Business Context and Reporting Period
This Form 10-Q covers the period ended September 30, 2016, for Limbach Holdings, Inc. (formerly 1347 Capital Corp.). The filing reflects a significant corporate event: the consummation of a business combination on July 20, 2016, where the Company acquired Limbach Holdings LLC. Consequently, financial statements are presented with a "black line" division separating the Predecessor period (Limbach Holdings LLC operations prior to July 20, 2016) from the Successor period (Limbach Holdings, Inc. operations from July 20, 2016 through September 30, 2016). The Company operates in two segments: Construction and Service, providing HVAC, plumbing, and electrical services primarily in the United States.
Key Financial Metrics
Successor Period (July 20, 2016 – September 30, 2016)
- Revenue: $91.9 million
- Gross Profit: $12.1 million (13.1% margin)
- Operating Income: $0.4 million
- Net Income: $1.8 million (driven by a $2.3 million deferred tax benefit)
- Net Income Attributable to Common Stockholders: $1.7 million
- Basic EPS: $0.28
- Cash and Cash Equivalents: $0.5 million
- Total Debt: $51.5 million (including $11.8 million revolver, $23.3 million term loan, and $13.1 million subordinated debt)
- Working Capital: $36.5 million
Predecessor Period (January 1, 2016 – July 19, 2016)
- Revenue: $221.4 million
- Net Income: $2.6 million
Material Changes vs. Prior Comparable Period
Comparing the combined 2016 period (Predecessor + Successor) to the nine months ended September 30, 2015:
- Revenue Growth: Total revenue increased by 30.8% to $313.3 million (Pro Forma) or $313.3 million (Combined actuals). Construction revenue grew 32.3% and Service revenue grew 24.2%.
- Profitability: Gross profit increased 25.7% to $40.5 million combined. However, the gross profit margin decreased slightly from 13.5% in 2015 to 12.9% in 2016.
- Operating Expenses: Selling, General, and Administrative (SG&A) expenses increased 24.7% year-over-year, driven by increased staffing, IT infrastructure, and transaction-related costs ($0.1 million in Successor period, $1.5 million in Predecessor period for stock options).
- Amortization: The Successor period incurred $1.5 million in amortization of intangible assets acquired in the merger, a non-existent expense in the Predecessor period.
- Tax Impact: The Successor period recorded a significant deferred tax benefit of $2.3 million due to the reversal of a valuation allowance upon the business combination, resulting in an effective tax rate of 364.6% for the quarter. The Predecessor was taxed as a partnership with no entity-level tax.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Liquidity: Management expects cash flow trends to stabilize in the fourth quarter of 2016 as large construction projects mature and collections increase. The Company has $9.9 million of availability under its revolving credit facility. Backlog as of September 30, 2016, was $450.1 million ($402.0 million Construction, $48.1 million Service).
Unusual Items:
- Business Combination Costs: Transaction costs and stock-based compensation related to the merger totaled approximately $2.2 million across the periods.
- Debt Refinancing: The Company extinguished prior debt and entered into a new $25.0 million revolving credit facility, a $24.0 million term loan, and a $13.0 million subordinated note (16% interest rate).
Risks and Contingencies:
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of September 30, 2016, due to a material weakness in the internal control over financial reporting. The Company lacks sufficient accounting infrastructure for complex public company reporting and has retained a consulting firm to assist.
- Legal Proceedings: A class action lawsuit was filed in May 2016 alleging the merger was "ultra vires" and that directors breached fiduciary duties. The Company intends to vigorously defend the suit.
- Multiemployer Pension Plans: The Company participates in ~50 plans; some are in "critical" status, creating potential withdrawal liability risks.
Investor Verification Checklist
- Internal Control Remediation: Verify the progress of hiring additional accounting personnel and implementing the Disclosure Committee to address the material weakness in internal controls.
- Cash Flow Sustainability: Monitor operating cash flows in Q4 2016 to confirm management's expectation of stabilization, given the $15.4 million cash outflow from operations in the Successor period.
- Debt Covenants: Review compliance with the new Credit Agreement covenants (leverage, fixed charges, tangible net worth), particularly given the high interest rate on the subordinated debt (16%).
- Legal Litigation Status: Track the outcome of the shareholder class action lawsuit regarding the validity of the merger.
- Backlog Realization: Assess the conversion of the $450 million backlog into revenue, noting that a single customer represented 17% of Successor period revenue.