Limbach Holdings Inc (LMB) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Limbach Holdings Fourth Quarter and Year-end 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Adam Prior of The Equity Group.

Thank you so much, and thank you, everyone, for joining us. Good morning. Yesterday, the company issued the announcement of Limbach Holdings' 2017 fourth quarter and year-end financial results and filed its Form 10-K with the Securities and Exchange Commission. The company, for this call, will also be using a slide presentation to accompany the presentation for this call. The presentation can be found at the Investors section of the company's website, and in addition, will be available via the webcast for this call as well.

The company encourages everyone to review the forward-looking statement on Slide 2 of that presentation.

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

Thank you, Adam. And welcome, everyone, to the call. Joining me today is Chief Financial Officer, John Jordan; and also our Executive Vice President of Mergers and Acquisitions, Matt Katz.

As Adam noted, we have a slide presentation to accompany our prepared remarks, and we hope you'll find the additional material helpful. We'll make a point of refencing which slide we are going on as long -- as we go along.

I'll start on Slide 2 to remind everyone to review our forward-looking statement.

Turning to Slide 3. We have summarized 5 key themes from 2017 and they are: showcase projects; solid financial performance; nonrecurring expenses, which are now behind us; backlog growth in both Construction and Service segments; and a few general comments on our industry, including our continued emphasis on our initiative to support employee advancement and well-being.

I'll cover each of these themes in more detail and also provide guidance for 2018. We have also made considerable progress on the M&A front, and Matt will cover those initiatives. John will, of course, provide a summary of our results.

On the timing of our earnings release, we have made some terrific progress with improving our processes over the past year, and we have completed hiring of all of the key staff to support our public company requirements. While we still have some actions around training and development of service staff members as an emerging growth company as well as new team members that joined the general population of the company, we have sorted out all of our key processes. We strongly believe this work and the related nonrecurring expense was a smart investment and will make us a more efficient and effective company, leading to improvements around timing of our future earnings releases.

Let's move on to Slide 4. While we have many projects that were incredible home runs for us in 2017, I want to highlight 3 particular successes in terms of completion and sales expansion. As we have discussed previously, the new Detroit Red Wings Arena was the largest project in our company's history. Given the fact this facility is a focal point for the community, it really is a showcase project for us. Importantly, we completed it on time and under budget. We look to leverage this quality execution of pursuing several large-scale projects in the greater Detroit and Wayne County region that will be awarded later this year. We decided to reinforce our commitment to Detroit's rebirth and leverage our successful reputation. The company is opening up a management office in downtown Detroit in Q2.

We need to be part of the fabric of the Detroit business community. We see a long-term opportunity be the leading major MEP and Service firm in the region for commercial, institutional and entertainment construction. We would suggest to you, we are the premier brand in the region.

Concerning the incentive payments on the Red Wings project, we received the change order for the incentives in the first quarter of 2018. We're working through the closeout of the contract and will reconcile the final gross profit recognition in 2018. We also need to note, a portion of the incentive payment will be going to some of our partners on the project. I want to acknowledge all of the Michigan Limbach's staff, both office and field, for a remarkable outcome in 2017. They truly are the best-in-class talent and their ability to construct revenues like the Red Wings Arena is remarkable.

Our pipeline of opportunities also remains very strong. We are presently tracking approximately $3.3 billion of opportunities and are confident that our win rates will remain strong. The recently enacted Tax Cuts and Jobs Act is something we feel will place even more wind in our sales. We secured a significant opportunity to expand into a new market sector with significant growth potential as well as an existing customer with a substantial capital campaign. As I've stressed in the past, diversity in market sectors and geography, while delivering our construction and service offerings within our core competencies will also allow us to weather any ups and downs of the particular market sector or geography. Adding a new sector through the support of significant customer is just plain smart business. The new sector includes our recently announced contract to build a new large-scale data center. This picture you see on Slide 4 is a graphical rendering of that building, which we refer to as Project Turnstile. We have identified mission-critical projects like this as an emerging growth sector for Limbach, and we are very excited to notch this first win.

All the information we see points to data center construction as a multibillion-dollar opportunity for the foreseeable future. Perhaps, even more importantly, the companies that are among the top owners and users of data centers are hyper-focused on the quality of these facilities. Many of you have heard me speak of how we deliver and position Limbach as the Nordstroms of the construction industry in terms of customer care, and we fully expect that to work in our favor in this sector. At the request of our client, we are unable to provide much more detail on Project Turnstile, but I will say that we were selected for this project based on our sterling reputation, and we fully expect this project will open the door to additional business, both with this client and others.

Concerning our ongoing relationship with Disney, they recently asked us to sit down with them to discuss their capital programs in the Orlando region. In 2017, we were awarded several substantial projects with Disney, with a number of very promising opportunities for ongoing business for the next several years. This is just another example of our success at moving our relationships closer to the owners, leading to Limbach being selected in many cases prior to the general contractor. This is the pole position we continue to strive to achieve.

Moving to Slide 5. We had a very solid year in terms of our financial performance. John will provide more detail on our financials shortly, but I just want to touch on some of the highlights. Our revenues of $485.7 million were ahead of our internal plan and also above the high-end of our guidance range for the year. So we are certainly pleased with that.

Construction revenues were up a solid 7.3%, while service grew 14.8%. We were also pleased to see both segments exceed our 2017 business plan at the operating EBIT level, along with very strong growth over 2016, which was 20.3%. With Service, we are approaching $100 million of revenue, up substantially over the past several years, and we don't see that growth slowing at all. We have established smart momentum, especially with the core foundation of Service, preventive maintenance contract sales, which leads to the high-margin, pull through work. What was more important to Limbach was that we were achieving sales growth in a manner that will directly lead to margin expansion. For the year, gross margin was up 100 basis points to 13.5%. In the fourth quarter, our gross margin hit 15.9%, which is what we were expecting at the back end of the year. In both of our segments, Construction and Service, we saw margin expansion in 2017, so that's certainly good to see. As our Service contributions continue to increase, that will also aid in our overall gross margin improvement. We have consistently shared with the market our expectation that there was room for gross margins to improve. Our 2017 results bear that out, and we still have room for further more margin expansion, which will more than likely be at the back end of the year.

Turning to Slide 6. We benefited Limbach from having a strong and decentralized operating infrastructure. This is the definitive competitive advantage, as we continue to build scale and grow. We continue to enhance our capabilities on the public company side as well. We did incur nonrecurring expenses, as we have strengthened the business in terms of Sarbanes-Oxley compliance and auditing. For the full year in 2017, we had nonrecurring expenses, totaling $2.8 million. John will go into more detail on this, but just to be clear, those are expenses that were not in our budget going into the year, but we understand that this is a process of establishing a corporate infrastructure that matches our already impressive operating breadth.

Absent these expenses, our adjusted EBITDA for the year would have come in towards the high-end of our guidance at $19.5 million, continuing a solid trend we have established in the last several years.

On Slide 7, we have highlighted a few points of emphasis regarding our backlog. Overall backlog was up 6.2% year-over-year, to $461.4 million and $426.7 million, which was construction work. Our Service side -- excuse me, on our Service side, our maintenance base continues to grow and that's a key point to note. Our year-on-year sales of maintenance contracts grew by 31% to a record annual sales of $3.4 million. Our renewal rate hit 86% for the year, just short of our internal benchmark of 90%. Many of you heard us talk about our pull-through revenue, which is really good, high-margin work that is driven by the maintenance base. So as that base grows, the overall impact of Service revenue has a multiplier effect. We expect approximately 65% or -- excuse me, we expect approximately 65% or $302 million of our overall year-end backlog to convert to revenue in 2018, so we're feeling pretty good about where we are. During our Q1 reforecasting work that commenced in February and taking into account what was sold through to December 31, 2017, we're pleased to see that we have 80% of our revenue secured for 2018, a very strong position to be in at this point in time. Please remember, our pipeline remains extremely robust, so we are confident in our review of 2018 and starting to get some views on 2019.

On Slide 8, we have summarized some key points related to the macro storylines in our industry. First off, we just received the latest data from industry research from FMI last week, and they continue to have a positive outlook on nonresidential construction. This really reinforces what we are seeing. We have a couple of slides with additional data pulled from the FMI report, which is in the Appendix of the presentation. Also noted in the FMI report is a topic of labor supply in our industry. Human capital deployment is becoming mission critical to our operational success as well as growth, with the entire industry heating up, sourcing new talent is becoming more of a challenge, both at the salary and craft levels. With that in mind, we have highlighted a couple of steps we have undertaken to support our employee recruiting and training efforts. Since 2013, we have doubled our staff, and in 2017, we added another 15% for a total headcount of 1,624 employees at December 31, 2017. We have made it a priority at Limbach to position our company as an employer of choice. Key to that is our new Learning and Development Center in Orlando, which we have discussed on previous calls. The new Learning Center is focused on leadership development and certification of certain positions within the company, such as project management. Coupled with our corporate emphasis on local performance training and worker safety through our Hearts & Minds safety program, we are creating a place where salary staff see clear lines of career growth and skilled craftsmen and technicians want to hang their hardhats.

I'm very pleased to see these efforts are paying off in 2017, which was another high watermark for the company, with our internal employee satisfaction survey, known as the We Care survey. This is something I pay a lot of attention to as it really does submit the fact that our people enjoy working here. Happy employees are the driving force behind healthy customer relationships. Our #1 core value is, We Care, and that translates to happy and satisfied employees which leads to repeat business customers. The end result that we see is that Limbach is leveraging its existing infrastructure to even further strengthen our industry-leading employee retention level, and we are well prepared to take advantage of the growth we expect.

With that, I'll hand the call over to John for his review of the financials. John?

Thank you, Charlie. Before I get into the details, I just want to remind everyone to please see our 10-K for a full breakdown of our results and also note that the presentation accompanying our remarks contains several appendix pages, which contain further data we think you will find helpful.

I'm now on Slide 9. Starting on the left with revenues. For the year-end, our consolidated revenue was $485.7 million, up about 8.7% versus 2016. That consolidated revenue figure also exceed our internal goal for the year and our initial guidance, which we shared with the market to be in the range of $460 million to $480 million. Construction revenues grew 7.3% and Service grew 14.8%.

Overall for the year, Construction accounted for 80.6% of revenues, and Service was 19.4% of revenue. While Service growth continues to lead, construction is a much larger base resulting in a larger dollar contribution. As Service revenues continue to grow, that lends a positive vibe to our gross margin. In 2017, we saw that play out, while favorable industry pricing and our project mix also played a part in our full year gross margin coming in at 13.5%, which is up 100 basis points from the prior year.

Gross margin in our Construction segment benefited from large projects, achieving milestones and nearing completion, which allowed for gross profit contribution and recognition. Overall, Construction gross margin was up 160 basis points to 11.4%. Going forward, we still think we have room for continued improvement, as Charlie noted.

Service gross margin was up modestly to 22.1% from 21.3% last year. Importantly, our contractual maintenance base increased by 14.2%, up to $12.9 million. As a reminder, we typically see considerable pull-through revenue from our Service over our maintenance base, so this growth is certainly a positive sign for future pull-through revenues.

Moving on to Slide 10. Selling and general administrative expenses rose to $56 million for the full year of 2017 compared to $48.4 million in 2016. As Charlie noted during his remarks, we incurred some nonrecurring expenses, as we continue to build out our Sarbanes-Oxley compliance along with other public company functions. Those expenses aggregated to approximately $2.8 million and accounted for a good portion of the SG&A expenses. The $2.8 million negatively impacted the EPS by about $0.23 for the year.

Moving down the income statement, we incurred a $1.7 million charge, as we revalued our deferred tax asset due to the passage of the 2017 Tax Cuts and Jobs Act. That resulted in an effective tax rate of 81.6%. The EPS impact of the $1.7 million charge is approximately $0.23 per share as well. Although, we certainly didn't enjoy taking the charge, we definitely look forward to the lower corporate tax rate going forward. For modeling purposes, a range of 25% to 27% is reasonable for taxes in 2018.

We incurred a charge of $847,000 associated with a partial redemption of the preferred shares in July. The EPS impact of this was approximately $0.07 per share. For the full year, our earnings per share was negative $0.13. Excluding the previously noted EPS impacts of the nonrecurring expenses, the deferred tax asset revaluation and the preferred redemption, EPS would have been approximately $0.40 per share for 2017.

Charlie already touched on some of the backlog information, but I'll highlight that once again. At year-end, our total backlog stood at $461.4 million, of that, $426.7 million was Construction and $34.7 million was Service. In terms of conversion, we expect approximately 65% of the backlog to be booked as revenue in 2018. Within the Construction segment, the Mid-Atlantic and Michigan branches saw the strongest balance sales during the year, while Florida, Ohio and New England were on the weak side. We do have the big data center project that Charlie referenced, which is breaking ground in the first quarter.

Moving to Slide 11. We have highlighted several balance sheet items. During 2017 and into early 2018, we continued in our efforts to simplify our capital structure by repurchasing our preferred shares in 2 separate transactions. With those shares retired, we are now focusing our attention on additional shareholder-friendly steps we can take. We have heard from a number of investors that they would like us to eliminate our outstanding warrants, and we are busy studying ways to accomplish that. During the year, working capital improved $2.3 million up to $30.8 million and our current ratio was at 1.23. At year-end, we had total debt of $26.9 million, as undrawn capacity on our revolver of $15.9 million. As of year-end, we are in compliance with all bank covenants.

I'll now hand the call off to Executive Vice President, Mergers and Acquisitions and Capital Markets, Matt Katz, who will provide a summary and a commentary on the M&A efforts. Matt?

Thanks very much, John. Starting on Slide 12. Earlier in the conversation, Charlie referenced the latest FMI data. Just a couple of points to add to that. The data did comment as well on the M&A market in the nonresidential construction industry, noted that it was healthy and that confirms much of what we're experiencing in reality as well. We continue to see a great number of aging business owners who are now on out in the market either actively or somewhat reflexively searching for both liquidity as well as for solutions to management transition issues, many of which are, sort of, long in the tooth. So we think it's a good environment to be outlooking for potential acquisition opportunities. And again, much of what FMI is saying about the M&A market certainly corroborates what we're seeing in the market firsthand. In addition, from a perspective of being healthy, for us that means we're seeing a good volume of opportunities across a reasonably diverse set of subverticals within the specialty construction market and among those businesses, there's a high degree of quality on an absolute basis, which is important, we're seeing businesses that we would like to own not just businesses that are sort of the ones that kind of flow to the top, again, good high-quality businesses that we think would be good with the Limbach family.

Since assuming my role at Limbach, one of the things I've focused on has been creating a systematized framework and process for the M&A activity. The industry is very fragmented at the local level and so, it's important to have a proper framework so that we can efficiently evaluate the opportunities that we do see, both the ones that cross our desk and the ones that we source proactively. Ultimately, that allows us to be more efficient in our evaluation of the opportunities. We are a little bit skeptical, I would say, in terms of the things that we do see, and as we'll note here shortly, our bar is pretty high, but we're seeing some things that are quite interesting in the market. We've been very busy over the last several months reviewing a significant number of opportunities, including a significant number of healthy operators that are technically not for sale but whom we know well and who have either proactively reached out to us given some of their concerns and they're feeling that Limbach would be a good fit as well as opportunities that we've identified for many of the same reasons. But it is important to note that people are calling us largely based on reputation, working relationship in a reasonably large diaspora of Limbach alumni that have filtered out into the market over the last 10, 15 years.

We have opportunities that we are evaluating, that we would characterize as being active and advanced at this time. But we do want to reiterate that we are sticking to our guns in terms of evaluating these businesses, both from a business perspective as well as a financial perspective. As we've noted previously, we have some reasonably strict criteria, against which we evaluate potential acquisition opportunities, including whether they are culturally compatible, whether the management team that is running that business day-to-day is going to stick around and be part of a Limbach team going forward. And importantly, valuation. Our benchmark is that we want businesses to be accretive to earnings within the first year. We are, I think, reasonably disciplined around what we think the market really should be for well-run Construction and Service operations, and we're not prepared to sacrifice those criteria for the expediency of just getting something done. Some of what this entails ultimately, is being patient. And again, we've got a number of advanced opportunities that we're working on. They take time. The upside of that, from our point of view, is that we get to see businesses perform. We get to see people meet expectations, meet their projections and the opportunity to really evaluate operations, so that ultimately, we can derisk the opportunity by the time it gets to the finish line.

Given the market environment, we have been very conscious of businesses' upward trajectory, which we think is a good thing. But it does present some challenges from a valuation perspective. That being said, the bogies that we've announced to the market or that we think we can buy well-run construction businesses for somewhere between 4 and 5x EBITDA, maybe a little bit plus or minus on either end of that. Our experience and reality has been that those are, and will continue to be valid benchmarks. We are also cognizant of the growth that people have enjoyed over the last couple of years. And so, we do look at things, both on an LTM basis as well as on a multiyear average basis to make sure that we're not, sort of, buying peak earnings off of peak multiple and based on our experience in the market over the last 6 months, we think that thesis works and we think it holds, and will continue for some time.

Turning to Slide 13, we've got a graphical representation of our M&A strategy. This is a slide I think many people have seen before. We are active in every one of these vectors at this point. The 4 principal ones, obviously, being Mechanical Service, Geographic Expansion, Mechanical Construction and Electrical Construction. We're finding interesting opportunities in each of those 4 verticals. I would note that on the Geographic Expansion, our activities at this point are focused largely in the Southeast. We will get to Texas and the Pacific Northwest in due course, but we think the Southeast is particularly attractive right now and a good fit for where we're seeing, both demographic growth as well as sort of growth with our customers in our end markets. The sort of Tax Cut and Jobs Act bill as well as the emerging energy dynamic in the country are making for some pretty interesting market opportunities, particularly on the construction side, we're seeing good mechanical and electrical businesses that provide us not only with entrance into adjacent markets geographically, but also that are coming with pretty nice-sized Service businesses as well as end market exposure, that we didn't have before, including into industrial and some other areas that we think are interesting over the long term. So ultimately, we're making very good progress on the M&A strategy. The pipeline is very full. It's allowed us to be somewhat picky and somewhat choosy versus just sort of reacting to everything that comes on the door. We are continuously reprioritizing and reorganizing those opportunities that are most actionable, on incubating other opportunities that are perhaps, not actionable in the near term but will be 3, 6, 9 months down the road. But importantly, it's sort of critical for us to remain disciplined, which we think we've done. We are very excited about some of the things that we're looking at and as we continue to move forward with the strategy, we want to make sure that the entire team is sure that it's the right one for the company and not -- and for the shareholders.

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

Thanks, Matt. And to everybody on the call, I just want to reinforce, having Matt join the team has just been a fantastic add and the way he's amped up the M&A activity for the company has been remarkable. So, Matt, thank you for joining the company.

All right, as highlighted on Slide 14, I'd like to provide some comments on our high-level market outlook and introduce our guidance for 2018. First, the general outlook for nonresidential construction in the sectors we focus on remains positive. This is the theme we've been echoing for a while, and if anything, we think the macro environment has gotten even better. There are a number of demographic issues that are really fueling demand for construction. A good example of this is the baby boomer demands on healthcare, which continue to fuel construction in that industry. In the education sector, we see a number of top institutions with significant CapEx programs as they seek to satisfy the increasing demands for a higher education. Those are just a couple of many, many positive examples we can cite. To be clear, these market forces have been in place for some time. Now with the Tax Cuts and Jobs Act, we see even more positive macro drivers only getting better and the recent data from the research entities such as FMI, really brings the point home. We have also talked about the opportunity we see in new areas such as mission-critical assets like data centers. The largest owners of data centers tend to be very tight-lipped about what they are up to. So data isn't readily available as it is with our other sectors. However, every bit of market intelligence we see from entities like Jones Lang LaSalle certainly confirms our viewpoint that billions of dollars of construction is in the pipeline. I made a point earlier that I want to emphasize again here, that is that the data centers will be contemplated by market-leading companies out there and the industry leaders that are everyday names in every American household, those companies require top-quality facilities, which need to be built by top-quality construction companies. Because of this, we feel data centers are a perfect opportunities for Limbach and our Project Turnstile went to really solidify this in our mind. We are studying our options for further market penetration.

I also want to acknowledge the great people that work here at Limbach. Our people truly care about what they do. It's incredible to witness their hard and smart work and what they produce from iconic structures with systems that support creature comforts to maintaining those systems 24/7. We have great people here at the company, and I hope all of you appreciate that. I certainly do.

Before opening the floor to your questions, the last thing I want to address is our guidance for 2018, which we're now introducing. For the full year, we are guiding to revenue of $510 million to $530 million, with adjusted EBITDA of $20 million to $24 million. Our business typically has some seasonality. Growing through the year, such as the second half trends to be greater than the first half. With that in mind, we anticipate we'll be able to narrow and update our guidance as we move through the year, and we feel confident that these ranges, based on our projections will be achieved.

With that, operator, I'd like to open it up for questions.

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

You touched a little bit on some of the worker shortages, we've heard that a lot, kind of, throughout the industry. Is that an impediment for you guys in any way, whether it's wage inflation, whether it's just capping some of what you can bid on, maybe a little color on how you're sort of dealing with that?

Sure. Steve, human capital deployment, as I mentioned, is critical right now. We have to make sure we are staying on top of the game. What we're doing right now -- and you got to look at it both from a salary perspective and a craft hourly perspective. So first on the salary part. We're very focused right now on career path planning, and showing our employees that are with us as well as attracting new talent to the company that there is a way to grow with our company, and we're highlighting promotions throughout the business. So people get a feel like this is an important place to be and my career is going to advance. The Learning Center we built with a focus on leadership development and certification of certain positions in the company is going to reinforce to those salaried employees that this is a terrific opportunity to grow. And from my perspective, I believe that's what people look for. How I am going to grow my career here at Limbach and as a result they'll stay here. From a labor -- not to mention attract people from other companies. From a labor craft perspective, there's 2 key things that we're working hard on. One is inclusion in the company, that they feel like they're part of the fabric of the business and the way we do that is actually through our safety program. You heard me use the words Hearts & Minds. Safety is mission critical, it's not the driving force as to why someone comes to work for our company, but when people are here, they realize we truly care for them, and as a result of that, they spread the word to their buddies, and they come over to Limbach and we execute. I think a great example of that was the ramp up of manpower when we built the Detroit Red Wings project. I thought we were very smart about that project. We outsourced certain elements of it, and then we looked at what we would self-perform. And between the outsourcing and self-performed, the job was executed extremely well but we had to ramp up manpower. And quite frankly, our reputation up there in that Michigan marketplace allowed us to dramatically roll our craft labor, and we finish that project as you heard, on time and on budget, and the client's quite satisfied. The other thing we're working on, is incentives. We're putting certain measures in our company, so we can be transparent with our employees, so they can see how they're doing against benchmarks, be it internal benchmarks or project benchmarks and then look at incentivizing them through additional incentive compensation, they perform well, they can see more in their paychecks. So we're working on both those fronts, and we think that, that's going to allow us to attract the talent we need. Now coming back to just the dynamics or the pressure in the business in terms of the industry rather, not just Limbach. From a talent perspective, all the competitors are facing the same thing. And what I just shared with you is the differentiator. And that's going to allow us to continue to bring in the new people, we're making the investments in recruitment as well as training and development and that will be allowing us to have the nice measured growth that we've had and we're going to watch it very carefully through the course of the next year, 1.5 years, maybe 2 years, 3 years, that I think this boom is going to continue. So Steve, does that answer the question?

Yes, that was helpful. I guess just turning the page here, Service obviously had a very big year, good margin business that continues to grow. But I noticed your backlog was down in Q4, both quarter-over-quarter and year-over-year. Is that just a timing issue? Or help me reconcile that, I guess.

Sure. Yes, it was a timing issue. One of our major customers had a CapEx program that they expected to go forward with in 2017, and that's getting pushed into 2018. It's a repeat customer. It was unfortunate, we didn't see the revenue come through last year as well as the backlog but it's happening in 2018. So I think it was more of a timing issue.

Our next question is from Brent Thielman with D.A. Davidson.

Charlie, or John, appreciate the breakdown of the nonrecurring costs for '17. A two-part question here. One would be, will be -- there be some carry over into the first half of '18? I think you mentioned some items specific to training some of the personnel. And then the second part of the question would be, should we think about this corporate SG&A line of around kind of $4 million per quarter going forward? Just trying to think about that in context of your guidance.

Yes, Brent, I'm going to take the first part and I'll let John jump in afterwards. But from a standpoint of the way we looked at the nonrecurring, they were expenses that we incurred really the majority of it in the first half of '17, leading into the third quarter. And it had a lot to do with some auditing matters that we had to address, which we've addressed in previous calls as well as just going through the material weakness, proving out our processes and such, and that is complete. I mean, the processes are established, we got through all the accounting matters and audit matters last year and it was interesting in our Audit Committee call, it was great to hear the audit firm, Crowe, make a comment about the incredible progress that the finance team and the operational team made to get those processes in place last year, to do all the testing that we did and the vast majority of that is clean and clear. We have a couple of things we still have to work through, but it's mainly some minor training. It's not going to be all that recreation of processes or tremendous testing. We're through that. So John and I both looked at what we spent last year, and we spent more than the $2.8 million in terms of getting all that done but we feel very confident the $2.8 million is nonrecurring. John, would you like to add some additional color to that?

Sure. Brent, thanks for the question. And yes, we have analyzed that pretty heavily and determined that, that $2.8 million does represent costs that will not be reoccurring going forward. They're clearly identified with our -- the AP matter we have in the first quarter and second quarter of last year as well as our getting to SOX compliant level. As far as the run rate going forward, the second part of your question. I think a $4 million to $4.5 million run rate on the corporate SG&A is a reasonable range. As Charlie's referenced, we have made some investments in the business, both in 2017 and 2018, outside of the nonrecurring expenses. A big focus on training and development. We've done some relocation of some of our locations that allowed them to have more space for expansion. So we do have some components of the SG&A that will be increasing slightly in 2018, but that run rate that you referenced is a pretty good range for modeling purposes.

Okay. Okay. Appreciate that. And then on the Service margin is notably stronger this quarter. Is that just a simple benefit of seasonality in a cold winter? Is there new work you're picking up that we should think maybe changes the profile of margins there going forward?

John, do you want to take that one?

Sure. As far as Service margins, as we've referenced that the maintenance base is growing, and that maintenance base certainly is at a very high rate. As we've discussed that the maintenance contracts carry gross margins of 35% to 40%. And with that, the pull through that we've also talked about is -- that can run anywhere from 20% to 30%. So the combination of those 2 items plus better pricing on some of the larger Service projects that we're executing is pushing that margin higher. So what we experienced as the margin rate in 2017 for Service, is something that we do expect to see duplicated going forward.

Okay. And maybe just one last one, obviously, some focus here on the call about M&A, the acquisition pipeline. Could you talk about your confidence in, perhaps getting a deal done this year? Do you have some potential candidates out there that are pretty far along in the process? Any more discussion there, just to kind of give us a sense of where things might be at?

Yes, look, things are progressing quite well and as Matt said, we have several that are advanced past the dating, and we're excited about the opportunities. So we're working hard. I -- it's kind of interesting, Brent, we're talking to people that were not for sale. They weren't thinking of selling their companies and it takes time, one, to nurture that and two, once you get into the real deal as it is, you've got, quite frankly, a bit of emotions kicking in by the seller about parting ways with their ownership. And I think, at this point, based on kind of the way things are maturing just takes a bit of time, but they're getting over that and they realize, Limbach is a great home for their employees. They realize how much we care about our people, so unfortunately, it's not like we're chasing a book with a finite deadline that you can work through a process. We don't want to get into a bidding war on opportunities. We're selectively rifle shooting at certain opportunities, certain companies that we think the world of. It just takes a bit of time. To answer your question about getting one done, yes, we anticipate getting one done this year. I hope we have better news than that, but at this point, I think it's a fair assumption that we're working hard to get one done this year. Matt, do you have any additional commentary you'd like to add?

I'd only add that, in most cases we're dealing with folks that have built a very successful Construction and Service business over a very long-time period. And that's a language that they speak well, they understand well. By and large, M&A and transaction opportunity is somewhat foreign to them, both from an economic and financial point of view as well as from a legal and structural point of view. And so, even if we've, sort of, crossed the Rubicon on the 2 businesses being a good fit together, we do spend a fair amount of time helping to educate folks on what a deal looks like and what a deal means and what all the documentation means and that takes time and people then need to reflect and go talk to advisers and come back to us and so it is very much a process and as Charlie said, and I noted, most of these businesses are not technically for sale. They haven't hired advisers or investment bankers and I probably developed a new-found appreciation for what an investment banker can do on the sell side, because, ultimately, they help corral the client and help provide a benchmark for what market terms and conditions are and sort of generally keep the process moving. Obviously, we prefer to converse and negotiate with people directly and so, I'm not knocking that but it does require us to spend a little bit more time and a little bit more care in getting everybody comfortable. So as I noted previously, the upside to a slower transaction time line is that we have the opportunity to see how businesses perform and for people who may have projected a very strong fourth quarter or a very strong 2017, instead of having to underwrite that based on a couple of months of actuals and then a fourth quarter or a third and fourth quarter projection, we have the opportunity to actually see people hit numbers. So there is a silver lining to it, but we continue to work very hard on trying to get some things across the finish line and there are a number of things that we are quite excited about.

(Operator Instructions) Our next question is from Alex Silverman with Special Situations Fund.

Can you guys touch on the decline in Service revs and then along the same lines, the decline in Service backlog, both sequentially and year-over-year?

Sure. Let me start with backlog. There was a question earlier by Steve Dyer of Craig-Hallum, asked a question about that, and our response to that was, we actually had one significant customer that we do a lot of business with that backed off their CapEx spending, and they had to push it out to a future period. That work is starting to come into backlog now. So we were disappointed we didn't get the sale and we couldn't book it in '17, but we see that happening in '18. So...

Is that Service? Or is that Construction?

No, it's Service. That was Service. And it's a customer that we were -- it's an owner. We work directly for them in their hospitals, multiple locations, it's a great relationship. We actually worked for them on the Construction side, designing their hospitals, we build their hospitals and then we do service, and they also have us doing various facility services at different buildings we did not build. So it's a great relationship. So we're a little disappointed that they didn't have the CapEx spend last year to book those sales but that's happening in 2018. On the decline in Service revenues, John, I'd like you to take that.

I'm not sure -- yes, I'm not sure the nature of your question, Service revenues actually grew year-over-year.

In the fourth quarter?

Oh, in the fourth quarter.

They declined 10%, right? In the fourth quarter?

Yes. I'm sorry, I was looking at the full year. Yes, fourth quarter, that was mainly driven by just a timing, as Charlie referenced, some of the projects that we were expecting to come in on some of the owner-direct service work just did not get in the backlog and did not get executed in the fourth quarter, which caused that slight decline. Again, we feel it's just a timing issue. We expect to see service continue to grow year-over-year from 2017 into 2018. So it was just a timing issue of projects getting into the backlog and executed.

And Alex, it's...

Isn't Service a more of a recurring business?

Yes. What I wanted to comment on, with Service work, whether it's pull through or a client wants us to do a slightly larger project like changing out air handler units on top of their building. That work happens quickly. So they generally say, all right go, and we burn it. So the backlog burns off very quickly. I think a good barometer on the health of the business is the issue of the maintenance base. So that's that, we're in the building, we more or less own the building, and the client just comes to us naturally for any sort of spend, for repairs or improvements within that facility for the mechanical and sometimes electrical maintenance. So in the case of our 2017, we sold $3.4 million in maintenance contracts. That's up from $2.6 million in 2016. So very nice growth. It takes time to get traction to knock on doors of buildings we didn't build but we're seeing that growth continue. And we had expected that, so it's -- I think it's coming along quite nicely but again, with the project backlog, when a client has a CapEx spend, they get the approval and then they tell us to go and generally it's executed very quickly, so I hope that provides a bit more color on the situation. But I think a good thing to look out is our maintenance base and how those sales are going. So we're pretty pleased with how things played out through '17.

That's helpful on the Service side. One last question, which is the $2.8 million in unusual in accounting or a SOX prep, was that part of the $18 million to $20 million guidance?

We originally did not expect to be spending that money in the $18 million to $20 million guidance. So we had to overcome that. We had -- and the good news is, when I look back year-on-year, in terms of what we had to spend on our audit last year and the additional work for testing, we have not seen that happen in '18 at all with the wrap up in audit. So we're very pleased to see that right there as nonrecurring. So yes, from the standpoint of what we looked at last year in some of the cost, we didn't expect to see that but we had to deal with it. And I thought we did a good job, and we came out fairly clean with our results. So does that answer the question?

Just to be fair, that was a -- the first 9 months or first half of the year spend, is that right?

Yes, I think there was a little bit in the fourth quarter too, but it trailed off as the year went on.

When you gave guidance for $18 million to $20 million of EBITDA in November though, you knew that was -- that you were spending that $2.8 million?

Yes, there was absolutely the spend there and some of the difference, it just got down to some revenue recognition, the diversity of our business, there's ups and downs in all of our business units but the diversity of the company fared well. Overall though, if you look at our company as we go forward, I think there's always going to be some lumpiness in quarter-to-quarter, mainly on the Construction side, based on when projects start and when they finish, and when we can take actual revenue recognition, especially, on the upside. We can't take that until the project is complete. So yes, there was a little bit of a shortfall there as we wrapped up the year. But I think we're going to see a little bit of that from time to time. But overall, when I look at the year, we came out within the guidance range we had provided, when you take into account the $2.8 million.

Last question is, can you give us any sense of how the first quarter concluded?

We're going to be releasing those results fairly soon, so I really can't comment right now.

Were there weather issues that prevented you from getting projects done? I mean, that -- the weather was pretty awful in the first quarter.

We had some of that, but I remember the polar vortex a number of years ago, where we did face some challenges. We did not see that, we saw some minor but nothing that really hurt us in terms of revenue in the first quarter, no.

(Operator Instructions) We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Well, I just want to thank everybody for joining us here today. Our overall year, we're pleased with our operational side of the business. We outperformed our business plan in terms of what we had to get done. We did face some interesting elements in terms of just the compliance and getting our public company expenses squared away. As we go forward, we're pleased with where we stand today. The guidance we gave for 2018 is -- we're excited about the growth opportunities that we're continuing to see in the marketplace, and there's no letup in the market opportunities. So we're pretty pleased with what's in front of us.

Thank you for joining us today, and we look forward to future conversations and future earnings calls. All the best.

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