Limbach Holdings Inc (LMB) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Limbach Holdings First Quarter 2018 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, Jeremy Hellman of Equity Group.

Thank you very much. Good morning, everyone. Yesterday, the company issued the announcement of Limbach Holdings 2018 first quarter results and filed its Form 10-Q. The company will also be using a slide presentation to accompany this call. The presentation can be found in the Earnings section of the company website at www.limbachinc.com. The company encourages you to review the forward-looking statements on slide 1 of the presentation. With that, I'd like to turn the call over to Charlie Bacon, CEO of Limbach Holdings. Please go ahead, Charlie.

Thanks, Jeremy, and good morning to all. Welcome to the call. Joining me today is also our Chief Financial Officer, John Jordan. As Jeremy noted, we have a slide presentation to accompany our prepared remarks, and we hope you find the additional material helpful. We'll make a point of referencing which slide we are on as we go along.

I'll start on Slide 2 to remind everybody to review our forward-looking statement. Let's turn to Slide 3, where we'll summarize -- or we have summarized several key themes from the quarter, which includes strong sales and pipeline development activity, which further supports our near-term outlook, strong revenue growth during the quarter and continuing improvement in margin.

We'll also review our Construction and Service operating segments, noting particular strengths and a few challenges, and then address the balance sheet and some strategic activity. Importantly, in light of the excellent sales activity and a solid first quarter revenue, we are increasing our revenue guidance for the year from $510 million to $530 million to $520 million to $540 million.

Moving to Slide 4. Consolidated revenues increased 4.7% year-over-year to $120.5 million. Revenue growth was led by our business units in Eastern Pennsylvania, New England, Ohio and Orlando. In fact, 7 of our 10 business units generated strong year-on-year growth in revenue. This excludes our Michigan operation, which nonetheless, outperformed expectations this quarter but was challenged by a difficult year-over-year comparison due to the inclusion of revenue from the Red Wings arena project in the first quarter of 2017.

Additionally, I would like to highlight our Eastern Pennsylvania business unit, which is making strong inroads into regional health care, commercial development and the industrial market. We believe there is a promising growth story emerging in the Greater Philadelphia region, and that we are well positioned with our design and engineering resources and a deep resume of education and health care experience. The branch had a strong first quarter of sales which supports a favorable 2018 outlook and is creating a solid backlog for 2019.

As I noted earlier, and as is reflected in the chart on the left, we have increased our revenue guidance by $10 million at both the low and high ends of our previously provided range due to the strong sales activity in the first quarter. Our revised revenue guidance now stands at $520 million to $540 million.

We've communicated previously that improving gross margins are a key focus and in the quarter we saw a further evidence of progress, although consolidated results were impacted by $4.6 million in write-downs in our Mid-Atlantic operation, which I'll address shortly.

In general, however, the tight labor market and our focus on higher value-add engineering opportunities and complex design projects has shifted pricing power in our favor, and we are experiencing greater margin opportunities on new project sales. The margin profile of our work in backlog has increased approximately 40 basis points from a year ago. Our expectation is that there will continue to be opportunities to expand margin as we don't see either a labor dynamic or a market position shifting anytime soon.

I want to provide some color on the Mid-Atlantic write-downs. As we communicated previously, when discussing negative project adjustments, in many cases, we have strong positions and solid bases from which to pursue reimbursement for additional costs we incurred on these projects. But again, the timing and dollar amount we might ultimately recover are difficult to estimate with any precision. In the first quarter, we were adversely impacted by -- on a handful of projects, including 3, in which we feel we have very good recovery potential.

The first project was delayed in its completion due to a lack of owner direction on design and testing procedures. The second instance was for an escrow project, where one of our key subcontractors failed to perform under its contracted scope of work. On the third project, we experienced considerable owner-directed acceleration to compensate for massive delays in the delivery and erection of the structural steel, which in turn, materially impacted our ability to perform our scope of work. With no flexibility in the completion date, the general contractor directed us to sharply increase our craftwork or manpower in order to maintain the schedule. As a result, we initiated a substantial overtime program and began working 6 days a week, which increased cost and reduced productivity.

To be clear, the structural steel was obviously not in our scope of work or our responsibility. Nevertheless, because our work was dependent upon the structural steel being delivered and erected by a certain date, we and many of the other specialty contractors on the project, could not perform installation testing and startup as originally planned.

We'll be submitting request for equitable adjustments on these projects to recover the direct and indirect incremental cost we have incurred. I should note that while these projects have been a disappointment, our Mid-Atlantic branch is a large sophisticated operation that excels in delivering design-build execution. Within the business unit there are a number of very favorable projects that are exceeding expectations, and as they mature, are likely to generate incremental profit and write-ups later in the year.

Returning to margin trends. While we rightfully recognize the full impact of these projects of the quarter, gross margin would've been 15.9%, continuing our recent trajectory of increased margins. You'll recall that in Q4, we also hit 15.9%.

Let's now turn to Slide 5. Our pipeline of opportunities remains very strong and increasingly reflects our preference for design and engineering influenced opportunities. Currently, we have 94% of our budgeted 2018 Construction revenue forecast booked in backlog and/or included in committed projects that have entered preconstruction.

We have not formally booked these committed projects at the backlog in accordance with our policies, but our experience is that this committed work ultimately ends up in backlog.

In the graphic on Slide 5, we provide a segmentation of the 2018 Construction revenue bridge to achieving the forecast. As you can see, we need just $26.1 million in incremental new sales to be booked and earned during the remaining 9 months of the year to meet the forecast, supported by a very, very strong pipeline.

Turning now to Slide 6. Our Construction revenue had a solid first quarter, setting us up for a 2018 budget coverage that I just noted along with a nice head start to our 2019 plan. Sales activity was outstanding, and at quarter end, our reported Construction backlog stood at $413.9 million.

However, that excludes an additional $143.8 million of committed work we have yet to record in backlog. These projects, where we have entered into preconstruction agreement with the customer or we are engaged in engineering activity to arrive at a design and associated pricing.

Not all of these opportunities will materialize as firm projects to be booked into backlog but experience suggests that most will eventually, and those projects we booked into backlog once the budget has been agreed to, and we have received either a contract or a letter of intent finalizing the value of the project.

When taking into account the booked and committed projects, year-to-date Construction sales were $232 million with increasing margins. I want to note that Construction sales in the first quarter reflected a significant increase in design-build work, with 34% of the new work booked being contracted under that format.

Design-build services typically provides us with stronger margin opportunity, while reducing risk through the utilization of our in-house engineering group, Limbach Engineering & Design Services, or LEDS.

LEDS continues to be a huge differentiator for us. Also of note during the quarter, was that 18% of the new awards were for full multi-trade MEP services. Our MEP offering is attracting more and more interest. Today, 4 of our business units are offering full MEP services.

On Slide 7, we address sales performance in the Service segment. Service sales were up 17.9% year-over-year to $23.6 million. This exceeded our internal growth forecast of 15.2% for the quarter. Sales of maintenance contracts increased 17.3% year-over-year to a record $1.2 million, while project sales were up 15.3% year-over-year. We ended the quarter with Service segment backlog at $38.6 million and view the recent trends as favorable. Service business has really strong organic growth over the past several years. We expect this to continue and to support.

(technical difficulty)

Excuse me, folks. Operator, can you still hear me?

Yes, we can hear you. We lost you for 10 seconds.

Thank you. Okay, sorry about that. Service business has really a strong organic growth over the past several years. We expect this to continue and to support this growth, we are promoting and recruiting management personnel that have the talent and skill necessary to perform to our expectations. We view this as a smart investment for the medium to long term, as the Service business surpasses $100 million in revenue this year, up from just $39.9 million in 2013, when we launched this strategic growth initiative.

Importantly, we are pushing margin as we pursue new opportunities given the favorable balance in the market. Service EBIT performance for the quarter was disappointing as we continued to be challenged on an escrow project I mentioned earlier. One of our key subcontractors failed to perform under the contractual scope of work, and we intend to pursue recovery.

I touched on manpower and labor, and I want to do so again here given its importance to our operation. Talent is a challenge for the industry, and perhaps, throughout the entire business community, giving this moving -- given the moving economy. Limbach is being proactive in addressing our current and anticipated needs. One, we have invested in internal recruiters who are supported by outside resources from time to time. Two, our training and development programs are being expanded to onboard new employees to support the advancement of those employees who show promise. Three, we are very focused on retention and are offering promotions, robust career growth planning and better recognition. Four, we are committed to offering competitive compensation packages. We've also continued to upgrading our facilities to create attractive workspaces, especially targeted at the millennial generation.

In the field, we continue to promote training, development and safety through our Hearts & Minds safety program. In the past 12 months, we have hired 86 salaried staff and the company currently has 47 salaried positions open, the majority of which are project-charge related staff as opposed to corporate overhead. This is a perpetual commitment but critical to achieving our goals.

As we consider the lay of the landscape and the risk and opportunities it presents, we'll be conducting risk reviews to evaluate whether we should be self-performing work or self-contracting it, with the Detroit Red Wings project being a great example. Over 40% of that project, which was our largest in our history, was sub-contracted out, which helped us to manage the risk associated with that project.

Finally, we also are focusing on expanding our prefabrication and modular construction capabilities in an effort to create more efficiencies as well as to reduce our craft labor requirements in the field. I'll hand this off to John now for his review of the financial results on our balance sheet. I will be returning later to offer some more insights on some other strategic initiatives. John?

Thanks, 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, and also note that the presentation accompanying our remarks contains several appendix pages with additional data we think you will find helpful.

Turning to Slide 8. For the quarter our consolidated revenues were $120.5 million, which is up 4.7% versus the prior year. That consolidated figure also exceeded our internal forecast for the quarter.

Construction Segment revenues were up 5.8%, while Service segment revenue was flat year-over-year due to owner-direct projects being completed in 2017, which did not repeat in the first quarter of 2018.

Construction operations accounted for 80.3% of revenue, while Service accounted for 19.7%.

Gross margin in our Construction segment was 11% compared to 11.9% in the first quarter of 2017. The decline largely results from write-downs in our Mid-Atlantic business unit, totaling $3.7 million, which were offset by write-offs on other projects in Mid-Atlantic, Florida, Michigan and New England.

Excluding the write-downs at Mid-Atlantic, gross profit for the quarter would've been 15.9%. We have taken operational steps to ensure the write-downs on these projects have been fully identified and recognized and expect at least partial recovery in the future.

As Charlie noted, Service segment gross margin was negatively impacted by the write-down on an owner direct escrow project in the amount of $900,000, which combined with the Construction write-down of $3.7 million, totaled the $4.6 million we recognized in the quarter.

For the quarter, Service gross margin was 16.9% compared to 20.3% in the first quarter of 2017. During the quarter, selling and general administrative expenses were $15.7 million compared to $14.6 million in the first quarter of 2017. 2018 includes $467,000 of stock-based compensation expense, which we did not have in the first quarter of 2017. As Charlie previously referenced, we are making investments in our people, which drove the remainder of the cost increase.

Our effective tax rate for the quarter was 30.7%. At quarter-end, our total backlog was $452.5 million, of which, $413.9 million was Construction and $38.6 million was Service. Our estimated backlog burn provides 83% coverage for our 2018 expected Construction revenue, which is very healthy coverage at the end of the first quarter. That does not include the incremental coverage resulting from the committed work that has not yet been booked into backlog. With that included, their coverage will be 94%.

Moving to Slide 9. As we noted in our last call in January, we repurchased the remainder of the preferred stock. Doing so eliminated the associated dividend expense along with the potential dilution as those shares were convertible into common stock.

With the preferred stock now addressed we are now focusing our attention on addressing the warrant structure. We have more work to do here but it remains priority item for us. From a balance sheet perspective, the total debt increased $15.7 million, as we borrowed $10 million to repurchase the preferred stock, threw an additional $6.2 million on our credit line, leased additional vehicles with financing and made the required principal payments in our long-term debt.

Our working capital position remains strong, increasing by $1.6 million from December 31, 2017 to $32.4 million at the end of the first quarter, resulting in a current ratio of 1.25. As noted in our 10-Q, we did trip our debt-to-EBITDA covenant during the quarter due to timing issues with some large cash receipts which were due in March, but were not received until early April. The delayed payments were received in full shortly following the quarter end.

These delayed collections together with the impact of the write-downs in the Mid-Atlantic business unit contributed to the covenant breach. Our bank group remains very supportive and granted us a waiver for our breach, and we are currently in compliance with the covenants. The bank group also provided a temporary reduction in the fixed-charged coverage ratio as of June 30, as we see some continued tightness in cash flow for the second quarter. With that, I'll turn things back over to Charlie to share some closing comments. Charlie?

Thanks, John. As highlighted on Slides 10 and 11, market forecast for the sectors we focus on remains strong. Our growth has been outpacing the industry, so we see a very nice convergence of growing market and increasing market share. It has been our expectation since the presidential election that tax reform could be a great catalyst for nonresidential construction industry, and our sense is that the Tax Cuts and Jobs Act is indeed leading to increased corporate capital expenditure budgets.

We noted in a recent report that capital expenditures jumped 19.4% in the first quarter, which, if you read the Wall Street Journal this morning, actually on the front page, there is an article about CapEx expanding by 24%. So that's even an improved number. We expect to see additional capital construction programs as well as HVAC equipment upgrades and improvements, including energy reduction programs to expand.

At this point, I do want to comment on our M&A efforts. Many of you heard Matt Katz describe our M&A program on the April 3 year-end earnings call, and we continue to make great progress in identifying actionable opportunities and executing on them. There are multiple opportunities, which are maturing nicely, including active diligence efforts by management and third-party advisors on proprietary opportunities that meet our acquisition criteria. Overall, the M&A effort is producing many interesting opportunities across the Construction spectrum, from pure service businesses to other trade expansion opportunities, and in one case, a software and data analytics platform tied to energy retrofits.

We want to reiterate that we remain disciplined and focused on our strategic plan and acquisition criteria, which includes cultural compatibility, our continuing commitment for management and being accretive to our valuation and earnings.

Finally, on Slide 12, as I noted earlier on the call, we are raising our revenue guidance for the year by $10 million. We now expect revenues to be in the range of $520 million to $540 million. We are keeping our adjusted EBITDA at $20 million to $24 million. We see developing profit opportunities in the business, and I'm confident we can meet the guidance based on the work we have scheduled for the balance of the year. We also have a couple of conferences we'll be attending later this month. We will be at the B. Riley FBR Conference in Santa Monica next week and then we'll be at the Craig-Hallum Conference in Minneapolis the last week of May. We hope to see many of you at those events. With that, operator, let's open it up for questions.

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

Charlie, the fixed projects, when are these jobs going to be completed? And I guess, any sense on timeline of when you could potentially get some recoveries on the work.

Sure. So one project is demobilized at this point. Several others are wrapping up in Q2 very shortly. And then, one project continues into Q3. As far as recovery is concerned, when you look at how these processes go, there's an opportunity in 2018 to possibly see recovery this year but the trends and what I've seen in the past, you wrap up the projects, you submit all your information, there's a lot of back and forth between the general contractor and the owner, where in one case, we'll be pursuing a subcontractor. It's going to take some time. I'd suggest something could happen in Q4, but I think, in reality, we might be looking at recovery in the first half of '19. Again, Brent, if we could do it earlier, we certainly will, but I'm just letting you know how these tend to play out, and I'm sure you've seen that in the past with other contractors who have faced similar situations.

Sure. No, I can understand. And Charlie, I guess -- and the fact that all these issues sort of occurred within the same region -- are there additional measures or actions that you feel you need to take to kind of ensure that the slug of new work you expect to come in is bid effectively, I mean, do you view these occurrences as more coincidental and kind of out of your control and you have the safeguards in place to avoid this going forward?

Yes, let's just step back a little bit. Let me explain some things that happened here. Our manpower in the mid-Atlantic region, I'm talking about the craft level, ranges anywhere from 175 to 225 craft workers. This like surge that hit us due to the acceleration and some projects being delayed and pushed work that should've been completed in Q4 into Q1, and then the acceleration that they directed us to do in Q1 on that one project where the steel was late, added up to just a massive increase in manpower, and we were peaking, last count I heard, the highest number we were at 353 craft workers. So on a very, very tight labor market to find that many workers on very, very short notice, obviously, you can realize that was a heck of a challenge. What we do in the business, when we look at our workload and project out our projects, both what we have in backlog as well as what's in the pipeline, we schedule out our manpower 12 months in advance. So we can see where we need business. We obviously want to continue to grow, but you want the growth to be on a nice steady state, not ramping up with manpower like that. So we -- I think we do a pretty good view of the future. And then we look at our business in terms of sales activity, how do we plug-in to continue to meet our current manpower resources and some growth? In this particular case, it was outside of our control where just these particular projects all kind of came together at once, including some other projects that are going extremely well, but they're big jobs, happening at the same time. Manpower in this particular region, by the way, is leveling off. So as these projects wrap up here in Q2, we're seeing that manpower drop off dramatically, getting back to normalized levels. The other thing I just want to reinforce is our COO, Kris Thorne, is spending a considerable amount of time in Washington, D.C, right now working with that team, working through the issues both in terms of just that getting that -- the labor normalized but also overseeing the recovery efforts on collecting the money. Brent, does that provide enough color?

Yes. That's helpful Charlie. And I guess just from the standpoint that you're maintaining, the guidance for the year, and the fact that you guys kind of came out with that at the end of March, I presume, some of this was within the realm of your expectations when you offered that guidance, is that fair?

Yes. When we -- when you look at, kind of, the bridge on how do we continue to look at the year, we're raising the revenue guidance only because the sales have been so strong in Q1. So it was terrific to see that. So you'll see that additional gross profit margin drop to the bottom line. So about $10 million to $15 million in range, kind of in that -- we're expecting to see that kind of increase. We've had very strong service sales in the first quarter and that includes preventative maintenance contracts, which tees us up to grab quite a bit of pull-through during the heavy seasonal months of the summer, like, we love hot weather, we love storms, that just means more pull-through for us on our maintenance side of the business, and the other thing is your operating margins continue to increase. And on sales, just in general, we have several branches that are -- exceeded their sales plan at this point in the year, and while we're watching that manpower equation very carefully, they have room to take on some more business. And I think, we're doing a good job on the recruitment of manpower. So that's going to be accretive to our bottom line. And then finally, and I -- you started off by asking me the question about recovery on these jobs. We're not anticipating big recoveries on these projects in 2018, we're not thinking that way. We expect some resolution, but like I said earlier, we think the prudent thing to do is to look into 2019 for recovery as we work our way through that process.

Okay. Last one, if I could, I apologize if you touched on this. But on Service, the reason for the sub-20% gross margin this quarter. And should that come back here in subsequent quarters?

Yes, no, that was really a direct impact of that one Service project, where that subcontractor dropped the ball big time, and we had to jump in and do a bunch of work that we didn't expect to do. So that was just an anomaly. It happens to be a large Service project. So I -- we don't see that, I mean, actually if I look back in the past, Brent, we haven't experienced this in the past this is a -- just an anomaly that I think we're going to work our way through and go for the recovery of the subcontractors, bond and just pursue the recovery of those monies in the future. John, do you have any other commentary on that?

No. That is -- that's accurate. We have the $900,000 write-down on that one Service project, Brent, the escrow project that we referenced. And that is what really drove that Service gross margin down.

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

Don't want to beat the recovery question into the ground but just to make -- just to be clear, you don't have any recovery assumed in your EBITDA guidance this year. So anything you were able to recover maybe late this year would be upside. Is that right?

On the one project, we already have a commitment that the client is going to reimburse us for the overtime portion of the cost of acceleration. So we have assumed that a portion of that recovery. As far as the impacts and efficiencies, we will be pursuing that, but no, we've not included any of that in our projection.

So just I want to make sure kind of I'm thinking about this on an apples-to-apples way. So effectively, your EBITDA guidance would be $5 million, give or take, better. You guided that obviously, after the end of the first call. But that was obviously -- there's a $5 million, sort of, overhang on that, given some of these overruns and effectively, it should be $5 million better. Is that the right way to think about it?

Yes, if we wouldn't have had the hits, the year obviously, was progressing quite nicely. And if we can get the recovery this year, Steve, that obviously, is going to be a bonus to us. But again, we're being conservative on that perspective.

Sure, understood. And then, some of the wage inflation that, I guess, the entire industry is seeing and not just your industry, I mean, is it -- are you finding that you're able to pass that along in the bidding and how do you, sort of, think about that as you go forward the next couple of years?

Well, from the standpoint of -- you've got to look at several components here. First of all, on our union agreements, we know when they're coming up for a renewal, and we generally have a good feel for what they're asking for. And yes, we do expect some negotiations to be aggressive, but we have a pulse on that and we price our contracts accordingly, based on what we expect to see in the future. When you look at the salary component of staff, I think, we're seeing some pressure there in terms of the marketplace, but what we're leaning towards right now is going more towards a pay-for-performance type solution. So yes, there'll be some increases in base salaries, perhaps, more than the 3% we've become accustomed to -- 2% or 3% actually, but we're shifting our thinking right now that -- let's create the opportunity for the people a little bit different than we have in the past that if they perform, they could get a nice upside and obviously, the company would benefit too. So we're dealing with that. That's a big project we're working on right now. And then finally, I think, the other thing that I think we're pretty famous for and I know this might sound soft, but we do care about our people and our safety program, which a lot of people in the industry have taken note of, along with just, in general, how we operate our business around caring for people, the people that work here like working here. And their friends hear the good word about what we're all about, and they want to work for us. So, I think, we have to pay midrange. We have our salary studies. For the better performers, obviously, we have to do better in the higher end of the ranges, but we're being smart about it. But, I think, the combination of staying out in the front, taking it through, quite frankly, putting our arms around our people, letting them know we care about them, goes a long, long way and that's going to help us as we go forward. Bottom line though, we're pricing expenses both in terms of our projects, or for that matter, what we have to spend in corporate, we're constantly reviewing that and pricing accordingly.

Okay. And then lastly for me, as it relates to M&A, I know it's always hard to put a time line on it because all kinds of things can happen, but I mean, it's your -- kind your of thought or your hope that, that's a 2018 event or is it just too hard to kind of pin it down beyond there's a lot of stuff that you're looking at in diligence?

Something could always go wrong, Steve, but it's a 2018 event. We have a number of opportunities that are in active diligence and third parties have been retained to help us. We're moving down the path, and when we get to the point of we're ready to announce, we'll have a definitive agreement, and we'll share that with the community at large. So we're working hard at it, Matt's doing a terrific job. He's got some great resources working with him, and we're quite excited, not only about the opportunities that we're laser focused on, but what's happened actually, over the past -- well, since our call, just a number of opportunities have come in on our doorstep. Companies reaching out to us saying, we heard you're in the market, greatly respect Limbach, we'd like to talk. And it really gets down to generational transfer and people are just looking at, what are they going to do? And we're staying away from that process environment, where when you get the book and you bid and all that other stuff. We've hooked in a couple, but our real focus is working with companies that we respect, that we think would be a great marriage in terms of cultural compatibility. And actually, if you -- I'll just make a few other comments. In the businesses that we're currently looking at we're seeing a very, very nice split of Construction, Service, exactly what we're looking for, and we're also seeing some opportunity with their customers and their sectors that they're in little bit different than Limbach, which would, quite frankly, assist us in kind of getting into those sectors in a stronger way and leveraging their customer relationships because some of their customers work in multiple geographies. So we're pretty excited about what we're looking at in terms of the laser focus right now. The pipeline seems to be opening up even more, giving us more to look at. Staying away from the process environment and that the only thing I'll -- maybe I'll wrap up by saying this. The challenging part is, these businesses are not in a process. So we're introducing the concept of, would you like to join Limbach? And it takes a while for them to emotionally get past that, then you got all the rest of it, be it pricing, legal, but we're staying very disciplined in what we said we were going to do, and I'm pretty excited. The bottom line is we expect to see a 2018 event.

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

I apologize, I may not -- for the connection, it's not in the best location. But, Charlie, I think you touched upon us a little bit talking about in-house training and your prefab work, just improving, I guess, your labor and your ability to go out into the market. But we -- in general, with overall labor shortages and improving demand, are there enough maybe quality subcontractors and personnel out there to take advantage of some of this growth that you're seeing? And is there a way to maybe mitigate, maybe, some of risk associated with that? I mean, with increasing sales, you have to possibly go a little bit further down in that labor pool, which is shrinking. Any thoughts or comments on that front?

Yes, look, there's no question about it. The labor is becoming a challenge for the industry. But I have to reinforce a couple of points that I made earlier. When we look at our labor needs in the business, we're forecasting out 12 months to see where we need additional business to come in and -- or if we see if that there's a challenge in front of us with work that we've sold, what should we do in-house or what we should we subcontract out to? We have an excellent, excellent list of subcontractors that love working with us. We're good, honest people as opposed to running off to a general contractor, who might not treat them well, we treat our subs extremely well. We treat them the way we like to be treated. So between the manpower, the subcontracting community, I think we have a pretty good handle on, kind of, what's coming up and what we need to do. I think, the added benefit of our focus around in-house training, I was down in our Orlando facility 4 times in the past month, and every time I was down there, our new Learning Center, which is just spectacular, has been just in active use. And I always going in there and I address all the people that are there. What we've done is, we've ramped up the training program to create certifications for certain classifications of employees. So one, they're feeling great that Limbach is investing in them. They are meeting people from around the country. So they all get together and talk about what they're up against but they're making friendships. And it's creating a stronger bond within the company. Those individuals become our best recruiters because they start talking to their peers in the industry saying, you know what, Limbach's a great company, you ought to consider coming over. So the in-house training, while it's helping the individuals, it's spreading the word about what a great company we are. The last part is modular construction, which we just -- we started off the comment with -- or the question. And what we're working on right now, we recently had a board meeting down in our Lake Mary facility, and the board -- actually myself too, I was so impressed with how we're manufacturing our pipe racks, our complete multi-trade racks, it's phenomenal. Technology's allowing us to do a lot more prefabrication, more than we ever have in the past. And the conversation is now moving forward, what can we do to set up a manufacturing facility where we could hub these zones throughout the company and offer that manufacturing service to our other business units but also maybe, even to third parties, although we haven't advanced it that far. So we're looking at how can we continue to reduce the labor requirement in the field and just really focus in on prefabrication modular components. It's a -- It's much easier to work in a controlled environment and then plug and play out in the field compared to stick-built construction, which is having coordination problems when you're working around other trades, and we eliminate that. And as a result, we lean out the process, and we reduce the labor component. So Gerry, a little bit of a winded response but, I think, we have a pretty good plan in front of us on how to deal with this. We're looking at our labor component very carefully, make sure we don't outgrow our capacity, and where we see a pitch point and we subcontract out more like the Red Wings arena, and believe me that was all that plan on the Red Wings we laid out that plan, we looked at our labor, what we could get, and then we went out to the community and we subbed out 40-plus percent of that project and it was an absolute home run. Does that answer the question?

Our next question is from Eric Gomberg with Dane Capital Management.

I was wondering, it sounds like when you gave 1Q guidance and full year guidance, you were aware of some of these cost write-ups -- sorry, write-downs. As far as you can see at this point, do you see any additional write-downs for 2Q or any other quarter this year?

Well, Eric, I just want to step back a bit. In terms of the normal operations of our business, every month, every project is reviewed by the local business unit and the local business unit is reviewed by our COO and John. And we have a very detailed reporting process, where they report, what we call our write-ups and write-downs, the upside/downside report. And when we go to contract, we either contract under a lump sum arrangement, a guaranteed maximum price arrangement, or a cost-plus. And with the latter two, GMP and cost-plus, they tend to be projects that write-up, not write-down. Only because we have better negotiation, better control, and it all seems to work. On the lump-sum contracts, you see either write-ups or write-downs and obviously, we want to see more write-ups than write-downs but the nature of what we do on estimate day and we submit, and we close a contract, you go into a project and sometimes we see massive windfalls of upside. And in this particular quarter, John mentioned, we had a number of significant upsides that came through a number of business units, which equated to $1.5 million. That's kind of a normal scenario of what we see. You also have some write-downs, they tend to be smaller in size. What we witnessed here, which I think I've already gone with some details to what happened on these particular projects, it was a real exception to what we typically see. I mean, there were very large hits that we typically don't see, we're going to pursue recovery and all that, but typically, we see the write-ups and some write-downs, it's the nature of what we do. So, Eric, does that -- I mean, so I can't say there won't be any. But from the standpoint of what we traditionally see and what we saw in the fourth quarter of last year, we saw very nice write-ups come in to the business. We had seen that materializing earlier in 2017. I think some people were concerned, how is the year going to wrap up, and the fourth quarter was pretty strong, and we expect to see that through the course of this year and in this case, our projections for the balance of the year, traditionally, our first half is a little light, second half is a little strong, that's what we've seen in the past and we expect to repeat that again.

And to hit the full year EBITDA guidance, are you relying upon write-ups in the back half of the year?

What we do, Eric, when we go through the assembly every month of our projections, and then in each quarter we do a reforecast for the year. If we see something developing and I -- you've got to look at last year, we saw the upsides developing earlier in 2017. We couldn't take them until Q4, when the projects were completing per our policy, and that's when we took the upsides. In 2018, we're seeing similar activity, where we see some very nice upside developing. We can't take the things the projects aren't far enough along, but we will take it at the final stages of completion. And again, we project that out, whether that's Q3, Q4, Q1 next year, we project that out when we do our reforecast. As of right now, the last forecast we did, we are projecting certain projects to bring an upside, we're feeling really good about them, they're developing quite nicely, including a couple in Mid-Atlantic. Does that provide enough color on that Eric or...

So I guess that you're relying somewhat on write-ups but not a huge amount?

That's accurate. We take a very conservative view with write-ups because again, they're not done, done, done. When we see the projects nearing 85% to 95% completion, our COO and John discuss the opportunity. The big, big write-ups, they present to me, and whether I feel good about it, then we bring it into the P&L. But we remain very conservative with write-ups, as we're projecting them. John, you want to add anything else to that?

Sure. Eric, on your initial question about are there future write-downs occurring, we do a very strong subsequent event testing process, as we close out whether it's a Q or a K and really try to uncover on -- in every branch if there are any changes to any of the estimates in the work in process. And as that subsequent event testing is ongoing in that 45-day window from the end of a quarter, sometimes that testing does disclose, okay, we do need to take some additional write-down, no, we had that in first quarter. We've continued to be diligent, and when we see write-downs occurring on a project, we take them immediately. But to Charlie's point on the write-ups, we have to wait till the job is substantially complete. There's certain parts of the project that need to be done. Our labor risk needs to be minimal before we would take some write-ups. There are certain triggering events in the life of a project that generate write-up recognition, but when a write-down is identified, it is captured in the financials and that's what you saw in the first quarter.

Okay. And if I look at your backlog, I mean, you said you would've had a 15.9% gross margin. If I look at backlog, should I assume that, that's -- all things being equal, that, that's kind of what the gross margin profile ought to look like, assuming no write-ups or write-downs?

We're expecting in the roughly, the 15% range for gross margin going forward for the remainder of the year. There are some write-ups assumed, as you asked earlier, some write-ups assumed in that forecast. But to Charlie's point, we've identified those. We will only include them in a forecast if we're very, very confident of those occurring. We don't take speculative write-up. We only take a write-up when we should, and we only include it in the forecast when we have a high confidence level both from the branch, from my perspective, from Chris' perspective, our COO, and also from Charlie's perspective from the major write-ups. But I would say that mid-teen range is a reasonable expectation for gross margin going forward.

Okay. And I mean, your backlog was down a little sequentially, but then again, it was down a little sequentially in Q1 of last year's but it was I guess up around 10% year-over-year. Given the funnel and given that -- it sounds like there's some Mid-Atlantic capacity coming on, I mean, would you expect backlog to be growing throughout the year?

Yes, we had a heck of a first quarter of sales. The $143 million that's not in backlog, we're very excited about, they're very nice projects. We are in preconstruction doing engineering work, and we'll take them into backlog at some point during the course of the year Q2, Q3, Q4, as we finalize the front-end work. But as far as the overall pipeline, Eric, it's substantial, it's substantial. We don't see any slow-up. We're creating good visibility now on 2020, into 2021. It's pretty exciting to see what's in front of us right now. Some very large health care projects. So very -- well, the data center market, which we didn't comment on today, the whole mission-critical sector that we're working on a business plan on right now, we are just very excited about it. We're going to make sure we don't run too fast, but we have clients talking to us about other data centers and it's pretty exciting to see what's in front. We have to do all of this at a measured pace, right? I think, that's been a big point of today's call around manpower, and we've got to stay very focused on it. I want to share one example though, on a sale with the group that came up recently. It's a large museum project on the West Coast, and our business unit presented it to me, and after thinking it through with the -- with what's going on in the marketplace and looking at the competitive environment, I just decided, you know what, let's -- there are so many opportunities that are out there, let's pass, let's not do this one. So we told the customer that we were going to walk away, and within 24 hours they reached back to us and said, please, think of something, you can do this and come back to us. And we went back to them with a similar Red Wings proposal, we'll do it cost-plus, if you're interested, we'll do it cost-plus. And this is a very large museum. And we didn't expect it to go too far actually. But the client really likes our front-end services so much that they're going to take a chance -- this happens to be general contractor and they have the project, they're going to go to the donor and recommend due to the value of Limbach and what we create in the front end with our Limbach Engineering & Design Services, LEDS. They want to bring us on board. And I don't know how that's going to play out, but I'm giving you an example of, kind of, market dynamics that are in our favor. If that was 6 years ago, that wouldn't have happened. So the market's very robust. And what does it mean to us? It means we could rightfully shoot at what we want. We can negotiate terms that are better in our favor, and clearly, margins can go up. And we don't see any letup in the industry, and I think, all the information we've included or that I've referenced between the AIA Billing Index, the Dodge Momentum Index and others. It's just clear that our sector is going to remain extremely robust, clearly, for the near to midterm. A little bit winded, Eric.

Yes. No, no, it's fine. One last question, just regarding -- you made a comment that you cleaned up the press and high on your priority list is sorting out the existing warrants. Could you elaborate on that at all and any anticipated timing?

We have active discussions going on, looking at our options. It is high on the list, and we're looking at our different avenues of how to clean that up. John, you want to provide any more comment on that?

Sure. Eric, you need to keep in mind that we have, I think, 5 different tranches of warrants, all with slightly different terms. Some public, some private. So what we're trying to -- kind of, thread the needle as far as what's the best plan forward for all the different tranches. So Matt Katz is actively engaged along with Charlie and I in looking at those options, looking at some outside consulting services to help us think through and weigh all the options as to what's the best path forward to address either all the tranches, part of the tranches, and the timing is still to be determined.

We have retained a third-party adviser to help us with thinking through how to work our way through all those different layers and what's the smartest way to do it. So it is actively being discussed, Eric.

And something you intend to address this year?

We would like to see if we can move on at this year, yes.

(Operator Instructions) Our next question is from [Jordan Cox] at [AECES] .

Can we circle back to the acquisitions a little bit and talk about how you're looking at constructing them? And what kind of financing or equity would be involved?

Sure. We're looking at a combination of cash, equity and seller debt. The conversations have been very productive with the targets that we've engaged with, and that seems to be acceptable to them. And obviously, the percentages of what is going to be equity, what's going to be cash, what's going to be seller note, varies. But the conversations have gone extremely well, and obviously, people are interested in our stock. That's obviously, great to see, and it'll be restricted stock. So we're pretty -- we're, kind of excited how those conversations are going.

And then, also on the Detroit Red Wings, you guys were looking at possibly some kind of, I guess, write-up or additional incentive comp. Have you guys booked that? And is that in your, I guess, your forecast through this year?

John, could you take that, please?

Sure. The Red Wings project, while the work, [Jordan], is done, there is still a fair amount of contract closeout that's involved, and we're still several months away from bringing that to a conclusion. There is some upside assumed in the forecast, but it's -- there's still a lot of moving parts. With a cost-plus contract, we're subject to audit, and a $100 million cost-plus contract, there's certainly a lot of time needed for the outside auditors to work through that. That process will be getting started here in the next few weeks from what I understand from the team out there. So we're still probably, several months away from any final resolution of the financial aspects of the project, but there is some slight upside assumed in that forecast.

Okay, but not the entire -- because I remember it -- I thought it was fairly significant potential for you guys to capture. And so if -- again, it varies depending on the final conclusion of the deal but if there is -- at one time, there was a I thought a very sizable amount of award that you guys could possibly reap. Is that a fair assessment?

There is still some potential upside, but there's also because of the audit process, some exposure as well. So we've tempered that potential upside with the potential audit outcome that could be negative to the upside amount.

All right. And then also, I think, last year, you guys had a couple overages that you were looking at possibly recovering. Can you give us an update about how those things have progressed?

The one project is the Boston Medical Center, which was a hit back in 2016, actually. That project, multiple phases, is still continuing. It's not complete yet, [Jordan]. And it's a cost-plus and a fee arrangement. So all of our costs are being covered for this ongoing work, and they added additional work to the scope, which really irritated us because we're not getting markup on top of it. The conversations have continued. It's not only us, it's the other specialty contractors too, and the general contractor, pursuing the owner to get some recovery here. We expect something to happen this year, but what we've done in our forecast is, we've not brought anything into our forecast for that resolution. We just don't know what it's going to end up being. So we decided to take a very conservative view. But we think it will get resolved this year. John, is that -- any other comments on that?

No, that's accurate on the BMC job. That's still in process.

And then going back to -- you alluded to the fact that the pricing environment seems to be improving. So as we go forward, you guys have had wonderful gross margins with the exception of the write-offs. If you -- if we see pricing improvements, does the gross margin trend continue to pick up? Can we see -- you talked about maybe 40 basis points in the backlog. Is there a potential to get that gross margin up, even to 16% to 17% over the next 18 months?

You know, in our last -- for those of you that have been tracking us for a couple of years now, when we looked at the recessionary period, we were down at 12%, 13%, and we talked about prerecession levels getting up to 15% to 16%. That's where we thought we would go and, in fact, that's what we're seeing. So this market seems to be, Jordan, even better to that prior period. I know the market isn't necessarily saying that, but with the Tax Cuts and Jobs Act, we've seen the CapEx spending jump up in Q1 the way it has, that 19.4%, the Journal reported 24% year-on-year improvement in CapEx spending by corporations, we think that's just going to increase our funnel of opportunities. So it continues to push the supply and demand curve in our favor. The big conversation internally right now is, pushing the margins further. Our executives get a bit concerned, are we going too far? Will we lose that opportunity that we want to win? So the dialogue really has shifted, all right? So the projects you need to win to ensure your backlog is solid and to cover your plan for the year, priced that appropriately. But when you're sold out, and I mentioned there were several branches that are sold out, let's really push the margin, and if we don't win, we don't win. But if we win, obviously, we can make a lot more money. All of that tempered with the labor resource issue. So, yes, I can't say, it's going to go to 16%, 17% or 18%, but we're certainly pushing hard to maximize what margins we can charge on the jobs.

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

Well, I just want to thank everybody for your continued interest in Limbach. We've got a number of core initiatives that we're working on aggressively. I think, we covered all of them today. We weren't happy with what happened in our Mid-Atlantic region in Q1. But well, I think, we've painted that picture clear enough for everybody to understand it was a strange event. And in terms of recovery, it will happen in the future. So we are going to work that hard and aggressively. So -- but from the standpoint of all the other good things that are going on in the company, we're on track with our organic growth that we've been telling everybody for our mid-term goal. And in terms of the M&A, we're staying disciplined, and I'm pretty excited about where that's going. So little frustrating that we haven't announced yet, but we're working it hard. Thank you for your interest, and I wish everybody all the best. Take care.

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