Limbach Holdings Inc (LMB) 2017 Q3 法說會逐字稿

Greetings, and welcome to Limbach Holdings' Third Quarter 2017 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to your host, Jeremy Hellman of Equity Group. Thank you.

Thank you very much, and good morning, everyone. Yesterday, the company issued the announcement of Limbach Holdings' 2017 third quarter results.

Certain statements contained herein may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and it is our intent that any such statements be protected by the safe harbor created thereby. Except for historical information, the matters set forth herein including, but not limited to, any projections of revenues, earnings or other financial items, any statements concerning our plans, strategies and objectives for future operations, and any statements regarding future economic conditions or performance are forward-looking statements.

These forward-looking statements are based on our current expectations, estimates and assumptions, and are subject to certain risks and uncertainties. Although we believe that the expectations, estimates and assumptions reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.

Important factors that could cause our actual results to differ materially from estimates or projections contained in our forward-looking statements are set forth in the risk factors section and elsewhere in the reports we have filed with the Securities and Exchange Commission, including that unfavorable global economic conditions may adversely impact our business, our backlog may not be fully realizable as revenue, and our expenses may be higher than anticipated. We do not intend and undertake no obligation to update any forward-looking statements.

With that, I'd like to turn the call over to Charlie Bacon, CEO of Limbach Holdings. Please go ahead, Charlie.

Thank you, Jeremy, and good morning to all. As of the past, joining me today is our Chief Financial Officer, John Jordan.

I'll start with a review of some of the highlights for the quarter, before turning it over to John for his review of the financials. And then I'll return for a few final comments before we open it up for your questions.

Our third quarter was solid on multiple fronts, as we came in ahead of plan on revenues and gross profit when you strip out the unusual items. All the tailwinds in our industry that we've reported on over the past year are continuing, and we see exceptional progress in our service and maintenance business. Further, we are very excited about the prospect of the large projects in a number of our sectors that we have both completed and are working on in the coming quarters.

Among the highlights, we successfully completed our largest ever contract, the Detroit Red Wings Arena project. We are now working on confirming our bonus payments. We expect those payments to be resolved in the first half of 2018, as the customer closes out this large-scale project.

We were disappointed in a major cash progress payment on the project, which we expected in September. It was delayed not to -- any issue with Limbach. It was just a timing and processing issue. The payment was received on October 17. The late payment, along with other earnings charges, caused us to trip our senior debt coverage ratio. Our lending group remains very supportive of Limbach and readily issued a waiver for this isolated event.

We won a large data center project with one of our national customers, which we expect to be multi-phased and built out over several years. During Q3, we booked into backlog the value of the preconstruction phase work. We expect to book the construction value for the first phase of this project in Q1 of 2018. While a significant dollar value win, it's a very strategic win for Limbach. We have built smaller data centers over the past 2 decades, but never a mega data center like this project.

On the back of this project, we are contemplating building a new market sector, referred to as mission critical, a sector that by all projections will remain extremely strong, as data requirements jumped dramatically in the near to midterm. Should we elect to invest in the sector, we envision ramping up the marketing of the sector during the latter half of 2018.

I should point out, we ventured with 2 other peers on this project, one that has considerable experience with the end customer. We are under a NDA, and we cannot reveal any further details on the project.

Our Service and maintenance business segment is continuing its strong growth trends, with our key forward indicator of maintenance contract sales exceeding our 2017 business plan. We continue to invest in both our sales force and expanding our management team to support the growth we have enjoyed. The pipeline with Service opportunities remained strong.

As previously reported, we also stepped up our M&A work and brought on board Matt Katz, our Executive Vice President of Mergers, Acquisitions and Capital Markets. I'm quite pleased with his ramp-up since he started on September 5. We have identified several opportunities that have met our gating criteria, and we're working on the next steps of our review and diligence processes. We are also actively reviewing other capital market moves to improve our balance sheet.

We also reported very solid top line results in the quarter, although we did take charges on 3 projects which negatively impacted our gross margin and subsequent bottom line. Offsetting a portion of those charges, we did have a fourth project that had significant adjustments that went our way. Despite these charges, we are exceeding our 2017 business plan operating margins at the business unit level. When removing these impacts from our year-to-date results, our gross profit margin would be 14.4%, which is what we expected to see happen this year. The hundreds of other projects are performing well, and we are experiencing rise in gross profit margins, which is what we expected to see this year.

The charges netted out to approximately $2.2 million. 2 of the projects are government facilities. The third is a renovation project. 2 of the 3 projects are currently under review for recovery options. The largest one, which has been reviewed and we are in the process of finalizing a potential recovery plan, which addresses significant outstanding change orders the client chose not to process and the assembly of a delay and impact claim. We have favorable contract terms to support the pursuit. We expect to complete the recovery -- excuse me, we expect to complete the review and recovery option of the 2 other projects in the month of November. While these charges impacted our ability to exceed our 2017 guidance, we expect some recovery to occur in 2018 or 2019.

You may recall we had a charge of $2.1 million back in Q4 of last year on the Boston Medical Center Integrated Project Delivery contract. The contract terms had our profit at risk with other parties, which includes the architect, engineers, general contractor and other key specialty contractors. The project went over budget, and all parties had forfeit our profit fees. I must note that Limbach remained in budget.

We were not the cause of the overruns. While not resolved, we do expect some recovery in 2018. The project is still under construction. Under this agreement, we are being paid all of our cost and certain overhead expenses. The customer is working with us to help us with this recovery. We don't expect it to be near our write-down, but some portion will be recovered.

Our backlog was up nicely versus last year, although it did dip from last year's -- excuse me, last quarter's record level. A reminder, we realized record sales in bookings in Q2, as promised projects awarded to us in May were brought into backlog. As of last quarter, our backlog was at record level, but the timing of the start of those projects was not due to get underway until Q4 and into Q1 of 2018.

Additionally, as was the case in the first quarter this year, we have meaningful -- a meaningful number of projects that we've been awarded, but which have not included in our backlog yet, as we wait for final pricing and scheduling of those projects.

Overall, Service and Construction sales for the quarter were $96 million including a major project with Disney at Epcot, with another $56 million being promised, which includes the data center construction phase previously noted. For the year-to-date, our total sales were approximately $400 million, exceeding our 2017 year-to-date business plan.

I'm excited to report we are planning to open up an office in downtown Detroit. We are tracking over $200 million in opportunities in the local market and to better position ourselves to win some of that business. We are addressing a concern raised by one of the key decision makers to have a downtown Detroit presence. We'll be the only major mechanical contractor in the Detroit city proper, and believe this will dramatically improve our opportunities to secure some of the upcoming major projects.

I'd also want to note a move into the industrial and manufacturing sector. Our Michigan business, with a Michigan-based client, Barton Malow, is assisting Limbach in sponsoring us with their customers to build our industrial manufacturing sector presence in Michigan. Barton Malow, who we just completed the Red Wings Arena with, greatly appreciates our services, especially our engineering group. They want us to take our proven processes and bring that approach to this growth sector. This is a great compliment to our Michigan-based business unit. Like mission critical previously commented on, this will assist Limbach into a broader play into the industrial and manufacturing sector.

On the human capital front, which is a stress point in the industry due to the heated market, we'll be opening up our new learning and development center in our Orlando engineering office. The new center, which will support training of 35 staff members at a time, will complement our growth objectives, producing Limbach-certified project managers, foremen and other key staff positions. We believe this is a very wise investment to support our growth.

I also want to comment on our SG&A cost in the corporate center, which absolutely impacted our quarter and year-to-date earnings. On previous earning calls, we noted certain nonrecurring public company expenses. I am disappointed with those expenses, but we needed to get the company properly organized and compliant with such requirements. We took Limbach public in a very fast manner and require us to catch up with the requirements, as well under SOX rules. The work is still underway from a testing perspective, but all processes that are required have been rolled out. We have made considerable progress.

I want to reinforce the business units through September 30 are exceeding our 2017 business plan with their operational results, despite the charges previously noted.

I'd also like to take a moment to brag a bit. Limbach was rated #10 in the U.S.A. by Engineering News Record's Top 600 firms published on October 23, 2017. We moved up 2 spots from #12 within the mechanical contracting segment. We also moved up to #43 from 50 in the overall top 600, which rates all specialty contractors in the U.S.A. That's a really great testament to our entire company and all the hard work everybody is putting in.

With that, I'll turn it over to John, our Chief Financial Officer, to review the financials. And I'll return for closing remarks with my views of the market, as well as our M&A efforts where we continue to proceed with meaningful opportunities. John?

Thank you, Charlie. Before getting into the details, I just want to remind everyone to please see our 10-Q for a full breakdown of our results, along with the supplemental tables included in our press release.

Third quarter 2017 revenues increased 2.1% to $121.3 million compared to $118.8 million in the same quarter last year. The Service segment led our growth, gaining 23% versus the prior year. Within the Construction segment, our Michigan and Southern California and New England branches had a number of projects wrap up. Recall that we had record backlog at the end of the second quarter, so we have quite a bit of work upcoming on our calendar. However, the timing of the completion of the earlier projects and the start of the new projects led to some Construction segment softness in the quarter, with revenues down 2.3% versus the prior year quarter. Within the quarter, Construction accounted for 79% of revenues, with Service accounting for 21%.

Our splits will bounce around quarter-to-quarter, given the nature of our Construction segment work and the growing trend of our Service offerings. We remain committed to our 25%, 75% target over the next several years.

At the end of the third quarter, Limbach had an aggregate backlog of $492.2 million compared with $450.1 million at this time last year. We expect approximately $120 million of our current backlog to be booked as revenue over the remainder of 2017, in addition to any new sales which are booked and earned as revenue in the fourth quarter.

Looking ahead to 2018. Based on the July backlog when we began the planning process in August, our Construction plan coverage is about 59%, which is very healthy based on that time of year. Including promised and probable projects, the coverage increased it to 69%. Our goal is to be at 80% coverage by year-end, so we are tracking nicely towards that goal.

Because of the quick burn nature of the service work, coverage percentages are not relevant for Service. We will update the coverage percentages as the year closes and the 2018 plan is finalized.

Our gross margin for the third quarter was 12.7% versus 12.8% in the same quarter last year. As noted in our press release and 10-Q filing, we had net gross margin write-downs of $2.2 million in the quarter. The largest component in that was the $2 million write-down for a government project. As Charlie noted, our contract included very favorable dispute resolution clauses, which we intend to pursue, and we feel the company is well positioned to recover some of those costs. However, I also want to remind everyone that the timing and potential amounts to be recovered are both unknown at this time.

Excluding those net charges, our gross margin in the third quarter would have been 14.4%, which is the figure consistent with our recent margin improvement trends. We incurred $900,000 of stock-based compensation in the third quarter as a result of our long-term incentive plan going into effect. The awards placed a heavy emphasis on performance, which we feel aligns our senior executives and business unit managers with our shareholders by creating an opportunity for more ownership of the company. 50% of the LTIP is performance based and requires our stock to be at or above $18 per share for an 80-day consecutive period by August of 2021. All executives are tied into the same measure. Additional annual grants are expected to be issued with clear financial performance measures.

As we previously reported, we have a plan to clean up our capital structure, and aligned with that plan, we repurchased 30% of the outstanding preferred stock in July. Because of the premium paid as part of the repurchase, we incurred a charge of $847,000 in the quarter. The purchase agreement includes an option for the company to repurchase the remaining preferred stock by mid-January under the same terms as of July partial repurchase.

As a percent of total revenue, third quarter 2017 SG&A accounted for 11.2% compared to 11.9% in the third quarter of 2016. On a dollar basis, our SG&A expenses declined $0.5 million from $14.1 million in the third quarter 2016 to $13.6 million in the third quarter of 2017, as our nonrecurring expenses and public company-related consulting expenses dropped.

SG&A expenses continued to be negatively impacted by public company expenses, including incremental professional accounting, legal and consulting fees related to the transition from private to public, some of which will be nonrecurring, and also, the process that we're undertaking with our Sarbanes–Oxley compliance.

Our quarter ending debt balance was higher than planned, as we needed to draw $12.2 million on our revolver due to the delayed payment on the Red Wings project. That payment was received -- the payment of $7.1 million was received by October 17 and was immediately paid -- used to pay down our revolver. As a result of several factors, including this delayed payment and the margin reductions I previously mentioned, we tripped our debt-to-EBITDA ratio in our bank covenant as of September 30. The maximum ratio was 2.50, our actual ratio was 2.55. The bank group has issued a waiver for the covenant breach. We anticipate being in compliance in future quarters.

Our annual effective tax rate is currently between 39% and 40%. Our diluted share count at quarter-end was 7.5 million shares outstanding and 7.1 million warrants outstanding, which can convert into 4.6 million shares.

With that, I'll turn things back over to Charlie to share some closing comments.

All right. Thanks, John. I'd like to provide some comments on market conditions for the midterm and an update on the M&A initiative.

Concerning our sales, our pipeline of opportunities, we continue to track $3.3 billion of opportunity, with health care sector -- with the health care sector accounting for approximately 25% of that. Many of you heard me reference industry analysis firm, FMI, when it comes to their projections for the non-residential construction industry. In their most recent Q3 report, their projections for nonresidential Construction growth to 2021 points to a compounded annual growth rate of 4%. So our sector is still growing, and we intend to be aggressive in our sales efforts.

Let me move on to the M&A update. On September 1, we announced that Matt Katz joined us as Executive Vice President of Mergers, Acquisitions and Capital Markets. Matt has extensive background with over 15 years of experience, consummating corporate transactions, as well as connected -- being very well connected in the nonresidential construction space. In the 2.5 months since assuming this position, we have seen Matt's positive impact on the M&A efforts and expect that to translate to tangible results over time.

I'm sure those of you that have been following us for some time maybe thinking, Charlie, you've talked about wanting to get an acquisition done for a while now, when are you going to close one? It's a fair question, but unfortunately, it's sort of a thing that we are limited in the amount of transparency we can provide. Rest assured, we are making good progress, especially with Matt on board now. Finding the right deals that check every box we insist on can take some time, but we are confident that our methodology and approach we're taking will serve us well over the long term. We are actively engaged in the due diligence process on 2 deals. While there is no assurance either we'll get over the goal line, I am very excited about both opportunities.

I also want to comment on the 2018 business plan. We commenced our work in August, and we are nearing completion of that work. We expect to continue to see both top line and bottom line growth. We did start with a 0 baseline in the center to ensure our SG&A dollars are addressing the needs of the business, both the ongoing business and our M&A growth objectives. There is still work to be completed, but we're pleased with our Construction backlog coverage, our growing contract maintenance base, the expansion of our customer base. And our sectors look solid for the near to midterm, and again, I'm referencing the third quarter FMI report; plus the potential entry into 2 new market sectors: mission critical and industrial and manufacturing.

With all that said, we remain very positive about the future expansion of the company. We will also have nonrecovering -- nonrecurring public company expense drifting off, and we'll be done with it, and we'll be SOX compliant, which is just exciting to see that we're finally where we need to be.

I'll close with a word on our guidance. You have seen in our press release, we are tightening our revenue guidance to a range of $460 million to $470 million, while noting we'll be at the lower end of our adjusted EBITDA range of $18 million to $20 million. This was a direct result of the nonbudget of public company expenses, some of which are absolutely nonrecurring. Clearly, the charges we took on the 3 projects previously noted impact our ability to offset the unbudgeted public expenses from the strong performance we're seeing in the underlying business. And I want to stress that the results of the underlying business were exceeding our 2017 EBIT plans, so very, very pleased with that.

With that, operator, let's open it up for some questions.

(Operator Instructions) Our first question is from Brent Thielman with D.A. Davidson.

Charlie, I guess, start on the guidance. I think you're at $9 million in EBITDA year-to-date. Is there particular work you're executing right now, other things that you're seeing that gives you the confidence in, kind of, get $9 million in 4Q to get to the lower end of that guidance range? Just trying to, kind of, bridge the gap there.

Sure. Absolutely. There's a couple of things going on. One, there's -- the revenue perspective in our forecast were rock-solid on, so we're very confident at the end of the fourth quarter, we'll be there. The other thing that we shared with the group many times is the issue of upside opportunity. And what's happening in the fourth quarter, and I actually saw that happen in the third quarter, we're seeing some of these larger projects ramp up. And as I've suggested in the past, we hold on to contingency towards the end of the project. And as we wrap up, we understand the completion is completely understood. We start taking that upside into our financials. So we see that visibility on a number of major projects here in Q4, and we expect those projects to wrap up nicely. John, would you like to add to that, please?

Sure. Brent, we clearly see some continued good performance in the base business. And there's multiple branches that have significant projects that are getting closer to completion, that based on their internal policies on recognizing upside, as well as being in compliance with GAAP, we see a very clear path to significant upsides on projects. And that, coupled with the base business performance, will give us that path to the lower end of the $18 million to $20 million guidance. We also see continued contraction of SG&A expenses, as we wind down some of the unusual expenses that we've incurred in the first 3 quarters, that will also contribute to the bottom line.

Okay. And John, the nonrecurring expenses you guys are talking about, how much of that rolls off in fourth quarter?

In the fourth quarter, there could be several hundred thousand dollars.

$700,000?

Several hundred thousand dollars will be rolling off.

Okay. Okay. And then Charlie, could you just talk a little bit more in detail the nature of the project charges? I guess, specifically what you, kind of, view as unusual about them, and when these jobs are expected to be completed.

Sure. Absolutely. The one project, which was the big one, I actually walked it yesterday, and I was on-site to understand it myself based on the news we heard. And it was [funny] to see just working the job and, guys, I used to be a Construction Superintendent, so I know what I'm looking at. And when I saw the project, it was supposed to complete in October. That'll be completing in January at this point. To see some of the design changes, and quite frankly, some unresolved design changes that the architect and engineer have not resolved yet, and our client just isn't getting on top of it, and there's just a series of examples like that through the course of a project. And there's also some logistical issues, but a big impact were all of the late, late design changes. So we have several million of change orders in with the client. And it was interesting. They went and negotiated some change orders. And then all of a sudden, just stopped. I can't get into the details of the client, but I want to let you all know that this is a Fortune 100 client. We've actually -- do a lot of business with them, and we're having conversations at a very senior level to get this resolved. So it was very disappointing. But the proper thing to do, with a conservative view was to take the charge. So a lot of it has to do with just change orders not being finalized, and also, the delays in the project caused by the owner just pushed it out. And by the way, the end owner is a federal government agency. And so you may be aware, they tend to, unfortunately, drag things out. So in my commentary earlier about getting this resolved in '18, it may creep into '19. We have very, very solid footing from our perspective to pursue these change orders, as well as the delay and impact claim. So that's project number 1. And quite frankly, from a change order perspective, this is pretty extreme. I've never seen this happen before. This is really extreme. On the other 2, we're still investigating what happened on those 2 jobs. One job, it's very clear there were design changes on the project and also delay impacts, but we've not finalized the resolution about how we're going to go about our recovery process. The last project was more along the lines of the general contractor just executing the work and not allowing us to put our work in. And the example I'll just give you, it's renovation. And normally, before you start putting up walls, you put up your dock work, your piping and all that. Well, the contractor just moved forward, put up walls, put up all sorts of obstacles. And you could imagine what happened to productivity. Just went down the drain. So it cost us money. And again, we're stepping back right now, analyzing that particular situation and deciding how we want to go forward with a recovery scheme. So the first one, which is the largest, it's well at hand. We've done our investigation. We understand what we need to do, and we're executing that. The other 2, we're still in, kind of, that discovery phase and really laying out our strategy about where we want to go with the 2 opportunities to recover.

Okay. All right. And then maybe one more, if I could. Charlie, maybe -- love to kind of hear your thoughts, as you look at where we are at this point in the year thinking about 2018, compare and contrast to maybe this point in the last couple of years, what's got you feeling really good about the prospects for next year, and maybe terms of contracts you're putting then back on, things like that?

Yes. Just -- I'll give you some color on, kind of, the sectors. From a health care perspective, I mentioned earlier, of the 3-point-plus billion we're tracking, approximately 25% of that is health care. And there's a major acute care hospitals that we're currently proposing on, and very, very pleased. These are repeat customers that we do a lot of business with. I don't know if we're going to win all of them, guys, but we stand a very, very good chance at securing many of them. And I'm quite excited about the health care market. It's what we're experts at, and we do extremely well. Another example, we mentioned the office opening up in Detroit. And there's some major, major projects that Dan Gilbert up there continues to push with the revitalization of Detroit. And obviously, we're very proud of the Red Wings Arena completion. And we've got a lot of other projects in downtown Detroit. But what's coming up with the Hudson Development, which is a multistory tower, some other large health care related type work, I'm very, very excited about that opportunity. I think everybody understands who we are out there in Michigan. We're one of the best. And again, I don't know if we'll secure all that work, but I think we stand a fair chance of securing a number of the projects. And then the other part that I mentioned about industrial/manufacturing, Barton Malow, one of our top customers, came to us and just asked if we would be interested in spending energy and resources and consider ramping up in manufacturing. And we looked at it and we, kind of, sat down, and this happened several months ago. And since then, we've decided up there, let's take some steps with this. Let's see where we can go. And it's wonderful when a client sponsors you into it. They love what we do. They love the engineering aspect of Limbach modeling, the Limbach engineering design services, along with the LMPS technology suite we have. And they want us to move into that sector. They see just a huge ramp-up opportunity in the state. And we're going to take advantage of that. We're going to work with them. Now the question is, where else do we go with manufacturing? So when I look at the market sectors, I'm cautiously optimistic what might happen there. But the headlines in the journal today was interesting to see the employment figures in manufacturing and the expansion. There is optimism. What happens with tax reform? Could that fuel that even more? We'll have to wait and see. But I can tell you, we have our eyes on it. And if that starts taking off, strategically, we're going to shift. And then, finally, on the data centers, which, again, we've been building these for years. But securing this mega data center, and I think we did it quite smartly. We have a partnership with 2 other peers, one that has worked for this end customer on other projects and is bringing that knowledge and understanding about expectations. And then, finally, the other partner we've done a lot of business with together, we have a standing joint venture with, and we pursue large jobs together in that region. So it all made sense. And the really cool thing was, by the way, guys, the general contractor coached us into securing this opportunity. They really -- again, like Barton Malow, and I can't name this customer because we're under an NDA. They worked it our way, and that's the beauty of Limbach with our first choice vision and how we push our customers, and then we drive that engineering component. So to recap. Health care, very excited about. Love some certain geographies that are just booming, and I mentioned Detroit, the Renaissance of that. And then when we look at these 2 new sectors that we're kind of looking at, very, very positive. And I could get it to other sectors, Brent, but I hope that provides some color. Let me comment on 3 other sectors. Higher education, I've mentioned this to everybody before. We're only looking at elite schools. They're going to continue to spend, they're going to continue to expand, so we'll continue to market them. And we see quite a pipeline of opportunities with them with various types of facilities. On the entertainment front, Disney continues to spend. We're excited about the job we nailed at Epcot recently. And there is more projects coming, and we're in discussions with them for other work. So a huge spend happening at Epcot, not to mention the Magic Kingdom, so we're going to continue to do well there. I do believe, in Disney's eyes, we are the mechanical contractor of choice. They have others, but they seem to be coming to us for their rides continuously, so that's really exciting. And also on the sporting front, we continue to see some other market opportunities. And providing we could cut another good deal like we did with the Red Wings, we'll continued to pursue that. Finally, transportation on the airport work. We continue to see a nice, steady pipeline of opportunities, whether it be out at LAX or Philly. There's just a number of airports that are right in our sweet spot that we are marketing, and we hope to secure some of that work in the future. Brent, does that give you a pretty good feel for kind of my views on the sectors?

That's great, Charlie. I'll pass it on. Appreciate it.

Our next question is from Gerry Sweeney with Roth Capital Partners.

I want to take this from a little bit of a top level. And -- I mean, you've got quite a bit on your plate. You're looking at expanding in, sort of, mission critical, manufacturing, industrial. You recently went public. You're looking at M&A. You've had some costs push out charges. Are you biting off more than you can chew in the near term, to be blunt?

Gerry, look, good question. And let me just break this down. When we looked at the expansion of the business and where we were going being a public company, I think everybody's aware we have a rock-solid Chief Operating Officer, Kris Thorne, and he runs the business day to day. He takes care of day-to-day aspects. And when you look across the business, as we mentioned, our gross profit margin, putting aside these couple of projects here we took hits on, the underlying business, hundreds of projects, are performing extremely well. So we're quite pleased with that. And you also heard me talk about the issue of continuing to educate our people for execution. Again, to support the organic growth, we're opening up this training and development center, and I'm just really, really excited about what we've done there. And last year, actually, it was 1.5 years ago, we promoted one of our individuals to Chief Learning Officer. So we need to continue to develop what we call Limbachians to support the business. And again, that's under the guidance of our COO, as well as the overall organic growth of each of the business units. When you look at the mission critical opportunity, we looked at that and we decided we are going to make some significant moves in this particular geography. And I can assure you, from a staffing perspective, we actually took one of senior guys and put them on that project to do 2 things. One, obviously, to execute it and execute it well. And I think we did a smart move by venturing with others to make sure we share the risk and make sure we have a solid team. But that person also has the responsibility to figure out how can we unlock the opportunity with mission critical. So we greatly trust this individual. He's a great employee, he's a senior guy, and we think that was the right move to deal with that. On the M&A front, what we realized earlier this year was we needed to resource it with a top shelf individual. So what we did was we took a look at the marketplace, and quite frankly, I kind of knew right away what I wanted, but needed to have conversations with them. And I've been working with them now for close to 15 years, Matt Katz, and he is running with that, he has the full responsibility. He has the resources of the company at his disposal. I think he's quite pleased with what we have in place in terms of corporate support, especially as we are entering these due diligence phases and working with these different management teams to look at their businesses under the hood. I think he's pretty impressed with what we have to help him with that initiative. So -- and then finally, taking the company public, it's been an interesting journey from the standpoint of what we had to do. And Gerry, as John mentioned, and I think I mentioned, the way we did this with the reverse merger, it happened fairly quickly as opposed to having the time to prep and get ready for an IPO. So we had to play catch-up. And I think our board, our auditors, outside people that are looking at us are pleased with our progress on getting compliant with SOX. It just took us a while to get organized. We hired a number of new staff members that absolutely have this experience. They're great additions to our team. And we are executing. John mentioned, we have our processes all out there. It's happening. So on the multitude of fronts, we have resourced the company appropriately with the talent, and we're excited about it. And even down to that, when I mentioned about manufacturing, by the way, that is a spot situation that our Michigan business is taking on. And it's not like the entire business is going to go into industrial/manufacturing. We're going to pilot this and see how it goes. And if we see the market shift, later in '18, we'll take a look at that step back and figure out if we want to take that on. So I think it's a great question, and I hope I responded appropriately and ample of clarity to tell you where we're going and what we're doing.

No. Absolutely. I mean, it's a fair sort of dissecting the opportunities and where -- how you're staffing on them, giving a little bit more compliments, and the right people, the right place and the structure in place. So I appreciate that. And then moving on to the Red Wings project. Obviously, there was the delayed cash payment. But I think, previously, we were -- so we'll say hopeful or optimistic that some bonus payments could hit this year. It looks like they're being pushed into 2018. I just want to touch base since the project appears to be done, what are your thoughts on potential bonus payments that could be coming from that project?

Yes. No. It's -- we made our milestones with the -- what Limbach absolutely controlled. There are some other global milestones that the overall team had to achieve. We're a little disappointed they're not going to get the job closed out this year. But when you think about the scale of the project worth of $1 billion, it takes time to reconcile everything. And I think everybody is quite pleased with us, and I know that as a fact based on conversations I've had with the President of Barton Malow. They're quite pleased with what we did and thrilled. As a matter of fact, they asked us to help as the project was wrapping up on some of the fronts, which we couldn't. As far as timing of it, we're pushing, Gerry, to see if something can happen this year. We have not forecast that into this year's wrap-up of the numbers and the guidance we're providing. If it happens, obviously, it's an improvement. But right now, we're basically looking at it saying, you know what's going to happen in the first half of '18. I wish it could happen sooner, but that -- I think it's just a bit of reality on the close out of the project.

Do you have any insight into magnitude of payments, or you would not want to, sort of, touch upon that equation?

Yes. I don't really want to go there. John, do you have any other insights you'd like to share? I'm not sure how far we can go with that.

Gerry, we really can't share any exact amounts. There are a lot of variables in closing out any project, especially a project of this size, that could impact the timing and ultimate amount. So as Charlie made reference to, a lot of it is out of our control. As far as 2 of the 4 major bonus payments, there is just some other normal close-out process that needs to get worked through on the project. So I think for us to give you a number, it's really an unknown number at this point from an exact perspective. And as Charlie said, we've assumed nothing in 2017 for this job as we provided the guidance on the call a few minutes ago. So anything we get would be accretive to the 2017 bottom line. But I think reality is, this will be a 2018 event.

Rest assured, Gerry, we're pushing. We are pushing.

Okay. Yes. No. I had -- there's no doubt in my mind. I don't want to take up too much time, but I do have a couple of more questions. On the charges, I mean, especially the larger government one. Obviously, some of the charges that's the nature of the beast of the Construction business. But would you characterize it as falling within the realm of pay -- when this happens? Or was this outside that realm, would you call it unusual, the larger the, I think, the charges which got you the government one?

We -- let me just be blunt here. When we look at execution of our work, the company can, on occasion, mess up in terms of just how we go about things and maybe there was a miscalculation or an estimate bust, or something like that. And then you have these extreme situations. I remember years ago, when we finished the Thomas Bradley International arrivals building, very, very large project. This is the new construction that we built for the A380s. If you're familiar with LAX, it's an iconic building. And it took a while to get the change orders processed. We went in with a contract of $25 million. When we wrapped up the project and closed it out, which took about a year after completion, we were at close to $43 million. So there is quite a few change orders on that project. And it was just a bit of a bear to get them all over the finish line, and there was just dramatic design changes. This particular project, again, which I walked yesterday, it's not a very large building. But the design changes that happened along the way, there was a twofold problem: one, obviously, the design changes increased cost; and two, just when the design changes happened so late in the project, it's just mismanagement on behalf of our client. And we've got to pursue that. And again, we've -- we brought in third parties to take a look at this, to make sure we're in good standing with what we're pursuing. And the general commentary by everybody that's looked at this is, you're rock solid. And it's going to take some time to resolve. And I -- it is a federal agency. And you also have a Fortune 100 company that we're actually working for and then we're doing all the other work. And it's just a circumstance that I found interesting yesterday, when I worked the job as to how this happened. But I think a lot of it has to do with just a government type project where it wasn't managed properly internally at the government. And then I think our customer didn't get aggressive enough to resolve certain issues. As a result, there were some big cost impacts. I am working this at the most senior level with this customer to see if we can't get this cleared up quickly. But as I shared with everybody, I think it's just going to take some time. It's an abnormal situation. We normally don't see this, Gerry.

Okay. So I mean, bringing a full circle, I mean, without this charge and the Red Wings project, if the bonus payment came in like we expected the second half of '17, I don't necessarily like the base analysis on what-ifs. But you -- adding those back in, you could have very well exceeded your EBITDA guidance for this year. It's -- I'm looking but some of this Red Wing is being pushed into '18 as a positive and a potential recapture of some revenue from this project. Or recapture some of the profitability from the government project potentially in '18 would be a positive, so...

Gerry, the answer is absolutely, would have exceeded the guidance. And let me throw one more else -- one more item out there. Some of the pubco expense, and we shared this in the previous quarter results around the AP matter, which we came up smelling like a rose. We just had to look at some processes a little bit differently, but we had a tremendous amount of expense to get that over the finish line, and that's just a shame. I think that should have happened in normal course. But in order to get our [day] complete on time, we had to do what we had to do, to make sure we were rock solid, and it proved out to be we're rock solid. So when you add those 3 elements in, we would have far exceeded, quite frankly, our guidance.

(Operator Instructions) Our next question is from Steve Dyer with Craig-Hallum Capital Group.

Ryan Sigdahl on for Steve. So by my math, revenue guidance implies Q4 revenue of $106 million to $116 million. However, I think you said approximately $120 million of backlog is expected to be recognized as revenue by the end of 2017. Can you just help me reconcile those two?

John, can you take that, please?

Well, Ryan, the $120 million that I referenced is an estimated burn rate for all of our projects. It can vary based on multiple factors. Many of them out of our control, based on progress on projects. And also, we have some expected burn of promised work as well factored in there. So the $120 million, again, is an estimate based on where we think the projects are going to be by the end of the fourth quarter. The guidance that we provided is consistent with where we think the business is going to be. But as we always try to do, we always try to exceed our guidance. But based on the burn rates, we think that $120 million might be possible. But again, there's many variables on projects that could impact that.

Okay. Great. And then one more on the backlog. Looks like Service backlog was down sequentially, as well as year-over-year. Any color there on what's causing the declines? Did you lose customers, timing of contracts, et cetera?

Yes. I mean, down in our Florida business, we have a great relationship, and I think everybody's aware of this with Hospital Corporation of America, and a lot of the timing of some of the facilities work. So we built major projects for HCA, acute care facilities, renovations and such. But we also work with their other group called their Facilities Group. And that's smaller get in, get out type work. And it really got down to -- we were expecting to see some additional revenue burn, but they didn't get certain capital expenditures approved. It's delaying, and it's pushed into next year. So unfortunately, it hurt us a bit in the backlog. We expect to book that work in Q1 to Q2. We got to wait for their approvals. We will do the work. But I also want to just note. Again, with Service, it's a great element of our business. It's growing rapidly. And we're exceeding our revenue expectations on the Service side of our business against our business plans, so it continues to, quite frankly, come along quite nicely with the investments we made.

Okay. And then a couple of questions regarding the Mega Data Center award. So first, was it a public bid, or was it negotiated? And then secondly, how do margins compare to overall Construction margins, i.e. was it bid similar to the Red Wings Arena where it's considered, kind of, a showcase project and at lower margins just to get the award and get the work?

No. It was -- first of all, it was negotiated with one of our national customers. They approached us. It was kind of interesting. There were several projects in the region, and the customer had all 3. And they basically said, look, we have this one project coming up. We can't tell you what it is, but please sit on the sidelines. We think you're the right guys for this project. So it all resorts to take that information, maybe not pursue something, but save us some money on the other pursuits, which they were thinking a different way. And in the end, when the opportunity came up a couple of months later, they sat down with us and said, look, here is the situation. We'll try to help you win this, and they did. So from a standpoint of a negotiated deal, that's what it is. I mean, we have not arranged or reached to any pricing yet. They hired us for our preconstruction phase, which is a combination of estimating or coming up with a guaranteed maximum price and also the engineering work that has to happen upfront. And it is a very fast-track project. It's going to happen fairly quickly. So having said all that, in terms of our fees and such, it's not finalized. But the answer is no. It's different than the Red Wings project, and we did not discount this fee. It's going to be a very nice project for us. We're pretty excited about the opportunity. The other thing is, it's multi-phased, and that's just the history of this particular end-user. Once they settle on a location, the site continues to develop over a number of years. So we think there's a great opportunity on 2 fronts: One, obviously to continue to build out this facility over the years, but also provide maintenance services to the center. And as you can imagine, data centers maintenance is crucial with massive redundancy in place. So we're pretty excited about the opportunity. The pricing is not finalized. That's the bottom line.

Okay. Great. One last one from me here. Without giving formal guidance on 2018, backlog is strong, nonres industry tailwinds are favorable. Is it reasonable to assume something in the lines of, kind of, your long-term targets there, which I think are 10% to 15% organic revenue CAGR?

Without providing any guidance, which I don't want to tell you just yet because we're still in the process of finalizing our plan, I will say there is growth. It's trending the way we had expected it. We love to -- we're out with our backlog, as John mentioned, in terms of coverage. We're sitting pretty for next year, and that is fueling our view that it will be another growth year. And that's with our current base business, the way we're growing. If we think through where we can go with mission critical or where we can go with industrial/manufacturing, but that won't really have an impact on '18. I think that will be the latter half of the year when we decide to really start pursuing that in a more aggressive manner, which could lead to some sales next year, but probably revenue in '19 and '20, I'd suggest. So I think we're in good shape for organic growth for next year. The question is, where else can we go with some of the other market opportunities that we're identifying? And that's going to impact '19 and '20.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to management for closing thoughts.

Listen, thanks, everybody, for continuing to follow Limbach and what we're doing here. We're quite excited about our future and how everything's coming together really nicely. And when I look at just those comments I made about '18, there is just tremendous opportunity for our company to continue the growth patterns that we have enjoyed and that we shared in past conversations. We're excited about our future with the backlog, the Service, maintenance base. The tailwinds are absolutely behind us, and these new sector opportunities are pretty exciting if we choose to pursue them. So a lot of good things are happening in the business. And then on the M&A front, we're going to continue down our path of work that we've laid out for ourselves. We have resourced it, and we are executing on that strategy. But with that said, we're going to make sure we do the right thing for the long-term health of this company. And the M&A deals have to measure up to all of our gating criteria. And as of right now, we're seeing some very, very good prospects. The question is, can we see that under the hood as we continue to do our research on due diligence, that everything we believe to be true about these companies actually plays out, so that we feel good about the deal, which will allow the long-term health of Limbach to continue. So with that said, thank you very much for your time this morning, and all the best.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.