LIMBACH HOLDINGS, INC. 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 for the fiscal year endedDecember 31, 2019 and in subsequent Quarterly Reports on Form 10-Q. We assume no obligation to update any of these forward-looking statements. Overview We are an industry-leading commercial specialty contractor in the areas of heating, ventilation, and air conditioning ("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 inFlorida ,California ,Massachusetts ,New Jersey ,Pennsylvania ,Delaware ,Maryland ,Washington, D.C. ,Virginia , WestVirginia, Ohio andMichigan . We operate our business in two segments, (i) Construction, in which we generally manage large construction or renovation projects that involve primarily HVAC, plumbing or electrical services, and (ii) Service, in which we provide facility maintenance or services primarily on HVAC, plumbing or electrical systems. Our branches and corporate headquarters are located inthe United States . JOBS Act We ceased to qualify as an "emerging growth company" pursuant to the Jumpstart Our Business Startups Act onDecember 31, 2019 , at which time we reached the last day of the fiscal year following the fifth anniversary of our initial public offering of common equity securities. Key Components of Condensed Consolidated Statements of Operations Revenue We generate revenue principally from fixed-price construction contracts to 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 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. 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. 31
--------------------------------------------------------------------------------
Table of Contents
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 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. 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 to support the growth of our business and to meet the compliance requirements associated with operating as a public company. Those costs include accounting, human resources, information technology, legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors' compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act. StartingJanuary 1, 2020 , we changed the methodology in which we present our corporate selling, general and administrative expenses to our CODM (as defined below) to better reflect the way the business is managed. Under this new methodology, all corporate expenses except for stock-based compensation are allocated to our Construction and Service segments. For comparability purposes, we reclassified our selling, general and administrative expense segment amounts for the three and six months endedJune 30, 2019 to align with this updated allocation methodology. Amortization of Intangibles Amortization expense represents periodic non-cash charges that consist of amortization of various intangible assets, primarily including leasehold interests, customer relationships - Service and backlog - Construction. Other Income/Expense Other income/expense, net consists primarily of interest expense incurred in connection with our debt, net of interest income and gains and losses on the sale of property and equipment and change in fair value of warrant liability. Deferred financing costs are amortized to interest expense using the effective interest method. Income Taxes We are taxed as a C corporation and our financial results include the effects of federal income taxes which are paid at the parent level. For interim periods, the provision for income taxes (including federal, state and local taxes) is calculated based on the estimated annual effective tax rate. The Company accounts for income taxes in accordance with ASC Topic 740 - Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities and income or expense are recognized for the expected future tax consequences of temporary differences between the financial statement carrying values and their respective tax bases, using enacted tax rates expected to be applicable in the years in which the temporary differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. 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") reviews its operating results for the purposes of allocating resources and assessing performance. Our CODM is comprised of our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. The CODM evaluates performance and allocates resources based on operating income, which is profit or loss from operations before "other" corporate expenses, income tax provision (benefit), if any. 32
--------------------------------------------------------------------------------
Table of Contents
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. In accordance with ASC Topic 280 - Segment Reporting, the Company has elected to aggregate all of the construction branches into one Construction reportable segment and all of the service branches into one Service reportable segment. All transactions between segments are eliminated in consolidation. Our corporate department provides general and administrative support services to our two operating segments. We allocate costs between segments for selling, general and administrative expenses and depreciation expense. See Note 12 - Operating Segments in the notes to condensed consolidated financial statements. We do not identify capital expenditures and total assets 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. Comparison of Results of Operations for the three months endedJune 30, 2020 andJune 30, 2019 The following table presents operating results for the three months endedJune 30, 2020 andJune 30, 2019 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared below: Three months ended June 30, 2020 2019 (As Recast) (in thousands except for percentages) ($) (%) ($) (%) Statement of Operations Data: Revenue: Construction$ 105,937 78.4 %$ 104,759 79.0 % Service 29,248 21.6 % 27,844 21.0 % Total revenue 135,185 100.0 % 132,603 100.0 % Gross profit: Construction 12,213 11.5 % (1) 10,683 10.2 % (1) Service 8,122 27.8 % (2) 7,012 25.2 % (2) Total gross profit 20,335 15.0 % 17,695 13.3 % Selling, general and administrative:(3) Construction 8,024 7.6 % (1) 11,229 10.7 % (1) Service 5,588 19.1 % (2) 5,335 19.2 % (2) Corporate 140 0.1 % 515 0.4 % Total selling, general and administrative expenses 13,752 10.2 % 17,079 12.9 % Amortization of intangibles (Corporate) 274 0.2 % 175 0.1 % Operating income (loss): Construction 4,189 4.0 % (1) (546 ) (0.5 )% (1) Service 2,534 8.7 % (2) 1,677 6.0 % (2) Corporate (414 ) - % (690 ) - % Total operating income 6,309 4.7 % 441 0.3 % Other expenses (Corporate) (2,252 ) (1.7 )% (2,204 ) (1.7 )% Total consolidated income (loss) before income taxes 4,057 3.0 % (1,763 ) (1.3 )% Income tax provision (benefit) 1,110 0.8 % (474 ) (0.4 )% Net income (loss)$ 2,947 2.2 %$ (1,289 ) (1.0 )% 33
--------------------------------------------------------------------------------
Table of Contents
(1) As a percentage of Construction revenue.
(2) As a percentage of Service revenue.
(3) Starting
corporate selling, general and administrative expenses to our CODM to better
reflect the way the business is managed. Under this new methodology, all
corporate expenses except for stock-based compensation are allocated to our
Construction and Service segments. For comparability purposes, we
reclassified our selling, general and administrative expense segment amounts
for the three months ended
allocation methodology.
Revenue
Three months ended June 30,
2020 2019 Increase/(Decrease)
(As Recast)
(in thousands except for percentages) $ $ $ %
Revenue:
Construction 105,937 104,759 1,178 1.1 %
Service 29,248 27,844 1,404 5.0 %
Total revenue 135,185 132,603 2,582 1.9 %
Revenue for the three months ended June 30, 2020 increased by $2.6 million
compared to the revenue for the three months ended June 30, 2019 , as recast for
the adoption of ASC Topic 606. Construction revenue increased by $1.2 million ,
or 1.1% while Service revenue increased by $1.4 million , or 5.0%. The increase
in Construction revenue was primarily driven by revenue increases at the
Michigan , Southern California and Ohio regions. These increases were partially
offset by revenue decreases in the Florida and New England regions largely due
to project shutdowns due to COVID-19 and Western and Eastern Pennsylvania
regions due to the substantial completion of projects in the second quarter of
2020 compared to the same prior year quarter. Florida and Mid-Atlantic regions'
Service revenue increased quarter over quarter nearly offset by declines in
Service revenue in Michigan , Eastern Pennsylvania and New England . Maintenance
contract revenue, a component of Service revenue, remained relatively flat at
$3.7 million for both the three months ended June 30, 2020 and June 30, 2019 .
Gross Profit
Three months ended June 30,
2020 2019 Increase/(Decrease)
(As Recast)
(in thousands except for percentages) $ $ $ %
Gross Profit:
Construction 12,213 10,683 1,530 14.3 %
Service 8,122 7,012 1,110 15.8 %
Total gross profit 20,335 17,695 2,640 14.9 %
Total gross profit as a percentage of
consolidated total revenue 15.0 % 13.3 %
Our gross profit for the three months ended June 30, 2020 increased by $2.6
million compared to our gross profit for the three months ended June 30, 2019 .
Construction gross profit increased $1.5 million or 14.3%. Service gross profit
increased $1.1 million , or 15.8% due to more favorable project pricing. The
total gross profit percentage increased from 13.3% for the three months ended
June 30, 2019 to 15.0% for the same period ended in 2020, mainly driven by the
mix of higher margin Service to Construction projects and more favorable pricing
of those projects year over year.
We recorded revisions in our contract estimates for certain construction
projects. For projects having revisions with a material gross profit impact,
this resulted in gross profit write downs on four construction projects of $1.5
million for the three months ended June 30, 2020 , two of which were within the
Southern California region for a total of $0.7 million . No material project
revisions resulting in gross profit write ups were recorded for the three months
ended June 30, 2020 .
For the three months ended June 30, 2019 , we recorded revisions in our contract
estimates for certain construction and service projects. For individual projects
with revisions having a material gross profit impact, this resulted in gross
profit write ups totaling
34--------------------------------------------------------------------------------
Table of Contents
$0.3 million on one construction project and$0.3 million on one service project. We also recorded revisions in contract estimates that resulted in project write downs totaling$1.9 million on three construction projects for ourSouthern California region. Selling, General and Administrative Expenses Three months ended June 30, 2020 2019 Increase/(Decrease) (As Recast) (in thousands except for percentages) $ $ $ % Selling, general and administrative expenses: Construction 8,024 11,229 (3,205 ) (28.5 )% Service 5,588 5,335 253 4.7 % Corporate 140 515 (375 ) (72.8 )% Total selling, general and administrative expenses 13,752 17,079 (3,327 ) (19.5 )% Selling, general and administrative expenses as a percentage of consolidated total revenue 10.2 % 12.9 % Our total selling, general and administrative ("SG&A") expenses decreased by approximately$3.3 million to$13.8 million for the three months endedJune 30, 2020 compared to$17.1 million for the three months endedJune 30, 2019 . Total SG&A expense decreased during the current quarter by$3.3 million primarily related to$0.7 million in net headcount reductions throughout the Company,$0.8 million related to company-wide reduction in travel and entertainment expenses, a$0.2 million reduction in professional service fees and a$0.4 million reduction on pre-sale engineering expenses. Corporate SG&A decreased to$0.1 million for the three months endedJune 30, 2020 from$0.5 million for the three months endedJune 30, 2019 due to lower expense related to stock-based compensation awards. Additionally, total SG&A as a percentage of revenues were 10.2% for the three months endedJune 30, 2020 and 12.9% for the three months endedJune 30, 2019 . Amortization of Intangibles Three months ended June 30, 2020 2019 Increase/(Decrease) (in thousands except for percentages) $ $ $ % Amortization of intangibles (Corporate) 274 175 99 56.6 % Total amortization expense for the amortizable intangible assets was$0.3 million for the three months endedJune 30, 2020 and$0.2 million for the three months endedJune 30, 2019 . This increase was attributable to$0.1 million of accelerated amortization of our favorable leasehold interests intangible asset in conjunction with theWestern Pennsylvania office relocation during the three months endedJune 30, 2020 . Other Expenses Three months ended June 30, 2020 2019 Increase/(Decrease) (in thousands except for percentages) $ $ $ % Other income (expenses): Interest expense, net (2,137 ) (1,597 ) (540
) 33.8 %
Gain on disposition of property and equipment (13 ) 9 (22
) (244.4 )%
Loss on debt extinguishment - (513 ) 513
(100.0 )%
Gain (loss) on fair value of warrant liability (102 ) (103 ) 1 (1.0 )% Total other expenses (2,252 ) (2,204 ) (48 ) 2.2 % Other expenses, consisting primarily of interest expense, were$2.3 million for the three months endedJune 30, 2020 and$2.2 million for the three months endedJune 30, 2019 . The increase in interest expense was primarily due to the Company's higher interest rates on the refinanced debt obligations at 13.0% in the second quarter of 2020 compared to 10.5% in the second quarter 35
--------------------------------------------------------------------------------
Table of Contents
of 2019, including debt issuance and discount amortization, associated with the 2019 Refinancing Agreement that occurred onApril 12, 2019 . Accordingly, a loss on debt extinguishment of$0.5 million was recognized on that same date. The Company also recorded other income of$0.1 million to reflect the change in fair value of the CB Warrants liability for both the three months endedJune 30, 2020 andJune 30, 2019 . Income Taxes For the three months endedJune 30, 2020 , the Company recorded a$1.0 million current tax provision and a$0.2 million deferred income tax benefit for the three months endedJune 30, 2020 . For the three months endedJune 30, 2019 , the Company recorded a$0.1 million current federal tax benefit. In addition, the Company recorded a$0.5 million deferred federal income tax benefit for the three months endedJune 30, 2019 . The effective tax rate for the three months endedJune 30, 2020 was 27.4% and the effective tax rate for the three months endedJune 30, 2019 was (26.9%). The difference in the effective rate for the three months endedJune 30, 2020 as compared to 2019 is primarily due to the CARES Act allowing the Company to carryback net operating losses generated in 2018 and 2019 (originally valued at a 21% federal tax rate) to prior tax years and generate a tax refund based on the higher 34% federal tax rate in those prior years. The refund generated by this carryback has been netted against income taxes payable and has been included in income tax receivable as$0.7 million in the condensed consolidated balance sheet atJune 30, 2020 . 36
--------------------------------------------------------------------------------
Table of Contents
Comparison of Results of Operations for the six months endedJune 30, 2020 andJune 30, 2019 The following table presents operating results for the six months endedJune 30, 2020 andJune 30, 2019 in dollars and expressed as a percentage of total revenue (except as indicated below), as compared below: Six months ended June 30, 2020 2019 (As Recast) (in thousands except for percentages) ($) (%) ($) (%) Statement of Operations Data: Revenue: Construction$ 215,423 78.6 %$ 209,219 78.6 % Service 58,534 21.4 % 57,131 21.4 % Total revenue 273,957 100.0 % 266,350 100.0 % Gross profit: Construction 23,195 10.8 % (1) 23,599 11.3 % (1) Service 15,364 26.2 % (2) 13,720 24.0 % (2) Total gross profit 38,559 14.1 % 37,319 14.0 % Selling, general and administrative:(3) Construction 18,200 8.4 % (1) 21,681 10.4 % (1) Service 11,917 20.4 % (2) 10,561 18.5 % (2) Corporate 435 0.2 % 882 0.3 % Total selling, general and administrative expenses 30,552 11.2 % 33,124 12.4 % Amortization of intangibles (Corporate) 417 0.2 % 350 0.1 % Operating income (loss): Construction 4,995 2.3 % (1) 1,918 0.9 % (1) Service 3,447 5.9 % (2) 3,159 5.5 % (2) Corporate (852 ) - % (1,232 ) - % Total operating income 7,590 2.8 % 3,845 1.4 % Other expenses (Corporate) (4,219 ) (1.5 )% (3,025 ) (1.1 )% Total consolidated income (loss) before income taxes 3,371 1.2 % 820 0.3 % Income tax provision (benefit) 476 0.2 % 261 0.1 % Net income (loss)$ 2,895 1.1 %$ 559 0.2 %
(1) As a percentage of Construction revenue.
(2) As a percentage of Service revenue.
(3) Starting
corporate selling, general and administrative expenses to our CODM to better
reflect the way the business is managed. Under this new methodology, all
corporate expenses except for stock-based compensation are allocated to our
Construction and Service segments. For comparability purposes, we
reclassified our selling, general and administrative expense segment amounts
for the six months ended
methodology.
37--------------------------------------------------------------------------------
Table of Contents
Revenue
Six months ended June 30,
2020 2019 Increase/(Decrease)
(As Recast)
(in thousands except for percentages) $ $ $ %
Revenue:
Construction 215,423 209,219 6,204 3.0 %
Service 58,534 57,131 1,403 2.5 %
Total revenue 273,957 266,350 7,607 2.9 %
Revenue for the six months ended June 30, 2020 increased by $7.6 million
compared to the revenue for the six months ended June 30, 2019 , as recast for
the adoption of ASC Topic 606. Construction revenue increased by $6.2 million ,
or 3.0%. The increase in Construction revenue was primarily driven by revenue
increases at the Michigan and Southern California regions. These increases were
partially offset by revenue decreases in all other regions, particularly, the
Florida and New England regions due to project shutdowns due to COVID-19 and
Western and Eastern Pennsylvania regions due to the substantial completion of
projects in the first half of the year of 2020 compared to the same period in
the prior year. Ohio , Florida and Mid-Atlantic regions' Service revenue
increased year over year offset by declines in Service revenue in all other
regions, resulting in a net Service revenue of $1.4 million . Maintenance
contract revenue, a component of Service revenue, was $7.5 million for the six
months ended June 30, 2020 and $7.4 million for the six months ended June 30,
2019 , remaining relatively flat year over year.
Gross Profit
Six months ended June 30,
2020 2019 Increase/(Decrease)
(As Recast)
(in thousands except for percentages) $ $ $ %
Gross Profit:
Construction 23,195 23,599 (404 ) (1.7 )%
Service 15,364 13,720 1,644 12.0 %
Total gross profit 38,559 37,319 1,240 3.3 %
Total gross profit as a percentage of
consolidated total revenue 14.1 % 14.0 %
Our gross profit for the six months ended June 30, 2020 increased by $1.2
million compared to our gross profit for the six months ended June 30, 2019 .
Construction gross profit decreased $0.4 million or (1.7)% due to the project
write downs referenced in the succeeding paragraph. Service gross profit
increased $1.6 million , or 12.0% due to more favorable project pricing. The
total gross profit percentage was 14.0% for the six months ended June 30, 2019
as compared to 14.1% for the same period ended in 2020, remaining relatively
flat.
For the six months ended June 30, 2020 , we recorded revisions in our contract
estimates for certain construction projects. We recorded gross profit write
downs on eight construction projects and two gross profit write ups on
construction projects for the six months ended June 30, 2020 , each of which had
a material gross profit impact, for an aggregate revision of $5.2 million and
$1.2 million , respectively.
For the six months ended June 30, 2019 , we recorded revisions in our contract
estimates for certain construction and service projects. For individual projects
with revisions having a material gross profit impact, this resulted in gross
profit write ups totaling $3.0 million on six projects, including three projects
totaling $1.0 million for our Mid-Atlantic region. One of these project write
ups in the amount of $1.4 million resulted from our settlement of a significant
Michigan project. We also recorded revisions in contract estimates that resulted
in project write downs totaling $3.5 million on seven projects, including four
projects totaling $2.2 million in our Southern California region and one project
for $0.5 million in our Mid-Atlantic region. Revisions in our contract estimates
on one service project resulted in a gross profit write up of $0.3 million on a
Mid-Atlantic project and one Southern California project resulted in a gross
profit write down of $0.3 million for the first six months of 2019.
38--------------------------------------------------------------------------------
Table of Contents
Selling, General and Administrative Expenses
Six months ended June 30,
2020 2019 Increase/(Decrease)
(As Recast)
(in thousands except for percentages) $ $ $ %
Selling, general and administrative
expenses:
Construction 18,200 21,681 (3,481 ) (16.1 )%
Service 11,917 10,561 1,356 12.8 %
Corporate 435 882 (447 ) (50.7 )%
Total selling, general and
administrative expenses 30,552 33,124 (2,572 ) (7.8 )%
Selling, general and administrative
expenses as a percentage of
consolidated total revenue 11.2 % 12.4 %
Our total SG&A expenses decreased by approximately $2.6 million to $30.6 million
for the six months ended June 30, 2020 compared to $33.1 million for the six
months ended June 30, 2019 . Total SG&A expense decreased during the first half
of the year by $2.6 million primarily related to reductions of $1.1 million in
company-wide travel and entertainment expenses, $0.4 million in pre-sales
engineering expenses, $0.2 million for medical and workers' compensation
expense, $0.1 million in rent-related expense and a $0.5 million decrease in
professional fees offset by a $1.0 million increase in payroll related expenses
due to the timing of headcount for the first half of the year as compared to
prior year. Corporate SG&A decreased to $0.4 million for the six months ended
June 30, 2020 from $0.9 million for the six months ended June 30, 2019 due to
lower expense related to stock-based compensation awards. Additionally, total
SG&A as a percentage of revenues were 11.2% for the six months ended June 30,
2020 and 12.4% for the six months ended June 30, 2019 .
Amortization of Intangibles
Six months ended June 30,
2020 2019 Increase/(Decrease)
(in thousands except for percentages) $ $ $ %
Amortization of intangibles (Corporate) 417 350 67 19.1 %
Total amortization expense for the amortizable intangible assets was $0.4
million for the six months ended June 30, 2020 and $0.4 million for the six
months ended June 30, 2019 . This increase was attributable to a $0.1 million
accelerated amortization of our favorable leasehold interests intangible asset
in conjunction with the Western Pennsylvania office relocation offset by lower
amortization of the Customer Relationships - Service intangible asset for the
six months ended June 30, 2020 than for the six months ended June 30, 2019 .
Other Expenses
Six months ended June 30,
2020 2019 Increase/(Decrease)
(in thousands except for percentages) $ $ $ %
Other income (expenses): Interest expense, net (4,295 ) (2,430 ) (1,865
) 76.7 %
Gain on disposition of property and equipment 17 21 (4
) (19.0 )%
Loss on debt extinguishment - (513 ) 513
(100.0 )%
Gain (loss) on fair value of warrant liability 59 (103 ) 162 (157.3 )% Total other expenses (4,219 ) (3,025 ) (1,194 ) 39.5 % Other expenses, consisting primarily of interest expense, were$4.2 million for the six months endedJune 30, 2020 and$3.0 million for the six months endedJune 30, 2019 . The increase in interest expense was primarily due to the Company's higher interest rates on the refinanced debt obligations, including debt issuance and discount amortization, associated with the 2019 Refinancing Agreement that occurred onApril 12, 2019 . The Company also recorded other income of$0.5 million for a loss on debt 39
--------------------------------------------------------------------------------
Table of Contents
extinguishment also related to the refinancing and$0.1 million to reflect the change in fair value of the CB Warrants liability for the six months endedJune 30, 2019 . Income Taxes The Company recorded a$0.2 million current federal tax benefit and a$0.1 million current state and local income tax benefit for the six months endedJune 30, 2020 . In addition, the Company recorded a$0.7 million deferred federal income tax provision and a$0.1 million deferred state and local income tax provision for the six months endedJune 30, 2020 . For the six months endedJune 30, 2019 , the Company recorded a$0.1 million current federal and state and local current tax provision. In addition, the Company recorded a$0.6 million deferred federal income tax provision and a$0.1 million deferred state and local income tax provision for the six months endedJune 30, 2019 . The effective tax benefit rate for the six months endedJune 30, 2020 was 14.1% and the effective tax provision rate for the six months endedJune 30, 2019 was 31.8%. The difference in the effective rate for the six months endedJune 30, 2020 as compared to 2019 is primarily due to the CARES Act allowing the Company to carryback net operating losses generated in 2018 and 2019 (originally valued at a 21% federal tax rate) to prior tax years and generate a tax refund based on the higher 34% federal tax rate in those prior years. The total refund generated by this carryback was$1.6 million and has been included in income tax receivable in the condensed consolidated balance sheet atJune 30, 2020 . Construction and Service Backlog Information We refer to our estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue we have recognized under such contracts, as "backlog." Backlog includes unexercised contract options. Our backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Additionally, the difference between our backlog and remaining performance obligations is due to the portion of unexercised contract options that are excluded, under certain contract types, from our remaining performance obligations as these contracts can be canceled for convenience at any time by us or the customer without considerable cost incurred by the customer. Additional information related to our remaining performance obligations is provided in Note 16 - Remaining Performance Obligations in the accompanying notes to our consolidated financial statements. 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 as ofJune 30, 2020 was$408.8 million compared to$504.2 million atDecember 31, 2019 . In addition, Service backlog as ofJune 30, 2020 was$61.8 million compared to$57.0 million atDecember 31, 2019 as a result of incremental Service sales generated from the Company's investment in Service sales staff over the past few years. Of the total backlog atJune 30, 2020 , we expect to recognize approximately$275.9 million by the end of 2020. 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 and Tariffs The prices of products such as steel, pipe, copper and equipment from manufacturers are subject to fluctuation and the imposition of or increases in tariffs. While it is difficult to accurately measure the impact of inflation and tariffs due to the imprecise nature of the estimates required, we believe these 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 Cash Flows 40
--------------------------------------------------------------------------------
Table of Contents
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 borrowings
from commercial banks and institutional lenders.
The following table presents summary cash flow information for the periods
indicated:
Six months ended June 30,
2020 2019
(in thousands) (As Recast)
Net cash provided by (used in):
Operating activities $ 22,457 $ (15,661 )
Investing activities (597 ) (1,151 )
Financing activities (1,375 ) 16,204
Net increase in cash and cash equivalents $ 20,485 Noncash investing and financing transactions:
Right of use assets obtained in exchange for new operating lease liabilities
$ - Right of use assets obtained in exchange for new finance lease liabilities
1,050 1,630
Right of use assets disposed or adjusted modifying operating lease liabilities
586 1,651
Right of use assets disposed or adjusted modifying finance lease liabilities (64 ) - Interest paid$ 3,250 $ 1,621 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 contract assets. We regularly assess our receivables for collectability and provide allowances for doubtful accounts where appropriate. We believe that our reserves for doubtful accounts are appropriate as ofJune 30, 2020 andDecember 31, 2019 , 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 Company's existing current backlog is projected to provide substantial coverage of forecasted construction revenue for one year from the date of the financial statement issuance. Our current cash balance, together with cash we expect to generate from future operations (inclusive of actions we are taking to reduce costs and spending across our organization, in response to the COVID-19 pandemic) along with borrowings available under our 2019 Refinancing Agreement and 2019 ABL Credit Agreement, is expected to be sufficient to finance our short- and long-term capital requirements (or meet working capital requirements) for the next twelve months. In addition to the future operating cash flows of the Company, along with its existing borrowing availability and access to financial markets, the Company believes it will be able to meet any working capital and future operating requirements, and capital investment forecast opportunities for the next twelve months. If current economic conditions decline materially from information presently available or if project shutdowns recur in the fourth quarter of 2020 or the first quarter of 2021, the Company could be unable to meet its financial covenants, which would cause an event of default thereby classifying its debt as current. If the lenders were to call the debt, the Company might not have the available working capital to satisfy its outstanding debt obligations. The following table represents our summarized working capital information: As of As of (in thousands, except ratios) June 30, 2020 December 31, 2019 Current assets$ 207,685 $ 195,380 Current liabilities (164,840 ) (156,869 ) Net working capital$ 42,845 $ 38,511 Current ratio* 1.26 1.25 41
--------------------------------------------------------------------------------
Table of Contents
* Current ratio is calculated by dividing current assets by current liabilities.
As discussed above and in Note 7 to the accompanying condensed consolidated financial statements, as ofJune 30, 2020 , the Company was in compliance with all debt covenants as required by the 2019 Refinancing Credit Agreement. Cash Flows Provided by (Used in) Operating Activities Cash flows provided by operating activities were$22.5 million for the six months endedJune 30, 2020 compared to cash flows used in operating activities of$15.7 million for the six months endedJune 30, 2019 . For the six months endedJune 30, 2020 , the key components included cash inflows of$3.6 million related to our accounts receivable,$4.9 million related to our contract assets,$16.3 million for our contract liabilities shifting from an underbilled to an overbilled position consistent with our renewed focus on project cash flows and$9.4 million related to accrued expenses and other current liabilities. These cash inflows were offset by outflows of$19.5 million related to our accounts payable, including retainage. Cash flows used in operating activities were$15.7 million for the six months endedJune 30, 2019 . For the six months endedJune 30, 2019 , our cash usage in operating activities was significantly impacted by a$5.7 million increase in accounts receivable, a$4.7 million decrease in accounts payable, a$4.5 million decrease in contract assets, a$4.7 million increase in contract liabilities. The accounts receivable increase resulted primarily from our lower revenue volume and billing during the second quarter of 2019 in comparison to stronger revenue and billings for the fourth quarter of 2018. The reduction in accounts payable is consistent with our decrease in accounts receivable and attributable to our second quarter 2019 revenue volume decrease, as well as tighter management of our payable balances. Our decrease of$9.2 million in net contract assets resulted primarily from the combination of 2019 unbilled costs incurred on aSouthern California region Construction project on which a claim and change orders are pending, additional work performed on a previously overbilledFlorida Construction project that is nearing completion, the final settlement of a significantMichigan region project, and the effects of our second quarter 2019 overall revenue reduction as compared to the fourth quarter of 2018. The significant decreases in other current assets and accrued expenses and other current liabilities are primarily attributable to the$30.0 million lawsuit settlement payments referenced in Note 14 to the accompanying condensed consolidated financial statements. The settlement of this matter was entirely covered by the Company's insurance carriers. Non-cash charges for depreciation and amortization were$3.1 million for the six months endedJune 30, 2020 and$2.9 million for the six months endedJune 30, 2019 . Cash Flows Used in Investing Activities Cash flows used in investing activities were$0.6 million for the six months endedJune 30, 2020 and$1.2 million for the six months endedJune 30, 2019 . The majority of our cash used for investing activities in both periods was for capital additions pertaining to tools and equipment, computer software and hardware purchases, office furniture and office related leasehold improvements. Cash Flows Provided by (Used in) Financing Activities Cash flows used in financing activities were$1.4 million for the six months endedJune 30, 2020 . Cash provided by financing activities was$16.2 million for the six months endedJune 30, 2019 . For the six months endedJune 30, 2020 , we borrowed and repaid$7.3 million on the 2019 Revolving Credit Facility and made capital lease payments of$1.3 million . For the six months endedJune 30, 2019 , we both borrowed and repaid a total of$17.5 million on the Credit Agreement revolver (as defined below), and another$7.5 million on the 2019 Revolving Credit Facility. The Company also borrowed$38.6 million on its 2019 Refinancing Term Loan, which was used to repay, in its entirety,$14.3 million on the Credit Agreement Term Loan,$7.7 million on the Bridge Term Loan and$10.5 million on the Credit Agreement Revolver. The Company also recorded fair values of the CB Warrants liability and the embedded derivative liability which approximated$0.9 million and$0.4 million , respectively, on the Refinancing Closing Date. The Company also made capital lease payments of$1.1 million and payments of$3.3 million related to debt issuance costs for ourApril 2019 Refinancing Agreement. For the six months endedJune 30, 2019 , the Company's bank overdraft increased by$2.8 million , representing an increase in the Company's short-term obligation to its bank. Bank overdrafts represent outstanding checks in excess of cash on hand with a specific financial institution as of any balance sheet date. Debt and Other Obligations Credit Agreement In 2016, LFS, a subsidiary of the Company, entered into the Credit Agreement (as amended, the "Credit Agreement"). The Credit Agreement consisted of a$25.0 million revolving line of credit (the "Credit Agreement revolver") and a$24.0 million term loan 42
--------------------------------------------------------------------------------
Table of Contents
(the "Credit Agreement term loan"), both with a maturity date ofJuly 20, 2021 . The Credit Agreement was collateralized by substantially all assets of LFS and its subsidiaries. Principal payments of$900,000 on the Credit Agreement term loan were due at the end of each quarter, beginningSeptember 30, 2018 , through maturity of the loan, with any remaining amounts due at maturity. Outstanding borrowings on both the Credit Agreement term loan and the Credit Agreement revolver bore 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. Mandatory prepayments were 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. The Credit Agreement included 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. Loans under the Credit Agreement bore interest, at the borrower's option, at either Adjusted LIBOR ("Eurodollar") or a Base Rate, in each case, plus an applicable margin. The applicable margin with respect to any Base Rate loan was 5.00% per annum and with respect to a Eurodollar loan was 6.00% per annum. The borrower was required to make principal payments on the Bridge Term Loan in the amount of$250,000 on the last business day of March, June, September and December of each year. The Bridge Term Loan had a maturity date ofApril 12, 2019 . The Bridge Term Loan was guaranteed by the same guarantors (includingLimbach Holdings, Inc. ,Limbach Facility Services LLC ,Limbach Holdings LLC ,Limbach Company LLC ,Limbach Company LP ,Harper Limbach LLC andHarper Limbach Construction LLC ) and secured (on a pari passu basis) by the same collateral as the other loans under the Credit Agreement.
2019 Refinancing Agreement
OnApril 12, 2019 (the "Refinancing Closing Date"), LFS entered into a financing agreement (the "2019 Refinancing Agreement") with the lenders thereto andCortland Capital Market Services LLC , as collateral agent and administrative agent andCB Agent Services LLC , as origination agent ("CB"). The 2019 Refinancing Agreement consists of (i) a$40.0 million term loan (the "2019 Refinancing Term Loan") and (ii) a new$25.0 million multi-draw delayed draw term loan (the "2019 Delayed Draw Term Loan" and, collectively with the 2019 Refinancing Term Loan, the "2019 Term Loans"). Proceeds from the 2019 Refinancing Term Loan were used to repay the then existing Credit Agreement, to pay related fees and expenses thereof and to fund working capital of the Borrowers (defined below). Management intends for proceeds of the 2019 Delayed Draw Term Loan to be used to fund permitted acquisitions under the 2019 Refinancing Agreement and related fees and expenses in connection therewith. LFS, a wholly-owned subsidiary of the Company, and each of its subsidiaries are borrowers (the "Borrowers") under the 2019 Refinancing Agreement. In addition, the 2019 Refinancing Agreement is guaranteed by the Company and LHLLC (each, a "Guarantor", and together with the Borrowers, the "Loan Parties"). The 2019 Refinancing Agreement is secured by a first-priority lien on the real property of the Loan Parties and a second-priority lien on substantially all other assets of the Loan Parties, behind the 2019 ABL Credit Agreement (as defined below). The respective lien priorities of the 2019 Refinancing Agreement and the 2019 ABL Credit Agreement are governed by an intercreditor agreement.
2019 Refinancing Agreement - Interest Rates and Fees
The interest rate on borrowings under the 2019 Refinancing Agreement is, at the Borrowers' option, either LIBOR (with a 2.00% floor) plus 11.00% or a base rate (with a 3.00% minimum) plus 10.00%. AtJune 30, 2020 andJune 30, 2019 , the interest rates in effect on the 2019 Refinancing Term Loan were 13.00% and 10.54%, respectively.
2019 Refinancing Agreement - Other Terms and Conditions
The 2019 Refinancing Agreement matures onApril 12, 2022 , subject to certain adjustment. Required amortization is$1.0 million per quarter commencing with the fiscal quarter endingSeptember 30, 2020 . There is an unused line fee of 2.0% per annum on the undrawn portion of the 2019 Delayed Draw Term Loan, and there is a make-whole premium on prepayments made prior to the 19-month anniversary of the Refinancing Closing Date. This make-whole provision guarantees that the Company will pay no less than 18 months' applicable interest to the lenders under the 2019 Refinancing Agreement. The 2019 Refinancing Agreement contains representations and warranties, and covenants which are customary for debt facilities of this type. Unless the Required Lenders (as defined in the 2019 Refinancing Agreement) otherwise consent in writing, the covenants limit the ability of the Company and its restricted subsidiaries to, among other things, (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to the Company's stockholders, (iii) purchase or redeem the Company's equity interests, (iv) make 43
--------------------------------------------------------------------------------
Table of Contents
investments, (v) create liens on their assets, (vi) enter into transactions with the Company's affiliates, (vii) sell assets and (viii) merge or consolidate with, or dispose of substantially all of the Company's assets to, other companies.
In addition, the 2019 Refinancing Agreement includes customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company fails to comply with the terms of the 2019 Refinancing Agreement or if other customary events occur. Furthermore, the 2019 Refinancing Agreement also contains two financial maintenance covenants for the 2019 Refinancing Term Loan, including a requirement to have sufficient collateral coverage of the aggregate outstanding principal amount of the 2019 Refinancing Term Loans and as of the last day of each month for the total leverage ratio of the Company and its Subsidiaries (the "Total Leverage Ratio ") not to exceed an amount beginning at 4.25 to 1.00 throughJune 30, 2019 , and stepping down to 2.00 to 1.00 effectiveJuly 1, 2021 . FromJuly 1, 2019 throughSeptember 30, 2019 , the Total Leverage Ratio may not exceed 4.00 to 1.00. As ofAugust 31, 2019 , the Company's Total Leverage Ratio for the preceding twelve consecutive fiscal month period was 4.61 to 1.00, which did not meet the requirement for such ratio not to exceed 4.00 to 1.00. As ofSeptember 30, 2019 , the Company's Total Leverage Ratio for the preceding twelve consecutive fiscal month period was 2.85 to 1.00, which was in compliance with the 4.00 to 1.00 requirement. The lender has waived the event of default arising from this noncompliance as ofAugust 31, 2019 , while reserving its rights with respect to covenant compliance in future months. In addition, the parties to the 2019 Refinancing Agreement entered into an amendment which, among other changes, revises the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 onOctober 1, 2019 with a peak ratio of 4.25 duringMarch 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 onApril 1, 2021 through the term of such agreement. The 2019 Refinancing Agreement contains a post-closing covenant requiring the remediation of the Company's material weakness, as described in Item 9A of its 2018 Annual Report on Form 10-K, no later thanDecember 31, 2020 and to provide updates as to the progress of such remediation, provided that, if such remediation has not been completed on or prior toDecember 31, 2019 , (x) the Company shall be required to pay the post-closing fee pursuant to the terms of the Origination AgentFee Letter (as defined in the 2019 Refinancing Agreement) and (y) the applicable margin shall be increased by 1.00% per annum for the period fromJanuary 1, 2020 until the date at which the material weakness is no longer disclosed or required to be disclosed in the Company'sSEC filings or audited financial statements of the Company or related auditor's reports. As ofDecember 31, 2019 , the Company fully remediated its material weakness eliminating its disclosure in the Company'sSEC filings, audited financial statements or related auditor's reports. In connection with the 2019 Refinancing Amendment Number One and Waiver, the parties amended certain provisions of the 2019 Refinancing Agreement, including, among other changes to: (i) require, commencingOctober 1, 2019 , a 3.00% increase in the interest rate on borrowings under the 2019 Refinancing Agreement; (ii) require the approval of CB and, generally, the lenders representing at least 50.1% of the aggregate undrawn term loan commitment or unpaid principal amount of the term loans, prior to effecting any permitted acquisition; (iii) revise the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 onOctober 1, 2019 with a peak ratio of 4.25 duringMarch 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 onApril 1, 2021 and thereafter through the term of the 2019 Refinancing Agreement; and (iv) require the liquidity of the loan parties, which is generally calculated by adding (a) unrestricted cash on hand of the Loan Parties maintained in deposit accounts subject to control agreements granting control to the collateral agent for the 2019 ABL Credit Agreement, to (b) the difference between (1) the lesser of (x)$15 million , as adjusted from time to time, and (y) 75% of certain customer accounts resulting from the sale of goods or services in the ordinary course of business minus certain reserves established by the Administrative Agent and (2) the sum of (x) the outstanding principal balance of all revolving loans under the 2019 ABL Credit Agreement plus (y) the aggregate undrawn available amount of all letters of credit then outstanding plus the amount of any obligations that arise from any draw against any letter of credit that have not been reimbursed by the borrowers or funded with a revolving loan under the 2019 ABL Credit Agreement (the "Loan Parties Liquidity"), as of the last day of any fiscal month ending on or afterNovember 30, 2019 , of at least$10,000,000 . As a condition to executing the 2019 Refinancing Amendment Number One and Waiver, the loan parties will be required to pay a non-refundable waiver fee of$400,000 and a non-refundable amendment fee of$1,000,000 (the "PIK First Amendment Fee", which shall be paid in kind by adding the PIK First Amendment Fee to the outstanding principal amount of the term loan under the 2019 Refinancing Agreement as additional principal obligations thereunder on and as of the effective date 2019 Refinancing Amendment Number One and Waiver).
2019 Refinancing Agreement - CB Warrants
In connection with the 2019 Refinancing Agreement, on the Refinancing Closing Date, the Company issued to CB and the other lenders under the 2019 Refinancing Agreement warrants (the "CB Warrants") to purchase up to a maximum of 263,314 shares of the Company's common stock at an exercise price of$7.63 per share subject to certain adjustments, including for stock dividends, stock splits or reclassifications. The actual number of shares of common stock into which the CB Warrants will be exercisable at any given time will be equal to: (i) the product of (x) the number of shares equal to 2% of the Company's issued and outstanding shares of common stock on the Refinancing Closing Date on a fully diluted basis and (y) the percentage of the total 2019 Delayed Draw Term Loan made as of the exercise date, minus (ii) the number of shares previously issued under the CB Warrants. As of 44
--------------------------------------------------------------------------------
Table of Contents
the Refinancing Closing Date andJune 30, 2020 , no amounts had been drawn on the 2019 Delayed Draw Term Loan, so no portion of the CB Warrants was exercisable. The CB Warrants may be exercised for cash or on a "cashless basis," subject to certain adjustments, at any time after the Refinancing Closing Date until the expiration of such warrant at5:00 p.m. ,New York time, on the earlier of (i) the five (5) year anniversary of the Refinancing Closing Date, or (ii) the liquidation of the Company.
Accounting for the 2019 Term Loans and CB Warrants
The CB Warrants represent a freestanding financial instrument that is classified as a liability because the CB Warrants meet the definition of a derivative instrument that does not meet the equity scope exception (i.e., the CB Warrants are not indexed to the entity's own equity). In addition, the material weakness penalty described above was evaluated as an embedded derivative liability and bifurcated from the 2019 Term Loans as it represents a non-credit related embedded feature that provides for net settlement. Both the CB Warrants liability and the embedded derivative liability are required to be initially and subsequently measured at fair value. The initial fair values of the CB Warrants liability and the embedded derivative liability approximated$0.9 million and$0.4 million , respectively, on the Refinancing Closing Date. The Company estimated these fair values by using the Black-Scholes-Merton option pricing model and a probability-weighted discounted cash flow approach, respectively. The CB Warrants liability is included in other long-term liabilities. The Company remeasured the fair value of the CB Warrants liability as ofJune 30, 2020 and recorded any adjustments as other income (expense). AtJune 30, 2020 andDecember 31, 2019 , the CB Warrants liability was$0.3 million and$0.4 million , respectively. For the six months endedJune 30, 2020 , the Company recorded other income of$0.2 million to reflect the change in fair value of the CB Warrants liability. AtJune 30, 2020 andDecember 31, 2019 , the embedded derivative liability was$0.0 million as the Company remediated the material weakness associated with the embedded derivative as ofDecember 31, 2019 , and the$0.4 million embedded derivative liability was fully reversed into other income at that date. The proceeds for the 2019 Term Loan were first allocated to the CB Warrants liability and embedded derivative liability based on their respective fair values with a corresponding amount of$1.3 million recorded as a debt discount to the 2019 Term Loans. In addition, the Company incurred approximately$2.5 million of debt issuance costs for the 2019 Term Loans that have also been recorded as a debt discount. The combined debt discount from the CB Warrants liability, embedded derivative liability and the debt issuance costs are being amortized into interest expense over the term of the 2019 Term Loans using the effective interest method. The Company recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of$0.1 million for the six months endedJune 30, 2020 and recorded an additional$0.4 million of interest expense for the amortization of the debt issuance costs for the six months endedJune 30, 2020 . The Company also recorded interest expense for the amortization of the CB Warrants liability and embedded derivative debt discounts of$0.1 million for the three months endedJune 30, 2019 and recorded an additional$0.2 million of interest expense for the amortization of the debt issuance costs for the three months endedJune 30, 2019 .
2019 ABL Credit Agreement
On the Refinancing Closing Date, LFS also entered into a financing agreement with the lenders thereto andCitizens Bank, N.A. , as collateral agent, administrative agent and origination agent (the "2019 ABL Credit Agreement" and, together with the 2019 Refinancing Agreement, the "Refinancing Agreements"). The 2019 ABL Credit Agreement consists of a$15.0 million revolving credit facility (the "2019 Revolving Credit Facility"). Proceeds of the 2019 Revolving Credit Facility may be used for general corporate purposes. On the Refinancing Closing Date, the Company had nothing drawn on the ABL Credit Agreement and$14.0 million of available borrowing capacity thereunder (net of a$1.0 million reserve imposed by the lender).
The Borrowers and Guarantors under the 2019 ABL Credit Agreement are the same as under the 2019 Refinancing Agreement.
The 2019 ABL Credit Agreement is secured by a second-priority lien on the real property of the Loan Parties (behind the 2019 Refinancing Agreement) and a first-priority lien on substantially all other assets of the Loan Parties.
2019 ABL Credit Agreement - Interest Rates and Fees
The interest rate on borrowings under the 2019 ABL Credit Agreement is, at the Borrowers' option, either LIBOR (with a 2.0% floor) plus an applicable margin ranging from 3.00% to 3.50% or a base rate (with a 3.0% minimum) plus an applicable margin ranging from 2.00% to 2.50%. AtJune 30, 2020 , the interest rate in effect on the 2019 ABL Credit Agreement was 5.25%.
2019 ABL Credit Agreement - Other Terms and Conditions
45--------------------------------------------------------------------------------
Table of Contents
The 2019 ABL Credit Agreement matures on
The 2019 ABL Credit Agreement contains representations and warranties, and covenants which are customary for debt facilities of this type. Unless the Required Lenders otherwise consent in writing, the covenants limit the ability of the Company and its restricted subsidiaries to, among other things, generally, to (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to the Company's stockholders, (iii) purchase or redeem the Company's equity interests, (iv) make investments, (v) create liens on their assets, (vi) enter into transactions with the Company's affiliates, (vii) sell assets other than in the ordinary course of business or another permitted disposition of assets and (viii) merge or consolidate with, or dispose of substantially all of the Company's assets to, other companies. The 2019 ABL Credit Agreement includes customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company fails to comply with the terms of the 2019 ABL Credit Agreement or if other customary events occur. The 2019 ABL Credit Agreement also contains a financial maintenance covenant for the 2019 Revolving Credit Facility, which is a requirement for the Total Leverage Ratio of the Company and its Subsidiaries not to exceed an amount beginning at 4.00 to 1.00 throughSeptember 30, 2019 , and stepping down to 1.75 to 1.00 effectiveJuly 1, 2021 . As ofAugust 31, 2019 , the Company's Total Leverage Ratio for the preceding twelve consecutive fiscal month period was 4.61 to 1.00, which did not meet the requirement for such ratio not to exceed 4.00 to 1.00. As ofSeptember 30, 2019 , the Company's Total Leverage Ratio for the preceding twelve consecutive fiscal month period was 2.85 to 1.00, which was in compliance with the 4.00 to 1.00 requirement. The lender has waived the event of default arising from this noncompliance as ofAugust 31, 2019 , while reserving its rights with respect to covenant compliance in future months. In addition, the parties to the 2019 ABL Credit Agreement entered into an amendment which, among other changes revises the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 onOctober 1, 2019 with a peak ratio of 4.25 duringMarch 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 onApril 1, 2021 through the term of such agreement. In connection with the 2019 ABL Credit Amendment Number One and Waiver, the parties amended certain provisions of the 2019 ABL Credit Agreement, including, among other changes to (i) require the approval of the origination agent and, generally, the lenders representing at least 50.1% of the aggregate undrawn revolving loan commitment or unpaid principal amount of the term loans, prior to effecting any permitted acquisition; (ii) revise the maximum permitted Total Leverage Ratio, starting at 3.30 to 1.00 onOctober 1, 2019 with a peak ratio of 4.25 duringMarch 2020 along with varying monthly rates culminating in the lowest Total Leverage Ratio of 2.00 to 1.00 onApril 1, 2021 through the term of the 2019 ABL Credit Agreement; and (iii) require the Loan Parties Liquidity as of the last day of any fiscal month ending on or afterNovember 30, 2019 , of at least$10,000,000 , as described above in the Amendment Number One to 2019 Refinancing Agreement and Waiver. As a condition to executing the 2019 ABL Credit Amendment Number One and Waiver, the loan parties was required to pay a non-refundable waiver fee of$7,500 .
Accounting for the 2019 ABL Credit Agreement
As ofJune 30, 2020 andDecember 31, 2019 , the Company had no amounts drawn on the 2019 ABL Credit Agreement. In addition, the Company incurred approximately$0.9 million of debt issuance costs for the 2019 ABL Credit Agreement that have been recorded as a non-current deferred asset. The deferred asset is being amortized into interest expense over the term of the 2019 Term ABL Credit Agreement using the effective interest method. The Company recorded interest expense of$0.1 million for the amortization the debt issuance costs for the six months endedJune 30, 2020 . AtJune 30, 2020 , the Company had total irrevocable letters of credit in the amount of$3.5 million under its self-insurance program as compared to$3.3 million atDecember 31, 2019 . The following table reflects our available funding capacity as ofJune 30, 2020 : (in thousands) Cash & cash equivalents$ 28,829 Credit agreement: Revolving credit facility$ 14,000 Outstanding revolving credit facility - Outstanding letters of credit (3,510 ) Net credit agreement capacity available 10,490 Total available funding capacity$ 39,319 46
--------------------------------------------------------------------------------
Table of Contents
Cash Flow Summary Management continues to devote additional resources to its billing and collection efforts, which has resulted in positive cash flow from operating activities for the six months endedJune 30, 2020 . Management continues to expect that growth in its service business, which is less sensitive to the cash flow issues presented by large construction projects, will positively impact our cash flow trends. Provided that the Company's lenders continue to provide working capital funding, we believe based on the Company's current reforecast that our current cash and cash equivalents of$28.8 million as ofJune 30, 2020 , cash payments to be received from existing and new customers, and availability of borrowing under the revolving line of credit under our 2019 Refinancing Agreement (pursuant to which we had$14.0 million of availability as ofJune 30, 2020 ) will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. See Note 1 - Organization and Plan of Business Operations. Surety Bonding In connection with our business, we are occasionally required to provide various types of surety bonds that provide an additional measure of security to our customers for our performance under certain government and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our backlog that we have currently bonded and their current underwriting standards, which may change from time-to-time. The bonds we provide typically reflect the contract value. As ofJune 30, 2020 andDecember 31, 2019 , the Company had approximately$128.6 million and$116.0 million in surety bonds outstanding, respectively. We believe that our$700.0 million bonding capacity provides us with a significant competitive advantage relative to many of our competitors which have limited bonding capacity. Insurance andSelf-Insurance We purchase workers' compensation and general liability insurance under policies with per-incident deductibles of$250,000 per occurrence. Losses incurred over primary policy limits are covered by umbrella and excess policies up to specified limits with multiple excess insurers. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as current and non-current liabilities. The liability is computed by determining a reserve for each reported claim on a case-by-case basis based on the nature of the claim and historical loss experience for similar claims plus an allowance for the cost of incurred but not reported claims. The current portion of the liability is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The non-current portion of the liability is included in other long-term liabilities on the Condensed Consolidated Balance Sheets. We are self-insured related to medical and dental claims under policies with annual per-claimant and annual aggregate stop-loss limits. We accrue for the unfunded portion of costs for both reported claims and claims incurred but not reported. The liability for unfunded reported claims and future claims is reflected on the Condensed Consolidated Balance Sheets as a current liability in accrued expenses and other current liabilities. The components of the self-insurance liability are reflected below as ofJune 30, 2020 andDecember 31, 2019 : (in thousands)June 30, 2020
$ 514 $ 703
Current liability - medical and dental 511 821
Non-current liability 452 382
Total liability $ 1,477 $ 1,906
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 40 multiemployer pension plans ("MEPPs") that
provide retirement benefits to certain union employees in accordance with
various collective bargaining agreements ("CBAs"). As one of many participating
employers in these MEPPs, we are responsible with the other participating
employers for any plan underfunding. Our contributions to a particular
47--------------------------------------------------------------------------------
Table of Contents
MEPP are established by the applicable CBAs; however, required contributions may
increase based on the funded status of an MEPP and legal requirements of the
Pension Protection Act of 2006 (the "PPA"), which requires substantially
underfunded MEPPs to implement a funding improvement plan ("FIP") or a
rehabilitation plan ("RP") to improve their funded status. Factors that could
impact funded status of an MEPP include, without limitation, investment
performance, changes in the participant demographics, decline in the number of
contributing employers, changes in actuarial assumptions and the utilization of
extended amortization provisions. Assets contributed to the MEPPs by us may be
used to provide benefits to employees of other participating employers. If a
participating employer stops contributing to an MEPP, the unfunded obligations
of the MEPP may be borne by the remaining participating employers.
An FIP or RP requires a particular MEPP to adopt measures to correct its
underfunding status. These measures may include, but are not limited to an
increase in a company's contribution rate as a signatory to the applicable CBA,
or changes to the benefits paid to retirees. In addition, the PPA requires that
a 5.0% surcharge be levied on employer contributions for the first year
commencing shortly after the date the employer receives notice that the MEPP is
in critical status and a 10.0% surcharge on each succeeding year until a CBA is
in place with terms and conditions consistent with the RP.
We could also be obligated to make payments to MEPPs if we either cease to have
an obligation to contribute to the MEPP or significantly reduce our
contributions to the MEPP because we reduce the number of employees who are
covered by the relevant MEPP for various reasons, including, but not limited to,
layoffs or closure of a subsidiary assuming the MEPP has unfunded vested
benefits. The amount of such payments (known as a complete or partial withdrawal
liability) would equal our proportionate share of the MEPPs' unfunded vested
benefits. We believe that certain of the MEPPs in which we participate may have
unfunded vested benefits. Due to uncertainty regarding future factors that could
trigger withdrawal liability, we are unable to determine (a) the amount and
timing of any future withdrawal liability, if any, and (b) whether our
participation in these MEPPs could have a material adverse impact on our
financial condition, results of operations or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined in Rule 12b-2 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); therefore, pursuant to
Item 301(c) of Regulation S-K, we are not required to provide the information
required by this Item.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on that
evaluation as of June 30, 2020 , our Chief Executive Officer and Chief Financial
Officer concluded that our Company's disclosure controls and procedures were
effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified
in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of
the Exchange Act that occurred during the period covered by this Quarterly
Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
As a result of the COVID-19 pandemic, certain employees began working remotely
in March 2020 and continue to do so. Notwithstanding these changes to the
working environment, we have not identified any material changes in our internal
control over financial reporting. We will continue to monitor and assess the
COVID-19 situation to determine any potential impact on the design and operating
effectiveness of our internal controls over financial reporting.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, cannot provide absolute assurance of achieving the desired control
objectives. Our management recognizes that any control system, no matter how
well designed and operated, is based upon certain judgments and assumptions and
cannot provide absolute assurance that its objectives will be met. Similarly, an
evaluation of controls cannot provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and instances of
fraud, if any, have been detected.
48--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
