the last day of the Company's fiscal year and (iii) Net Claim Proceeds from Legacy Claims as defined in the A&R Wintrust Credit Agreement. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan is due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan matures and becomes due and payable by LFS on February 24, 2026. During the second quarter of
2022, the Company made certain Excess Cash Flow and Net Claim Proceeds payments of $i3.3 million and $i2.1 million,
respectively, which concurrently reduced the outstanding A&R Wintrust Term Loan balance. In addition, during the third quarter of 2022,
the Company made a Net Claim Proceeds payment of $i0.6 million,
which was also applied against the outstanding A&R Wintrust Term Loan balance.
The A&R Wintrust Loans are secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor.
The A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly
described in the A&R Credit Agreement. The A&R Wintrust Loans also contain ithree financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at i2.00
to 1.00, (ii) a fixed charge coverage ratio of not less than i1.20 to 1.00 as of the last day of each fiscal quarter, commencing with the fiscal quarter ending December 31, 2021, and (iii) ino
unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $i4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, i50%
of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business.
On May 5, 2022, the Company, LFS and LHLLC entered into a first amendment and waiver to the A&R Wintrust Credit Agreement (the “First Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The First Amendment to the A&R Wintrust Credit Agreement modifies certain definitions within the A&R Wintrust Credit Agreement, and make other corresponding
changes, including: (i) the definition of “EBITDA” to allow for the recognition of certain restructuring charges and lease breakage costs not previously specified, (ii) the definition of “Excess Cash Flow” to exclude the aggregate amount of the Earnout Payments paid in cash, (iii) the definition of “Total Funded Debt” to exclude certain capitalized lease obligations for real estate based on the approval of each lender and (iv) the definition of “Disposition” to include a clause for the sale and leaseback of certain real property based on the approval of each lender.
On September 28, 2022, the Company, LFS and LHLLC entered into a second amendment and waiver to the amended and restated Wintrust credit agreement (the “Second Amendment to the A&R Wintrust Credit
Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The Second Amendment to the A&R Wintrust Credit Agreement incorporates certain restricted payment provisions, among other things, to permit LFS to repurchase shares under the Company’s Share Repurchase Program (as defined in Note 7).
As of September 30, 2022 and December 31, 2021, the Company had ino borrowings
outstanding under the A&R Wintrust Revolving Loan. During the three and nine months ended September 30, 2022, the maximum outstanding borrowings under the A&R Wintrust Revolving Loan at any time was $i3.5 million and $i9.4 million,
respectively, and the average daily balance was approximately $i0.2 million and $i0.1 million, respectively. For the three and nine
months ended September 30, 2022, the Company incurred interest on the A&R Wintrust Revolving Loan at a weighted average annual interest rate of i5.25% and i4.78%,
respectively.
At September 30, 2022, the Company had irrevocable letters of credit in the amount of $i3.3 million with the lenders under the A&R Wintrust Credit Agreement to secure obligations under its self-insurance program.
The following is a summary of the applicable margin and commitment fees payable on the available A&R Wintrust Term Loan and A&R Wintrust Revolving Loan credit commitment:
Level
Senior
Leverage Ratio
Additional Margin for Prime Rate loans
Additional Margin for Prime Revolving loans
Additional Margin for Eurodollar Term loans
I
Greater than i1.00 to 1.00
i1.00
%
i0.50
%
i0.25
%
II
Less
than or equal to i1.00 to 1.00
i0.25
%
i—
%
i0.25
%
/
As
of September 30, 2022, the Company was in compliance with all financial maintenance covenants as required by the A&R Wintrust Loans.
Sale-Leaseback Financing Transaction
On September 29, 2022, LC LLC and Royal Oak Acquisitions, LLC (the “Purchaser”) consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $i7.8
million (a purchase price of approximately $i5.4 million and $i2.4
million in tenant improvement allowances), pursuant to a purchase agreement under which the Purchaser purchased from LC LLC the Company’s facility and real property in Pontiac, MI (collectively, the “Pontiac Facility”).
In connection with the sale and leaseback transaction, LC LLC and Featherstone St Pontiac MI LLC (the “Landlord”) entered into a Lease Agreement (the “Lease Agreement”), dated September 29, 2022 (the “Lease Effective Date”) for the Pontiac Facility. Commencing on the Lease Effective Date, pursuant to the Lease Agreement, LC LLC has leased the Pontiac Facility, subject to the terms and conditions of the Lease Agreement. The Lease Agreement provides for a term of i25
years (the “Primary Term”). The Lease Agreement also provides LC LLC with the option to extend the Primary Term by itwo separate renewal terms of ifive
years each (each a “Renewal Term”). Under the terms of the Lease Agreement, the Company’s annual minimum rent is $i499,730, payable in monthly installments, subject to annual increases of approximately i2.5%
each year under the Primary Term and for each year under the Renewal Terms, if exercised. LC LLC has a one-time option to terminate the Lease Agreement effective on the last day of the fifteenth lease year by providing written notice to the Landlord as more fully set forth in the Lease Agreement. The one-time termination option of the Lease Agreement would require LC LLC to pay to the Landlord a termination fee of approximately $i1.7 million.
Pursuant to the terms and conditions
set forth in the Lease Agreement, the Landlord has agreed to provide LC LLC with a tenant improvement allowance in an amount up to $i2.4 million. LC LLC is responsible for the initial capital outlay and completion of the agreed upon improvement work. The Landlord will subsequently reimburse LC LLC for such items up to the stated allowance amount.
The Company accounted for the sale and leaseback
arrangement as a financing transaction in accordance with ASC 842, “Leases,” as the Lease Agreement was determined to be a finance lease. The Company concluded the Lease Agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using an implicit rate of i11.11% to reflect the Company’s
incremental borrowing rate associated with the $i5.4 million purchase price as of the Lease Agreement date, compared to the fair value of the Pontiac Facility. The implicit rate associated with the aggregate purchase value, inclusive of tenant improvement allowances, was i6.53%
as of the Lease Agreement date.
The presence of a finance lease indicates that control of the Pontiac Facility has not transferred to the Purchaser and, as such, the transaction was deemed a failed sale-leaseback and must be accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sale proceeds from the Purchaser in the form of a hypothetical loan collateralized by its leased facilities. The hypothetical loan is payable as principal and interest in the form of “lease payments” to the Purchaser. Principal repayments are recorded as a reduction to the financing liability. The Company will not derecognize the Pontiac Facility from its books for accounting purposes until the lease ends.
No gain or loss was recognized under GAAP related to the sale and leaseback arrangement.
As of September 30, 2022, the financing liability was $i4.9 million, net of issuance costs, which was recognized within other long-term debt on the Company's condensed consolidated balance sheet. For the three and nine months ended September 30,
2022, iino/
interest expense associated with the financing was recognized.
Note 7 – iEquity
The Company’s second amended and restated certificate of incorporation currently authorizes the issuance
of i100,000,000 shares of common stock, par value $i0.0001, and i1,000,000
shares of preferred stock, par value $i0.0001.
In conjunction with the Company's
initial public offering, the Company issued Public Warrants, Private Warrants and $i15 Exercise Price Sponsor Warrants. The Company issued certain Merger Warrants and Additional Merger Warrants in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business
Combination”). On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms.
i
The following table summarizes the underlying shares of common stock with respect to outstanding warrants:
(1) Exercisable
for iione/
share of common stock at an exercise price of $ii15.00/
per share (“$ii15/
Exercise Price Sponsor Warrants”).
(2) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company.
(3) Exercisable for iione/
share of common stock at an exercise price of $ii12.50/
per share (“Merger Warrants”).
(4) Issued to the sellers of LHLLC.
/
Incentive Plan
Upon the consummation of the Company's Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) pursuant to which equity awards may be granted thereunder.
On March 9, 2021, the Board of Directors approved certain amendments to the
Company's Omnibus Incentive Plan (the “2021 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by i600,000, for a total of i2,250,000
shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2021 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 16, 2021.
On March 25, 2022, the Board of Directors approved certain additional amendments to the Company's Omnibus Incentive Plan (the “2022 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by i350,000,
for a total of i2,600,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2022 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 22, 2022.
See Note 14 for a discussion of
the Company's management incentive plans for restricted stock units (“RSUs”) granted, vested, forfeited and remaining unvested.
Share Repurchase Program
In September 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”) to repurchase shares of its common stock for an aggregate purchase price not to exceed $i2.0 million.
The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of September 30, 2022, the Company has not made any share repurchases under its Share Repurchase Program.
Employee
Stock Purchase Plan
Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during consecutive subscription periods at a purchase price of i85%
of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to iten percent of the participant's compensation or $i5,000,
whichever is less. Each offering period of the ESPP lasts isix months, commencing on January 1 and July 1 of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing
the i15% discount applied to the fair market value of common stock, is recognized on a straight-line basis over the isix-month
vesting period during which employees perform related services. Under the ESPP, i500,000 shares are authorized to be issued. In January 2022 and July 2022, the Company issued i12,898
and i24,592 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during the offering period ending December 31, 2021 and June 30, 2022, respectively. In January 2021 and July 2021, the Company issued a total of i8,928
and i16,140 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during the offering periods ending December 31, 2020 and June 30, 2021, respectively. As of September 30, 2022, i406,617
shares remain available for future issuance under the ESPP.
2021 Public Offering
On February 10, 2021the Company entered into an underwriting agreement (“Underwriting Agreement”) with Lake Street Capital Markets, LLC (“Underwriter”) relating to an underwritten public offering (the “2021 Public Offering”). On February 12, 2021, the Company sold to the Underwriter i1,783,500
shares of its Common Stock. The Underwriting Agreement provided for purchase and sale of the Shares by the company to the Underwriter at a price of $i11.28 per share. The price to the public in the 2021 Public Offering was $i12.00
per share. In addition, under the terms of the Underwriting Agreement, the Company granted the Underwriter a i30-day option to purchase up to an additional i267,525
shares of Common Stock to cover over-allotments, if any, on the same terms and conditions. The net proceeds to the Company from the 2021 Public Offering after deducting the underwriting discounts and commissions were approximately $i19.8 million. On February 18, 2021, the Company received approximately
$i3.0 million of net proceeds for the sale of i267,525 shares in connection
with the exercise of the over-allotment option.
Note 8 – iFair Value Measurements
i
The
Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
•Level 1 — inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities that are accessible at the measurement date;
•Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and
•Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company believes
that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. The Company also believes that the carrying value of the A&R Wintrust Term Loan approximates its respective fair value due to the variable rate on such debt. As of September 30, 2022, the Company determined that the fair value of the A&R Wintrust Term Loan was $i23.3 million.
Such fair value was determined using discounted estimated future cash flows using level 3 inputs.
Earnout Payments
As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $i3.1 million in contingent consideration, of which the
entire balance was included in other long-term liabilities in the Company’s condensed consolidated balance sheet on the Effective Date. The fair value of contingent Earnout Payments is based on generating growth rates on the projected gross margins of the Acquired Entities and calculating the associated contingent payments based on achieving the earnout targets, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of contingent earnout liability, the Company recorded net increases in the estimated fair value of such liabilities of $i0.4 million
and $i1.2 million for the three and nine months ended September 30, 2022, respectively, which were presented in change in fair value of contingent consideration in the Company's condensed consolidated statements of operations. The
Company has assessed the maximum estimated exposure to the contingent earnout liabilities to be approximately $i4.2 million
at September 30,
2022, of which approximately $i2.7 million was included in accrued expenses and other current liabilities and approximately $i1.5 million
was included in other long-term liabilities.
The Company determines the fair value of the Earnout Payments by utilizing the Monte Carlo Simulation method, which represents a Level 3 measurement. The Monte Carlo Simulation method models the probability of different financial results of the Acquired Entities during the earn-out period, utilizing a discount rate, which reflects a credit spread over the term-adjusted continuous risk-free rate. As of September 30, 2022 and the Effective Date, the Earnout Payments associated with the Jake Marshall Transaction were valued utilizing a discount rate of i10.1%
and i6.83%, respectively. The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the Earnout Payments based on the U.S. Treasury Constant Maturity Yield.
Interest Rate Swap
The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are
no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The fair value of the interest rate contract has been determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The interest rate swap is classified as a Level 2 item within the fair value hierarchy. As of September 30,
2022, the Company determined that the fair value of the interest rate swap was $i0.3 million and is recognized in other assets on the Company's condensed consolidated balance sheets. For the three and nine months ended September 30, 2022, the
Company recognized a gain of $ii0.3/ million
on its condensed consolidated statements of operations associated with the change in fair value of the interest rate swap arrangement.
CB Warrants
Prior to its termination as a result of the 2021 Refinancing, the Company's CB Warrants were determined using the Black-Scholes-Merton option pricing model. The valuation inputs included the quoted price of the Company’s common stock in an active market, volatility and expected life of the warrants, which were considered Level 3 inputs. The CB Warrants liability was included in other long-term liabilities on the Company's Condensed Consolidated Balance Sheets. The
Company remeasured the fair value of the CB Warrants liability as of February 24, 2021 and recorded any adjustments to other income (expense). Prior to its extinguishment, the CB Warrants liability was $i2.0 million. Due to the extinguishment of the CB Warrants on the 2021 Refinancing Date, there was ino
liability associated with the CB Warrants. For the period from January 1, 2021 through the 2021 Refinancing Date, the Company recorded other income of $i14 thousand to reflect the change in the CB Warrants liability.
Note 9 – iEarnings
per Share
Earnings per Share
The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”). Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP and RSUs, all using the treasury stock method.
iThe
following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common shareholders for the three and nine months ended September 30, 2022 and 2021:
The
following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common share:
(1) For
the three and nine months ended September 30, 2022 and 2021, certain MRSU awards (each defined in Note 14) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period.
For interim periods, the provision for income taxes (including federal, state, local and foreign taxes) is calculated based on the estimated annual effective tax rate, adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the
Company makes a cumulative adjustment.
i
The following table presents our income tax provision and our income tax rate for the three and nine months ended September 30, 2022 and 2021.
Three
Months Ended September 30,
Nine Months Ended September 30,
(in thousands, except percentages)
2022
2021
2022
2021
Income tax provision
$
i1,654
$
i1,615
$
i1,275
$
i844
Income
tax rate
i31.2
%
i28.8
%
i29.9
%
i25.7
%
/
The
U.S. federal statutory tax rate was 21% for each of the three and nine months ended September 30, 2022 and 2021. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three and nine months ended September 30, 2022 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items.
As discussed in Note 1, the Company operates in itwo segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors
or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer, Chief Financial Officer and Chief Operating Officer.
The CODM evaluates performance based on income from operations of the respective branches after
the allocation of corporate office operating expenses. In accordance with ASC Topic 280 – Segment Reporting, the Company has elected to aggregate all of the GCR work performed at branches into ione GCR reportable segment and all of the ODR work performed at branches into ione
ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company's corporate department provides general and administrative support services to its itwo operating segments. The CODM allocates costs between segments for selling, general and administrative expenses and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service.
All of the
Company’s identifiable assets are located in the United States, which is where the Company is domiciled. Interest expense is not allocated to segments because of the corporate management of debt service including interest.
iCondensed consolidated segment information for the three and nine months ended September 30, 2022 and 2021
were as follows:
Gain
(loss) on disposition of property and equipment
i150
(i49)
i262
(i41)
Loss
on early termination of operating lease
i—
i—
(i849)
i—
Loss
on early debt extinguishment
i—
i—
i—
(i1,961)
Gain
on change in fair value of interest rate swap
i298
i—
i298
i—
Gain
on change in fair value of warrant liability
i—
i—
i—
i14
Total
unallocated amounts
(i99)
(i473)
(i1,800)
(i4,128)
Income
before income taxes
$
i5,295
$
i5,601
$
i4,266
$
i3,280
Other
Data:
Depreciation and amortization:
GCR
$
i1,049
$
i1,035
$
i3,232
$
i3,091
ODR
i590
i267
i1,757
i967
Corporate
i386
i87
i1,184
i295
Total
other data
$
i2,025
$
i1,389
$
i6,173
$
i4,353
The
Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest.
Note 12 - iiLeases/
The
Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term.
The
Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include ione
or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the
Company uses quoted borrowing rates on its secured debt.
Related Party Lease Agreement. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is i10 years and includes an option to
extend the lease for itwo successive periods of itwo years each through November 2035. Base rent for the term of the lease is $i37,500
per month for the first iifive years/ with payment commencing on January 1, 2022. The fixed rent
payment is escalated to $i45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $i45,000
by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses.
Southern California Sublease. In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of i71,787
square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $i0.6 million per year, which is subject to a i3.0%
annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of September 30, 2022, the Company remains obligated under the original lease for such office space and, in the event the subtenant of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease.
In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned
sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of i16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $i0.8 million
per year, which is subject to a i3.0% annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For the three and nine months ended September 30, 2022, the Company recorded approximately $i0.3 million
and $i0.6 million of income in selling, general and administrative expenses related to this sublease agreement.
Pittsburgh Lease Termination. In March, 2022, the Company entered into a lease termination agreement (the “Lease Termination Agreement”) to terminate, effective March 31, 2022, the lease associated with the
Company’s office space located in Pittsburgh, Pennsylvania, which previously served as its corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in July 2025. Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to pay a termination fee in the aggregate of approximately $i0.7 million
in i16 equal monthly installments commencing on April 1, 2022. The Company recognized the full termination fee expense during the first quarter of 2022.
In connection with the lease termination, the Company recognized a gain of $i0.1 million
associated with the derecognition of the operating lease right-of-use asset and corresponding operating lease liabilities associated with the operating lease and recorded a $i0.1 million loss on the disposal of leasehold improvements and moving expenses.
(1)
Operating lease assets are recorded net of accumulated amortization of $i11.4 million at September 30, 2022 and $i15.9
million at December 31, 2021.
(2) Finance lease vehicle assets are recorded net of accumulated amortization of $i6.3 million at September 30, 2022 and $i5.9
million at December 31, 2021.
(3) Includes approximately $i2.7 million of net property assets associated with the the Company's Pontiac Facility.
(4) Includes approximately $i5.4 million
associated with the Company's sale and leaseback financing transaction. See Note 6 for further detail.
/i
The following table summarizes the lease costs included in the Company's condensed consolidated statements
of operations for the three and nine months ended September 30, 2022 and 2021:
Three Months Ended September 30,
Nine
Months Ended September 30,
(in thousands)
Classification on the Condensed Consolidated Statement of Operations
2022
2021
2022
2021
Operating lease cost
Cost of revenue(1)
$
i654
$
i716
$
i2,005
$
i2,088
Operating
lease cost
Selling, general and administrative(1)
i622
i553
i1,957
i1,724
Finance
lease cost
Amortization
Cost of revenue(2)
i684
i644
i2,020
i1,971
Interest
Interest
expense, net(2)
i68
i72
i200
i236
Total
lease cost
$
i2,028
$
i1,985
$
i6,182
$
i6,019
(1) Operating
lease costs recorded in cost of revenue included $ii0.2/ million of variable lease costs
for each of the three months ended September 30, 2022 and 2021, and $ii0.4/
million for each of the nine months ended September 30, 2022 and 2021. In addition, $i0.2 million and $i0.1
million of variable lease costs are included in selling, general and administrative for each of the three months ended September 30, 2022 and 2021, respectively, and $i0.4 million and $i0.3
million for the nine months ended September 30, 2022 and 2021, respectively. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities.
(2) Finance lease costs recorded in cost of revenue include variable lease costs of $i1.0 million and $i0.7
million for the three months ended September 30, 2022 and 2021, respectively, and $i2.8 million and $i2.0
million for the nine months ended September 30, 2022 and 2021, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges.
Future
minimum commitments for finance and operating leases that have non-cancelable lease terms in excess of one year as of September 30, 2022 were as follows:
Finance
Leases
Operating Leases
Year ending (in thousands):
Vehicles
Pontiac Facility
Total Finance
Non-Related Party
Related Party(1)
Sublease Receipts(2)
Total Operating
Remainder
of 2022
$
i675
$
i42
$
i717
$
i1,052
$
i113
$
(i218)
$
i947
2023
i2,035
i—
i2,035
i3,948
i450
(i885)
i3,513
2024
i1,322
i—
i1,322
i3,259
i450
(i912)
i2,797
2025
i827
i—
i827
i2,745
i450
(i939)
i2,256
2026
i315
i—
i315
i2,625
i450
(i967)
i2,108
Thereafter
i—
i5,351
i5,351
i3,479
i4,815
(i327)
i7,967
Total
minimum lease payments
$
i5,174
$
i5,393
$
i10,567
$
i17,108
$
i6,728
$
(i4,248)
$
i19,588
Amounts
representing interest
i353
i11,676
i12,029
Present
value of net minimum lease payments
$
i5,527
$
i17,069
$
i22,596
(1) Associated
with the aforementioned related party lease entered into with a former member of JMLLC.
(2) Associated with the aforementioned third party sublease.
//
The following is a summary of the lease terms and discount rates:
(1)
Excludes the weighted average lease term and weighted average discount rate associated with the aforementioned sale-leaseback financing transaction, which has a Primary Term of i25 years and utilized an implicit rate of i11.11%.
See Note 6 for further detail.
i
The following is a summary of other information and supplemental cash flow information related to finance and operating leases:
Nine
months ended September 30,
(in thousands)
2022
2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i3,890
$
i3,696
Operating
cash flows from finance leases
i200
i236
Financing
cash flows from finance leases
i2,051
i1,966
Right-of-use
assets exchanged for lease liabilities:
Operating leases
i—
i156
Finance
leases
i2,171
i846
Right-of-use
assets disposed or adjusted modifying operating leases liabilities
i2,396
i47
Right-of-use
assets disposed or adjusted modifying finance leases liabilities
$
(i77)
i—
/
Note
13 – iCommitments and Contingencies
Legal.The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to the condensed consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company.
On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los
Angeles. The complaint alleges that the Company's Southern California operations refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the wrongful failure to honor the proposal, Bernards suffered damages in excess of $i3.0 million, including alleged increased costs for hiring a different subcontractor to perform the work. The
Company is vigorously defending the suit. A non-binding mediation took place on August 19, 2021 that did not result in a settlement. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial date has been set for January 2023. The Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency.
On April 17, 2020, plaintiff, LA Excavating, Inc., filed a complaint against the Company's wholly-owned
subsidiary, Limbach Company LP, and several other parties, in Superior Court of the State of California, for the County of Los Angeles. The complaint sought damages of approximately $i1.0 million for alleged failure to pay contract balances and extra work ordered by Limbach Company LP, as well as sought to enforce payment obligations under a payment bond. In April 2022, the parties settled for an immaterial amount and the case was dismissed.
On
January 26, 2022, claimant, Suffolk Construction Company, Inc. (“Suffolk”) filed a Demand for Arbitration in Massachusetts against Boston Medical Center Corporation (“BMC”) and numerous of Suffolk’s trade subcontractors, including, the Company’s wholly-owned subsidiary, Limbach Company LLC, seeking to recover monies BMC withheld from Suffolk and its subcontractors based on an audit of project billings. Suffolk has demanded the Company defend and indemnify Suffolk against BMC’s audit findings that the Company overbilled the project just over $i0.3 million
and for the Company’s share of BMC’s audit costs, which share has not been, and cannot currently be, quantified. The Company disputes the findings of BMC’s audit and intends to vigorously defend the allegation that it overbilled the project. An arbitration hearing date has been set for February 2023. The Company believes that a loss is neither probable nor reasonably estimable for this matter, and, as such, has not recorded a loss contingency.
Surety. The terms of its construction contracts frequently require that the
Company obtain from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure its payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector
contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of September 30, 2022, the Company had approximately $i115.6
million in surety bonds outstanding. The Surety Bonds are issued by surety companies in return for premiums, which vary depending on the size and type of bond.
Collective Bargaining Agreements. Many of the Company’s craft labor employees are covered by collective bargaining agreements. The agreements require the Company to pay specified wages, provide certain benefits and contribute certain amounts to multi-employer pension plans. If the Company withdraws from any of the multi-employer pension plans or if the plans were to otherwise become underfunded, the Company
could incur additional liabilities related to these plans. Although the Company has been informed that some of the multi-employer pension plans to which it contributes have been classified as “critical” status, the Company is not currently aware of any significant liabilities related to this issue.
Self-insurance. The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles the Company absorbs under its insurance arrangements for these risks. The
Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $i250,000 per occurrence and a $i4.4
million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is determined by establishing a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheet. The non-current portion of the liability is
included in other long-term liabilities on the consolidated balance sheet.
The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets
as a current liability in accrued expenses and other current liabilities.
Current liability — workers’ compensation and general liability
$
i133
$
i184
Current
liability — medical and dental
i479
i456
Non-current
liability
i321
i451
Total
liability
$
i933
$
i1,091
Restricted
cash
$
i113
$
i113
/
The
restricted cash balance represents an imprest cash balance set aside for the funding of workers' compensation and general liability insurance claims. This amount is replenished either when depleted or at the beginning of each month.
Note 14 – iManagement Incentive Plans
The
Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose of: (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan, provides that the
Company may grant options, stock appreciation rights, restricted shares, RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing.
Following the approval of the 2022 Amended and Restated Omnibus Incentive Plan, the Company will reserve i2,600,000 shares
of its common stock for issuance. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only.
Service-Based Awards
The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over ithree
years and in the case of certain awards to non-employee directors, ione year. The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant.
i
The
following table summarizes the Company's service-based RSU activity for the nine months ended September 30, 2022:
The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from izero
to i150% of the target shares awarded, based upon the Company’s performance
compared to the metrics. The metrics used for the grant
are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a ithree year period.
The Company recognizes stock-based compensation expense
for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. For the three months ended September 30, 2022 and 2021, the Company recognized $i0.3
million and $i0.2 million, respectively, of stock-based compensation expense related to outstanding PRSUs. For the nine months ended September 30, 2022 and 2021, the Company recognized $i0.7
million and $i0.6 million, respectively, of stock-based compensation expense related to outstanding PRSUs.
The
vesting of the MRSUs is contingent upon the Company’s closing price of a share of the Company's common stock on the Nasdaq Capital market, or such other applicable principal securities exchange or quotation system, achieving at least $i18.00 over a period of eighty (i80)
consecutive trading days during the ithree-year period commencing on August 1, 2018 and concluding on July 31, 2021. On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved an amendment to extend the measurement period to July
16, 2022. These awards expired on July 16, 2022 as the MRSU award conditions were not achieved.
Total recognized stock-based compensation expense amounted to $i0.8 million and $i2.0
million for the three and nine months ended September 30, 2022, respectively, and $i0.7 million and $i2.0 million for the three and nine
months ended September 30, 2021. The aggregate fair value as of the vest date of RSUs that vested during the nine months ended September 30, 2022 and 2021 was $i1.1 million and $i1.4 million,
respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting was $i3.3 million at September 30, 2022. These costs are expected to be recognized over a weighted average period of i1.68
years.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our management’s expectations. See “Cautionary Note Regarding Forward Looking Statements” contained above in this Quarterly Report on Form 10-Q. We assume no obligation to update any of these forward-looking statements.
Unless the context otherwise requires, a reference to a “Note” herein refers to the accompanying Notes to Condensed Consolidated Financial Statements (Unaudited) contained in Part I, "Item 1. Financial Statements."
Overview
The
Company is an integrated building systems solutions firm whose expertise is in the design, modular prefabrication, installation, management and maintenance of HVAC, mechanical, electrical, plumbing and control systems for commercial, institutional and light industrial markets. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast, Midwest, and Southwestern regions of the United States. In February 2022, the Company announced its strategic decision to wind down its Southern California GCR and ODR operations. The decision was made to better align the Company’s customer geographic focus and to reduce losses related to unprofitable locations. The
Company expects to fully exit the Southern California Region in 2022.
The Company’s market sectors primarily include the following:
•Healthcare, including research, acute care and inpatient hospitals for regional and national hospital groups, and pharmaceutical and biotech laboratories and manufacturing facilities;
•Education, including both public and private colleges, universities, research centers and K-12 facilities;
•Sports and entertainment, including sports arenas, entertainment facilities (including casinos) and amusement rides;
•Infrastructure,
including passenger terminals and maintenance facilities for rail and airports;
•Government, including various facilities for federal, state and local agencies;
•Hospitality, including hotels and resorts;
•Commercial, including office building, warehouse and distribution centers and other commercial structures;
•Mission critical facilities, including data centers; and
•Industrial manufacturing facilities, including indoor grow farms and automotive, energy and general manufacturing plants.
The
Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically
less than two years.
Key Components of Condensed Consolidated Statements of Operations
Revenue
The Company generates revenue principally from fixed-price construction contracts to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of the Company's contracts generally ranges from six months to two years. Revenue from fixed price
contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials service contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts.
The Company generally invoices customers on a monthly basis based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings are recorded as a contract liability until the related revenue is recognizable.
Cost
of Revenue
Cost of revenue primarily consists of the labor, equipment, material, subcontract, and other job costs in connection with fulfilling the terms of our contracts. Labor costs consist of wages plus taxes, fringe benefits, and insurance. Equipment costs consist of the ownership and operating costs of company-owned assets, in addition to outside-rented equipment. If applicable, job costs include estimated contract losses to be incurred in future periods. Due to the varied nature of the Company's services, and the risks associated therewith, contract costs as a percentage
of contract revenue have historically fluctuated and it expects this fluctuation to continue in future periods.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses consist primarily of personnel costs for its administrative, estimating, human resources, safety, information technology, legal, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, legal and other professional fees and other corporate expenses to support the growth of the Company's business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information
technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Change in fair value of contingent consideration
The change in fair value of contingent consideration relates to the remeasurement of the contingent consideration arrangement resulting from the Jake Marshall Transaction. As a part of the total consideration for the Jake Marshall Transaction, the Company initially recognized $3.1 million in contingent consideration associated with the Earnout Payments. The carrying value of the Earnout Payments is subject to remeasurement at fair value at each reporting date through the end of the Earnout Periods with any changes in the fair
value reported as a separate component of operating income in the condensed consolidated statements of operations.
Amortization of Intangibles
Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets primarily including favorable leasehold interests and certain customer relationships in the ODR segment. As a result of the Jake Marshall Transaction, the Company recognized, in the aggregate, an additional $5.7 million of intangible assets associated with customer relationships with third-party customers, the acquired trade name and acquired backlog. The Jake Marshall-related intangible assets were recorded under the acquisition method of accounting at their estimated fair values at the acquisition date.
Other
(Expenses) Income
Other (expenses) income consists primarily of interest expense incurred in connection with the Company's debt, net of interest income, a loss associated with the early termination of an operating lease, a loss on early debt extinguishment, losses associated with the disposition of property and equipment, changes in fair value of interest rate swaps and changes in fair value of warrant liability. Deferred financing costs are amortized to interest expense using the effective interest method.
Provision for Income Taxes
The Company is taxed as a C corporation and its financial results include the effects of federal income taxes which will be paid at the parent
level.
For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 – Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes.
The Company manages and measures the performance of its business in two operating segments: GCR and ODR. These segments are reflective of how the Company’s CODM reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer, Chief Financial Officer and Chief Operating Officer.
The CODM evaluates performance based on income from operations of the respective branches after the allocation of corporate office
operating expenses. In accordance with ASC Topic 280 – Segment Reporting, the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation. The Company's corporate department provides general and administrative support services to its two operating segments. The Company allocates costs between segments for selling, general and administrative and depreciation expense. Interest expense is not allocated to segments because of the corporate management of debt service. See Note 11 for
further discussion on the Company's operating segments.
Comparison of Results of Operations for the three months ended September 30, 2022 and 2021
The following table presents operating results for the three months ended September 30, 2022 and 2021 in dollars and expressed as a percentage
of total revenue (except as indicated below), as compared below:
Revenue for the three months ended September 30, 2022 decreased by $6.8 million compared to the three months ended September 30, 2021. GCR revenue decreased by $27.3 million, or 30.3%, while ODR revenue increased by $20.5 million, or 52.2%. The decrease in period over period
GCR segment revenue was primarily due to revenue declines in the New England, Mid-Atlantic, Michigan, Southern California and Orlando operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. In addition, in February 2022, the Company announced its strategic decision to wind down its Southern California operations. The Company expects to fully exit the Southern California Region in 2022. For the three months ended September 30,
2022, GCR and ODR revenue decreased $3.2 million and $0.9 million, respectively, as a result of the Company's announced wind down of its Southern California operations. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. For the three months ended September 30, 2022, GCR and ODR segment revenue increased by $8.0 million and $10.2 million, respectively, as a result of revenue generated by the Acquired Entities in the Jake Marshall Transaction. See Note 3 for further information on the Jake Marshall Transaction.
In addition, during the third quarter of 2022, the
Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods.
Total gross profit as a percentage of consolidated total revenue
20.3
%
18.9
%
The
Company's gross profit for the three months ended September 30, 2022 increased by $0.4 million compared to the three months ended September 30, 2021. GCR gross profit decreased $3.1 million, or 24.4%, primarily due to lower revenue despite higher margins. ODR gross profit increased $3.5 million, or 29.9%, due to an increase in revenue, despite lower margins driven by project mix and timing. The total gross profit percentage increased from 18.9% for the three months ended September 30, 2021 to 20.3% for the same period ended in 2022, mainly driven by the mix of higher margin ODR segment work.
The Company recorded revisions in its contract
estimates for certain GCR and ODR projects. During the three months ended September 30, 2022, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $0.5 million or more. During the three months ended September 30, 2021, the Company recorded material gross profit write-downs on two GCR projects for a total of $1.1 million and a gross profit write-up on one GCR project for a total of $0.6 million that had a net gross profit impact of $0.5 million or more.
Total selling, general and administrative as a percentage of consolidated total revenue
15.3
%
14.2
%
The
Company's SG&A expense for the three months ended September 30, 2022 increased by approximately $0.4 million compared to the three months ended September 30, 2021. The increase in SG&A was primarily due to a $1.2 million increase associated with costs incurred by the Acquired Entities in the Jake Marshall Transaction, partially offset by a $0.7 million decrease in payroll related expenses and a $0.2 million decrease in rent related expenses. Additionally, SG&A as a percentage of revenue were 15.3% for the three months ended September 30, 2022 and 14.2% for the three months ended September 30, 2021.
Change in Fair Value of Contingent Consideration
The change in fair value
of the Earnout Payments contingent consideration was a $0.4 million loss for the three months ended September 30, 2022. The increase to the contingent liability was primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of September 30, 2022.
Total
amortization expense for the three months ended September 30, 2022 was $0.4 million as compared to $0.1 million for the three months ended September 30, 2021. As a result of the Jake Marshall Transaction, the Company acquired certain intangible assets in which the Company recognized approximately $0.3 million of amortization expense for the three months ended September 30, 2022. See Note 5 for further information on the Company's intangible assets.
Gain (loss) on disposition of property and equipment
150
(49)
199
(406.1)
%
Gain
on change in fair value of interest rate swap
298
—
298
100.0
%
Total
other expenses
$
(99)
$
(473)
$
374
(79.1)
%
Total other expenses for the three months ended September 30, 2022 was $0.1 million as compared to $0.5 million for the three months ended September 30, 2021. The decrease in total other expense was primarily driven by a $0.3 million gain on the change
in fair value of the Company's interest rate swap transaction, which was entered in during the third quarter of 2022 in order to manage the risk associated with a portion of its variable-rate long-term debt.
The Company recorded a $1.7 million and $1.6 million income tax provision for the three months ended September 30, 2022 and September 30,
2021, respectively. The effective tax rate was 31.2% and 28.8% for the three months ended September 30, 2022 and 2021, respectively. The U.S. federal statutory tax rate was 21% for the three months ended September 30, 2022 and 2021. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the three months ended September 30, 2022 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items.
Comparison of Results of Operations for the nine months ended September 30,
2022 and 2021
The following table presents operating results for the nine months ended September 30, 2022 and 2021 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared below:
Revenue for the nine months ended September 30, 2022 decreased by $10.2 million compared to the nine months ended September 30, 2021. GCR revenue decreased by $61.4 million, or 23.4%, while ODR revenue increased by $51.1 million, or 50.5%. The decrease in period over period
GCR segment revenue was primarily due to revenue declines in the Michigan, Mid-Atlantic, New England, Southern California, Orlando and Eastern Pennsylvania operating regions. The Company continued to focus on improving project execution and profitability by pursuing GCR opportunities that were smaller in size, shorter in duration, and where the Company can leverage its captive design and engineering services. In addition, in February 2022, the Company announced its strategic decision to wind down its Southern California operations. The Company expects to fully exit the Southern California Region in 2022. For the nine months ended
September 30, 2022, GCR and ODR revenue decreased $7.5 million and $2.3 million, respectively, as a result of the Company's announced wind down of its Southern California operations. The increase in period over period ODR segment revenue was primarily due to the Company's continued focus on the accelerated growth of its ODR business. For the nine months ended September 30, 2022, GCR and ODR segment revenue increased by $16.9 million and $25.8 million, respectively, as a result of revenue generated by the Acquired Entities in the Jake Marshall Transaction. See Note 3 for further information on the Jake Marshall Transaction.
In addition, during the nine months
ended September 30, 2022, the Company was impacted by supply chain issues delaying equipment delivery, which resulted in revenue being pushed to future periods.
Total gross profit as a percentage of consolidated total revenue
18.3
%
16.6
%
The
Company's gross profit for the nine months ended September 30, 2022 increased by $4.1 million compared to the nine months ended September 30, 2021. GCR gross profit decreased $4.3 million, or 14.0%, primarily due to lower revenue despite higher margins. ODR gross profit increased $8.5 million, or 28.8%, due to an increase in revenue despite lower margins driven by project mix and timing. The total gross profit percentage increased from 16.6% for the nine months ended September 30, 2021 to 18.3% for the same period ended in 2022, mainly driven by the mix of higher margin ODR segment work as well as a gross profit write-up of $1.3 million related to a settlement of a prior claim.
The Company
recorded revisions in its contract estimates for certain GCR and ODR projects. During the nine months ended September 30, 2022, the Company recorded material gross profit write-ups on two GCR projects for a total of $2.0 million and gross profit write-downs for a total of $1.1 million on two GCR projects, each having a net gross profit impact of $0.5 million or more. During the nine months ended September 30, 2021, the Company recorded material gross profit write-downs on five GCR projects for a total of $4.0 million and a gross profit write-up of $0.7 million on one GCR project, each having a net gross profit
impact of $0.5 million or more.
Total selling, general and administrative as a percentage of consolidated total revenue
15.9
%
14.5
%
The
Company's SG&A expense for the nine months ended September 30, 2022 increased by approximately $3.4 million compared to the nine months ended September 30, 2021. The increase in SG&A was primarily due to a $3.4 million increase associated with costs incurred by the Acquired Entities in the Jake Marshall Transaction and a $1.0 million increase in travel and entertainment expense, partially offset by a decrease of $0.6 million associated with payroll related expenses and a $0.3 million decrease in rent related expenses, coupled with other various immaterial decreases to SG&A. Additionally, SG&A as a percentage of revenue were 15.9% for the nine months ended September 30, 2022 and 14.5% for the nine months ended September 30, 2021.
Change
in Fair Value of Contingent Consideration
The change in fair value of the Earnout Payments contingent consideration was a $1.2 million loss for the nine months ended September 30, 2022. The increase to the contingent liability was primarily attributable to the timing component and probability of meeting the gross profit margins associated with the contingent consideration arrangement as of September 30, 2022.
Total
amortization expense for the nine months ended September 30, 2022 was $1.2 million as compared to $0.3 million for the nine months ended September 30, 2021. As a result of the Jake Marshall Transaction, the Company acquired certain intangible assets in which the Company recognized approximately $0.9 million of amortization expense for the nine months ended September 30, 2022. See Note 5 for further information on the Company's intangible assets.
Other (expenses) income
consisted of interest expense of $1.5 million for the nine months ended September 30, 2022 as compared to $2.1 million for the nine months ended September 30, 2021. The reduction in interest expense period over period was due to the refinancing of the higher interest rate debt with a lower interest rate debt instrument as a result of the 2021 Refinancing and the A&R Wintrust Agreement. The decrease in other expenses period over period was also attributable to a prior year loss of $2.0 million on the early extinguishment of debt associated with the Company's 2021 Refinancing and a $0.3 million gain on the change in fair value of the Company's interest rate swap transaction, which was entered in
during the third quarter of 2022 in order to manage the risk associated with a portion of its variable-rate long-term debt. During the nine months ended September 30, 2022, the Company recognized a $0.8 million loss as a result of the early termination of its Pittsburgh operating lease. See Note 12 for further information.
Income Taxes
The Company recorded a $1.3 million and $0.8 million income tax provision for the nine months ended September 30, 2022 and 2021, respectively. The effective tax rate was 29.9% and 25.7% for the nine months ended September 30,
2022 and 2021, respectively. The U.S. federal statutory tax rate was 21% for the nine months ended September 30, 2022 and 2021. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate for the nine months ended September 30, 2022 was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items.
GCR and ODR Backlog Information
The
Company refers to its estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue it had recognized under such contracts, as “backlog.” Backlog includes unexercised contract options. The Company's backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between the
Company's backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from the Company's remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer. Additional information related to the Company's remaining performance obligations
is provided in Note 4.
Given the multi-year duration of many of the Company's contracts, revenue from backlog is expected to be earned over a period that will extend beyond one year. The Company's GCR backlog as of September 30, 2022 was $332.8 million compared to $337.2 million at December 31, 2021. In addition, ODR backlog as of September 30, 2022 was $124.5 million compared to $98.0 million at December 31, 2021. Of the total backlog at September 30,
2022, the Company expects to recognize approximately $140.9 million by the end of 2022.
COVID-19 and Market Update
In March 2020, the World Health Organization declared the outbreak of the coronavirus disease 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown, impacts to global supply chains, and the possibility of a continued economic recession. In limited instances, during fiscal 2020, the Company faced disruptions due to the COVID-19 pandemic as certain
projects chose to shutdown work irrespective of the existence or applicability of government action. In most markets, construction is considered an essential business and the Company continued to staff its projects and perform work during fiscal 2020 and into 2021, and most of the projects that were in progress at the time shutdowns commenced were restarted.
As new variants of the virus emerge, the Company remains cautious as many factors remain unpredictable. The Company actively monitors and responds to the changing conditions created by the pandemic, with focus on prioritizing the health and safety of the
Company’s employees, dedicating resources to support the Company’s communities, and innovating to address the Company’s customers’ needs. During 2021, the Company faced impacts of both the Delta and Omicron variants, with disruptions to the Company’s workforce, which impacted revenue.
Although the Company continues to recover from the financial impacts of the COVID-19 pandemic and related government orders implemented to mitigate it, the broader and longer-term implications the pandemic has on
the global economy continue to develop. Economic disruptions, including supply chain, production, and other logistical issues, as well as escalating commodity prices, have and may continue to negatively impact our business. For example, we are experiencing lead times significantly in excess of normal levels while also experiencing the effects of inflation through increases in fuel, material, and other commodity prices. These disruptions have escalated in 2022 and have manifested themselves most notably through project delays and reduced labor productivity and efficiency, particularly within our GCR segment. In response to these challenges, the Company continues to strive to more effectively manage its business through enhanced labor planning and project scheduling, increased pricing to the extent contractually permitted, and by leveraging the
Company's relationships with its suppliers and customers. However, the impact of these disruptions continue to evolve and the conflict in Ukraine has added
another layer of uncertainty, as described in Item “1A. Risk Factors” in the Company's most recent Annual Report on Form 10-K filed with the SEC on March 16, 2022 and within “Item 1A. Risk Factors” in this Form 10-Q. There can be no assurance that the
Company's actions will serve to mitigate such impacts in future periods. Further, while the Company believes its remaining performance obligations are firm, and its customers have not provided the Company with indications that they no longer wish to proceed with planned projects, prolonged delays in the receipt of critical equipment could result in the Company's customers seeking to terminate existing or pending agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations.
The Company continues to monitor
developments involving our workforce, customers, suppliers and vendors and take steps to mitigate against additional impacts, but given the unprecedented and evolving nature of these circumstances, it cannot predict the full extent of the impact that the economic disruptions caused by COVID-19 will have on the Company's operating results, financial condition and liquidity.
Seasonality, Cyclicality and Quarterly Trends
Severe weather can impact the Company’s operations. In the northern climates where it operates, and to a lesser extent the southern climates as well, severe winters can slow the
Company’s productivity on construction projects, which shifts revenue and gross profit recognition to a later period. The Company’s maintenance operations may also be impacted by mild or severe weather. Mild weather tends to reduce demand for its maintenance services, whereas severe weather may increase the demand for its maintenance and spot services. The Company’s operations also experience mild cyclicality, as building owners typically work through maintenance and capital projects at an increased level during the third and fourth calendar quarters of each year.
Effect of Inflation and Tariffs
The
prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and increases. It is difficult to accurately measure the impact of inflation, tariffs and price escalation due to the imprecise nature of the estimates required. However, these effects are, at times, material to our results of operations and financial condition. During fiscal year 2021 and throughout 2022, we have experienced higher cost of materials on specific projects and delays in our supply chain for equipment and service vehicles from the manufacturers, and we expect these higher costs and delays in our supply chain to persist through the remainder of 2022. When appropriate, we include cost escalation factors into our bids and proposals, as well as limit the acceptance time of our bid. In addition, we are often able to mitigate the impact of future price increases by entering into fixed price purchase orders for materials and equipment and subcontracts on
our projects. Notwithstanding these efforts, if we experience significant disruptions to our supply chain, we may need to delay certain projects that would otherwise be accretive to our business and this may also impact the conversion rate of our current backlog into revenue.
Liquidity and Capital Resources
Cash Flows
The Company's liquidity needs relate primarily to the provision of working capital (defined as current assets less current liabilities) to support operations, funding of capital expenditures, and investment in strategic opportunities. Historically, liquidity has been provided by operating activities and borrowings from commercial
banks and institutional lenders.
Net increase (decrease) in cash, cash equivalents and restricted cash
$
13,943
$
(8,845)
Noncash
investing and financing transactions:
Right of use assets obtained in exchange for new operating lease liabilities
$
—
$
156
Right of use assets obtained in exchange for new finance lease liabilities
2,171
846
Right
of use assets disposed or adjusted modifying operating lease liabilities
2,396
47
Right of use assets disposed or adjusted modifying finance lease liabilities
(77)
—
Interest paid
1,425
2,138
Cash
paid for income taxes
$
768
$
2,096
The Company's cash flows are primarily impacted period to period by fluctuations in working capital. Factors such as the Company's contract mix, commercial terms, days sales outstanding (“DSO”) and delays in the start of projects may impact the Company's
working capital. In line with industry practice, the Company accumulates costs during a given month then bills those costs in the current month for many of its contracts. While labor costs associated with these contracts are paid weekly and salary costs associated with the contracts are paid bi-weekly, certain subcontractor costs are generally not paid until the Company receives payment from its customers (contractual “pay-if-paid” terms). The
Company has not historically experienced a large volume of write-offs related to its receivables and contract assets. The Company regularly assesses its receivables for collectability and provides allowances for doubtful accounts where appropriate. The Company believes that its reserves for doubtful accounts are appropriate as of September 30, 2022 and December 31, 2021, but adverse changes in the economic environment may impact certain of its customers’ ability to access capital and compensate the Company for its services,
as well as impact project activity for the foreseeable future.
The Company's existing current backlog is projected to provide substantial coverage of forecasted GCR revenue for one year from the date of the financial statement issuance. The Company's current cash balance, together with cash it expects to generate from future operations along with borrowings available under its credit facility, are expected to be sufficient to finance its short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial
markets, the Company currently believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months.
The following table represents our summarized working capital information:
(1) Current ratio is calculated by dividing current assets by current liabilities.
As discussed above and in Note 6, as of September 30, 2022, the Company was in compliance with all financial maintenance covenants as required by its credit facility.
Cash Flows (Used in) Provided by Operating Activities
The following is a summary of the significant sources (uses) of cash from operating
activities:
Net cash provided by (used in) operating activities
$
22,980
$
(16,781)
$
39,761
(1)Represents non-cash activity associated
with depreciation and amortization, provision for doubtful accounts, stock-based compensation expense, operating lease expense, amortization of debt issuance costs, deferred income tax provision, (gain) loss on sale of property and equipment, loss on early debt extinguishment, loss on early termination of operating lease, changes in fair value of contingent consideration and changes in the fair value of warrant liabilities.
During the nine months ended September 30, 2022, the Company generated $23.0 million in cash from its operating activities, which consisted of cash provided by working capital of $7.8 million and non-cash adjustments of $12.2 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense, loss on early termination of an operating
lease and the change in fair value of contingent consideration) and net income for the period of $3.0 million. During the nine months ended September 30, 2021, the Company used $16.8 million from its operating activities, which consisted of cash used in working capital of $31.5 million, partially offset by non-cash adjustments of $12.3 million (primarily depreciation and amortization, stock-based compensation expense, operating lease expense and a loss on early debt extinguishment) and net income of $2.4 million.
The increase in operating cash flows during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to a $49.1 million
cash inflow period-over-period related to the aggregate change in our contract assets and liabilities. These cash inflows were partially offset by a $9.2 million period-over-period cash outflow related to the change in accounts receivable and a $4.2 million change in accounts payable, including retainage. The increase in our overbilled position was due to the timing of contract billings and the recognition of contract revenue. The cash outflows associated with our accounts receivable and accounts payable was due to the timing of cash receipts and payments, respectively.
Cash Flows Used in Investing Activities
Cash
flows used in investing activities were $0.3 million for both the nine months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022 and 2021, $0.7 million was used to purchase property and equipment, offset by $0.4 million in proceeds from the sale of property and equipment.
The majority of our cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements.
Cash Flows (Used in) Provided by Financing Activities
Cash flows used in financing activities were $8.8 million
for the nine months ended September 30, 2022 compared to cash flows provided by financing activities of $8.2 million for the nine months ended September 30, 2021. For the nine months
ended September 30, 2022, the Company made principal payments of $11.6 million, consisting of monthly installment payments of $0.6 million, an Excess Cash Flow payment of $3.3 million and total Net
Claim Proceeds payments of $2.7 million, payments on the A&R Wintrust Revolving Loan of $15.2 million, payments of $2.1 million on finance leases, $0.4 million in taxes related to net share settlement of equity awards and $0.4 million in payments for debt issuance costs. These financing cash outflows were partly offset by $15.2 million in proceeds from borrowings under the A&R Wintrust Revolving Loan, $5.4 million in proceeds from the sale-leaseback financing transaction and $0.3 million associated with proceeds from contributions to the ESPP.
For the nine months ended September 30, 2021, we received proceeds from the following: $22.8 million, net of fees and expenses, in conjunction with our common stock offering in February 2021, $2.0 million from the exercise of warrants and $30.0 million in connection with the refinancing of the 2019 Refinancing Term Loan with the
Wintrust Loans. These proceeds were offset by the $39.0 million payment in full of the 2019 Refinancing Term Loan and associated $1.4 million prepayment penalty and other extinguishment costs, $3.5 million in scheduled principal payments on the Wintrust Term Loan, a $2.0 million for payments on finance leases, $0.4 million in taxes related to net share settlement of equity awards and $0.6 million for payments related to debt issuance costs related to the Wintrust Term Loan and Revolver.
The following table reflects our available funding capacity, subject to covenant restrictions, as of September 30, 2022:
(in
thousands)
Cash & cash equivalents
$
28,419
Credit agreement:
A&R Wintrust Revolving Loan
$
25,000
Outstanding
borrowings on the A&R Wintrust Revolving Loan
—
Outstanding letters of credit
(3,300)
Net credit agreement capacity available
21,700
Total available funding capacity
$
50,119
Cash
Flow Summary
Management continued to devote additional resources to its billing and collection efforts during the nine months ended September 30, 2022. Management continues to expect that growth in its ODR business, which is less sensitive to the cash flow issues presented by large GCR projects, will positively impact our cash flow trends.
Provided that the Company’s lenders continue to provide working capital funding, the Company believes based on its current reforecast that our current cash and cash equivalents of $28.4 million as of September 30, 2022, cash payments to be received from existing and new customers,
and availability of borrowing under the A&R Wintrust Revolving Loan (pursuant to which we had $21.7 million of availability as of September 30, 2022) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
Debt and Related Obligations
Long-term debt consists of the following obligations as of:
A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, (commencing in December 2021) plus interest through February 2026
23,310
34,881
A&R Wintrust Revolving Loan
—
—
Finance leases – collateralized by vehicles, payable in monthly installments of principal,
plus interest ranging from 3.96% to 6.45% through 2026
5,174
5,132
Financing liability
5,393
—
Total debt
33,877
40,013
Less - Current portion of long-term debt
(9,719)
(9,879)
Less
- Unamortized discount and debt issuance costs
(685)
(318)
Long-term debt
$
23,473
$
29,816
On the 2021 Refinancing Date, the Company refinanced its 2019 Refinancing Term Loan and 2019 Revolving Credit Facility with proceeds from the issuance of the Wintrust Term Loan. As a result of the 2021 Refinancing, the
Company prepaid all
principal, interest, fees and other obligations outstanding under the 2019 Refinancing Agreements and terminated its 2019 Refinancing Term Loan and 2019 Refinancing Revolving Credit Facility. In addition, on the 2021 Refinancing Date, the Company recognized a loss on the early extinguishment of debt of $2.0 million, which consisted of the write-off of $2.6 million of unamortized discount and financing costs, the reversal of the $2.0 million CB warrants liability and the prepayment penalty and other
extinguishment costs of $1.4 million.
In conjunction with the Jake Marshall Transaction, the Company entered into the A&R Wintrust Credit Agreement. In accordance with the terms of the A&R Wintrust Credit Agreement, Lenders provided to LFS (i) a $35.5 million senior secured term loan; and (ii) a $25 million senior secured revolving credit facility with a $5 million sublimit for the issuance of letters of credit. The overall A&R Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $35.5 million in connection with the A&R Wintrust Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended to: permit the
Company to undertake the Jake Marshall Transaction, make certain adjustments to the covenants under the A&R Wintrust Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), allow for the Earnout Payments under the Jake Marshall Transaction and make other corresponding changes to the A&R Wintrust Credit Agreement.
See Note6 for further discussion.
Sale-Leaseback Financing Transaction
On September 29, 2022, LC LLC and the Purchaser consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $7.8 million (a purchase price of approximately $5.4 million and $2.4 million in tenant improvement allowances), pursuant to a purchase
agreement under which the Purchaser purchased from LC LLC the Pontiac Facility. In connection with the sale and leaseback transaction, LC LLC and the Landlord entered into the Lease Agreement for the Pontiac Facility. The Company accounted for the sale and leaseback arrangement as a financing transaction in accordance with ASC 842, “Leases,” as the Lease Agreement was determined to be a finance lease. See Note6 for further discussion.
Surety Bonding
In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional
measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds we provide typically reflect the contract value. As of September 30, 2022 and December 31, 2021, the Company
had approximately $115.6 million and $159.2 million in surety bonds outstanding, respectively. In January 2022, our bonding capacity was increased from $700.0 million to $800.0 million. We believe that our $800.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. See Note 13 for further discussion.
Insurance and Self-Insurance
We purchase workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims
and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The non-current portion of the liability is included in other long-term liabilities on the Condensed Consolidated Balance Sheets.
We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims
incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as a current liability in accrued expenses and other current liabilities. See Note 13 for further discussion.
We participate in approximately 40 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union
employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in these MEPPs, we are responsible with the other participating employers for any plan underfunding. Our contributions to a particular MEPP are established by the applicable CBAs; however, required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions. Assets contributed to the MEPPs by us may be used to provide
benefits to employees of other participating employers. If a participating employer stops contributing to an MEPP, the unfunded obligations of the MEPP may be borne by the remaining participating employers.
An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to an increase in a company’s contribution rate as a signatory to the applicable CBA, or changes to the benefits paid to retirees. In addition, the PPA requires that a 5.0% surcharge be levied on employer contributions for the first year commencing shortly after the date the employer receives notice that the MEPP is in critical status and a 10.0% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP.
We could also be obligated to make payments to MEPPs if we either cease to have an obligation
to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce the number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial condition, results of operations or liquidity.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); therefore, pursuant to Item 301(c) of Regulation S-K, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation as
of September 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that our Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
See Note 13 for information regarding legal proceedings.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
The
conflict in Ukraine could have an adverse effect on our business, results of operations, financial condition, and cash flow in the future.
The ongoing conflict in the Ukraine raises a host of potential risk factors to consider even though the Company does not conduct business in the Ukraine or Russia. Recent sanctions brought against Russia will impact the import, export, sale, and supply of goods and services with companies located in the U.S. and other regions. This will likely have a negative impact on the global economy and affect economic and capital markets. A downturn in the economy caused by these measures could result in a reduction in our revenue.
In light of the above described sanctions, we are aware of the possibilities of increased cyber-attacks. The U.S. Cyber-security and Infrastructure
Security Agency (“CISA”) has recently issued a warning of the risk of Russian cyber-attacks on U.S. networks and critical infrastructure. While we do not currently believe that we are a likely target of a cyber-attack, we continue to be diligent in our controls over our information technology, systems and data. If we do fall victim to such attack, it could have an adverse effect on our business operations.
Our operations and financial results are subject to various other risks and uncertainties that could adversely affect our business, financial condition, results of operations, and trading price of our common stock. Please refer to our Annual Report on Form 10-K filed with the SEC on March 16, 2022 for further information concerning other risks and uncertainties that could negatively impact us.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
