Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Business and Organization
Limbach Holdings, Inc. (the “Company,” “we” or “us”), a Delaware corporation headquartered in Warrendale, Pennsylvania, was formed on July 20, 2016 as a result of a business combination with Limbach Holdings LLC (“LHLLC”). The Company is a building systems solutions firm with expertise in the design, prefabrication, installation, management and maintenance of heating, ventilation, air-conditioning (“HVAC”), mechanical, electrical, plumbing and controls systems. The Company provides comprehensive facility services consisting of mechanical construction, full HVAC service and maintenance, energy audits and retrofits, engineering and design build services, constructability evaluation, equipment and materials selection, offsite/prefabrication construction, and the complete range of sustainable building solutions. The Company’s customers operate in diverse industries including, but not limited to, data centers and healthcare, industrial and light manufacturing, cultural and entertainment, higher education, and life science facilities. The Company operates primarily in the Northeast, Mid-Atlantic, Southeast and Midwest regions of the United States.
The Company operates in two segments, (i) General Contractor Relationships (“GCR”), in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) Owner Direct Relationships (“ODR”), in which the Company performs owner direct projects and/or provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. This work is primarily performed under fixed price, modified fixed price, and time and material contracts over periods of typically less than two years.
Note 2 – Significant Accounting Policies
Basis of Presentation
References in these financial statements to the Company refer collectively to the accounts of Limbach Holdings, Inc. and its wholly-owned subsidiaries, including LHLLC, Limbach Facility Services LLC (“LFS”), Limbach Company LLC (“LC LLC”), Limbach Company LP, Harper Limbach LLC, Harper Limbach Construction LLC, Limbach Facility & Project Solutions LLC, Jake Marshall, LLC (“JMLLC”) and Coating Solutions, LLC (“CSLLC”) for all periods presented. All intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the requirements of Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Readers of this report should refer to the consolidated financial statements and the notes thereto included in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 8, 2023.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements for assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the reported period, and the accompanying notes. Management believes that its most significant estimates and assumptions have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed consolidated financial statements. The Company’s significant estimates include estimates associated with revenue recognition on construction contracts, costs incurred through each balance sheet date, intangibles, property and equipment, fair value accounting for acquisitions, insurance reserves, fair value of contingent consideration arrangements and contingencies. If the underlying estimates and assumptions upon which the condensed consolidated financial statements are based change in the future, actual amounts may differ from those included in the accompanying condensed consolidated financial statements.
Unaudited Interim Financial Information
The accompanying interim Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the
periods presented are unaudited. Also, within the notes to the condensed consolidated financial statements, the Company has included unaudited information for these interim periods. These unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP. In the Company's opinion, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of March 31, 2023, its results of operations and equity for the three months ended March 31, 2023 and 2022 and its cash flows for the three months ended March 31, 2023 and 2022. The results for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023.
The Condensed Consolidated Balance Sheet as of December 31, 2022 was derived from the Company's audited financial statements included in its Annual Report on Form 10-K filed with the SEC on March 8, 2023, but is presented as condensed and does not contain all of the footnote disclosures from the annual financial statements.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the measurement and recognition of credit losses on most financial instruments, including trade receivables and off-balance sheet credit exposure. Under this guidance, an entity is required to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. This ASU also requires disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective method, whereby the guidance was applied prospectively as of the date of adoption and prior periods are not restated. The adoption of this ASU did not have a material impact on the Company's financial position or results of operations.
The Company assessed the scope of its financial assets and determined that the guidance associated with ASU 2016-13 is relevant to its trade accounts receivable and contract assets, including retainage. The Company’s trade receivables include amounts from work completed in which it has billed or has an unconditional right to bill its customers. The majority of the Company’s trade receivables are contractually due in less than a year. The Company further assessed the guidance based on its segment portfolio of receivables. While the Company’s construction-type GCR and ODR financial assets are often in the same subset of customers and industries, the Company’s construction-type related project work is typically bonded and the customers to which they perform work are well-known, solvent and have no history of material receivable write-offs. On the contrary, the Company’s service-type work, in particular its ODR core service work, is smaller in nature and is usually more susceptible to customer write-offs. As such, there is greater risk of credit loss on the Company’s ODR-related service-type receivables. The Company’s contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The Company has policies and procedures in place where it reviews claims and change orders on a quarterly basis to determine legal entitlement and recoverability in accordance with ASC Topic 606. As such, the Company has determined the risk of credit loss on its contracts assets to be remote.
The Company develops its allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its ODR-related service-type receivables, using an aging method. Under the aging method, the Company assigns its accounts receivable to a level of delinquency and applies a loss rate to each class. Loss rates are determined based on historical loss experiences with customers, the consideration of a customer’s financial condition, current market economic conditions and a forecast of future economic conditions when appropriate. When the Company becomes aware of a customer's inability to meet its financial obligation, a specific reserve is recorded to reduce the receivable to the expected amount to be collected.
As part of the Company’s analysis of expected credit losses, it may analyze receivables with customers on an individual basis in situations where such accounts receivables exhibit unique risk characteristics and are not expected to experience similar losses to the rest of their class.
Recent Accounting Pronouncements
The FASB has issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting in March 2020. This new guidance provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform, on financial reporting. The risk of termination of the London Interbank Offered Rate (LIBOR), has caused regulators to undertake reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based that are less susceptible to manipulation. ASU 2020-04 was effective between March 12, 2020 and December 31, 2022. However, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, extending the sunset date under Topic 848 from December 31, 2022 to December 31, 2024 to align the temporary accounting relief guidance with the expected LIBOR cessation date of June 30, 2023.
In addition, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this update refine the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. As a result of ASU 2022-06, an entity may now elect to apply the amendments in this update from the beginning of an interim period beginning as of March 12, 2020, through December 31, 2024. The Company has evaluated the impact of adopting the reference rate reform guidance (both ASU 2020-04 and ASU 2021-01) on its consolidated financial statements and has determined that these pronouncements did not have a significant impact. As discussed in Note 5, the A&R Credit Agreement removed LIBOR as a benchmark rate and now utilizes SOFR (as defined in the A&R Credit Agreement) as its replacement. In addition, the Company’s interest rate swap utilizes SOFR as its benchmark rate.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity and amends the scope guidance for contracts in an entity's own equity. The ASU addresses how convertible instruments are accounted for in the calculation of diluted earnings per share by using the if-converted method. The guidance is effective for all entities for fiscal years beginning after March 31, 2024, albeit early adoption is permitted no earlier than fiscal years beginning after December 15, 2020. Management is currently assessing the impact of this pronouncement on its condensed consolidated financial statements.
Note 3 – Revenue from Contracts with Customers
The Company generates revenue from construction type contracts, primarily consisting of fixed-price contracts, to deliver HVAC, plumbing, and electrical construction services to its customers. The duration of its contracts generally ranges from three months to two years. Revenue from fixed price contracts is recognized on the cost-to-cost method, measured by the relationship of total cost incurred to total estimated contract costs. Revenue from time and materials contracts is recognized as services are performed. The Company believes that its extensive experience in HVAC, plumbing, and electrical projects, and its internal cost review procedures during the bidding process, enable it to reasonably estimate costs and mitigate the risk of cost overruns on fixed price contracts.
The Company generally invoices customers on a monthly basis, based on a schedule of values that breaks down the contract amount into discrete billing items. Costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a contract asset until billable under the contract terms. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a contract liability until the related revenue is recognizable. The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle.
Contract assets
Contract assets include amounts due under retainage provisions and costs and estimated earnings in excess of billings on uncompleted contracts. The components of the contract asset balances as of the respective dates were as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | March 31, 2023 | | December 31, 2022 | | Change |
| Contract assets | | | | | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 37,479 | | | $ | 33,573 | | | $ | 3,906 | |
| Retainage receivable | 26,711 | | | 27,880 | | | (1,169) | |
| Total contract assets | $ | 64,190 | | | $ | 61,453 | | | $ | 2,737 | |
Retainage receivable represents amounts invoiced to customers where payments have been partially withheld, typically 10%, pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances such as contract-specific terms, project performance and other variables that may arise as the Company makes progress towards completion.
Contract assets represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Contract assets result when either: (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC Topic 606, but a portion of the revenue recorded cannot be currently billed due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings.
The current estimated net realizable value on such items as recorded in contract assets and contract liabilities in the condensed consolidated balance sheets was $29.4 million and $28.5 million as of March 31, 2023 and December 31, 2022, respectively. The Company currently anticipates that the majority of such amounts will be approved or executed within one year. The resolution of those claims and unapproved change orders that may require litigation or other forms of dispute resolution proceedings may delay the timing of billing beyond one year.
Contract liabilities
Contract liabilities include billings in excess of contract costs and provisions for losses. The components of the contract liability balances as of the respective dates were as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | March 31, 2023 | | December 31, 2022 | | Change |
| Contract liabilities | | | | | |
| Billings in excess of costs and estimated earnings on uncompleted contracts | $ | 44,689 | | | $ | 43,806 | | | $ | 883 | |
| Provisions for losses | 186 | | | 201 | | | (15) | |
| Total contract liabilities | $ | 44,875 | | | $ | 44,007 | | | $ | 868 | |
Billings in excess of costs and estimated earnings on uncompleted contracts represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue.
Provisions for losses are recognized in the condensed consolidated statements of operations at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue.
The net (overbilling) underbilling position for contracts in process consisted of the following:
| | | | | | | | | | | |
| (in thousands) | March 31, 2023 | | December 31, 2022 |
| Revenue earned on uncompleted contracts | $ | 687,730 | | | $ | 678,014 | |
| Less: Billings to date | (694,940) | | | (688,247) | |
| Net (overbilling) underbilling | $ | (7,210) | | | $ | (10,233) | |
| | | |
| | | |
| (in thousands) | March 31, 2023 | | December 31, 2022 |
| Costs in excess of billings and estimated earnings on uncompleted contracts | $ | 37,479 | | | $ | 33,573 | |
| Billings in excess of costs and estimated earnings on uncompleted contracts | (44,689) | | | (43,806) | |
| Net (overbilling) underbilling | $ | (7,210) | | | $ | (10,233) | |
Revisions in Contract Estimates
The Company recorded revisions in its contract estimates for certain GCR and ODR projects. During the three months ended March 31, 2023 and 2022, the Company did not record any material gross profit write-ups or write-downs that had a net gross profit impact of $0.5 million or more.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. The Company’s remaining performance obligations include projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions.
As of March 31, 2023, the aggregate amount of the transaction prices allocated to the remaining performance obligations of the Company's GCR and ODR segment contracts were $285.7 million and $101.2 million, respectively. The Company currently estimates that 56% and 72% of its GCR and ODR remaining performance obligations as of March 31, 2023, respectively, will be recognized as revenue during the remainder of 2023, with the substantial majority of remaining performance obligations to be recognized within 24 months, although the timing of the Company's performance is not always under its control.
Additionally, the difference between remaining performance obligations and backlog is due to the exclusion of a portion of the Company’s ODR agreements under certain contract types from the Company’s remaining performance obligations as these contracts can be canceled for convenience at any time by the Company or the customer without considerable cost incurred by the customer.
Note 4 – Goodwill and Intangibles
Goodwill
Goodwill was $11.4 million as of March 31, 2023 and December 31, 2022 and is entirely associated with the Company's ODR segment. The Company tests its goodwill and indefinite-lived intangible assets allocated to its reporting units for impairment annually on October 1, or more frequently if events or circumstances indicate that it is more likely than not that the fair value of its reporting units and indefinite-lived intangible assets are less than their carrying amount. The Company has the option to assess goodwill for possible impairment by performing a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A quantitative assessment is performed if the qualitative assessments results in a more-likely-than-not determination or if a qualitative assessment is not performed.
The Company did not recognize any impairment charges on its goodwill or intangible assets during the three months ended March 31, 2023 and March 31, 2022.
Intangible Assets
Intangible assets are comprised of the following:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Gross
carrying
amount | | Accumulated
amortization | | Net intangible
assets, excluding
goodwill |
March 31, 2023 | | | | | |
Amortized intangible assets: | | | | | |
| Customer relationships – GCR – Jake Marshall | $ | 570 | | | $ | (107) | | | $ | 463 | |
| Customer relationships – ODR – Jake Marshall | 3,050 | | | (536) | | | 2,514 | |
| Customer relationships – ODR – Limbach | 4,710 | | | (3,828) | | | 882 | |
Favorable leasehold interests – Limbach | 190 | | | (101) | | | 89 | |
| Backlog – GCR – Jake Marshall | 260 | | | (219) | | | 41 | |
| Backlog – ODR – Jake Marshall | 680 | | | (573) | | | 107 | |
| Trade name – Jake Marshall | 1,150 | | | (249) | | | 901 | |
Total amortized intangible assets | 10,610 | | | (5,613) | | | 4,997 | |
Unamortized intangible assets: | | | | | |
Trade name – Limbach(1) | 9,960 | | | — | | | 9,960 | |
| Total unamortized intangible assets | 9,960 | | | — | | | 9,960 | |
| Total amortized and unamortized assets, excluding goodwill | $ | 20,570 | | | $ | (5,613) | | | $ | 14,957 | |
(1) The Company has determined that its trade name has an indefinite useful life. The Limbach trade name has been in existence since the Company’s founding in 1901 and therefore is an established brand within the industry.
| | | | | | | | | | | | | | | | | |
| (in thousands) | Gross
carrying
amount | | Accumulated
amortization | | Net intangible
assets, excluding
goodwill |
December 31, 2022 | | | | | |
| Amortized intangible assets: | | | | | |
| Customer relationships – GCR – Jake Marshall | $ | 570 | | | $ | (87) | | | $ | 483 | |
| Customer relationships – ODR – Jake Marshall | 3,050 | | | (436) | | | 2,614 | |
| Customer relationships – ODR – Limbach | 4,710 | | | (3,765) | | | 945 | |
Favorable leasehold interests – Limbach | 190 | | | (97) | | | 93 | |
| Backlog – GCR – Jake Marshall | 260 | | | (178) | | | 82 | |
| Backlog – ODR – Jake Marshall | 680 | | | (465) | | | 215 | |
| Trade name – Jake Marshall | 1,150 | | | (202) | | | 948 | |
| Total amortized intangible assets | 10,610 | | | (5,230) | | | 5,380 | |
| Unamortized intangible assets: | | | | | |
| Trade name – Limbach | 9,960 | | | — | | | 9,960 | |
| Total unamortized intangible assets | 9,960 | | | — | | | 9,960 | |
| Total amortized and unamortized assets, excluding goodwill | $ | 20,570 | | | $ | (5,230) | | | $ | 15,340 | |
Total amortization expense for the Company's definite-lived intangible assets was $0.4 million for both the three months ended March 31, 2023 and 2022.
Note 5 – Debt
Long-term debt consists of the following obligations as of:
| | | | | | | | | | | |
| (in thousands) | March 31, 2023 | | December 31, 2022 |
| A&R Wintrust Term Loan - term loan payable in quarterly installments of principal, plus interest through February 2026 | 19,596 | | | 21,453 | |
| A&R Wintrust Revolving Loan | — | | | — | |
Finance leases – collateralized by vehicles, payable in monthly installments of principal, plus interest ranging from 3.96% to 8.10% through 2027 | 5,716 | | | 4,954 | |
| Financing liability | 5,351 | | | 5,351 | |
| Total debt | 30,663 | | | 31,758 | |
| Less - Current portion of long-term debt | (9,643) | | | (9,564) | |
| Less - Unamortized discount and debt issuance costs | (641) | | | (666) | |
| Long-term debt | $ | 20,379 | | | $ | 21,528 | |
Wintrust Term and Revolving Loans
On February 24, 2021, LFS, LHLLC and the direct and indirect subsidiaries of LFS from time to time included as parties to the agreement (the “Wintrust Guarantors”) entered into a credit agreement (the “Wintrust Credit Agreement”) by and among the LFS, LHLLC, Wintrust Guarantors, the lenders party thereto from time to time, Wheaton Bank & Trust Company, N.A., a subsidiary of Wintrust Financial Corporation (collectively, “Wintrust”), as administrative agent and L/C issuer, Bank of the West as documentation agent, M&T Bank as syndication agent, and Wintrust as lead arranger and sole book runner.
In accordance with the terms of the Wintrust Credit Agreement, Lenders provided to LFS (i) a $30.0 million senior secured term loan (the “Wintrust Term Loan”); and (ii) a $25.0 million senior secured revolving credit facility with a $5.0 million sublimit for the issuance of letters of credit (the “Wintrust Revolving Loan” and, together with the Wintrust Term Loan, the “Wintrust Loans”). Proceeds of the Wintrust Loans were used to refinance certain existing indebtedness, finance working capital and other general corporate purposes and fund certain fees and expenses associated with the closing of the Wintrust Loans.
The Wintrust Revolving Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25% floor) plus 3.5% or a base rate (with a 3.0% floor) plus 0.50%, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA (earnings before interest, income taxes, depreciation and amortization) of the LFS
and its subsidiaries for the most recently ended four fiscal quarters. The Wintrust Term Loan initially bore interest, at LFS’s option, at either LIBOR (with a 0.25% floor) plus 4.0% or a base rate (with a 3.0% floor) plus 1.00%, subject to a 50 (for LIBOR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio (as defined below).
LFS was initially required to make principal payments on the Wintrust Term Loan in $0.5 million installments on the last business day of each month commencing on March 31, 2021 with a final payment of all principal and interest not sooner paid on the Wintrust Term Loan due and payable on February 24, 2026.
In conjunction with the Company's acquisitions of JMLLC and CSLLC (the “Jake Marshall Transaction”), the Company entered into an amendment to the Wintrust Credit Agreement (the “A&R Wintrust Credit Agreement”). In accordance with the terms of the A&R Credit Agreement, Lenders provided to LFS (i) a $35.5 million senior secured term loan (the “A&R Wintrust Term Loan”); and (ii) a $25 million senior secured revolving credit facility with a $5 million sublimit for the issuance of letters of credit (the “A&R Wintrust Revolving Loan” and, together with the Term Loan, the “A&R Wintrust Loans”). The overall Wintrust Term Loan commitment under the A&R Wintrust Credit Agreement was recast at $35.5 million in connection with the A&R Credit Agreement. A portion of the A&R Wintrust Term Loan commitment was used to fund the closing purchase price of the Jake Marshall Transaction. The A&R Credit Agreement was also amended to: (i) permit the Company to undertake the Jake Marshall Transaction, (ii) make certain adjustments to the covenants under the A&R Credit Agreement (which were largely done to make certain adjustments for the Jake Marshall Transaction), (iii) allow for the Earnout Payments (as defined in Note 7) under the Jake Marshall Transaction, and (iv) make other corresponding changes to the A&R Credit Agreement.
The A&R Wintrust Revolving Loan bears interest, at LFS’s option, at either the Term SOFR (as defined in the A&R Credit Agreement) (with a 0.15% floor) plus 3.60%, 3.76% or 3.92% for a tenor of one month, three months or six months, respectively, or a base rate (as set forth in the A&R Credit Agreement) (with a 3.0% floor) plus 0.50%, subject to a 50 basis point step-down based on the ratio between the senior debt of the Company and its subsidiaries to the EBITDA of LFS and its subsidiaries for the most recently ended four fiscal quarters (the “Senior Leverage Ratio”). The A&R Wintrust Term Loan bears interest, at LFS’s option, at either Term SOFR (with a 0.15% floor) plus 4.10%, 4.26% or 4.42% for a tenor of one month, three months or six months, respectively, or a base rate (with a 3.0% floor) plus 1.00%, subject to a 50 (for Term SOFR) or 75 (for base rate) basis point step-down based on the Senior Leverage Ratio. At March 31, 2023 and 2022, the interest rate in effect on the non-hedged portion of the Wintrust Term Loan was 9.00% and 4.50%, respectively. For the three months ended March 31, 2023 and 2022, the Company incurred interest on the A&R Wintrust Term Loan at a weighted average annual interest rate of 8.68% and 4.29%, respectively.
The A&R Wintrust Term Loan is payable through a combination of (i) monthly installments of approximately $0.6 million due on the last business day of each month commencing on December 31, 2021, (ii) annual Excess Cash Flow payments as defined in the A&R Wintrust Credit Agreement, which are due 120 days after the last day of the Company's fiscal year and (iii) Net Claim Proceeds from Legacy Claims as defined in the A&R Wintrust Credit Agreement. Subject to defaults and remedies under the A&R Credit Agreement, the final payment of all principal and interest not sooner paid on the A&R Wintrust Term Loan is due and payable on February 24, 2026. Subject to defaults and remedies under the A&R Credit Agreement, the A&R Wintrust Revolving Loan matures and becomes due and payable by LFS on February 24, 2026. During the second quarter of 2022, the Company made certain Excess Cash Flow and Net Claim Proceeds payments of $3.3 million and $2.1 million, respectively, which concurrently reduced the outstanding A&R Wintrust Term Loan balance. In addition, during the third quarter of 2022, the Company made a Net Claim Proceeds payment of $0.6 million, which was also applied against the outstanding A&R Wintrust Term Loan balance.
The A&R Wintrust Loans are secured by (i) a valid, perfected and enforceable lien of the administrative agent on the ownership interests held by each of LFS and Wintrust Guarantors in their respective subsidiaries; and (ii) a valid, perfected and enforceable lien of the administrative agent on each of LFS and Wintrust Guarantors’ personal property, fixtures and real estate, subject to certain exceptions and limitations. Additionally, the re-payment of the A&R Wintrust Loans shall be jointly and severally guaranteed by each Wintrust Guarantor.
The A&R Credit Agreement contains representations and warranties, covenants and events of default that are customary for facilities of this type, as more particularly described in the A&R Credit Agreement. The A&R Wintrust Loans also contain three financial maintenance covenants, including (i) a requirement to have as of the last day of each quarter for the senior leverage ratio of the Company and its subsidiaries not to exceed an amount beginning at 2.00 to 1.00, (ii) a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the last day of each fiscal quarter, commencing with the fiscal quarter ending December 31, 2021, and (iii) no unfinanced capital expenditures, except for unfinanced capital expenditures in the ordinary course of business not exceeding in the aggregate $4.0 million during any fiscal year; and no default or event of default (as defined by the agreement) has occurred and is continuing, 50% of any portion of this annual limit, if not expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next following fiscal year as stipulated by the agreement. LFS and its
affiliates maintain various commercial and service relationships with certain members of the syndicate and their affiliates in the ordinary course of business.
On May 5, 2022, the Company, LFS and LHLLC entered into a first amendment and waiver to the A&R Wintrust Credit Agreement (the “First Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The First Amendment to the A&R Wintrust Credit Agreement modifies certain definitions within the A&R Wintrust Credit Agreement, and make other corresponding changes, including: (i) the definition of “EBITDA” to allow for the recognition of certain restructuring charges and lease breakage costs not previously specified, (ii) the definition of “Excess Cash Flow” to exclude the aggregate amount of the Earnout Payments paid in cash, (iii) the definition of “Total Funded Debt” to exclude certain capitalized lease obligations for real estate based on the approval of each lender and (iv) the definition of “Disposition” to include a clause for the sale and leaseback of certain real property based on the approval of each lender.
In July 2022, the Company entered into an interest rate swap agreement to manage the risk associated with a portion of its variable-rate long-term debt. The interest rate swap involves the exchange of fixed-rate and variable-rate payments without the exchange of the underlying notional amount on which the interest payments are calculated. The new swap agreement became effective on July 14, 2022 and will terminate on July 31, 2027. The notional amount of the swap agreement is $10.0 million with a fixed interest rate of 3.12%. If the one-month SOFR (as defined in the A&R Credit Agreement) is above the fixed rate, the counterparty pays the Company, and if the one-month SOFR is less than the fixed rate, the Company pays the counterparty, the difference between the fixed rate of 3.12% and one-month SOFR. The Company has not designated this instrument as a hedge for accounting purposes. As a result, the change in fair value of the derivative instrument is recognized directly in earnings on the Company's condensed consolidated statements of operations as a gain or loss on interest rate swap. Refer to Note 7 for further information regarding this interest rate swap.
On September 28, 2022, the Company, LFS and LHLLC entered into a second amendment and waiver to the amended and restated Wintrust credit agreement (the “Second Amendment to the A&R Wintrust Credit Agreement”) with the lenders party thereto and Wintrust, as administrative agent. The Second Amendment to the A&R Wintrust Credit Agreement incorporates certain restricted payment provisions, among other things, to permit LFS to repurchase shares under the Company’s Share Repurchase Program (as defined in Note 6).
As of March 31, 2023 and December 31, 2022, the Company had no borrowings outstanding under the A&R Wintrust Revolving Loan. During the three months ended March 31, 2022, the maximum outstanding borrowings under the A&R Wintrust Revolving Loan at any time was $9.4 million and the average daily balance was approximately $0.1 million. For the three months ended March 31, 2022, the Company incurred interest on the A&R Wintrust Revolving Loan at a weighted average annual interest rate of 4.00%.
At March 31, 2023, the Company had irrevocable letters of credit in the amount of $4.2 million with its lender to secure obligations under its self-insurance program.
The following is a summary of the applicable margin and commitment fees payable on the available A&R Wintrust Term Loan and A&R Wintrust Revolving Loan credit commitment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level | | Senior Leverage Ratio | | Additional Margin for
Prime Rate loans | | Additional Margin for
Prime Revolving loans | | Additional Margin for Eurodollar Term loans |
| I | | Greater than 1.00 to 1.00 | | 1.00 | % | | 0.50 | % | | 0.25 | % |
| II | | Less than or equal to 1.00 to 1.00 | | 0.25 | % | | — | % | | 0.25 | % |
As of March 31, 2023, the Company was in compliance with all financial maintenance covenants as required by the A&R Wintrust Loans.
Sale-Leaseback Financing Transaction
On September 29, 2022, LC LLC and Royal Oak Acquisitions, LLC (the “Purchaser”) consummated the purchase of the real property under a sale and leaseback transaction, with an aggregate value of approximately $7.8 million (a purchase price of approximately $5.4 million and $2.4 million in tenant improvement allowances), pursuant to a purchase agreement under which the Purchaser purchased from LC LLC the Company’s facility and real property in Pontiac, MI (collectively, the “Pontiac Facility”).
In connection with the sale and leaseback transaction, LC LLC and Featherstone St Pontiac MI LLC (the “Landlord”) entered into a Lease Agreement (the “Lease Agreement”), dated September 29, 2022 (the “Lease Effective Date”) for the Pontiac Facility. Commencing on the Lease Effective Date, pursuant to the Lease Agreement, LC LLC has leased the Pontiac Facility, subject to the terms and conditions of the Lease Agreement. The Lease Agreement provides for a term of 25 years (the “Primary Term”). The Lease Agreement also provides LC LLC with the option to extend the Primary Term by two separate renewal terms of five years each (each a “Renewal Term”). Under the terms of the Lease Agreement, the Company’s annual minimum rent is $499,730, payable in monthly installments, subject to annual increases of approximately 2.5% each year under the Primary Term and for each year under the Renewal Terms, if exercised. LC LLC has a one-time option to terminate the Lease Agreement effective on the last day of the fifteenth lease year by providing written notice to the Landlord as more fully set forth in the Lease Agreement. The one-time termination option of the Lease Agreement would require LC LLC to pay to the Landlord a termination fee of approximately $1.7 million.
Pursuant to the terms and conditions set forth in the Lease Agreement, the Landlord has agreed to provide LC LLC with a tenant improvement allowance in an amount up to $2.4 million. LC LLC is responsible for the initial capital outlay and completion of the agreed upon improvement work. The Landlord will subsequently reimburse LC LLC for such items up to the stated allowance amount.
The Company accounted for the sale and leaseback arrangement as a financing transaction in accordance with ASC Topic 842, “Leases,” as the Lease Agreement was determined to be a finance lease. The Company concluded the Lease Agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using an implicit rate of 11.11% to reflect the Company’s incremental borrowing rate associated with the $5.4 million purchase price as of the Lease Agreement date, compared to the fair value of the Pontiac Facility. The implicit rate associated with the aggregate purchase value, inclusive of tenant improvement allowances, was 6.53% as of the Lease Agreement date.
The presence of a finance lease indicates that control of the Pontiac Facility has not transferred to the Purchaser and, as such, the transaction was deemed a failed sale-leaseback and must be accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sale proceeds from the Purchaser in the form of a hypothetical loan collateralized by its leased facilities. The hypothetical loan is payable as principal and interest in the form of “lease payments” to the Purchaser. Principal repayments are recorded as a reduction to the financing liability. The Company will not derecognize the Pontiac Facility from its books for accounting purposes until the lease ends. No gain or loss was recognized under GAAP related to the sale and leaseback arrangement.
As of March 31, 2023, the financing liability was $4.9 million, net of issuance costs, which was recognized within other long-term debt on the Company's condensed consolidated balance sheets. For the three months ended March 31, 2023, approximately $0.1 million of interest expense associated with the financing was recognized.
Note 6 – Equity
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.
Warrants
In conjunction with the Company's initial public offering, the Company issued Public Warrants, Private Warrants and $15 Exercise Price Sponsor Warrants. The Company issued certain Merger Warrants and Additional Merger Warrants in conjunction with the Company's business combination with LHLLC in July 2016 (the “Business Combination”). On July 20, 2021, the Public Warrants, Private Warrants, and Additional Merger Warrants expired by their terms.
The following table summarizes the underlying shares of common stock with respect to outstanding warrants:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| | | |
| | | |
$15 Exercise Price Sponsor Warrants(1)(2) | 600,000 | | | 600,000 | |
Merger Warrants(3)(4) | 629,643 | | | 629,643 | |
| | | |
| Total | 1,229,643 | | | 1,229,643 | |
(1) Exercisable for one share of common stock at an exercise price of $15.00 per share (“$15 Exercise Price Sponsor Warrants”).
(2) Issued under a warrant agreement dated July 15, 2014, between Continental Stock Transfer and Trust Company, as warrant agent, and the Company.
(3) Exercisable for one share of common stock at an exercise price of $12.50 per share (“Merger Warrants”).
(4) Issued to the sellers of LHLLC.
Incentive Plan
Upon the consummation of the Company's Business Combination, the Company adopted an omnibus incentive plan (the “Omnibus Incentive Plan”) pursuant to which equity awards may be granted thereunder.
On March 25, 2022, the Board of Directors approved certain amendments to the Company's Omnibus Incentive Plan (the “2022 Amended and Restated Omnibus Incentive Plan”) to increase the number of shares of the Company's common stock that may be issued pursuant to awards by 350,000, for a total of 2,600,000 shares, and extended the term of the plan so that it will expire on the tenth anniversary of the date the stockholders approve the 2022 Amended and Restated Omnibus Incentive Plan. The amendments were approved by the Company's stockholders at the Annual Meeting held on June 22, 2022.
See Note 13 for a discussion of the Company's management incentive plans for restricted stock units (“RSUs”) granted, vested, forfeited and remaining unvested.
Share Repurchase Program
In September 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”) to repurchase shares of its common stock for an aggregate purchase price not to exceed $2.0 million. The share repurchase authority is valid through September 29, 2023. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. The Share Repurchase Program does not obligate the Company to acquire any particular amount of common stock, and the program may be suspended or terminated by the Company at any time at its discretion without prior notice. As of March 31, 2023, the Company has made share repurchases of approximately $2.0 million under its Share Repurchase Program.
Employee Stock Purchase Plan
Upon approval of the Company's stockholders on May 30, 2019, the Company adopted the Limbach Holdings, Inc. 2019 Employee Stock Purchase Plan (the “ESPP”). On January 1, 2020, the ESPP went into effect. The ESPP enables eligible employees, as defined by the ESPP, the right to purchase the Company's common stock through payroll deductions during consecutive subscription periods at a purchase price of 85% of the fair market value of a common share at the end of each offering period. Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant's compensation or $5,000, whichever is less. Each offering period of the ESPP lasts six months, commencing on January 1 and July 1 of each year. The amounts collected from participants during a subscription period are used on the exercise date to purchase full shares of common stock. Participants may withdraw from an offering before the exercise date and obtain a refund of amounts withheld through payroll deductions. Compensation cost, representing the 15% discount applied to the fair market value of common stock, is recognized on a straight-line basis over the six-month vesting period during which employees perform related services. Under the ESPP, 500,000 shares are authorized to be issued. In January 2023, the Company issued 10,997 shares of its common stock to participants in the ESPP who contributed to the plan during the offering period ending December 31, 2022. In January 2022, the Company issued a total of 12,898 shares of its common stock, respectively, to participants in the ESPP who contributed to the plan during the offering periods ending December 31, 2021. As of March 31, 2023, 395,620 shares remain available for future issuance under the ESPP.
Note 7 – Fair Value Measurements
The Company measures the fair value of financial assets and liabilities in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
•Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date;
•Level 2 — inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities; and
•Level 3 — unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company believes that the carrying amounts of its financial instruments, including cash and cash equivalents, trade accounts receivable and accounts payable, consist primarily of instruments without extended maturities, which approximate fair value primarily due to their short-term maturities and low risk of counterparty default. The Company also believes that the carrying value of the A&R Wintrust Term Loan approximates its respective fair value due to the variable rate on such debt. As of March 31, 2023, the Company determined that the fair value of the A&R Wintrust Term Loan was $19.6 million. Such fair value was determined using discounted estimated future cash flows using level 3 inputs.
Earnout Payments
As a part of the total consideration for the Jake Marshall Transaction, the former owners of JMLLC and CSLLC may receive up to an aggregate of $6.0 million in cash, consisting of two tranches of $3.0 million, as defined in the purchase agreement, if the gross profit of the acquired companies equals or exceeds $10.0 million in (i) the approximately 13 month period from closing through December 31, 2022 (the “2022 Earnout Period”) or (ii) fiscal year 2023 (the “2023 Earnout Period”), respectively (collectively, the “Earnout Payments”). To the extent, however, that the gross profit of the Acquired Companies is less than $10.0 million, but exceeds $8.0 million, during any of the 2022 Earnout Period or 2023 Earnout Period, the $3.0 million amount will be prorated for such period. The Company initially recognized $3.1 million in contingent consideration, of which the entire balance was included in other long-term liabilities in the Company’s condensed consolidated balance sheets on December 2, 2021. The fair value of contingent Earnout Payments is based on generating growth rates on the projected gross margins of the Acquired Entities and calculating the associated contingent payments based on achieving the earnout targets, which are reassessed each reporting period. Based on the Company’s ongoing assessment of the fair value of contingent earnout liability, the Company recorded a net increase in the estimated fair value of such liabilities of $0.1 million for the three months ended March 31, 2023, which was presented in change in fair value of contingent consideration in the Company's condensed consolidated statements of operations. No changes in the estimated fair value of the contingent payments were recognized during the three months ended March 31, 2022. The Company has assessed the estimated exposure to the contingent earnout liabilities to be approximately $5.5 million at March 31, 2023, of which approximately $3.0 million was included in accrued expenses and other current liabilities and approximately $2.5 million was included in other long-term liabilities. In April 2023, the Company made a $3.0 million payment to the former owners of JMLLC and CSLLC related to the 2022 Earnout Period.
The Company determines the fair value of the Earnout Payments by utilizing the Monte Carlo Simulation method, which represents a Level 3 measurement. The Monte Carlo Simulation method models the probability of different financial results of the Acquired Entities during the earn-out period, utilizing a discount rate, which reflects a credit spread over the term-adjusted continuous risk-free rate. As of March 31, 2023 and 2022, the Earnout Payments associated with the Jake Marshall Transaction were valued utilizing a discount rate of 10.2% and 6.83%, respectively. The discount rate was calculated using the build-up method with a risk-free rate commensurate with the term of the Earnout Payments based on the U.S. Treasury Constant Maturity Yield.
Interest Rate Swap
The fair value of the interest rate swap is determined using widely accepted valuation techniques and reflects the contractual terms of the interest rate swap including the period to maturity, and while there are no quoted prices in active markets, it uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value analysis also considers a credit valuation adjustment to reflect nonperformance risk of both the Company and the single counterparty. The fair value of the interest rate contract has been determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The interest rate swap is classified as a Level 2 item within the fair value hierarchy. As of March 31, 2023, the Company determined that the fair value of the interest rate swap was approximately $0.2 million and is recognized in other assets on the Company's condensed consolidated balance sheets. For the three months ended March 31, 2023, the Company recognized a loss of approximately $0.2 million on its condensed consolidated statements of operations associated with the change in fair value of the interest rate swap arrangement.
Note 8 – Earnings per Share
Earnings per Share
The Company calculates earnings per share in accordance with ASC Topic 260 - Earnings Per Share (“EPS”). Basic earnings per common share applicable to common stockholders is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding and assumed to be outstanding. Diluted EPS assumes the dilutive
effect of outstanding common stock warrants, shares issued in conjunction with the Company’s ESPP and RSUs, all using the treasury stock method.
The following table sets forth the computation of the basic and diluted earnings per share attributable to the Company's common shareholders for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| (in thousands, except per share amounts) | | 2023 | | 2022 | | | | |
| EPS numerator: | | | | | | | | |
| Net income (loss) | | $ | 2,993 | | | $ | (1,516) | | | | | |
| | | | | | | | |
| EPS denominator: | | | | | | | | |
Weighted average shares outstanding – basic | | 10,475 | | | 10,421 | | | | | |
Impact of dilutive securities(1) | | 565 | | | — | | | | | |
Weighted average shares outstanding – diluted | | 11,040 | | | 10,421 | | | | | |
| | | | | | | | |
| EPS: | | | | | | | | |
Basic | | $ | 0.29 | | | $ | (0.15) | | | | | |
| Diluted | | $ | 0.27 | | | $ | (0.15) | | | | | |
(1) For the three months ended March 31, 2022, the Company excluded 153,741 of weighted average anti-dilutive securities related to certain of the Company's outstanding common stock warrants, shares issued in conjunction with the Company's ESPP and nonvested RSUs.
The following table summarizes the securities that were antidilutive or out-of-the-money, and therefore, were not included in the computations of diluted income per common share:
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| | | | | | | |
Out-of-the-money warrants (see Note 6) | 600,000 | | | 1,229,643 | | | | | |
Service-based RSUs (See Note 13) | — | | | 70,999 | | | | | |
Performance and market-based RSUs(1) | — | | | 87,053 | | | | | |
| Employee Stock Purchase Plan | 1,561 | | | 3,547 | | | | | |
| Total | 601,561 | | | 1,391,242 | | | | | |
(1) For the three months ended March 31, 2022, certain MRSU awards (each defined in Note 13) were not included in the computation of diluted income per common share because the performance and market conditions were not satisfied during the periods and would not be satisfied if the reporting date was at the end of the contingency period.
Note 9 – Income Taxes
The Company is taxed as a C corporation.
For interim periods, the provision for income taxes (including federal, state, local and foreign taxes) is calculated based on the estimated annual effective tax rate, adjusted for certain discrete items for the full fiscal year. Cumulative adjustments to the Company's estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined.
Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment.
The following table presents our income tax provision and our income tax rate for the three months ended March 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| (in thousands, except percentages) | | 2023 | | 2022 | | | | |
| Income tax provision (benefit) | | $ | 622 | | | $ | (616) | | | | | |
| Income tax rate | | 17.2 | % | | 28.9 | % | | | | |
The U.S. federal statutory tax rate was 21% for each of the three months ended March 31, 2023 and 2022. The difference between the U.S. federal statutory tax rate and the Company’s effective tax rate period over period was primarily due to state income taxes, tax credits, other permanent adjustments and discrete tax items.
No valuation allowance was required as of March 31, 2023 or December 31, 2022.
Note 10 – Operating Segments
As discussed in Note 1, the Company operates in two segments, (i) GCR, in which the Company generally manages new construction or renovation projects that involve primarily HVAC, plumbing, or electrical services awarded to the Company by general contractors or construction managers, and (ii) ODR, in which the Company provides maintenance or service primarily on HVAC, plumbing or electrical systems, building controls and specialty contracting projects direct to, or assigned by, building owners or property managers. These segments are reflective of how the Company’s Chief Operating Decision Maker (“CODM”) reviews operating results for the purposes of allocating resources and assessing performance. The Company's CODM is comprised of its President and Chief Executive Officer and Executive Vice President and Chief Financial Officer.
In accordance with ASC Topic 280 – Segment Reporting, the Company has elected to aggregate all of the GCR work performed at branches into one GCR reportable segment and all of the ODR work performed at branches into one ODR reportable segment. All transactions between segments are eliminated in consolidation.
On January 17, 2023, the Company announced its planned transition succession, pursuant to which Charles A. Bacon III stepped down as President and Chief Executive Officer on March 28, 2023, and Michael M. McCann, the Company’s former Executive Vice President and Chief Operating Officer, was appointed President and Chief Executive Officer. Following the transition, the Company revised its segment presentation to align with how Mr. McCann assesses performance and makes resource allocation decisions for its operating segments, which is based on segment revenue and segment gross profit. Selling, general and administrative ("SG&A") expenses are no longer reported on a segment basis as the Company's current CODM does not review discrete segment financial information for SG&A in order to assess performance. Interest expense is not allocated to segments because of the corporate management of debt service.
The Company restated segment information for the historical periods presented herein to conform to the current presentation. This change in segment presentation does not affect the Company’s unaudited condensed consolidated statements of operations, balance sheets or statements of cash flows.
All of the Company’s identifiable assets are located in the United States, which is where the Company is domiciled.
Condensed consolidated segment information for the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| (in thousands) | 2023 | | 2022 | | | | |
| Statement of Operations Data: | | | | | | | |
| Revenue: | | | | | | | |
| GCR | $ | 62,291 | | | $ | 71,932 | | | | | |
| ODR | 58,718 | | | 42,890 | | | | | |
| Total revenue | 121,009 | | | 114,822 | | | | | |
| | | | | | | |
| Gross profit: | | | | | | | |
| GCR | 10,318 | | | 8,358 | | | | | |
| ODR | 15,909 | | | 9,982 | | | | | |
| Total gross profit | 26,227 | | | 18,340 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Selling, general and administrative(1) | 21,050 | | | 18,734 | | | | | |
| Change in fair value of contingent consideration | 141 | | | — | | | | | |
| Amortization of intangibles | 383 | | | 399 | | | | | |
| Operating income (loss) | $ | 4,653 | | | $ | (793) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Less unallocated amounts: | | | | | | | |
Interest expense, net | (667) | | | (486) | | | | | |
| Loss on disposition of property and equipment | (215) | | | (36) | | | | | |
| Loss on early termination of operating lease | — | | | (817) | | | | | |
| | | | | | | |
| Loss on change in fair value of interest rate swap | (156) | | | — | | | | | |
| | | | | | | |
Total unallocated amounts | (1,038) | | | (1,339) | | | | | |
| Income (loss) before income taxes | $ | 3,615 | | | $ | (2,132) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Included within selling, general and administrative expenses was $1.1 million and $0.6 million of stock based compensation expense for the three months ended March 31, 2023 and 2022, respectively.
The Company does not identify capital expenditures and total assets by segment in its internal financial reports due in part to the shared use of a centralized fleet of vehicles and specialized equipment. Interest expense is also not allocated to segments because of the Company’s corporate management of debt service, including interest.
Note 11 - Leases
The Company leases real estate, trucks and other equipment. The determination of whether an arrangement is, or contains, a lease is performed at the inception of the arrangement. Classification and initial measurement of the right-of-use asset and lease liability are determined at the lease commencement date. The Company elected the short-term lease measurement and recognition exemption; therefore, leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Instead, the short-term leases are recognized in expense on a straight-line basis over the lease term.
The Company's arrangements include certain non-lease components such as common area and other maintenance for leased real estate, as well as mileage, fuel and maintenance costs related to leased vehicles. For all leased asset classes, the Company has elected to not separate non-lease components from lease components and will account for each separate lease component and non-lease component associated with the lease as a single lease component. The Company does not guarantee any residual value in its lease agreements, and there are no material restrictions or covenants imposed by lease arrangements. Real estate leases typically include one or more options to extend the lease. The Company regularly evaluates the renewal options, and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term. For the Company's leased vehicles, the Company uses the interest rate implicit in its leases with the lessor to discount lease payments at the lease commencement date. When the implicit rate is not readily available, as is the case with the Company's real estate leases, the Company uses quoted borrowing rates on its secured debt.
Related Party Lease Agreement. In conjunction with the closing of the Jake Marshall Transaction, the Company entered into an operating lease for certain land and facilities owned by a former member of JMLLC who became a full-time employee of the Company. The lease term is 10 years and includes an option to extend the lease for two successive periods of two years each through November 2035. Base rent for the term of the lease is $37,500 per month for the first five years with payment commencing on January 1, 2022. The fixed rent payment is escalated to $45,000 per month for years 6 through 10 of the lease term. Fixed rent payments for the extension term shall be increased from $45,000 by the percentage increase, if any, in the consumer price index from the lease commencement date. In addition, under the agreement, the Company is required to pay its share of estimated property taxes and operating expenses, both of which are variable lease expenses.
Southern California Sublease. In June, 2021, the Company entered into a sublease agreement with a third party for the entire ground floor of its leased space in Southern California, consisting of 71,787 square feet. Under the terms of the sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $0.6 million per year, which is subject to a 3.0% annual rent increase, plus certain operating expenses and other costs. The initial lease term commenced in September 2021 and continues through April 30, 2027. As of March 31, 2023, the Company remains obligated under the original lease for such office space and, in the event the sublessee of such office space fails to satisfy its obligations under the sublease, the Company would be required to satisfy its obligations directly to the landlord under such original lease.
In addition, during the first quarter of 2022, the Company entered into an amendment to the aforementioned sublease agreement, which, among other things, expanded the sublease premises to include the entire second floor of its leased space in Southern California, consisting of 16,720 square feet. Under the terms of the amended sublease agreement, the sublessee is obligated to pay the Company base rent of approximately $0.8 million per year, which is subject to a 3.0% annual rent increase, plus certain operating expenses and other costs. The amended sublease term commenced in March 2022 and continues through April 30, 2027. For the three months ended March 31, 2023 and 2022, the Company recorded approximately $0.3 million and $0.2 million of income in selling, general and administrative expenses related to this sublease agreement.
Pittsburgh Lease Termination. In March, 2022, the Company entered into a lease termination agreement (the “Lease Termination Agreement”) to terminate, effective March 31, 2022, the lease associated with the Company’s office space located in Pittsburgh, Pennsylvania, which previously served as its corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in July 2025. Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to pay a termination fee in the aggregate of approximately $0.7 million in 16 equal monthly installments commencing on April 1, 2022. The Company recognized the full termination fee expense during the first quarter of 2022.
In connection with the lease termination, the Company recognized a gain of $0.1 million associated with the derecognition of the operating lease right-of-use asset and corresponding operating lease liabilities associated with the operating lease and recorded a $0.1 million loss on the disposal of leasehold improvements and moving expenses.
The following table summarizes the lease amounts included in the Company's condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Classification on the Condensed Consolidated Balance Sheets | | March 31, 2023 | | December 31, 2022 |
| Assets | | | | | |
| Operating | Operating lease right-of-use assets(1) | | $ | 18,055 | | | $ | 18,288 | |
| Finance | Property and equipment, net(2)(3) | | 8,118 | | | 7,402 | |
| Total lease assets | | | $ | 26,173 | | | $ | 25,690 | |
| | | | | |
| Liabilities | | | | | |
| Current | | | | | |
| Operating | Current operating lease liabilities | | $ | 3,639 | | | $ | 3,562 | |
| Finance | Current portion of long-term debt | | 2,214 | | | 2,135 | |
| Noncurrent | | | | | |
| Operating | Long-term operating lease liabilities | | 15,374 | | | 15,643 | |
| Finance | Long-term debt(4) | | 8,853 | | | 8,170 | |
| Total lease liabilities | | | $ | 30,080 | | | $ | 29,510 | |
(1) Operating lease assets are recorded net of accumulated amortization of $10.8 million at March 31, 2023 and $12.2 million at December 31, 2022.
(2) Finance lease vehicle assets are recorded net of accumulated amortization of $5.3 million at March 31, 2023 and $6.0 million at December 31, 2022.
(3) Includes approximately $2.6 million of net property assets associated with the Company's Pontiac Facility.
(4) Includes approximately $5.4 million associated with the Company's sale and leaseback financing transaction. See Note 5 for further detail.
The following table summarizes the lease costs included in the Company's condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, | | |
| (in thousands) | Classification on the Condensed Consolidated Statement of Operations | | 2023 | | 2022 | | | | |
| Operating lease cost | Cost of revenue(1) | | $ | 561 | | | $ | 694 | | | | | |
| Operating lease cost | Selling, general and administrative(1) | | 645 | | | 704 | | | | | |
| Finance lease cost | | | | | | | | | |
| Amortization | Cost of revenue(2) | | 631 | | | 651 | | | | | |
| Interest | Interest expense, net(2) | | 66 | | | 66 | | | | | |
| Total lease cost | | | $ | 1,903 | | | $ | 2,115 | | | | | |
(1) Operating lease costs recorded in cost of revenue included $0.1 million of variable lease costs for each of the three months ended March 31, 2023 and 2022. In addition, $0.1 million of variable lease costs are included in selling, general and administrative for each of the three months ended March 31, 2023 and 2022, respectively. These variable costs consist of the Company's proportionate share of operating expenses, real estate taxes and utilities.
(2) Finance lease costs recorded in cost of revenue include variable lease costs of $0.9 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively. These variable lease costs consist of fuel, maintenance, and sales tax charges.
Future minimum commitments for finance and operating leases that have non-cancelable lease terms in excess of one year as of March 31, 2023 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Finance Leases | | Operating Leases |
| Year ending: | | Vehicles | | Pontiac Facility | | Total Finance | | Non-Related Party | | Related Party(1) | | Sublease Receipts(2) | | Total Operating |
| Remainder of 2023 | | $ | 1,742 | | | $ | — | | | $ | 1,742 | | | $ | 3,051 | | | $ | 338 | | | $ | (668) | | | $ | 2,720 | |
| 2024 | | 1,745 | | | — | | | 1,745 | | | 3,435 | | | 450 | | | (912) | | | 2,973 | |
| 2025 | | 1,282 | | | — | | | 1,282 | | | 2,928 | | | 450 | | | (939) | | | 2,439 | |
| 2026 | | 805 | | | — | | | 805 | | | 2,815 | | | 450 | | | (967) | | | 2,298 | |
| 2027 | | 142 | | | — | | | 142 | | | 1,842 | | | 540 | | | (327) | | | 2,055 | |
| Thereafter | | — | | | 5,351 | | | 5,351 | | | 1,834 | | | 4,275 | | | — | | | 6,109 | |
| Total minimum lease payments | | $ | 5,716 | | | $ | 5,351 | | | $ | 11,067 | | | $ | 15,904 | | | $ | 6,503 | | | $ | (3,813) | | | $ | 18,594 | |
| Amounts representing interest | | 529 | | | 11,468 | | | 11,997 | | | | | | | | | |
| Aggregate future value of minimum lease payments | | $ | 6,245 | | | $ | 16,819 | | | $ | 23,064 | | | | | | | | | |
(1) Associated with the aforementioned related party lease entered into with a former member of JMLLC.
(2) Associated with the aforementioned third party sublease.
The following is a summary of the lease terms and discount rates as of:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Weighted average lease term (in years): | | | |
| Operating | 6.80 | | 6.98 |
Finance (1) | 2.96 | | 2.73 |
| | | |
| Weighted average discount rate: | | | |
| Operating | 4.88 | % | | 4.76 | % |
Finance (1) | 5.67 | % | | 5.06 | % |
(1) Excludes the weighted average lease term and weighted average discount rate associated with the aforementioned sale-leaseback financing transaction, which has a Primary Term of 25 years and utilized an implicit rate of 11.11%. See Note 5 for further detail.
The following is a summary of other information and supplemental cash flow information related to finance and operating leases:
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (in thousands) | | 2023 | | 2022 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 1,164 | | | $ | 1,358 | |
| Operating cash flows from finance leases | | 66 | | | 66 | |
| Financing cash flows from finance leases | | 639 | | | 660 | |
| Right-of-use assets exchanged for lease liabilities: | | | | |
| Operating leases | | 742 | | | — | |
| Finance leases | | 1,402 | | | 864 | |
| Right-of-use assets disposed or adjusted modifying operating leases liabilities | | — | | | (1,276) | |
| Right-of-use assets disposed or adjusted modifying finance leases liabilities | | $ | (1) | | | (19) | |
Note 12 – Commitments and Contingencies
Legal. The Company is continually engaged in administrative proceedings, arbitrations, and litigation with owners, general contractors, suppliers, employees, former employees and other unrelated parties, all arising in the ordinary courses of business. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the condensed consolidated financial statements. In the opinion of the Company’s management, the current belief is that the results of these actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company.
On January 23, 2020, plaintiff, Bernards Bros. Inc. (“Bernards”), filed a complaint against the Company in Superior Court of the State of California for the County of Los Angeles. The complaint alleges that the Company's Southern California business unit refused to honor a proposal made to Bernards to act as a subcontractor on a construction project, and that, as a result of the wrongful failure to honor the proposal, Bernards suffered damages in excess of $3.0 million plus interest, including alleged increased costs for hiring a different subcontractor to perform the work. The Company has vigorously defended the suit. Per the agreement of the Company and Bernards, in January 2022, the Court appointed a private referee to manage the case and adjudicate the dispute. A trial took place before the referee in January 2023, with no formal resolution of the matter having yet been rendered. As of December 31, 2022, the Company determined that a loss was probable, and, as such, recorded an estimated loss contingency, which is included in accrued expenses and other current liabilities reported within the Company’s consolidated balance sheets. In addition, the estimated loss contingency was recorded within selling, general and administrative
expenses on the Company’s consolidated statements of operations and was presented within GCR selling, general and
administrative expenses within the Company’s segment operations data. There have been no changes in the Bernards matter since the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
Surety. The terms of its construction contracts frequently require that the Company obtain from surety companies, and provide to its customers, payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure the Company's payment and performance obligations under such contracts, and the Company has agreed to indemnify the surety companies for amounts, if any, paid by them in respect of Surety Bonds issued on its behalf. In addition, at the request of labor unions representing certain of the Company's employees, Surety Bonds are sometimes provided to secure
obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, the Company's bonding requirements typically increase as the amount of public sector work increases. As of March 31, 2023, the Company had approximately $109.4 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.
Self-insurance. The Company is substantially self-insured for workers’ compensation and general liability claims, in the view of the relatively high per-incident deductibles the Company absorbs under its insurance arrangements for these risks. The Company purchases workers’ compensation and general liability insurance under policies with per-incident deductibles of $250,000 per occurrence and a $4.4 million maximum aggregate deductible loss limit per year. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as current and non-current liabilities. The liability is determined by establishing a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the consolidated balance sheets. The non-current portion of the liability is included in other long-term liabilities on the consolidated balance sheets.
The Company is self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. The Company accrues for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the consolidated balance sheets as a current liability in accrued expenses and other current liabilities.
The components of the self-insurance liability as of March 31, 2023 and December 31, 2022 are as follows:
| | | | | | | | | | | |
| (in thousands) | March 31,
2023 | | December 31,
2022 |
| Current liability — workers’ compensation and general liability | $ | 188 | | | $ | 158 | |
| Current liability — medical and dental | 461 | | | 557 | |
| Non-current liability | 569 | | | 343 | |
| Total liability | $ | 1,218 | | | $ | 1,058 | |
| 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 13 – Management Incentive Plans
The Company initially adopted the Omnibus Incentive Plan on July 20, 2016 for the purpose of: (a) encouraging the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) giving participants an incentive for excellence in individual performance; (c) promoting teamwork among participants; and (d) giving the Company a significant advantage in attracting and retaining key employees, directors and consultants. To accomplish such purposes, the Omnibus Incentive Plan, and such subsequent amendments to the Omnibus Incentive Plan, provides that the Company may grant options, stock appreciation rights, restricted shares, RSUs, performance-based awards (including performance-based restricted shares and restricted stock units), other share based awards, other cash-based awards or any combination of the foregoing.
Following the approval of the 2022 Amended and Restated Omnibus Incentive Plan, the Company will reserve 2,600,000 shares of its common stock for issuance. The number of shares issued or reserved pursuant to the Omnibus Incentive Plan will be adjusted by the plan administrator, as they deem appropriate and equitable, as a result of stock splits, stock dividends, and similar changes in the Company’s common stock. In connection with the grant of an award, the plan administrator may provide for the treatment of such award in the event of a change in control. All awards are made in the form of shares only.
Service-Based Awards
The Company grants service-based stock awards in the form of RSUs. Service-based RSUs granted to executives, employees, and non-employee directors vest ratably, on an annual basis, over three years and in the case of certain awards to non-employee directors, one year. The grant date fair value of the service-based awards was equal to the closing market price of the Company’s common stock on the date of grant. For both the three months ended March 31, 2023 and 2022, the Company recognized $0.4 million of stock-based compensation expense related to outstanding service-based RSUs.
The following table summarizes the Company's service-based RSU activity for the three months ended March 31, 2023:
| | | | | | | | | | | |
| | Awards | | Weighted-Average
Grant Date
Fair Value |
| Unvested at December 31, 2022 | 280,275 | | | $ | 9.06 | |
Granted | 160,433 | | | 11.69 | |
Vested | (162,203) | | | 8.32 | |
Forfeited | — | | | — | |
| Unvested at March 31, 2023 | 278,505 | | | $ | 10.89 | |
Performance-Based Awards
The Company grants performance-based restricted stock units (“PRSUs”) under which shares of the Company’s common stock may be earned based on the Company’s performance compared to defined metrics. The number of shares earned under a performance award may vary from zero to 150% of the target shares awarded, based upon the Company’s performance compared to the metrics. The metrics used for the grant are determined by the Company’s Compensation Committee of the Board of Directors and are based on internal measures such as the achievement of certain predetermined adjusted EBITDA, EPS growth and EBITDA margin performance goals over a three year period.
The Company recognizes stock-based compensation expense for these awards over the vesting period based on the projected probability of achievement of the performance conditions as of the end of each reporting period during the performance period and may periodically adjust the recognition of such expense, as necessary, in response to any changes in the Company’s forecasts with respect to the performance conditions. For the three months ended March 31, 2023 and 2022, the Company recognized $0.7 million and $0.2 million, respectively, of stock-based compensation expense related to outstanding PRSUs.
The following table summarizes the Company's PRSU activity for the three months ended March 31, 2023:
| | | | | | | | | | | |
| | Awards | | Weighted-Average
Grant Date
Fair Value |
| Unvested at December 31, 2022 | 497,940 | | | $ | 8.32 | |
Granted | 237,994 | | | 11.71 | |
Performance factor adjustment(1) | 32,327 | | | 4.29 | |
Vested | (121,827) | | | 4.29 | |
Forfeited | — | | | — | |
| Unvested at March 31, 2023 | 646,434 | | | $ | 10.12 | |
(1) Performance-based awards covering the three year period ended December 31, 2022 were paid out in the first quarter of 2023. The performance factor during the measurement period used to determine compensation payouts was 136.13% of the pre-defined metric target.
Market-Based Awards
The vesting of the Company's market-based RSU (“MRSUs”) was contingent upon the Company’s closing price of a share of the Company's common stock on the Nasdaq Capital market, or such other applicable principal securities exchange or quotation system, achieving at least $18.00 over a period of eighty consecutive trading days during the three-year period commencing on August 1, 2018 and concluding on July 31, 2021. On September 4, 2020, the Compensation Committee of the Board of Directors of the Company approved amendments to modify the MRSUs to extend the measurement period to July 16, 2022. In
addition to the market performance-based vesting condition, the vesting of such restricted stock unit was subject to continued employment from August 1, 2017 through the later of July 31, 2019 or the date on which the Compensation Committee certifies the achievement of the performance goal. The Company accounted for this amendment as a Type I modification and recognized approximately $0.2 million of incremental stock-based compensation expense over 1.26 years from the modification date based on an updated Monte Carlo simulation model. These awards expired on July 16, 2022 as the MRSU award market condition was not achieved.
Stock-Based Compensation Expense
Total recognized stock-based compensation expense amounted to $1.1 million and $0.6 million for the three months ended March 31, 2023 and 2022, respectively. The aggregate fair value as of the vest date of RSUs that vested during the three months ended March 31, 2023 and 2022 was $3.3 million and $1.1 million, respectively. Total unrecognized stock-based compensation expense related to unvested RSUs which are probable of vesting was $6.2 million at March 31, 2023. These costs are expected to be recognized over a weighted average period of 2 years.
