Item 1. Financial Statements
LIMBACH HOLDINGS, INC.
Condensed Consolidated Balance Sheets
|
|
Successor
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
(
in thousands, except share data
)
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
685
|
|
|
$
|
7,406
|
|
Restricted cash
|
|
|
113
|
|
|
|
113
|
|
Accounts receivable, net
|
|
|
102,509
|
|
|
|
113,972
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
30,119
|
|
|
|
31,959
|
|
Other current assets
|
|
|
3,941
|
|
|
|
1,733
|
|
Total current assets
|
|
|
137,367
|
|
|
|
155,183
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $5.9 million and $2.6 million at June 30, 2017 and December 31, 2016, respectively
|
|
|
17,438
|
|
|
|
18,541
|
|
Intangible assets, net
|
|
|
15,783
|
|
|
|
17,807
|
|
Goodwill
|
|
|
10,488
|
|
|
|
10,488
|
|
Deferred tax asset
|
|
|
4,947
|
|
|
|
4,268
|
|
Other assets
|
|
|
527
|
|
|
|
588
|
|
Total assets
|
|
$
|
186,550
|
|
|
$
|
206,875
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
5,390
|
|
|
$
|
4,476
|
|
Accounts payable, including retainage
|
|
|
45,833
|
|
|
|
57,034
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
30,203
|
|
|
|
39,190
|
|
Accrued expenses and other current liabilities
|
|
|
28,819
|
|
|
|
26,029
|
|
Total current liabilities
|
|
|
110,245
|
|
|
|
126,729
|
|
Long-term debt
|
|
|
18,110
|
|
|
|
21,507
|
|
Other long-term liabilities
|
|
|
914
|
|
|
|
817
|
|
Total liabilities
|
|
|
129,269
|
|
|
|
149,053
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
Redeemable convertible preferred stock, net, par value $0.0001, 1,000,000 shares authorized, 400,000 issued and outstanding at June 30, 2017 and December 31, 2016, respectively ($10,780 and $10,365 redemption value at June 30, 2017 and December 31, 2016, respectively)
|
|
|
10,860
|
|
|
|
10,374
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value; 100,000,000 shares authorized, 7,454,602 issued and outstanding at June 30, 2017 and 7,454,491 at December 31, 2016
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
55,162
|
|
|
|
55,162
|
|
Accumulated deficit
|
|
|
(8,742
|
)
|
|
|
(7,715
|
)
|
Total stockholders’ equity
|
|
|
46,421
|
|
|
|
47,448
|
|
Total liabilities and stockholders’ equity
|
|
$
|
186,550
|
|
|
$
|
206,875
|
|
The Accompanying Notes are an Integral Part
of these Condensed Consolidated Financial Statements
LIMBACH HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
(
in thousands, except share and per share data
)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
117,838
|
|
|
$
|
96,648
|
|
|
$
|
233,028
|
|
|
$
|
194,467
|
|
Cost of revenue
|
|
|
102,300
|
|
|
|
83,462
|
|
|
|
203,722
|
|
|
|
169,140
|
|
Gross profit
|
|
|
15,538
|
|
|
|
13,186
|
|
|
|
29,306
|
|
|
|
25,327
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
12,787
|
|
|
|
10,277
|
|
|
|
27,353
|
|
|
|
20,118
|
|
Amortization of intangibles
|
|
|
1,016
|
|
|
|
-
|
|
|
|
2,024
|
|
|
|
-
|
|
Total operating expenses
|
|
|
13,803
|
|
|
|
10,277
|
|
|
|
29,377
|
|
|
|
20,118
|
|
Operating income (loss)
|
|
|
1,735
|
|
|
|
2,909
|
|
|
|
(71
|
)
|
|
|
5,209
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(563
|
)
|
|
|
(884
|
)
|
|
|
(1,017
|
)
|
|
|
(1,719
|
)
|
Loss on disposition of property and equipment
|
|
|
(99
|
)
|
|
|
(7
|
)
|
|
|
(136
|
)
|
|
|
(3
|
)
|
Total other expenses
|
|
|
(662
|
)
|
|
|
(891
|
)
|
|
|
(1,153
|
)
|
|
|
(1,722
|
)
|
Income (loss) before income taxes
|
|
|
1,073
|
|
|
|
2,018
|
|
|
|
(1,224
|
)
|
|
|
3,487
|
|
Income tax (expense) benefit
|
|
|
(404
|
)
|
|
|
-
|
|
|
|
679
|
|
|
|
-
|
|
Net income (loss)
|
|
|
669
|
|
|
|
2,018
|
|
|
|
(545
|
)
|
|
|
3,487
|
|
Dividends on cumulative redeemable convertible preferred stock
|
|
|
244
|
|
|
|
-
|
|
|
|
482
|
|
|
|
-
|
|
Net income (loss) attributable to Limbach Holdings, Inc. common stockholders
|
|
$
|
425
|
|
|
|
|
|
|
$
|
(1,027
|
)
|
|
|
|
|
Net income attributable to Limbach Holdings LLC member unit holders
|
|
|
|
|
|
$
|
2,018
|
|
|
|
|
|
|
$
|
3,487
|
|
Successor Earnings Per Share (“EPS”)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share for common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Limbach common stockholders
|
|
$
|
0.06
|
|
|
|
|
|
|
$
|
(0.14
|
)
|
|
|
|
|
Diluted earnings (loss) per share for common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Limbach common stockholders
|
|
$
|
0.05
|
|
|
|
|
|
|
$
|
(0.14
|
)
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,454,564
|
|
|
|
|
|
|
|
7,454,528
|
|
|
|
|
|
Diluted
|
|
|
7,795,484
|
|
|
|
|
|
|
|
7,454,528
|
|
|
|
|
|
The Accompanying Notes are an Integral Part
of these Condensed Consolidated Financial Statements
LIMBACH HOLDINGS, INC.
(Successor)
Condensed Consolidated Statement of Stockholders’
Equity
(Unaudited)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share amounts)
|
|
Number of
shares
outstanding
|
|
|
Par value
amount
|
|
|
Additional
paid-in
capital
|
|
|
Accumulated
deficit
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
7,454,491
|
|
|
$
|
1
|
|
|
$
|
55,162
|
|
|
$
|
(7,715
|
)
|
|
$
|
47,448
|
|
Dividends on redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(482
|
)
|
|
|
(482
|
)
|
Exercise of warrants
|
|
|
111
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(545
|
)
|
|
|
(545
|
)
|
Balance at June 30, 2017
|
|
|
7,454,602
|
|
|
$
|
1
|
|
|
$
|
55,162
|
|
|
$
|
(8,742
|
)
|
|
$
|
46,421
|
|
The Accompanying Notes are an Integral Part
of these Condensed Consolidated Financial Statements
LIMBACH HOLDINGS, INC.
Condensed Consolidated Statements of Cash
Flows
(Unaudited)
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Six months ended June 30,
|
|
(
in thousands
)
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(545
|
)
|
|
$
|
3,487
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,359
|
|
|
|
1,433
|
|
Allowance for doubtful accounts
|
|
|
245
|
|
|
|
48
|
|
Capitalized deferred interest on subordinated debt
|
|
|
-
|
|
|
|
1,234
|
|
Amortization of debt issuance costs
|
|
|
90
|
|
|
|
-
|
|
Deferred tax benefit
|
|
|
(679
|
)
|
|
|
-
|
|
Accretion of preferred stock discount to redemption value
|
|
|
4
|
|
|
|
-
|
|
(Gain) loss on disposition of property and equipment
|
|
|
136
|
|
|
|
3
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
11,218
|
|
|
|
(6,813
|
)
|
(Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
1,840
|
|
|
|
(2,439
|
)
|
(Increase) decrease in other current assets
|
|
|
(72
|
)
|
|
|
(493
|
)
|
(Increase) decrease in other assets
|
|
|
-
|
|
|
|
(39
|
)
|
Increase (decrease) in accounts payable
|
|
|
(11,201
|
)
|
|
|
(3,006
|
)
|
Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(8,987
|
)
|
|
|
9,814
|
|
Increase (decrease) in accrued expenses and other current liabilities
|
|
|
2,789
|
|
|
|
(2,389
|
)
|
Increase (decrease) in other long-term liabilities
|
|
|
97
|
|
|
|
245
|
|
Net cash provided by operating activities
|
|
|
294
|
|
|
|
1,085
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
7
|
|
|
|
7
|
|
Purchase of property and equipment
|
|
|
(1,656
|
)
|
|
|
(1,662
|
)
|
Net cash used in investing activities
|
|
|
(1,649
|
)
|
|
|
(1,655
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
-
|
|
|
|
55,611
|
|
Payments on revolving credit facility
|
|
|
-
|
|
|
|
(57,611
|
)
|
Payments on Credit Agreement term loan
|
|
|
(3,365
|
)
|
|
|
-
|
|
Proceeds from Credit Agreement revolver
|
|
|
44,553
|
|
|
|
-
|
|
Payments on Credit Agreement revolver
|
|
|
(44,553
|
)
|
|
|
-
|
|
Payments on term loan
|
|
|
(33
|
)
|
|
|
(1,038
|
)
|
Payments on financed insurance premium
|
|
|
(1,164
|
)
|
|
|
-
|
|
Payments of distributions
|
|
|
-
|
|
|
|
(162
|
)
|
Payments on capital leases
|
|
|
(804
|
)
|
|
|
(650
|
)
|
Net cash used in financing activities
|
|
|
(5,366
|
)
|
|
|
(3,850
|
)
|
Decrease in cash and cash equivalents
|
|
|
(6,721
|
)
|
|
|
(4,420
|
)
|
Cash and cash equivalents, beginning of period – Limbach Holdings, Inc.
|
|
|
7,406
|
|
|
|
-
|
|
Cash and cash equivalents, beginning of period – Limbach Holdings LLC
|
|
|
-
|
|
|
|
6,107
|
|
Cash and cash equivalents, end of period
|
|
$
|
685
|
|
|
$
|
1,687
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Noncash investing and financing transactions:
|
|
|
|
|
|
|
|
|
Property and equipment acquired financed with capital leases
|
|
$
|
718
|
|
|
$
|
873
|
|
Financed insurance premium
|
|
$
|
2,135
|
|
|
$
|
-
|
|
Interest paid
|
|
$
|
927
|
|
|
$
|
512
|
|
During the Successor period for the six months
ended June 30, 2017, the Company recorded redeemable convertible preferred stock dividends totaling $0.5 million.
The Accompanying Notes are an Integral Part
of these Condensed Consolidated Financial Statements
LIMBACH HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 — Organization and Plan of Business Operations
Limbach Holdings, Inc. (the “Company”
or “Successor”), formerly known as 1347 Capital Corp. (“1347 Capital”), is a Delaware corporation headquartered
in Pittsburgh, Pennsylvania. The Company’s Condensed Consolidated Financial Statements include the accounts of Limbach Holdings,
Inc. and its wholly owned subsidiaries, including Limbach Holdings LLC (“LHLLC”), Limbach Facility Services LLC, Limbach
Company LLC, Limbach Company LP, Harper Limbach LLC and Harper Limbach Construction LLC.
The Company was originally incorporated as
a special purpose acquisition company, formed for the purpose of effecting a merger, equity interest exchange, asset acquisition,
stock purchase, reorganization or similar business combination with one or more businesses. On July 20, 2016, the Company consummated
a business combination (“Business Combination”) with LHLLC pursuant to the agreement and plan of merger dated as of
March 23, 2016, by and among 1347 Capital Corp. (now Limbach Holdings, Inc.), LHLLC and F
d
G HVAC LLC (“F
d
G”),
as stockholders’ representative (the “Merger Agreement”). In connection with the closing of the Business Combination,
the Company changed its name from 1347 Capital Corp. to Limbach Holdings, Inc. See Note 4 – Business Combination for further
discussion.
We operate our business in two segments,
(i) Construction, in which we generally manage large construction or renovation projects that involve primarily HVAC, plumbing
and electrical services, and (ii) Service, in which we provide maintenance or service primarily on HVAC, plumbing or electrical
systems. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods
of typically less than two years. The Company's customers operate in several different industries, including healthcare, education,
government, commercial, manufacturing, entertainment, and leisure. The Company operates primarily in the Northeast, Mid-Atlantic,
Southeast, Midwest, and Southwestern regions of the United States.
Emerging Growth Company
Section 102(b)(1) of the JOBS Act exempts emerging
growth companies from being required to comply with new or revised financial accounting standards until private companies (that
is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered
under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that
a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth
companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period
which means that when a standard is issued or revised and it has different application dates for public or private companies, the
Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised
standard. This may make comparison of Company’s financial statements with another public company which is neither an emerging
growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible
because of the potential differences in accounting standards used.
Note 2 — Significant Accounting Policies
Basis of Presentation
Predecessor and Successor Financial Statements
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with instructions to the Quarterly Report on 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 generally accepted accounting principles in the United States of America (“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 our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).
The Condensed Consolidated Financial Statements and certain note
presentations separate the Company’s presentations into two distinct periods, the period up to and including the Business
Combination closing date (labeled “Predecessor”) and the period after that date (labeled “Successor”),
to indicate the application of different bases of accounting between the periods presented. The accompanying Condensed Consolidated
Financial Statements include a black line division which indicates that the Predecessor and Successor reporting entities shown
are not comparable. The period presented from January 1, 2017 through June 30, 2017 and at December 31, 2016 are the “Successor”
periods. The period presented from January 1, 2016 through June 30, 2016 is the “Predecessor” period.
Unaudited Interim Financial Information
The accompanying interim Condensed Consolidated
Balance Sheet as of June 30, 2017, the Condensed Consolidated Statements of Operations, Condensed Consolidated Statement of Stockholders’
Equity and the Condensed Consolidated Statements of Cash Flows for the periods presented are unaudited. Also, within the notes
to the Condensed Consolidated Financial Statements, we have included unaudited information for these interim periods. These unaudited
interim Condensed Consolidated Financial Statements have been prepared in accordance with GAAP.
In our opinion, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only of a normal recurring nature) necessary for a fair statement
of the Company’s financial position as of June 30, 2017, and its results of operations and its cash flows for the three and
six months ended June 30, 2017 (Successor) and June 30, 2016 (Predecessor). The results for the three and six months ended June
30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017.
The Successor Condensed Consolidated Balance
Sheet as of December 31, 2016 was derived from audited financial statements, but does not contain all of the footnote disclosures
from the annual financial statements.
Revenues and Cost Recognition
Revenues from fixed price and modified fixed
price contracts are recognized on the percentage-of-completion method, measured by the relationship of total cost incurred to total
estimated contract costs (cost-to-cost method). Revenues from time and materials contracts are recognized as services are performed.
Contract revenue for long-term construction contracts is based upon management's estimate of contract values at completion, including
revenue for additional work on which the contract value has not been finalized (claims) but is considered probable. Changes in
job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final
contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions
are determined. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are
determined.
Contract costs include direct labor, material,
and subcontractor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs,
depreciation, and insurance. Total estimated contract costs are based upon management's current estimate of total costs at completion.
The Company recognizes revenues from its service
segment contracts as these services are performed. There are two basic types of service contracts: fixed price service contracts
which are signed in advance for maintenance, repair, and retrofit work over a period of typically one year, and service contracts
not signed in advance for similar maintenance, repair, and retrofit work performed on an as-needed basis. Fixed price service contracts
are generally performed evenly over the contract period, and accordingly, revenue is recognized on a pro rata basis over the life
of the contract. Revenues derived from other service contracts are recognized when the services are performed. Expenses related
to all service contracts are recognized as services are provided.
Costs and estimated earnings in excess of billings
on uncompleted contracts reflected in the consolidated balance sheets arise when revenues have been recognized but the amounts
cannot be billed under the terms of the contracts. Also included in costs and estimated earnings on uncompleted contracts are amounts
the Company seeks or will seek to collect from customers or others for errors or changes in contract specifications or design,
contract change orders in dispute or unapproved as to scope and price, or other customer-related causes of unanticipated additional
contract costs (claims and unapproved change orders). Such amounts are recorded at estimated net realizable value when realization
is probable and can be reasonably estimated. No profit is recognized on the construction costs incurred in connection with claim
amounts. Claims and unapproved change orders made by the Company may involve negotiation and, in rare cases, litigation. Unapproved
change orders and claims also involve the use of estimates, and it is reasonably possible that revisions to the estimated recoverable
amounts of recorded claims and unapproved change orders may be made in the near term. Claims against the Company are recognized
when a loss is considered probable and amounts are reasonably determinable. Billings in excess of costs and estimated earnings
on uncompleted contracts represent billings in excess of revenues recognized.
In accordance with industry practice, we classify
as current all assets and liabilities relating to the performance of contracts. The terms of our contracts generally range from
six months to two years.
Selling, general, and administrative costs
are charged to expense as incurred. Bidding and proposal costs are also recognized as an expense in the period in which such amounts
are incurred.
Note 3 – Accounting Standards
Recent Accounting Pronouncements
The effective dates shown in the following
pronouncements are private company effective dates, based upon the Company’s election to conform to private company effective
dates based on the relief provided to Emerging Growth Companies (“EGC”) under the JOBS Act.
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with
Customers—Topic 606,” which supersedes the revenue recognition requirements in FASB Accounting Standard Codification
(“ASC”) 605. The new guidance established principles for reporting revenue and cash flows arising from an entity’s
contracts with customers. This new revenue recognition standard will replace most of the recognition guidance within GAAP. This
guidance was deferred by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, issued
by the FASB in August 2015, which deferred the effective date of ASU 2014-09 from annual and interim periods beginning after December
15, 2017 to annual and interim periods beginning after December 15, 2018. In March 2016, the FASB issued ASU 2016-08, Revenue
from Contracts with Customers: Principal versus Agent Considerations, which further clarifies the implementation guidance in ASU
2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing, to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In
May 2016, the FASB issued ASU 2016-12, Revenues from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,
which amends the guidance in the new revenue standard on collectability, noncash consideration, presentation of sales tax, and
transition. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional
practical expedients to reduce the cost and complexity of applying the new revenue standard. The guidance can be applied on a
full retrospective or modified retrospective basis whereby the entity records a cumulative effect of initially applying this update
at the date of initial application. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements
to Topic 606, Revenue from Contracts with Customers” intended to clarify the codification or to correct unintended application
of guidance which clarifies the definition of loan guarantee fees, what should be considered in contract costs impairment testing,
a requirement that provisions for losses on construction-type and production-type contracts be determined at the least at the
contract level, exclusion of insurance contracts from scope, specific disclosures regarding remaining performance obligations,
disclosure of prior-period performance obligations and gives an example of contract modifications. These standards are effective
for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Earlier application
is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within
that reporting period. The Company has not yet commenced its analysis of this standard or selected the basis on which it will
be applied, and therefore cannot estimate the impact of its adoption on the Condensed Consolidated Financial Statements. Beginning
in the third quarter of 2017, we will commence a process to evaluate the impact of the new pronouncement on our contracts, including
identifying potential differences that would result from applying the requirements of the new guidance. We will also review our
various types of revenue arrangements, draft accounting policies and evaluate the new disclosure requirements on our business
processes, controls and systems.
In February 2016, FASB issued ASU No. 2016-02,
“Leases (Topic 842),” ASU 2016-02 provides an approach for classifying leases as either finance leases or operating
leases. For either classification, a right-of-use asset and a lease liability will be required to be recognized, unless the term
of the lease is one year or less. The guidance is required to be applied using a modified retrospective approach which includes
optional practical expedients. It is effective for annual periods beginning after December 15, 2019, and for interim periods within
fiscal years beginning after December 15, 2020. Earlier application is permitted. The Company has not yet commenced its analysis
of this standard and therefore cannot estimate the impact of its adoption on the Condensed Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09,
“Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting” to simplify accounting
for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity
or liabilities and classification on the statement of cash flows. The guidance is effective for financial statements issued for
annual periods beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018.
The Company is currently evaluating this standard to determine the impact of its adoption on the Condensed Consolidated Financial
Statements.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments” to address diversity in practice
in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective
for financial statements issued for annual periods beginning after December 15, 2018, and for interim periods within fiscal years
beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts
the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that
interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments should
be applied using a retrospective transition method to each period presented. The Company is currently evaluating this standard
to determine the impact of its adoption on the Condensed Consolidated Financial Statements.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows: Restricted Cash” to address diversity in practice in the classification and presentation
of changes in restricted cash on the statement of cash flows. The guidance is effective for financial statements issued for annual
periods beginning after December 15, 2018, and for interim periods beginning after December 15, 2019. Early adoption is permitted,
including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should
be reflected as of the beginning of the year that includes that interim period. The Company is currently evaluating this standard
to determine the impact on the Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a Business” to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a screen to
determine when a set of assets and activities is not a business. If the screen is not met, the amendments require further consideration
of inputs, substantive processes and outputs to determine whether the transaction is an acquisition of a business. This guidance
is effective for financial statements issued for annual periods beginning after December 15, 2018, and for interim periods within
annual periods beginning after December 15, 2019. The amendments in this update are to be applied prospectively on or after the
effective date. The Company is currently evaluating this standard to determine the impact on its Consolidated Financial Statements.
Also, in January 2017, the FASB issued ASU
2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments–Equity Method and Joint Ventures (Topic
323)” which applies to ASU 2014-09 and ASU 2016-02 and provides an SEC staff view that a Company evaluate ASUs not yet adopted
to determine the appropriate financial statement disclosures about the potential material impacts of those ASUs on the financial
statements when adopted in a future period according to Staff Accounting Bulletin (“SAB”) Topic 11.M. If the Company
does not know or cannot reasonably estimate the impact that adoption of the ASU is expected to have on the financial statements,
a statement should be made to that effect and additional qualitative financial statement disclosures should be made to assist the
financial statement reader in assessing the significance of the impact that the standard will have on the financial statements
when adopted. This guidance was effective upon issuance and has been adopted.
In January 2017, the FASB issued ASU 2017-04,
“Intangibles–Goodwill and Other - Simplifying the Test for Goodwill Impairment” to address the cost and complexity
of the goodwill impairment test which resulted in the elimination of Step 2 from the goodwill impairment test. Step 2 measured
a goodwill impairment loss by comparing the implied fair value of goodwill by assigning fair value of a reporting unit to all of
its assets and liabilities as if that reporting unit had been acquired in a business combination. Rather, the Company would be
required to do its annual and interim goodwill impairment tests by comparing the fair value of the reporting unit with its carrying
amount and to recognize an impairment charge for the amount by which the carrying amount is greater than the reporting unit’s
fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Income tax effects measuring the goodwill
impairment loss, if applicable, from any tax deductible goodwill on the carrying amount on the reporting unit should also be considered.
The guidance is effective for financial statements issued for its annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The amendments in this Update are to be applied on a prospective basis along with a disclosure of
the nature and reason for the change in accounting principle upon initial adoption. The Company is currently evaluating this standard
to determine the impact on the Consolidated Financial Statements.
Note 4 – Business Combination
On July 20, 2016, pursuant to the Merger Agreement,
a wholly owned subsidiary of the Company merged with and into LHLLC in a transaction accounted for as a business combination. Following
this transaction, 1347 Capital changed its name to Limbach Holdings, Inc.
LHLLC’s equity holders and option holders
received consideration comprised of (a) $32.4 million in cash, (b) 2,200,005 shares of Company common stock with a fair value of
$17.5 million, (c) 666,670 merger warrants, each exercisable for one share of Company common stock at an exercise price of $12.50
per share with a fair value of $0.5 million, and (d) 1,000,006 additional warrants, each exercisable for one share of Company common
stock at an exercise price of $11.50 per share, with a fair value of $0.6 million. Certain of the shares and warrants are subject
to lockup agreements and securities law restrictions. Additional cash totaling $0.6 million in excess of fair value was paid to
LHLLC (Predecessor) Class C Unit Option holders, resulting in share-based compensation expense to Limbach Holdings, Inc. (Successor)
of $0.6 million for the period from July 20, 2016 through December 31, 2016. Total cash paid, including the additional share-based
compensation, was $33.0 million.
As part of the consideration in the Business
Combination, the Company issued shares of common stock to LHLLC’s equity holders pursuant to an effective registration statement
and Merger Warrants (as defined below) and Additional Merger Warrants (as defined below) pursuant to a private placement under
Section 4(a)(2) of the Securities Act of 1933, as amended (“Securities Act”). Securities Act restrictions on the resale
of such securities constitute a security-specific restriction under fair value guidance; therefore, a price adjustment to the fair
value is appropriate for affiliates of the Company who own in excess of 10% of the outstanding securities. Fair value determinations
for the securities used as consideration are valued at market prices, unless they have a security-specific restriction. Fair value
determination for securities with security-specific restrictions under federal securities laws incorporate a price adjustment to
the market price.
The final valuations of assets acquired and
liabilities assumed were:
|
|
As of
|
|
(in thousands)
|
|
July 20, 2016
|
|
Cash and cash equivalents
|
|
$
|
238
|
|
Restricted cash
|
|
|
63
|
|
Accounts receivable
|
|
|
80,930
|
|
Property and equipment
|
|
|
20,990
|
|
Intangible assets
|
|
|
20,910
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
38,215
|
|
Other current assets
|
|
|
2,272
|
|
Other assets
|
|
|
130
|
|
Advances to and equity in joint ventures, net
|
|
|
6
|
|
Deferred tax assets
|
|
|
380
|
|
Total assets acquired
|
|
|
164,134
|
|
Accounts payable, including retainage
|
|
|
35,596
|
|
Accrued expenses and other current liabilities
|
|
|
26,507
|
|
Billings in excess of costs on and estimated earnings on uncompleted contracts
|
|
|
30,068
|
|
Long-term debt
|
|
|
30,858
|
|
Other long term liabilities
|
|
|
645
|
|
Total liabilities assumed
|
|
|
123,674
|
|
Net assets acquired
|
|
$
|
40,460
|
|
Note 5 – Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable and the allowance for uncollectible
accounts are comprised of the following:
|
|
Successor
|
|
(
in thousands
)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Accounts receivable – trade
|
|
$
|
78,673
|
|
|
$
|
90,296
|
|
Retainage
|
|
|
24,090
|
|
|
|
23,868
|
|
Allowance for doubtful accounts
|
|
|
(254
|
)
|
|
|
(192
|
)
|
Accounts receivable, net of allowance for doubtful accounts
|
|
$
|
102,509
|
|
|
$
|
113,972
|
|
Note 6 – Contracts in
Progress
|
|
Successor
|
|
(
in thousands
)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Revenue earned on uncompleted contracts
|
|
$
|
578,861
|
|
|
$
|
532,549
|
|
Less: Billings to date
|
|
|
(578,945
|
)
|
|
|
(539,780
|
)
|
Net overbilling
|
|
$
|
(84
|
)
|
|
|
(7,231
|
)
|
|
|
|
|
|
|
|
|
|
The above is reflected in the accompanying condensed consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billing on uncompleted contracts
|
|
|
30,119
|
|
|
|
31,959
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(30,203
|
)
|
|
|
(39,190
|
)
|
Net overbilling
|
|
$
|
(84
|
)
|
|
$
|
(7,231
|
)
|
Accounts payable includes retainage due to
subcontractors totaling $9.2 million and $8.9 million as of June 30, 2017 and December 31, 2016, respectively.
The Company has asserted claims and may have
unapproved change orders on certain construction projects. These occur typically as a result of scope changes and project delays.
Management evaluates these items and estimates the recoverable amounts. If significant, these recoverability estimates are evaluated
to determine the net realizable value. If additional amounts are recovered, additional contract revenue would be recognized.
Note 7 – Intangibles
Goodwill was $10.5 million at June 30, 2017
(Successor) and December 31, 2016 (Successor). There has been no change in the carrying amount of the trade name since December
31, 2016 (Successor).
Intangible assets, excluding goodwill, are comprised of the following:
|
|
Successor
|
|
(in thousands)
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net intangible
assets, excluding
goodwill
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog – Construction
|
|
$
|
4,830
|
|
|
$
|
(3,276
|
)
|
|
$
|
1,554
|
|
Backlog – Service
|
|
|
880
|
|
|
|
(834
|
)
|
|
|
46
|
|
Customer Relationships - Service
|
|
|
4,710
|
|
|
|
(952
|
)
|
|
|
3,758
|
|
Favorable Leasehold Interests
|
|
|
530
|
|
|
|
(65
|
)
|
|
|
465
|
|
Total amortized intangible assets
|
|
|
10,950
|
|
|
|
(5,127
|
)
|
|
|
5,823
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
|
9,960
|
|
|
|
—
|
|
|
|
9,960
|
|
Total unamortized intangible assets
|
|
|
9,960
|
|
|
|
—
|
|
|
|
9,960
|
|
Total amortized and unamortized assets, excluding goodwill
|
|
$
|
20,910
|
|
|
$
|
(5,127
|
)
|
|
$
|
15,783
|
|
|
|
Successor
|
|
(in thousands)
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net intangible
assets, excluding
goodwill
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog – Construction
|
|
$
|
4,830
|
|
|
$
|
(2,222
|
)
|
|
$
|
2,608
|
|
Backlog – Service
|
|
|
880
|
|
|
|
(398
|
)
|
|
|
482
|
|
Customer Relationships - Service
|
|
|
4,710
|
|
|
|
(452
|
)
|
|
|
4,258
|
|
Favorable Leasehold Interests
|
|
|
530
|
|
|
|
(31
|
)
|
|
|
499
|
|
Total amortized intangible assets
|
|
|
10,950
|
|
|
|
(3,103
|
)
|
|
|
7,847
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
|
9,960
|
|
|
|
—
|
|
|
|
9,960
|
|
Total unamortized intangible assets
|
|
|
9,960
|
|
|
|
—
|
|
|
|
9,960
|
|
Total amortized and unamortized assets, excluding goodwill
|
|
$
|
20,910
|
|
|
$
|
(3,103
|
)
|
|
$
|
17,807
|
|
Total amortization expense for these amortizable
intangible assets was $2.0 million for the six months ended June 30, 2017 (Successor). There were no intangible assets in the Predecessor
period, and accordingly, there was no amortization expense. The Company did not recognize any impairment charges related to definite
and indefinite-lived intangible assets during the Successor period for the six months ended June 30, 2017.
Note 8 – Debt
Long-term debt consists of the following obligations
as of:
|
|
Successor
|
|
(in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Credit Agreement – revolver (Successor)
|
|
$
|
-
|
|
|
$
|
-
|
|
Credit Agreement – term loan payable in quarterly installments of principal, plus interest through 2021
|
|
|
19,135
|
|
|
|
22,500
|
|
Casualty insurance premium financing
|
|
|
971
|
|
|
|
-
|
|
State of Ohio loan- payable in monthly installments of principal, plus interest at 3% through 2017
|
|
|
-
|
|
|
|
33
|
|
Capital leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 4.9% to 5.3% through 2021
|
|
|
3,633
|
|
|
|
3,719
|
|
Total debt
|
|
|
23,739
|
|
|
|
26,252
|
|
Less - Current portion
|
|
|
(5,390
|
)
|
|
|
(4,476
|
)
|
Less - Debt issuance costs
|
|
|
(239
|
)
|
|
|
(269
|
)
|
Long-term debt
|
|
$
|
18,110
|
|
|
$
|
21,507
|
|
Successor
Senior Credit Facility
In conjunction with the completion of the Business
Combination, all amounts outstanding under LHLLC’s prior senior credit facility were paid in full and a subsidiary of the
Company, Limbach Facility Services LLC (“LFS”), entered into a new senior credit facility with multiple lenders (the
“Credit Agreement”). The new senior credit facility consists of a $25.0 million revolving line of credit and a $24.0
million term loan, both with a maturity date of July 20, 2021. It is collateralized by substantially all assets of LFS and its
subsidiaries. Principal payments of $750,000 on the term loan are due quarterly commencing with the calendar quarter ended September
30, 2016, and ending with the calendar quarter ending June 30, 2018. Principal payments of $900,000 are due at the end of subsequent
quarters through maturity of the loan, with any remaining amounts due at maturity. During June 2017, the Company voluntarily made
an additional principal payment of $1,865,000 on its term loan. Outstanding borrowings on both the term loan and the revolving
line of credit bear interest at either the Base Rate (as defined in the Credit Agreement) or LIBOR (as defined in the Credit Agreement),
plus the applicable additional margin, payable monthly. At June 30, 2017, the interest rate in effect on the term loan was 4.80%.
The Credit Agreement includes restrictions
on, among other things and subject to certain exceptions, the Company and its subsidiaries’ ability to incur additional indebtedness,
pay dividends or make other distributions, redeem or purchase capital stock, make investments and loans and enter into certain
transactions, including selling assets, engaging in mergers or acquisitions and entering into transactions with affiliates.
The Credit Agreement requires that the Company
comply with certain financial performance covenants including total leverage, senior leverage, fixed charges and tangible net worth.
As of June 30, 2017, the Company was in compliance with these covenants under the Credit Agreement. Mandatory prepayments are required
upon the occurrence of certain events, including, among other things and subject to certain exceptions, equity issuances, changes
of control of the Company, certain debt issuances, assets sales and excess cash flow. Commencing with the fiscal year ending December
31, 2017, the Company will be required to remit an amount equal to 50% of its excess cash flow (as defined in the Credit Agreement),
which percentage will be reduced based on the Senior Leverage Ratio (as defined therein). The Company may voluntarily prepay the
loans at any time subject to the limitations set forth in the Credit Agreement.
The equity interests of the Company’s
subsidiaries have been pledged as security for the obligations under the Credit Agreement. The Credit Agreement includes customary
events of default, including, among other items, payment defaults, cross-defaults to other indebtedness, a change of control default
and events of default with respect to certain material agreements. Additionally, with respect to the Company, an event of default
occurs if the Company’s securities cease to be registered with the SEC pursuant to Section 12(b) of the Securities and Exchange
Act of 1934, as amended (the “Exchange Act”). In case of an event of default, the administrative agent would be entitled
to, among other things, accelerated payment of amounts due under the new senior credit facility, foreclose on the equity of the
Company’s subsidiaries, and exercise all rights of a secured creditor on behalf of the lenders.
The additional margin applied to both the revolver
and term loan is determined based on levels achieved under the Company’s Senior Leverage Ratio covenant, which reflects the
ratio of indebtedness divided by EBITDA for the most recently ended four quarters.
The following is a summary of the additional
margin and commitment fees payable on the available revolving credit commitment:
Level
|
|
Senior Leverage Ratio
|
|
Additional Margin for
Base Rate loans
|
|
|
Additional Margin for
Libor Rate loans
|
|
|
Commitment Fee
|
|
I
|
|
Greater than or equal to 2.50 to 1.00
|
|
|
3.00
|
%
|
|
|
4.00
|
%
|
|
|
0.50
|
%
|
II
|
|
Less than 2.50 to 1.00, but greater than or equal to 2.00 to 1.00
|
|
|
2.75
|
%
|
|
|
3.75
|
%
|
|
|
0.50
|
%
|
III
|
|
Less than 2.00 to 1.00, but greater than or equal to 1.50 to 1.00
|
|
|
2.50
|
%
|
|
|
3.50
|
%
|
|
|
0.50
|
%
|
IV
|
|
Less than 1.50 to 1.00
|
|
|
2.25
|
%
|
|
|
3.25
|
%
|
|
|
0.50
|
%
|
During the six months ended June 30, 2017,
the Company drew down and repaid a total of $44.6 million on its revolving credit facility. The Company had $20.8 million of availability
under its revolving credit facility at June 30, 2017.
Subordinated Debt
In conjunction with the completion of the Business
Combination, the Company’s prior subordinated debt was paid in full and LFS entered into a new subordinated debt agreement.
The new subordinated debt agreement consisted of a $13.0 million loan with a maturity date of July 20, 2022 (the “Subordinated
Loan”). Principal payments were not required prior to maturity. Outstanding borrowings bore interest at 16.0%, with 13.0%
payable quarterly in cash, and the Company had the option either to pay the remaining 3.0% in cash or have it deferred and capitalized
into the Subordinated Loan balance. On December 21, 2016, the Company repaid all amounts outstanding under the Subordinated
Loan Agreement in full settlement thereof, including deferred interest and prepayment penalties, totaling $15.3 million, with the
proceeds of the Company’s public offering of 1,405,500 shares of its common stock at a price of $13.50 per share.
Predecessor
Senior Credit Facility
The Predecessor had a senior credit facility
with a single lender. The revolving credit facility permitted borrowings up to $30.0 million. In January 2016, the credit facility
was increased to $35.0 million and the maturity date was extended to May 2018. It was collateralized by substantially all of the
Company’s assets except for real property. The credit facility contained certain restrictive covenants, which, among other
things, required the Company to maintain certain financial ratios. The credit facility also contained cross-default provisions
related to the subordinated debt facility and the underwriting agreement with the Company’s surety. In January 2016, the
term loan was converted into a “draw term” loan facility and the amount of the facility was increased to $7.5 million,
of which $5.5 million was available to be drawn in increments not to exceed $2.0 million.
A commitment fee was payable on the average
daily unused amount of the senior credit facility. The fee was 0.4% of the unused amount.
Note 9 – Equity
Successor
The Company’s second amended and restated
certificate of incorporation currently authorizes the issuance of 100,000,000 shares of common stock, par value $0.0001, and 1,000,000
shares of preferred stock, par value $0.0001. Prior to the Business Combination, there were 5,948,000 shares of common stock issued
and outstanding.
In connection with its initial public offering
in July 2014, the Company sold 4,798,000 units comprised of one common share, one warrant, and one right to automatically obtain
one-tenth of a common share upon the consummation of a business combination. At the time of the Business Combination, these 4,798,000
outstanding rights were automatically converted into 479,800 common shares.
At June 30, 2017, the Company had outstanding
warrants exercisable for 4,664,901 shares of common stock, consisting of: (i) 4,600,000 Public Warrants; (ii) 198,000 warrants,
each exercisable for one-half of one share of common stock at an exercise price of $5.75 per half share ($11.50 per whole share)
(“Sponsor Warrants”); (iii) 600,000 warrants, each exercisable for one share of common stock at an exercise price of
$15.00 per share (“$15 Exercise Price Warrants”); (iv) 666,360 warrants, each exercisable for one share of common stock
at an exercise price of $12.50 per share (“Merger Warrants”); and (v) 999,541 warrants, each exercisable for one share
of common stock at an exercise price of $11.50 per share (“Additional Merger Warrants”). At December 31, 2016, the
Company had outstanding warrants exercisable for 4,665,676 shares of common stock.
The Public Warrants, Sponsor Warrants and $15
Exercise Price Warrants were issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer & Trust
Company, as warrant agent, and us. The Merger Warrants and Additional Merger Warrants were issued to the sellers of LHLLC.
On July 21, 2014, a total of 300,000 Unit Purchase
Options (“UPOs”) were issued by 1347 Capital to a representative of the underwriter and its designees. In December
2016, the Company issued 121,173 shares of common stock in connection with the cashless exercise of 282,900 of these UPOs. At June
30, 2017 and December 31, 2016, a total of 17,100 UPOs were outstanding and will be exercisable, either for cash or on a cashless
basis, through July 21, 2019.
On May 2, 2017, the Company issued 111 shares
of common stock in connection with the cashless exercise of 310 Merger Warrants and 465 Additional Merger Warrants.
Note 10 – Cumulative Redeemable Convertible Preferred Stock
The Company’s second amended and restated
certificate of incorporation authorizes the issuance of 1,000,000 shares of preferred stock with such designation, rights and preferences
as may be determined from time to time by its board of directors. In connection with the Business Combination, the Company issued
400,000 shares of Class A preferred stock (the “Preferred Stock”) on July 20, 2016. Each share of Preferred Stock may
be converted (at the holder’s election) into 2.00 shares of the Company’s common stock (as may be adjusted for any
stock splits, reverse stock splits or similar transactions), representing a conversion price of $12.50 per share; provided, that
such conversion is in compliance with NASDAQ’s listing requirements. The Preferred Stock ranks senior to all classes and
series of outstanding capital stock. The Company has agreed to not issue any other shares of capital stock that rank senior or
pari passu to the Preferred Stock while the Preferred Stock is outstanding, unless at least 30% of the proceeds from such issuance
are used to redeem Preferred Stock. The holders of the Preferred Stock will, in priority to any other class or series of capital
stock, be entitled to receive, as and when declared by the board of directors fixed, cumulative, preferential dividends at a rate
of: (i) 8% per annum in years one through three from issuance; (ii) 10% per annum in years four through five from issuance; and
(iii) 12% per annum thereafter, payable in equal quarterly installments. Dividends on outstanding Preferred Stock will accrue from
day to day from the date of issuance of the Preferred Stock. No dividends may be made in excess of the accrued and unpaid preferred
yield in respect of the Preferred Stock.
So long as the Preferred Stock is outstanding,
the Company is restricted from repurchasing, redeeming or retiring any shares of its capital stock other than the Preferred Stock.
In the event of liquidation, dissolution or winding up, the holders of the Preferred Stock will be entitled to receive $25.00 per
share of Preferred Stock, plus accrued but unpaid dividends thereon, whether declared or not, before any amount is paid or any
assets are distributed to holders of junior capital stock. After payment to the holders of Preferred Stock of the liquidation amounts,
such holders shall not be entitled to share in any further distribution payment in respect of the assets of the Company. The Company
will redeem all outstanding shares of Preferred Stock on the six-year anniversary from the date of issuance for the price of $25.00
per share of Preferred Stock (as may be adjusted for any stock splits, reverse stock splits or similar transactions), plus accrued
but unpaid dividends thereon, whether or not declared, up to and including the date specified for redemption. The holders are not
entitled to vote. See also Note 18 – Subsequent Events.
Note 11 - Fair Value Measurements
Accounting guidance defines fair value as the
exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants
at the measurement date. Under this guidance, valuation techniques used to measure fair value must maximize the use of observable
inputs and minimize the use of unobservable inputs. In addition, this guidance establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. The Company classifies and discloses assets and liabilities carried at fair
value in one of the following three categories:
|
•
|
Level 1 — quoted prices (unadjusted) in active markets for identical assets and
liabilities;
|
|
•
|
Level 2 — inputs other than quoted prices included within Level 1 that are observable,
either directly or indirectly, or can be corroborated by observable market data for substantially the full term of the assets or
liabilities; and
|
|
•
|
Level 3 — significant 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. As of June 30, 2017, the Company determined the fair value of its senior credit facility term loan at
$19.1 million. Such fair value is determined using discounted estimated future cash flows using level 3 inputs.
Note 12 - Earnings per Share
The Successor’s computations of diluted
EPS for the three and six-month periods ended June 30, 2017 excluded 800,000 potential shares related to the Preferred Stock due
to its antidilutive effects under the if-converted method.
For the six months ended June 30, 2017,
the Successor’s computation of diluted EPS also excluded 515,310 potential shares from warrants, which were “in the
money” (i.e., the average market price exceeded the exercise price), but would have had an antidilutive effect under the
treasury stock method for that period. Diluted EPS also excluded 5,915 potential shares in connection with 17,100 remaining UPOs
(issued in 2014), which also would have had an antidilutive effect under the treasury stock method for the six months ended June
30, 2017.
Warrants to purchase 600,000 shares of common
stock at $15.00 per share were outstanding but were not included in the computation of diluted EPS because the warrants’
exercise price was greater than the average market price of the shares of common stock during the period for the three months and
six months ended June 30, 2017 (in accordance with ASC 260-10-55-3). These warrants, which expire on various dates through July
20, 2023, were still outstanding at June 30, 2017.
(in thousands, except per share amounts)
|
|
Three months ended
June 30, 2017
|
|
|
Six months ended
June 30, 2017
|
|
EPS numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
669
|
|
|
$
|
(545
|
)
|
Less: Undistributed preferred stock dividends
|
|
|
(244
|
)
|
|
|
(482
|
)
|
Net income (loss) attributable to Limbach Holdings, Inc. common stockholders
|
|
$
|
425
|
|
|
$
|
(1,027
|
)
|
|
|
|
|
|
|
|
|
|
EPS denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
7,455
|
|
|
|
7,455
|
|
Impact of dilutive securities
(1)
|
|
|
340
|
|
|
|
-
|
|
Weighted average shares outstanding – diluted
|
|
|
7,795
|
|
|
|
7,455
|
|
|
|
|
|
|
|
|
|
|
Basic EPS attributable to common stockholders:
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Limbach Holdings, Inc. common stockholders
|
|
$
|
0.06
|
|
|
$
|
(0.14
|
)
|
Diluted EPS attributable to common stockholders:
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Limbach Holdings, Inc. common stockholders
|
|
$
|
0.05
|
|
|
$
|
(0.14
|
)
|
|
(1)
|
Consists of public, private, merger, additional merger and UPO warrants.
|
Predecessor
The Company has not presented predecessor earnings
per member unit information because it is not meaningful or comparable to the required Successor EPS information, as well as the
fact that Predecessor units were not publicly traded.
Note 13 – Income Taxes
The Company is taxed as a C Corporation. The
historical audited financial results and other Predecessor financial information included herein reflect the Predecessor results
as a limited liability company, which was taxed as a partnership for federal income tax purposes and not at the entity level. Following
the Business Combination, LHLLC was treated as a disregarded entity (i.e., a business entity that is separate from its owner for
liability purposes but is the same as its owner for income tax purposes); therefore, the financial results include the effects
of federal and state income taxes at the parent level.
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 and for the three and six months
ended June 30, 2017 (Successor) consists of the following:
(in thousands)
|
|
Three
months ended
June
30, 2017
|
|
|
Six
months ended
June 30, 2017
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State and local
|
|
|
-
|
|
|
|
-
|
|
Total current tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
333
|
|
|
|
(553
|
)
|
State and local
|
|
|
71
|
|
|
|
(126
|
)
|
Total deferred tax provision
(benefit)
|
|
|
404
|
|
|
|
(679
|
)
|
Provision for (benefit
from) income taxes
|
|
$
|
404
|
|
|
$
|
(679
|
)
|
No valuation allowance was required as of June
30, 2017 or December 31, 2016.
The Company performed an analysis of its tax
positions and determined that no material uncertain tax positions exist. Accordingly, there is no liability for uncertain tax positions
as of June 30, 2017 or December 31, 2016. Based on the provisions of ASC 740-10, the Company had no material unrecognized tax benefits
as of June 30, 2017.
A reconciliation of the federal statutory income
tax rate to the Company’s effective tax rate is as follows:
|
|
Six months ended
June 30, 2017
|
|
Federal statutory income tax rate
|
|
|
34.0
|
%
|
State income taxes, net of federal tax effect
|
|
|
4.6
|
%
|
Nondeductible/nontaxable items
|
|
|
2.1
|
%
|
Tax credits
|
|
|
(0.9
|
)%
|
Effective tax rate
|
|
|
39.8
|
%
|
Note 14 – Operating Segments
The Company determined its operating segments
on the same basis that it assesses performance and makes operating decisions. The Company manages and measures the performance
of its business in two distinct operating segments: Construction and Service. 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 Chief Executive Officer, Chief Financial Officer and Chief Operating Officer.
The accounting policies of the segments are
the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on income from
operations of the respective segments after the allocation of Corporate office operating expenses. Transactions between segments
are eliminated in consolidation. Our Corporate department provides general and administrative support services to our two operating
segments. The CODM allocates costs between segments for selling, general and administrative expenses and depreciation expense.
All of the Company’s identifiable assets
are located in the United States, which is where the Company is domiciled. The Company does not have sales outside the United States.
The Company does not identify capital expenditures and total assets, including goodwill, 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 not allocated to
segments because of the corporate management of debt service including interest.
Condensed segment information for the three
months ended June 30, 2017 (Successor) and 2016 (Predecessor) is as follows:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Three months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
96,221
|
|
|
$
|
77,329
|
|
Service
|
|
|
21,617
|
|
|
|
19,319
|
|
Total revenue
|
|
|
117,838
|
|
|
|
96,648
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
5,807
|
|
|
|
3,785
|
|
Service
|
|
|
1,008
|
|
|
|
1,392
|
|
Corporate
|
|
|
(5,080
|
)
|
|
|
(2,268
|
)
|
Operating income
|
|
$
|
1,735
|
|
|
$
|
2,909
|
|
|
|
|
|
|
|
|
|
|
Operating income for reportable segments
|
|
$
|
1,735
|
|
|
$
|
2,909
|
|
Less unallocated amounts:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
563
|
|
|
|
884
|
|
(Gain) loss on sale of property and equipment
|
|
|
99
|
|
|
|
7
|
|
Total unallocated amounts
|
|
|
662
|
|
|
|
891
|
|
Total consolidated income (loss) before income taxes
|
|
$
|
1,073
|
|
|
$
|
2,018
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
1,001
|
|
|
$
|
445
|
|
Service
|
|
|
503
|
|
|
|
156
|
|
Corporate
|
|
|
1,208
|
|
|
|
137
|
|
Total other data
|
|
$
|
2,712
|
|
|
$
|
738
|
|
Condensed segment information for the six months
ended June 30, 2017 (Successor) and 2016 (Predecessor) is as follows:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
187,686
|
|
|
$
|
158,949
|
|
Service
|
|
|
45,342
|
|
|
|
35,518
|
|
Total revenue
|
|
|
233,028
|
|
|
|
194,467
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
7,475
|
|
|
|
7,130
|
|
Service
|
|
|
2,376
|
|
|
|
1,923
|
|
Corporate
|
|
|
(9,922
|
)
|
|
|
(3,844
|
)
|
Operating income (loss)
|
|
$
|
(71
|
)
|
|
$
|
5,209
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) for reportable segments
|
|
$
|
(71
|
)
|
|
$
|
5,209
|
|
Less unallocated amounts:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,017
|
|
|
|
1,719
|
|
(Gain) loss on sale of property and equipment
|
|
|
136
|
|
|
|
3
|
|
Total unallocated amounts
|
|
|
1,153
|
|
|
|
1,722
|
|
Total consolidated income (loss) before income taxes
|
|
$
|
(1,224
|
)
|
|
$
|
3,487
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
1,979
|
|
|
$
|
860
|
|
Service
|
|
|
992
|
|
|
|
307
|
|
Corporate
|
|
|
2,388
|
|
|
|
266
|
|
Total other data
|
|
$
|
5,359
|
|
|
$
|
1,433
|
|
Note 15 – Commitments and Contingencies
Leases.
Operating leases consist primarily
of leases for real property and equipment. The leases frequently include renewal options, escalation clauses, and require the Company
to pay certain occupancy expenses. Lease expense was approximately $1.1 million and $2.1 million for the three and six months ended
June 30, 2017, respectively.
Capital leases consist primarily of leases
for vehicles (see Note 8 – Debt). The leases are collateralized by the vehicles and require monthly payments of principal
and interest. All leases transfer title at lease end for a nominal cash buyout.
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. In the opinion of the Company's management, 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.
Energy Contracts.
The Company enters
into contracts with certain state agencies in Ohio to acquire, construct, implement, and install energy conservation measures,
as described in the contracts. The contracts include guarantees related to yearly energy costs savings by these customers, typically
over a ten-year period. To the extent the yearly savings guarantees are unmet, the Company would be required to pay the customer
the difference between the amount of energy costs savings guarantee and actual savings realized. The total of those guarantee amounts
for each of the years ending December 31, 2017 and 2018 are $84 thousand and $42 thousand, respectively.
Under the terms of these energy contracts,
the Company provides a guarantee bond to its customers in the amount of the guaranteed savings. The Company also maintains a Service
Maintenance Agreement on most of the contracts so it can ensure proper maintenance of the equipment. On contracts without a Service
Maintenance Agreement, the Company has no obligation for the guarantee if the equipment is not properly maintained. From the inception
of these contracts in 1997 through June 30, 2017, the Company has not been required to make any material payments for unmet energy
savings under any of the contracts.
As a result of the guarantee bonds and its
experience with these arrangements, the Company does not expect to incur any material liabilities with respect to the contracts.
Accordingly, no liability has been recorded for the contract guarantees.
Surety.
The terms of our construction
contracts frequently require that we obtain from surety companies, and provide to our customers, payment and performance bonds
(“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure our payment and performance
obligations under such contracts, and we have agreed to indemnify the surety companies for amounts, if any, paid by them in respect
of Surety Bonds issued on our behalf. In addition, at the request of labor unions representing certain of our 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, our bonding requirements typically increase
as the amount of public sector work increases. As of June 30, 2017, we had approximately $85.4 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.
Note 16 - Self-Insurance
The Company purchases workers' compensation
and general liability insurance under policies with per-incident deductibles of $250 thousand and a $3.2 million maximum aggregate
deductible loss limit per year.
The components of the self-insurance liability as of June 30, 2017
and December 31, 2016 are as follows:
|
|
Successor
|
|
(in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Current liability — workers' compensation and general liability
|
|
$
|
111
|
|
|
$
|
479
|
|
Current liability — medical and dental
|
|
|
574
|
|
|
|
493
|
|
Non-current liability
|
|
|
564
|
|
|
|
601
|
|
Total liability shown in Accrued expenses and other liabilities
|
|
$
|
1,249
|
|
|
$
|
1,573
|
|
Restricted cash
|
|
$
|
113
|
|
|
$
|
113
|
|
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 17 – Backlog
At June 30, 2017 and December 31, 2016, the
Company's contractual Construction backlog, which represents the amount of revenue the Company expects to realize from work to
be performed on uncompleted construction contracts in progress, was $469.3 million and $390.2 million, respectively. In addition,
Service backlog as of June 30, 2017 and December 31, 2016 was $44.5 million and $44.1 million, respectively.
Note 18 – Subsequent Events
On July 14, 2017, the Company entered into
a preferred stock repurchase agreement (the “Preferred Stock Repurchase Agreement”) with 1347 Investors LLC (“1347
Investors”) pursuant to which (a) the Company repurchased from 1347 Investors a total of 120,000 shares of the Preferred
Stock for an aggregate sum of $4,092,153 in cash, (b) for a period of six months after such repurchase, the Company will have
the right to repurchase from 1347 Investors in one or more transactions all or a portion of the remaining 280,000 shares of Preferred
Stock owned by 1347 Investors for a purchase price equal to 130% of the liquidation value per share plus 130% of any and all accrued
but unpaid dividends thereon as of the date of closing of the purchase of such shares and (c) 1347 Investors will not, with respect
to the 509,500 shares of common stock held in escrow pursuant to its current lock-up arrangement that expired on July 20, 2017,
sell or otherwise transfer such shares of common stock during the period from such expiration through October 20, 2017.
This repurchase was funded through borrowings under the Company’s
revolving credit facility and closed on July 14, 2017. The Company has retired the repurchased shares.
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. Factors
that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors” in our
Annual Report on Form 10-K filed with the SEC on April 17, 2017. We assume no obligation to update any of these forward-looking
statements.
On July 20, 2016, we completed the Business
Combination in which we acquired Limbach Holdings LLC. Following the Business Combination, we changed our name to Limbach Holdings,
Inc. The Condensed Consolidated Financial Statements and certain note presentations separate the Company’s presentations
into two distinct periods, the period up to and including the Business Combination closing date (labeled “Predecessor”)
and the period after that date (labeled “Successor”), to indicate the application of different bases of accounting
between the periods presented. The accompanying Condensed Consolidated Financial Statements include a black line division which
indicates that the Predecessor and Successor reporting entities shown are not comparable. The period presented from January 1,
2017 through June 30, 2017 and at December 31, 2016 are the “Successor” periods. The period presented from January
1, 2016 through June 30, 2016 is the “Predecessor” period.
The historical financial information of 1347
Capital prior to the Business Combination (a special purpose acquisition company, or SPAC) has not been reflected in the Predecessor
financial statements as these historical amounts have been considered de minimis.
The application of acquisition accounting,
pursuant to U.S. Generally Accepted Accounting Principles (“GAAP”), for the Business Combination significantly affected
certain assets, liabilities, and expenses. As a result, financial information as of December 31, 2016 and for January 1, 2017 through
June 30, 2017 (Successor) may not be comparable to Limbach’s Predecessor financial information for January 1, 2016 through
June 30, 2016 (Predecessor). Refer to Notes 1 and 4 in the Notes to Condensed Consolidated Financial Statements for additional
information on the accounting for the Business Combination.
Calendar Year
We operate on a calendar year ending on December
31 for financial reporting purposes. For calendar year 2017, the Company’s Condensed Consolidated Financial Statements reflect
January 1, 2017 through June 30, 2017 (Successor) and for calendar year 2016, the Company’s Condensed Consolidated Financial
Statements reflect January 1, 2016 through June 30, 2016 (Predecessor).
Overview
We are an industry-leading commercial specialty
contractor in the areas of HVAC, plumbing, electrical and building controls through design and construction of new and renovated
buildings, maintenance services, energy retrofits and equipment upgrades for private customers and federal, state, and local public
agencies in Florida, California, Massachusetts, New Jersey, Pennsylvania, Maryland, Washington DC, Virginia, West Virginia, Ohio
and Michigan. We operate our business in two segments, (i) Construction, in which we generally manage large construction or renovation
projects that involve primarily HVAC, plumbing, sheet metal fabrication and installation, specialty piping and electrical services,
and (ii) Service, in which we provide facility maintenance or general construction services primarily related to HVAC, plumbing
or electrical services. Our branches and corporate headquarters are located in the United States.
JOBS Act
We are an “emerging growth company”
(“EGC”) pursuant to the JOBS Act. The JOBS Act contains provisions that, among other things, reduce certain reporting
requirements for qualifying companies. Under the JOBS Act, we will remain an EGC until the earliest of:
|
•
|
December 31, 2019 (the last day of the fiscal year following the fifth anniversary of our initial
public offering of common equity securities);
|
|
•
|
the last day of the fiscal year in which we have annual gross revenue of $1.0 billion or more;
|
|
•
|
the date on which we have, during the previous three-year period, issued more than $1.0 billion
in non-convertible debt; and
|
|
•
|
the date on which we are deemed to be a “large accelerated filer,” which will occur
at such time as the Company has an aggregate worldwide market value of common equity securities held by non-affiliates of $700.0
million or more as of the last business day of our most recently completed second fiscal quarter.
|
Pursuant to Section 107(b) of the JOBS Act,
as an EGC we elected to delay adoption of accounting pronouncements newly issued or revised after April 5, 2012 applicable to public
companies until such pronouncements are made applicable to private companies. As a result, our financial statements may not be
comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting
standards that are applicable to public companies.
Key Components of Condensed Consolidated
Statements of Operations
Revenue
We generate revenue principally from fixed-price
construction contracts under which we deliver HVAC, plumbing, and electrical construction services to our customers. The duration
of our contracts generally ranges from six months to two years. Revenue from fixed price and modified fixed price contracts is
recognized on the percentage-of-completion method, measured by the relationship of total cost incurred to total estimated contract
costs (cost-to-cost method). Revenue from time and materials contracts is recognized as services are performed. We believe that
our extensive experience in HVAC, plumbing, and electrical projects, and our internal cost review procedures during the bidding
process, enable us to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts.
We generally invoice 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 an asset until billable under the contract terms, and billings in
excess of costs and estimated earnings on uncompleted contracts are recorded as a 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 our services, and the risks associated therewith, contract costs as a percentage of contract
revenue have historically fluctuated and we expect this fluctuation to continue in future periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
consist primarily of personnel costs for our 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. We expect to incur incremental costs associated with supporting the growth
of our business and to meet the increased compliance requirements associated with our transition to and operation as a public company.
Those costs include increases in our accounting, human resources, information technology and legal personnel, additional consulting,
legal and audit fees, insurance costs, board of directors’ compensation and the costs of maintaining compliance with Section
404 of the Sarbanes-Oxley Act.
Depreciation and Amortization
Depreciation and amortization expenses are
periodic non-cash charges that consist of depreciation of fixed assets, including leasehold improvements and equipment, and amortization
of various intangible assets primarily including leasehold interests, customer relationships, Construction and Service backlogs
and definite lived assets.
Other Income (Expense), Net
Other income (expense), net consists primarily
of interest expense incurred in connection with our debt, along with the gain (loss) on disposition of property and equipment.
Provision for Income Taxes
Following the Business Combination, Limbach
has been taxed as a C Corporation. The Limbach (Predecessor) financial information included herein reflect our results as a limited
liability company taxed as a partnership for federal income tax purposes. As a partnership, our profits were not taxed at the
entity level. Following the Business Combination, our 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 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.
Surety Bonding
In connection with our business, occasionally
we are 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 have face amounts ranging up to $100 million. As
of June 30, 2017, we had approximately $85.4 million in surety bonds outstanding. We believe that our $600 million bonding capacity
provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity.
Operating Segments
We manage and measure the performance of our
business in two operating segments: Construction and Service. These segments are reflective of how the Company’s chief operating
decision makers (“CODM”) review operating results for the purposes of allocating resources and assessing performance.
Our chief operating decision makers are our chief executive officer, chief financial officer and chief operating officer. The CODM
evaluates performance and allocate resources based on operating income, which is profit or loss from operations before “other”
corporate expenses, income tax provision (benefit) and dividends on redeemable convertible preferred stock, if any.
The accounting policies of the segments are
the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on income from
operations of the respective branches after the allocation of corporate office operating expenses. Transactions between segments
are eliminated in consolidation. Our corporate department provides selling, general and administrative support services to our
two operating segments. We allocate costs between segments for selling, general and administrative expenses and depreciation expense.
Some selling, general and administrative expenses such as executive and administrative salaries and payroll expenses, corporate
marketing, corporate depreciation and amortization, and consulting, accounting and corporate legal fees are not allocated to segments
because the allocation method would be arbitrary and would not provide an accurate presentation of operating results of segments;
instead these types of expenses are maintained as a corporate expense. See Note 14 – Operating Segments in the Notes to Condensed
Consolidated Financial Statements.
We do not identify capital expenditures and
total assets, including goodwill, by segment in our internal financial reports due in part to the shared use of a centralized fleet
of vehicles and specialized equipment. Interest expense is not allocated to segments because of the corporate management of debt
service including interest.
Comparison of Results of Operations for
the three months ended June 30, 2017 (Successor) and June 30, 2016 (Predecessor)
The following table presents operating results
for the three months ended June 30, 2017 (Successor) and 2016 (Predecessor) in absolute terms and expressed as a percentage of
total revenue, as compared below:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Three months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
(Amounts in thousands except for percentage)
|
|
($)
|
|
|
(%)
|
|
|
($)
|
|
|
(%)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
96,221
|
|
|
|
81.7
|
%
|
|
$
|
77,329
|
|
|
|
80.0
|
%
|
Service
|
|
|
21,617
|
|
|
|
18.3
|
%
|
|
|
19,319
|
|
|
|
20.0
|
%
|
Total revenue
|
|
|
117,838
|
|
|
|
100.0
|
%
|
|
|
96,648
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
85,242
|
|
|
|
88.6
|
%
(1)
|
|
|
68,376
|
|
|
|
88.4
|
%
(1)
|
Service
|
|
|
17,058
|
|
|
|
78.9
|
%
(2)
|
|
|
15,086
|
|
|
|
78.1
|
%
(2)
|
Total cost of revenue
|
|
|
102,300
|
|
|
|
86.8
|
%
|
|
|
83,462
|
|
|
|
86.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
5,172
|
|
|
|
4.4
|
%
|
|
|
5,168
|
|
|
|
5.3
|
%
|
Service
|
|
|
3,551
|
|
|
|
3.0
|
%
|
|
|
2,841
|
|
|
|
2.9
|
%
|
Corporate
|
|
|
4,064
|
|
|
|
3.4
|
%
|
|
|
2,268
|
|
|
|
2.4
|
%
|
Total selling, general and administrative expenses
|
|
|
12,787
|
|
|
|
10.9
|
%
|
|
|
10,277
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
1,016
|
|
|
|
0.9
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Operating income
|
|
|
1,735
|
|
|
|
1.5
|
%
|
|
|
2,909
|
|
|
|
3.0
|
%
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
662
|
|
|
|
0.6
|
%
|
|
|
891
|
|
|
|
0.9
|
%
|
Total other expenses
|
|
|
662
|
|
|
|
0.6
|
%
|
|
|
891
|
|
|
|
0.9
|
%
|
Income before provision for income taxes
|
|
|
1,073
|
|
|
|
0.9
|
%
|
|
|
2,018
|
|
|
|
2.1
|
%
|
Income tax expense
|
|
|
404
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
669
|
|
|
|
0.6
|
%
|
|
|
2,018
|
|
|
|
2.1
|
%
|
Dividends on redeemable convertible preferred stock
|
|
|
244
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Net income attributable to Limbach Holdings, Inc. common stockholders
|
|
$
|
425
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
Net income attributable to Limbach Holdings LLC member unit holders
|
|
|
|
|
|
|
|
|
|
$
|
2,018
|
|
|
|
2.1
|
%
|
|
(1)
|
As a percentage of Construction revenue.
|
|
|
|
|
(2)
|
As a percentage of Service revenue.
|
Comparison of select financial data:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
(Amounts in thousands except for percentages)
|
|
2017
|
|
|
2016
|
|
|
Increase/
(Decrease)
|
|
|
|
($)
|
|
|
($)
|
|
|
$
|
|
|
%
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
96,221
|
|
|
$
|
77,329
|
|
|
$
|
18,892
|
|
|
|
24.4
|
%
|
Service
|
|
|
21,617
|
|
|
|
19,319
|
|
|
|
2,298
|
|
|
|
11.9
|
%
|
Total revenue
|
|
|
117,838
|
|
|
|
96,648
|
|
|
|
21,190
|
|
|
|
21.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
85,242
|
|
|
|
68,376
|
|
|
|
16,866
|
|
|
|
24.7
|
%
|
Service
|
|
|
17,058
|
|
|
|
15,086
|
|
|
|
1,972
|
|
|
|
13.1
|
%
|
Total cost of revenue
|
|
|
102,300
|
|
|
|
83,462
|
|
|
|
18,838
|
|
|
|
22.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
10,979
|
|
|
|
8,953
|
|
|
|
2,026
|
|
|
|
22.6
|
%
|
Service
|
|
|
4,559
|
|
|
|
4,233
|
|
|
|
326
|
|
|
|
7.7
|
%
|
Total gross profit
|
|
|
15,538
|
|
|
|
13,186
|
|
|
|
2,352
|
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
5,172
|
|
|
|
5,168
|
|
|
|
4
|
|
|
|
0.1
|
%
|
Service
|
|
|
3,551
|
|
|
|
2,841
|
|
|
|
710
|
|
|
|
25.0
|
%
|
Corporate
|
|
|
4,064
|
|
|
|
2,268
|
|
|
|
1,796
|
|
|
|
79.2
|
%
|
Total selling, general and administrative expenses
|
|
|
12,787
|
|
|
|
10,277
|
|
|
|
2,510
|
|
|
|
24.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
1,016
|
|
|
|
-
|
|
|
|
1,016
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
5,807
|
|
|
|
3,785
|
|
|
|
2,022
|
|
|
|
53.4
|
%
|
Service
|
|
|
1,008
|
|
|
|
1,392
|
|
|
|
(384
|
)
|
|
|
-27.6
|
%
|
Corporate
|
|
|
(5,080
|
)
|
|
|
(2,268
|
)
|
|
|
(2,812
|
)
|
|
|
-124.0
|
%
|
Operating income
|
|
$
|
1,735
|
|
|
$
|
2,909
|
|
|
$
|
(1,174
|
)
|
|
|
-40.4
|
%
|
Revenue
Revenue for the three months ended June 30,
2017 (Successor) increased by $21.2 million compared to the three months ended June 30, 2016 (Predecessor). Construction revenue
increased by $18.9 million, or 24.4%, and Service revenue increased by $2.3 million, or 11.9%. The increase in Construction revenue
was primarily driven by growth in the Michigan, New England and the Mid-Atlantic regions and partially offset by a decline in the
Southern California and Ohio regions. The $2.3 million increase in Service revenue resulted primarily from the Company’s
focus over recent years on developing longer term customer relationships and sales of larger service owner-direct projects and
contracts. Growth in Michigan, the Mid-Atlantic and Southern California regions caused the overall service revenue increase. Maintenance
contract revenue was $3.1 million and $2.8 million for the three months ended June 30, 2017 and June 30, 2016, respectively, an
increase of $333 thousand or 12.0%.
Gross Profit
Our gross profit increased by $2.3 million
for the three months ended June 30, 2017 (Successor) compared to the three months ended June 30, 2016 (Predecessor). Construction
gross profit increased $2.0 million, or 22.6%. Service gross profit increased $0.3 million, or 7.7%. The total gross profit percentage
decreased slightly from 13.6% for the three months ended June 30, 2016 to 13.2% for the same period ended in 2017, mainly driven
by project mix. At June 30, 2017, we had a large construction project, nearing completion, which carried a lower margin profile
than the overall average. The Service segment gross profit decreased from 21.9% for the three months ended June 30, 2016 compared
to 21.1% for the three months ended June 30, 2017 because we have grown our owner direct project business. Such growth results
in larger projects and more gross profit dollars, but a lower margin percentage as we complete more full service projects for
owners.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses
for the three months ended June 30, 2017 (Successor) increased by approximately $2.5 million to $12.8 million compared to $10.3
million for the three months ended June 30, 2016 (Predecessor). The Company incurred approximately $1.4 million of professional
accounting, legal and consulting fees related to public company requirements in the second quarter of 2017, coupled with other
cost increases at the branches. Specifically, during the second quarter of 2017, we experienced higher salary and benefits
costs totaling $594 thousand related to new hires at several branches. Selling, general and administrative expenses as a
percentage of revenues were 10.9% and 10.6% for the three months ended June 30, 2017 (Successor) and 2016 (Predecessor), respectively.
Amortization of Intangibles
Total amortization expense for the amortizable
intangible assets was $1.0 million for the three months ended June 30, 2017 (Successor). There were no intangible assets in the
Predecessor period, and accordingly no amortization expense.
Other Expenses
Other expenses, primarily interest expense,
were $0.7 million and $0.9 million for the three months ended June 30, 2017 (Successor) and 2016 (Predecessor), respectively. Other
expenses for the three months ended June 30, 2017 included a $99 thousand loss on the disposition of property and equipment associated
with the relocation of the Southern California branch.
Provision for Income Taxes
The Predecessor was a limited liability company
treated as a partnership for federal and state income tax purposes with all income tax liabilities or benefits being passed to
the members. As part of purchase accounting, the Company was required to record all of Limbach’s acquired assets and liabilities
at their acquisition date fair value. The Company established deferred tax assets and liabilities related to various asset classes
through the purchase price allocation.
The Company had no current federal and state
income tax expense for the three months ended June 30, 2017 (Successor). Deferred income tax expense totaled $0.4 million for the
same period. See Note 13 - Income Taxes in the Notes to Condensed Consolidated Financial Statements.
Comparison of Results of Operations for
the six months ended June 30, 2017 (Successor) and June 30, 2016 (Predecessor)
The following table presents operating results
for the six months ended June 30, 2017 (Successor) and 2016 (Predecessor) in absolute terms and expressed as a percentage of total
revenue, as compared below:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
(Amounts in thousands except for percentage)
|
|
($)
|
|
|
(%)
|
|
|
($)
|
|
|
(%)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
187,686
|
|
|
|
80.5
|
%
|
|
$
|
158,949
|
|
|
|
81.7
|
%
|
Service
|
|
|
45,342
|
|
|
|
19.5
|
%
|
|
|
35,518
|
|
|
|
18.3
|
%
|
Total revenue
|
|
|
233,028
|
|
|
|
100.0
|
%
|
|
|
194,467
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
167,758
|
|
|
|
89.4
|
%
(1)
|
|
|
141,288
|
|
|
|
88.9
|
%
(1)
|
Service
|
|
|
35,964
|
|
|
|
79.3
|
%
(2)
|
|
|
27,852
|
|
|
|
78.4
|
%
(2)
|
Total cost of revenue
|
|
|
203,722
|
|
|
|
87.4
|
%
|
|
|
169,140
|
|
|
|
87.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
12,453
|
|
|
|
5.3
|
%
|
|
|
10,531
|
|
|
|
5.4
|
%
|
Service
|
|
|
7,002
|
|
|
|
3.0
|
%
|
|
|
5,743
|
|
|
|
3.0
|
%
|
Corporate
|
|
|
7,898
|
|
|
|
3.4
|
%
|
|
|
3,844
|
|
|
|
2.0
|
%
|
Total selling, general and administrative expenses
|
|
|
27,353
|
|
|
|
11.7
|
%
|
|
|
20,118
|
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
2,024
|
|
|
|
0.9
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Operating income (loss)
|
|
|
(71
|
)
|
|
|
-0.0
|
%
|
|
|
5,209
|
|
|
|
2.7
|
%
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,153
|
|
|
|
0.5
|
%
|
|
|
1,722
|
|
|
|
0.9
|
%
|
Total other expenses
|
|
|
1,153
|
|
|
|
0.5
|
%
|
|
|
1,722
|
|
|
|
0.9
|
%
|
(Loss) income before provision for income taxes
|
|
|
(1,224
|
)
|
|
|
-0.5
|
%
|
|
|
3,487
|
|
|
|
1.8
|
%
|
Income tax benefit
|
|
|
679
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(545
|
)
|
|
|
-0.2
|
%
|
|
|
3,487
|
|
|
|
1.8
|
%
|
Dividends on redeemable convertible preferred stock
|
|
|
482
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Net loss attributable to Limbach Holdings, Inc. common stockholders
|
|
$
|
(1,027
|
)
|
|
|
-0.4
|
%
|
|
|
|
|
|
|
|
|
Net income attributable to Limbach Holdings LLC member unit holders
|
|
|
|
|
|
|
|
|
|
$
|
3,487
|
|
|
|
1.8
|
%
|
|
(1)
|
As a percentage of Construction revenue.
|
|
(2)
|
As a percentage of Service revenue.
|
Comparison of select financial data:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
(Amounts in thousands except for percentages)
|
|
2017
|
|
|
2016
|
|
|
Increase/
(Decrease)
|
|
|
|
($)
|
|
|
($)
|
|
|
$
|
|
|
%
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
187,686
|
|
|
$
|
158,949
|
|
|
$
|
28,737
|
|
|
|
18.1
|
%
|
Service
|
|
|
45,342
|
|
|
|
35,518
|
|
|
|
9,824
|
|
|
|
27.7
|
%
|
Total revenue
|
|
|
233,028
|
|
|
|
194,467
|
|
|
|
38,561
|
|
|
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
167,758
|
|
|
|
141,288
|
|
|
|
26,470
|
|
|
|
18.7
|
%
|
Service
|
|
|
35,964
|
|
|
|
27,852
|
|
|
|
8,112
|
|
|
|
29.1
|
%
|
Total cost of revenue
|
|
|
203,722
|
|
|
|
169,140
|
|
|
|
34,582
|
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
19,928
|
|
|
|
17,661
|
|
|
|
2,267
|
|
|
|
12.8
|
%
|
Service
|
|
|
9,378
|
|
|
|
7,666
|
|
|
|
1,712
|
|
|
|
22.3
|
%
|
Total gross profit
|
|
|
29,306
|
|
|
|
25,327
|
|
|
|
3,979
|
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
12,453
|
|
|
|
10,531
|
|
|
|
1,922
|
|
|
|
18.3
|
%
|
Service
|
|
|
7,002
|
|
|
|
5,743
|
|
|
|
1,259
|
|
|
|
21.9
|
%
|
Corporate
|
|
|
7,898
|
|
|
|
3,844
|
|
|
|
4,054
|
|
|
|
105.5
|
%
|
Total selling, general and administrative expenses
|
|
|
27,353
|
|
|
|
20,118
|
|
|
|
7,235
|
|
|
|
36.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
2,024
|
|
|
|
-
|
|
|
|
2,024
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
7,475
|
|
|
|
7,130
|
|
|
|
345
|
|
|
|
4.8
|
%
|
Service
|
|
|
2,376
|
|
|
|
1,923
|
|
|
|
453
|
|
|
|
23.6
|
%
|
Corporate
|
|
|
(9,922
|
)
|
|
|
(3,844
|
)
|
|
|
(6,078
|
)
|
|
|
-158.1
|
%
|
Operating income (loss)
|
|
$
|
(71
|
)
|
|
$
|
5,209
|
|
|
$
|
(5,280
|
)
|
|
|
-101.4
|
%
|
Revenue
Revenue for the six months ended June 30, 2017
(Successor) increased by $38.5 million compared to the six months ended June 30, 2016 (Predecessor). Construction revenue increased
by $28.7 million, or 18.1%, and Service revenue increased by $9.8 million, or 27.7%. The increase in Construction revenue was primarily
driven by growth in the Michigan and the Mid-Atlantic regions and partially offset by a decline in the Southern California, Ohio
and New England regions. The $9.8 million increase in Service revenue resulted primarily from the Company’s focus over recent
years on developing longer term customer relationships and sales of larger service owner-direct projects and contracts. Growth
in Michigan, New England, Florida, and Mid-Atlantic caused the overall service revenue increase. Year-to-date maintenance contract
revenue was $6.2 million and $5.5 million as of June 30, 2017 and June 30, 2016, respectively, an increase of $708 thousand or
13.0%.
Gross Profit
Our gross profit increased by $4.0 million
for the six months ended June 30, 2017 (Successor) compared to the six months ended June 30, 2016 (Predecessor). Construction
gross profit increased $2.3 million, or 12.8%. Service gross profit increased $1.7 million, or 22.3%. The total gross profit percentage
decreased slightly from 13.0% for the six months ended June 30, 2016 to 12.6% for the same period ended in 2017, mainly driven
by project mix. At June 30, 2017, we had a large construction project, nearing completion, which carried a lower margin profile
than the overall average. The service segment gross profit decreased from 21.6% for the six months ended June 30, 2016 compared
to 20.7% for the six months ended June 30, 2017 because we have grown our owner direct project business. Such growth results in
larger projects and more gross profit dollars, but a lower margin percentage as we complete more full service projects for owners.
Selling, General and Administrative Expenses
Our selling, general and administrative
expenses for the six months ended June 30, 2017 (Successor) increased by approximately $7.2 million to $27.4 million compared to
$20.1 million for the six months ended June 30, 2016 (Predecessor). The Company incurred approximately $4.2 million of professional
accounting, legal and consulting fees related to public company requirements for the six months ended June 30, 2017, coupled with
approximately $3.0 million in other cost increases at the branches. Specifically, we experienced higher salary and benefits
costs totaling $1.8 million related to new hires at several branches, and incurred a $242 thousand bad debt charge related to a
bankrupt customer. In Florida, we leased new office space to accommodate our growth and incurred additional rent expense
totaling $253 thousand during the first half of 2017. Selling, general and administrative expenses as a percentage of revenues
were 11.7% and 10.3% for the six months ended June 30, 2017 (Successor) and 2016 (Predecessor), respectively.
Amortization of Intangibles
Total amortization expense for the amortizable
intangible assets was $2.0 million for the six months ended June 30, 2017 (Successor). There were no intangible assets in the Predecessor
period, and accordingly no amortization expense.
Other Expenses
Other expenses, primarily interest expense,
were $1.2 million and $1.7 million for the six months ended June 30, 2017 (Successor) and 2016 (Predecessor), respectively. Difference
in interest expense year over year is due to the mix of debt outstanding for the first half of the year 2017 versus 2016. During
2017, there was $8.6 million less long-term debt coupled with lower blended interest rates and no subordinated debt outstanding.
Provision for Income Taxes
The Predecessor was a limited liability company
treated as a partnership for federal and state income tax purposes with all income tax liabilities or benefits being passed to
the members. As part of purchase accounting, the Company was required to record all of Limbach’s acquired assets and liabilities
at their acquisition date fair value. The Company established deferred tax assets and liabilities related to various asset classes
through the purchase price allocation.
The Company had no current federal and state
income tax expense for the six months ended June 30, 2017 (Successor). Deferred income tax benefit totaled $0.7 million for the
same period. See Note 13 - Income Taxes in the Notes to Condensed Consolidated Financial Statements.
Construction and Service Backlog Information
Our contract backlog consists of the remaining
unearned revenue on awarded contracts. Backlog is not a term recognized under GAAP; however, it is a common measurement used in
our industry. Once we have successfully negotiated a project and have received written confirmation of the contract being awarded
to us, we record the value of the contract as backlog. Consequently, contract backlog is also an important factor we use to monitor
our business. The duration of our contracts vary significantly from months to years and our backlog is subject to increases as
projects are added. Our backlog does not necessarily represent the amount of work that we are currently negotiating or pursuing
at any given time. It is also subject to change as contract backlog can increase or decrease due to contract change orders.
Given the multi-year duration of many of our
contracts, revenue from backlog is expected to be earned over a period that will extend beyond one year. Many of our contracts
contain provisions that allow the contract to be canceled at any time; however, if this occurs, we can generally recover costs
incurred up to the date of cancellation.
Construction backlog at June 30, 2017 (Successor)
was $469.3 million compared to $390.2 million at December 31, 2016 (Successor). The increase in backlog at June 30, 2017 compared
to backlog at December 31, 2016 was due to new construction contract awards related to the construction portion of Design build/Design
assist contracts that were in backlog for only the engineering value of the projects as of December 31, 2016 and other new construction
awards. In addition, Service backlog as of June 30, 2017 (Successor) was $44.5 million compared to $44.1 million at December 31,
2016 (Successor). Of the backlog at June 30, 2017, we expect to recognize approximately $243.5 million by the end of 2017.
Upon the closing of the Business Combination,
the Company recognized intangible assets for the fair value of both Construction and Service backlogs. See Note 4 – Business
Combination in the Notes to Condensed Consolidated Financial Statements.
Seasonality, Cyclicality and Quarterly Trends
Severe weather can impact our operations. In
the northern climates where we operate, and to a lesser extent the southern climates as well, severe winters can slow our productivity
on construction projects, which shifts revenue and gross profit recognition to a later period. Our maintenance operations may also
be impacted by mild or severe weather. Mild weather tends to reduce demand for our maintenance services, whereas severe weather
may increase the demand for our maintenance and spot services. Our 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
The prices of products such as steel, pipe,
copper and equipment from manufacturers are subject to fluctuation. While it is difficult to accurately measure the impact of inflation
due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations
and financial condition have been immaterial. When appropriate, we include cost escalation factors into our bids and proposals.
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.
Liquidity and Capital Resources
Summary of Cash Flows
Our 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 borrowing from
commercial banks and institutional lenders.
Billing and collections
on both construction and service projects are increasing on a monthly basis and management expects this operating cash flow trend
will continue to improve as these projects mature, cash is collected, and profits increase. Management further expects that high
volumes of service work, which is less sensitive to the cash flow issues presented by large construction projects, will further
continue to positively impact our cash flow trends.
We believe our current cash and cash equivalents
of $685 thousand as of June 30, 2017, cash to be received from existing and new customers, and availability of borrowing under
a revolving line of credit under our Credit Agreement (pursuant to which we had $20.8 million of availability as of June 30, 2017)
will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. The elimination
of the subordinated debt as well as the reduction of our term debt and accompanying interest expense reduction has improved cash
flow. Additionally, we expect that certain non-cash items, including certain deferred tax assets resulting from accumulated net
operating losses generated by the Company prior to the Business Combination, certain permanent book-tax differences originating
in the ordinary course of business, and certain additional temporary differences between book and tax basis resulting from the
Business Combination will mitigate our cash outflow until such items are completely utilized, and therefore add to liquidity in
the near term.
The following table reflects our available funding capacity as of
June 30, 2017:
(in thousands)
|
|
|
|
|
|
|
Cash & cash equivalents
|
|
|
|
|
|
$
|
685
|
|
Credit agreement:
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
25,000
|
|
|
|
|
|
Outstanding letters of credit
|
|
|
(4,240
|
)
|
|
|
|
|
Net credit agreement capacity available
|
|
|
|
|
|
|
20,760
|
|
Total available funding capacity
|
|
|
|
|
|
$
|
21,445
|
|
Our cash flows are primarily impacted from
period to period by fluctuations in working capital. Factors such as our contract mix, commercial terms, days sales outstanding
(“DSO”) and delays in the start of projects may impact our working capital. In line with industry practice, we accumulate
costs during a given month then bill those costs in the current month for many of our 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 we receive payment from our customers (contractual “pay-if-paid” terms). We have not historically
experienced a large volume of write-offs related to our receivables and our unbilled revenue on contracts in progress. We regularly
assess our receivables and costs in excess of billings for collectability and provide allowances for doubtful accounts where appropriate.
We believe that our reserves for doubtful accounts are appropriate as of June 30, 2017, but adverse changes in the economic environment
may impact certain of our customers’ ability to access capital and compensate us for our services, as well as impact project
activity for the foreseeable future.
The following table represents our summarized working capital information:
|
|
Successor
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands, except ratios)
|
|
2017
|
|
|
2016
|
|
Current assets
|
|
$
|
137,367
|
|
|
$
|
155,183
|
|
Current liabilities
|
|
|
(110,245
|
)
|
|
|
(126,729
|
)
|
|
|
|
|
|
|
|
|
|
Net working capital
|
|
$
|
27,122
|
|
|
$
|
28,454
|
|
Current ratio*
|
|
|
1.25
|
|
|
|
1.22
|
|
|
*
|
Current ratio is calculated by dividing current assets by current liabilities.
|
The following table presents summary cash flow information for the
periods indicated:
|
|
Successor
|
|
|
Predecessor
|
|
|
|
For the six months ended June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
294
|
|
|
$
|
1,085
|
|
Investing activities
|
|
|
(1,649
|
)
|
|
|
(1,655
|
)
|
Financing activities
|
|
|
(5,366
|
)
|
|
|
(3,850
|
)
|
Net decrease in cash and cash equivalents
|
|
$
|
(6,721
|
)
|
|
$
|
(4,420
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment financed with capital leases
|
|
$
|
718
|
|
|
$
|
873
|
|
Financed insurance premium
|
|
|
2,135
|
|
|
|
-
|
|
Interest paid
|
|
|
927
|
|
|
|
512
|
|
Cash Flows Provided by Operating Activities
Cash flows provided by operating activities
were $0.3 million for the six months ended June 30, 2017 (Successor) as compared to $1.1 million for the six months ended June
30, 2016 (Predecessor). For the six months ended June 30, 2017, the key drivers of the cash used in operating activities were
a $11.2 million decrease in accounts payable corresponding to decreasing quarterly revenue volume since the fourth quarter of
2016 and timing of disbursement approvals, and a $9.0 million decrease in billings in excess of costs and estimated earnings on
uncompleted contracts, or overbillings. Accounts payable decreased due to major projects nearing completion; therefore, lower
material, equipment and subcontractor costs were outstanding at June 30, 2017. The decrease in overbillings was primarily due
to a single significant project which was still ongoing but nearing completion at quarter end.
These 2017 operating uses of cash were
offset by operating sources of cash resulting from an $11.2 million decrease in accounts receivable due to decreasing quarterly
revenue volume since the fourth quarter of 2016, and a $2.8 million increase in accrued expenses representing $6.4 million of checks
not cleared at June 30, 2017, as reduced by 2016 bonuses totaling $3.6 million which were paid in 2017 and a decrease of $0.5 million
in accrued job cost and selling, general and administrative expenses. There was also a $1.8 million decrease in costs and estimated
earnings in excess of billings on uncompleted contracts.
For the six months ended June 30, 2016,
we generated cash of $1.1 million from operating activities. We experienced an increase in receivables of $6.8 million, a decrease
in trade payables of $3.0 million and an increase in billings in excess of costs and estimated earnings on uncompleted contracts
of $9.8 million. Accrued expenses decreased $2.4 million and costs and estimated earnings in excess of billings on uncompleted
contracts increased $2.4 million. The increase in receivables was due to additional business volume. The increase in costs and
estimated earnings in excess of billings on uncompleted contracts was due to a large health care project in Southern California,
several projects in Michigan and two large guaranteed maximum price, or GMP, projects that require monthly billing to cut off one
week before month end. The early cutoff relating to the GMP projects resulted in costs being incurred during the last week of the
month that are not billed until the following month, as well as a corresponding increase in unbilled service costs. Trade payables
decreased due to payment of invoices on new projects and the completion of projects from the prior year.
Non-cash charges for depreciation and amortization
increased by approximately $3.9 million to $5.4 million for the six months ended June 30, 2017 from $1.4 million for the same period
ended June 30, 2016, due primarily to the amortization of intangible assets acquired as part of the acquisition of LHLLC beginning
in the third quarter of 2016.
Cash Flows Used in Investing Activities
Cash flows used in investing activities for
the six months ended June 30, 2017 (Successor) and 2016 (Predecessor) were $1.6 million and $1.7 million, respectively, and were
primarily for capital additions. The majority of our 2017 and 2016 capital additions pertain to additional vehicles, tools and
equipment, computer software and hardware purchases, office furniture and office related leasehold improvements. We also obtained
the use of various assets through operating and capital leases, which reduced the level of capital expenditures that would have
otherwise been necessary to operate our business.
Cash Flows Used in Financing Activities
Cash flows used in financing activities were
$5.4 million and $3.9 million for the six months ended June 30, 2017 (Successor) and June 30, 2016 (Predecessor), respectively.
For the six months ended June 30, 2017 (Successor), we borrowed and repaid a total of $44.6 million on the Credit Agreement revolving
facility, made repayments of $3.4 million on the term loan, capital lease payments of $0.8 million and financed insurance premium
payments of $1.2 million.
For the six months ended June 30, 2016, we
used net cash of $3.9 million in financing activities, primarily due to the net reduction of long-term debt in the form of revolver
credit of $2.0 million, term loan payments of $1.0 million and capital lease payments of $0.7 million.
Our future capital requirements will depend
on many factors, including revenue growth and costs incurred to support it, and increased selling, general and administrative expenses
to support the anticipated growth in our operations and regulatory requirements as a new public company. Our capital expenditures
in future periods are expected to grow in line with our business. To the extent that existing cash and cash from operations are
not sufficient to fund our future operations, we may need to raise additional funds through public or private equity or additional
debt financing. Although we currently are not a party to any agreement with any third parties with respect to potential investments
in, or acquisitions of, businesses, we may enter into these types of arrangements in the future, which could also require us to
seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
Debt and Other Obligations
In January 2016, we amended our prior credit
facility, resulting in a $35.0 million line of credit with a commercial bank, which contained variable interest at one-month LIBOR
plus 2.75%, and was due to expire May 2018. This line of credit was refinanced in connection with the Business Combination as disclosed
below. The line of credit was subject to certain financial covenants.
On July 20, 2016, in connection with the Business
Combination, a subsidiary of the Company, Limbach Facility Services, LLC (“LFS”), refinanced its existing debt by entering
into the Credit Agreement and Subordinated Loan Agreement, and incurred lender and third party costs which were all capitalized
on our balance sheet. The refinancing qualified as debt extinguishment under GAAP. The Credit Agreement provides for a $25.0 million
line of credit and a $24.0 million term loan with a consortium of four commercial banks. The loans have a variable interest rate
based on one-month LIBOR and expire in July 2021. The loans are subject to certain financial covenants. Also on July 20, 2016,
LFS entered into the Subordinated Loan Agreement, which provided for a $13.0 million subordinated note at 16.0% interest with 13.0%
interest paid in cash and the option to pay the additional 3.0% interest in cash or allow it to accrue into the note balance, as
payment in kind. The subordinated loan was set to mature in July 2022. On December 21, 2016, the Company repaid all amounts outstanding
under the Subordinated Loan Agreement, including deferred interest and prepayment penalties, totaling $15.3 million to the subordinated
debt lender in full settlement of the Subordinated Loan Agreement using the proceeds from the sale of 1,405,500 shares of its common
stock at an offering price of $13.50 per share.
During the six months ended June 30, 2017,
the Company drew down and repaid a total of $44.6 million on its revolving credit facility. The Company also made its required
quarterly payments of $1.5 million per the Credit Agreement for that same period. During June 2017, the Company voluntarily made
an additional principal payment of $1.9 million under the term loan. As of June 30, 2017, there was $20.8 million of available
capacity under the line of credit and $19.1 million outstanding under the term loan provided by the Credit Agreement. In January
2017, the Company obtained an additional irrevocable letter of credit in the amount of $850 thousand for its self-insurance program.
At June 30, 2017, the Company had total irrevocable letters of credit in the amount of $4.2 million under its self-insurance program
as compared to $3.4 million at December 31, 2016. As of June 30, 2017 and December 31, 2016, we were in compliance with all the
financial and other covenants related to the Credit Agreement.
On July 14, 2017, the Company entered into
a preferred stock repurchase agreement (the “Preferred Stock Repurchase Agreement”) with 1347 Investors LLC (“1347
Investors”) pursuant to which (a) the Company repurchased from 1347 Investors a total of 120,000 shares of the Company’s
Class A Preferred Stock, par value $0.0001 per share (the “Preferred Stock”), for an aggregate sum of approximately
$4,092,153 in cash, (b) for a period of six months after such repurchase, the Company will have the right to repurchase from 1347
Investors in one or more transactions all or a portion of the remaining 280,000 shares of Preferred Stock owned by 1347 Investors
for a purchase price equal to 130% of the liquidation value per share plus 130% of any and all accrued but unpaid dividends thereon
as of the date of closing of the purchase of such shares and (c) 1347 Investors will not, with respect to the 509,500 shares of
common stock held in escrow pursuant to its current lock-up arrangement that is to expire on July 20, 2017, sell or otherwise transfer
such shares of common stock during the period from such expiration and ending on October 20, 2017.
This repurchase was funded through borrowings
under the Company’s revolving credit facility and closed on July 14, 2017. The Company has retired the repurchased shares.
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 determined 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 Sheet.
The non-current portion of the liability is included in other long-term liabilities on the Condensed Consolidated Balance Sheet.
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.
The components of the self-insurance liability are reflected below
as of June 30, 2017 and December 31, 2016:
|
|
Successor
|
|
(in thousands)
|
|
As of
June 30, 2017
|
|
|
As of
December 31, 2016
|
|
Current liability – workers’ compensation and general liability
|
|
$
|
111
|
|
|
$
|
479
|
|
Current liability – medical and dental
|
|
|
574
|
|
|
|
493
|
|
Non-current liability
|
|
|
564
|
|
|
|
601
|
|
Total liability
|
|
$
|
1,249
|
|
|
$
|
1,573
|
|
Restricted cash
|
|
$
|
113
|
|
|
$
|
113
|
|
The restricted cash balance represents cash
set aside for the funding of workers’ compensation and general liability insurance claims. This amount is replenished when
depleted, or at the beginning of each month.
Multiemployer Pension Plans
We participate in approximately 50 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. In 2015, the Company terminated its relationship with the Teamsters local union in Michigan.
As a result of the termination, the Collective Bargaining Agreement required the Company to pay an assessment for future pension
liabilities. During 2015, the Company paid $42 thousand and accrued another $375 thousand for a total expense of $417 thousand,
the full amount the Company was liable for under the settlement agreement. The remaining liability of $375 thousand was paid during
April 2016.
Recent Accounting Pronouncements
We review new accounting standards to determine
the expected financial impact, if any, that the adoption of such standards will have. See Note 3 - Accounting Standards in the
Notes to Condensed Consolidated Financial Statements for further information regarding new accounting standards, including the
anticipated dates of adoption and the effects on our consolidated financial position, results of operations or liquidity.
Significant Accounting Policies and Significant Estimates
Our Condensed Consolidated Financial Statements
are based on the application of significant accounting policies, which require management to make significant estimates and assumptions.
Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies of the notes to
consolidated financial statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016. We
believe that some of our more critical judgment areas in the application of accounting policies that affect our financial condition
and results of operations are the impact of changes in the estimates and judgments pertaining to: (a) revenue recognition from
(i) long-term construction contracts for which the percentage-of-completion method of accounting is used and (ii) service contracts;
(b) collectability or valuation of accounts receivable; (c) costs and earnings in excess of billings and billings in excess of
costs and earnings; (d) property and equipment; (e) fair value measurements; (f) stock based compensation; (g) impairment of both
definite and indefinite- lived intangibles; (h) long-lived assets; (i) insurance reserves; (j) tax valuation allowance; and (k)
accounting for business combinations.
Revenue and Cost Recognition
We believe our most significant accounting
policy is revenue recognition from long-term construction contracts for which we use the percentage-of-completion method of accounting.
Percentage-of-completion accounting is the prescribed method of accounting for long-term contracts in accordance with Accounting
Standard Codification (“ASC”) Topic 605-35, “Revenue Recognition – Construction-Type and Production-Type
Contracts”, and, accordingly, is the method used for revenue recognition within our industry. Revenue from fixed price and
modified fixed price contracts are recognized on the percentage-of-completion method, measured by the relationship of total cost
incurred to total estimated contract costs (cost-to-cost method). Revenue from time and materials contracts are recognized as services
are performed.
Contract costs include direct labor, material,
and subcontractor costs, and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs,
depreciation, and insurance. Selling, general, and administrative costs are charged to expense as incurred. Bidding and proposal
costs are also recognized as an expense in the period in which such amounts are incurred. Total estimated contract costs are based
upon management’s current estimate of total costs at completion. As changes in estimates of contract costs at completion
and/or estimated total losses on projects are identified, appropriate earnings adjustments are recorded during the period that
the change or loss is identified. Contract revenue for long-term construction contracts is based upon management’s estimate
of contract prices at completion, including revenue for additional work on which contract pricing has not been finalized. Changes
in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final
contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions
are determined. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are
determined.
Costs and estimated earnings in excess of billings
on uncompleted contracts reflected in the condensed consolidated balance sheets arise when revenue has been recognized but the
amounts have not been billed under the terms of the contracts. Also included in Costs and estimated earnings on uncompleted contracts
are amounts the Company seeks or will seek to collect from customers or others for errors or changes in contract specifications
or design, contract change orders in dispute or unapproved as to scope and price, or other customer-related causes of unanticipated
additional contract costs (claims and unapproved change orders). Such amounts are recorded at estimated net realizable value when
realization is probable and can be reasonably estimated. No profit is recognized on the construction costs incurred in connection
with claim amounts. Claims and unapproved change orders made by the Company may involve negotiation and, in rare cases, litigation.
Unapproved change orders and claims also involve the use of estimates, and it is reasonably possible that revisions to the estimated
recoverable amounts of recorded claims and unapproved change orders may be made in the near term. Claims against the Company are
recognized when a loss is considered probable and amounts are reasonably determinable. Billings in excess of costs and estimated
earnings on uncompleted contracts represent billings in excess of revenue recognized.
In accordance with industry practice, we classify
as current all assets and liabilities relating to the performance of long-term contracts. The term of our contracts generally ranges
from one month to three years and, accordingly, collection or payment of amounts relating to these contracts may extend beyond
one year.
Costs and Earnings in Excess of Billings
and Billings in Excess of Costs and Earnings
The asset “Costs and estimated earnings
in excess of billings on uncompleted contracts” represents revenue earned and recognized in advance of billings. The liability
“Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in advance of revenue
recognized. These amounts will generally be billable or recognizable, as applicable, in the next twelve months. We generally consider
collection risk to be low. When events or conditions indicate that the amounts outstanding may become uncollectible, an allowance
is estimated and recorded.
Accounts Receivable
Accounts receivable include amounts billed
to customers under retention provisions in construction contracts. Such provisions are standard in the Company’s industry
and usually allow for a small portion of progress billings or the contract price, typically 10%, to be withheld by the customer
until after the Company has completed work on the project. Based on the Company’s experience with similar contracts in recent
years, billings for such retention balances at each balance sheet date are finalized and collected after project completion.
The carrying value of the receivables, net
of the allowance for doubtful accounts, represents their estimated net realizable value. Management provides for probable uncollectible
accounts through a charge to earnings and a credit to the valuation account based on its assessment of the current status of individual
accounts, type of service performed, and current economic conditions. Balances that are still outstanding after management has
used reasonable collection efforts are written off through a charge to the valuation allowance and an adjustment of the account
receivable.
Property and Equipment
Property and equipment, including purchases
financed through capital leases, are recorded at cost and depreciated on a straight-line basis over their estimated useful lives,
which for buildings and leasehold improvements is 5 to 40 years and for machinery and equipment is 1 to 10 years. Expenditures
for maintenance and repairs are expensed as incurred. Leasehold improvements for operating leases are amortized over the lesser
of the term of the related lease or the estimated useful lives of the improvements.
Fair Value Measurements
Accounting guidance defines fair value as the
exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants
at the measurement date. Under this guidance, valuation techniques used to measure fair value must maximize the use of observable
inputs and minimize the use of unobservable inputs. In addition, this guidance establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. The Company classifies and discloses assets and liabilities carried at fair
value in one of the following three categories:
|
•
|
Level 1 — quoted prices (unadjusted) in active markets for identical assets and
liabilities;
|
|
•
|
Level 2 — inputs other than quoted prices included within Level 1 that are observable,
either directly or indirectly, that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities; and
|
|
•
|
Level 3 — significant unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions.
|
The Company’s consolidated financial
instruments are comprised of cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable which approximate
fair value primarily due to their short-term maturities and low risk of counterparty default. The Company determined the fair value
of its senior credit facility term loan at $19.1 million as of June 30, 2017. Such fair value is determined using discounted estimated
future cash flows using level 3 inputs.
The Company believes that the carrying amounts
of its financial instruments, including cash and cash equivalents, trade accounts receivable, accounts payable and amounts drawn
under the revolving portion of the new senior credit facility consist primarily of instruments without extended maturities, which
approximate fair value primarily due to their short-term maturities and low risk of counterparty default. We also believe that
the carrying value of the term portion of the new senior credit facility approximates its fair value due to the variable rate on
such debt.
Stock Based Compensation
Successor
Upon approval of the Business Combination,
the Company adopted the Limbach Holdings, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”). Certain employees, directors
and consultants will be eligible to be granted awards under the 2016 Plan, other than incentive stock options, which may be granted
only to employees. Successor has reserved 800,000 shares of the Company’s common stock for issuance under the 2016 Plan.
The number of shares issued or reserved pursuant to the 2016 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.
At June 30, 2017, no stock-based awards have been granted under the 2016 Plan.
Predecessor
The Company measured future compensation expense
for all stock options and warrants based on the fair value of the awards at the grant date using the Black-Scholes option pricing
model. The Company’s Predecessor stock options could only be exercised with a change in control of the Company, consummation
of an initial public offering, or dissolution of the Company, as defined by the agreement. In conjunction with the Business Combination
on July 20, 2016, the Predecessor options were exercised in a cashless exercise and compensation expense for all outstanding options
was recorded in the predecessor period from January 1, 2016 to July 19, 2016.
Intangible Assets and Impairment
We review intangible assets with indefinite
lives not subject to amortization for impairment each year, or more frequently when events or significant changes in circumstances
indicate that the carrying value may not be recoverable.
We also review intangible assets with definite
lives subject to amortization whenever events or circumstances indicate that a carrying amount of an asset may not be recoverable.
Intangible assets with definite lives subject to amortization are amortized on a straight-line basis with estimated useful lives
ranging from 1 to 9 years. Events or circumstances that might require impairment testing include the identification of other impaired
assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, a significant
decline in stock price or a significant adverse change in business climate or regulations.
Long-Lived Assets
We evaluate the carrying value of long-lived
assets whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has
occurred if the projected future undiscounted cash flows are less than the carrying value of the assets. The estimate of cash flows
includes management’s assumptions of cash inflows and outflows directly resulting from the use of the asset in operations.
When a potential impairment has occurred, an impairment charge is recorded if the carrying value of the long-lived asset exceeds
its fair value. Fair value is measured based on a projected discounted cash flow model using a discount rate we feel is commensurate
with the risk inherent in our business. Our impairment analysis contains estimates due to the inherently judgmental nature of forecasting
long-term estimated cash flows and determining the ultimate useful lives of assets. Actual results may differ, which could materially
impact our impairment assessment.
Contractual Obligations
The following table represents the Company’s
contractual commitments (which include expected interest expense, calculated based on current interest rates) to make future payments
pursuant to debt and other obligations disclosed above and pursuant to operating leases outstanding as of June 30, 2017:
|
|
Payments Due by Period
|
|
(Amounts in thousands)
|
|
Total
|
|
|
Less than 1
year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
More than 5
years
|
|
Operating leases
|
|
$
|
24,227
|
|
|
$
|
3,628
|
|
|
$
|
6,485
|
|
|
$
|
6,178
|
|
|
$
|
7,936
|
|
Capital leases and deemed landlord financing
|
|
|
3,633
|
|
|
|
1,419
|
|
|
|
1,919
|
|
|
|
295
|
|
|
|
-
|
|
Long-term debt
|
|
|
19,135
|
|
|
|
3,000
|
|
|
|
7,200
|
|
|
|
8,935
|
|
|
|
-
|
|
Insurance premium financing
|
|
|
971
|
|
|
|
971
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest on long-term debt
(1)
|
|
|
2,518
|
|
|
|
876
|
|
|
|
1,261
|
|
|
|
381
|
|
|
|
-
|
|
Purchase commitments
(2)
|
|
|
178,770
|
|
|
|
164,592
|
|
|
|
14,178
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
229,254
|
|
|
$
|
174,486
|
|
|
$
|
31,043
|
|
|
$
|
15,789
|
|
|
$
|
7,936
|
|
|
(1)
|
Interest on long-term debt includes projected interest due on the outstanding term loan debt at an interest rate of 4.80%, and a 0.50% unused commitment fee on the unused balance of the revolver.
|
|
(2)
|
Purchase commitments represent open purchase orders for material and subcontracting costs related to construction and service contracts. These purchase orders are not reflected in the Company's Condensed Consolidated Balance Sheets and should not impact future cash flows, as amounts should be recovered through customer billings.
|
Certain lease agreements contain escalation
provisions which could impact the future minimum payments presented above. The costs related to leases with an initial term of
less than one year have been reflected in rent expense but have been excluded from the future minimum payments presented above.
Off-Balance Sheet and Other Arrangements
We did not have any relationships with any
entities or financial partnerships, such as structured finance or special purpose entities established for the purpose of facilitating
off-balance sheet arrangements or other purposes.