Limbach Holdings Inc (LMB) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Limbach Holdings Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jeremy Hellman of The Equity Group. Thank you. You may begin.

Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings issued the announcement of its 2018 third quarter results and filed its Form 10-Q. The company will also be using a slide presentation to accompany this earnings call. The presentation can be found in the Investors section of the company website at www.limbachinc.com. The company encourages everyone to review the forward-looking statement disclosure on Slide 2 of the presentation.

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

Good morning, everyone. Thank you, Jeremy, and welcome, and thanks for joining us. Joining me today is our Chief Financial Officer, John Jordan; and our Executive Vice President of Acquisitions and Capital Markets, Matt Katz.

As Jeremy mentioned, we'll be using a presentation deck and I'll note which pages we are on. So let's go to Page 3 or Slide 3.

We have 5 key areas of focus for our prepared remarks. Number one, first and foremost, we're going to hit the Mid-Atlantic business unit and what's happening there. Number two, comments around our solid performance we see across the company and other business units. Number three, we'll update you on the company's management initiatives to address our continuing growth. Number four, John will provide a detailed set of comments around our results and our focus on financing. And finally, number five, I'll wrap up with some preliminary thoughts on 2019.

Let me start off with some global comments. Our revenue for the quarter was strong for both Construction and Service segments. Our SG&A is tracking as expected, but we incurred substantial write-downs late in the quarter on several major projects in our Mid-Atlantic region leading to our loss in the quarter. When isolating Mid-Atlantic, the balance of our business is performing very, very well and in fact, beating our plan with strong year-on-year growth.

Let me start with Mid-Atlantic. I want to give you a thorough explanation of the background, where we are and what we see going forward.

So I'd ask that you now move to Slide 4. First, let me provide some context around Limbach and the region. Currently, Limbach is managing hundreds of projects across the country, and we separate these projects by branch, location or region. The Mid-Atlantic is one of Limbach's largest and historically has been one of the most profitable. However, as we have reported in the past, certain projects began to see higher-than-expected costs, and we took certain write-downs in the first half of 2018.

We thought the majority of our challenges within Mid-Atlantic were starting to get behind us. In late September, during our normal monthly project review process, several teams reported further delays on the completion of their projects, the majority of which were outside of our control along with quality control issues. Our local management team then notified senior management.

This was very late in September. We agreed to a work plan to get to the bottom of the problems and review work completed in late October. We wanted to understand the issues that were causing the delays and cost impacts and provide a better projection from the information on hand to project the final cost of these projects as well as to identify recovery options.

Following management's work, our auditors commenced their work and we notified our bank group and the surety of our issues. The auditors' review led to confirming all charges are properly accounted for within the quarter due to the impacts realized in the quarter due to the delays or rework.

To restate, I want everyone to know this region has been a strong performer for Limbach. In fact, from 2004, when I took on leading the company, the region in one particular year delivered one of the largest single bottom line contributions in the company's history. Over the period of 2008 through 2017, this region provided average revenue in about the $60 million range and delivered an average 6% EBIT over the period. It had both stellar years and some tight years during the recession, but on average, a solid performer.

So what happened? The region's capacity to deliver was stressed with revenues growing to over $100 million in 2017 and that number will repeat again in 2018. We just didn't have enough human capital on the mechanical and plumbing side of the business to deal with what was sold, while realizing all the delays that stacked up against us.

Our normal craft manpower in the region is in the range of 175 to 225 craft professionals. At our peak, earlier this year, the headcount swelled to over 350. That was an incredible challenge for the business unit in the booming construction industry.

For those of you that have traveled in and around Washington D.C. over the past several years, you can't help but notice all the tower cranes. The region is just simply booming. Within the Mid-Atlantic region, we self-performed mechanical piping, plumbing and electrical, with electrical being a small part of our business.

We subcontract out our sheet metal fabrication and installation. Our losses are coming out of the mechanical piping and plumbing work. I wanted to reinforce we have terrific, terrific talent in the office and craft workers in the Mid-Atlantic business unit. For years, they have produced good returns for the business with some great customers. They just could not handle all the work at once in the heated labor market. In my 22 years of running businesses in that region, I think it's one of the most -- best profitable markets in the USA.

Limbach has had a steady presence in the market for years dating back to the air and space museum, which we built with the Gilbane Building Company back in the 1980s. We have a strong local brand and reputation for both service and construction and more recently with electrical.

So where do we stand on the projects that have had the larger financial impacts? The Columbia Place Marriott Hotel opened earlier this month. It was originally scheduled for September, but due to drywall concerns, we just couldn't finish our work and it dragged out into this month.

Our National Institute of Standards turbine project continues to face delays, but we believe after Thanksgiving, we should be able to have the initial start-up, which triggers substantial completion.

Our rail to Dulles project, where we're installing the HVAC and plumbing on 7 stations, will substantially complete in Q1 of 2019.

Finally, a large hospital project, which faced numerous delays upfront with very little relief on the back end of the schedule will have the majority of the rough-in of our systems complete next month.

Our manpower is now down to 240, and we expect to see that drop to our normalized levels next month.

Finally, regarding the D.C. United Soccer Stadium, which we completed last July, we are in active conversations with the general contractor, Turner, to resolve our outstanding change orders and 2 claims we submitted.

We have just about $17 million in outstanding change orders with our customers, which are continuing to be negotiated. We expect to see many of these change orders cleaned up between Q4 and Q1 of 2019. In addition, we have several claims assembled and others potentially in development to recover from the impacts caused by others. This is all future capital coming into the company to improve our balance sheet.

Depending upon negotiations, we could realize additional revenue and profit in future periods. To be clear, we have very few claims in the overall company. When we all burnt due to forces outside of our control, we do aggressively pursue recovery. An example is a long delayed project known as Santa Monica [AET]. We recently resolved the claim, which took over a year to resolve. It will lead to additional capital coming into the business in Q4 along with a modest profit upside recognition for our Southern California business.

Concerning actions we have taken within Mid-Atlantic, let me go over 4 key moves we have made: Number one, while we continue to sell our profitable service and maintenance work direct to building owners and our smaller electrical projects, we are only selling larger complex HVAC and plumbing projects that start after June 30, 2019. We have sufficient backlog through that period, which allows us to stay within our acceptable craft manpower range. Number two, we have a new leader in the business unit and have an additional Operations Manager from another region there weekly to support the branch's completion of the project work and assist in change order negotiations and claims recovery process. Number three, we commenced weekly reporting to monitor the completion of the remaining work and collection of our capital. Number four, as previously mentioned, across the company, we have increased our training of our staff along with auditing our operations. But specific to Mid-Atlantic, we are providing a focused training effort, especially with our superintendents and foremen to reinforce our proven Limbach management processes.

These 4 actions involve stronger leadership, a focus on profitability collecting our outstanding capital and creating a scalable business unit for the long term.

To wrap up my comments on Mid-Atlantic, our goal is always to be transparent, timely with information for our investors and open about our strategy and focus on the future. We understand that timeliness matters.

As a result of a number of moving parts around the Mid-Atlantic region, we worked diligently with our team since hearing of the news coming out of the project reviews in late September for the preparation of the third quarter to be as accurate and our assessment of the write-downs of the region, which totaled $9.6 million in gross margin during the quarter. This was a major exercise for the company in the month of October.

We certainly understand the questions from all the investors will be. Do you have a handle on the Mid-Atlantic cost and is there a strategy to address these challenges? We work diligently to be as accurate as we could in assessing the region with the information on hand and have laid out our activities and strategy and certainly are open to any questions surrounding the region at the end of this call.

All right, I'm going to move on to Slide 5 now. And this is some terrific news. Overall, the business is performing well absent the write-down challenges in Mid-Atlantic.

On Slide 5, you will see we are maintaining our full year 2018 revenue guidance of $530 million to $550 million. With year-to-date revenues of $395 million and construction and service project backlog of $487.5 million at September 30, I'm confident we'll reach our guidance.

Gross profit was down for the quarter due to the Mid-Atlantic write-downs. When you remove Mid-Atlantic from the mix, the rest of the business is performing at our targeted gross profit margin of 15.3% with year-on-year performance growth of 31.8%. As previously stated, we expect to see gross profit margins in the 15% to 16% range.

Year-on-year comparison of sales bookings as of September 30 has construction of 50 basis points. Service is down by 70 basis points due to several larger service projects being booked. Our margins on maintenance contracts are up 100 basis points and our spot or T&M service contracts are up 300 basis points. We continue to push up margins where we see the opportunities.

Now moving on to Slide 6. Our pipeline remains very robust with over $3.4 billion being tracked. The level is remaining steady across the company, which is allowing us to be more selective in what we pursue. When we look at combining our aggregate backlog of $487 million plus our promised work of $354 million, we have a combined $841 million of work ahead of us.

Speaking specifically on the Construction segment, our backlog at September 30 was $435.8 million. To reach our segment revenue goal for the year, that means we need to burn about $124 million of backlog, although we typically see some quick-hitting book and burn projects, which will add to these figures. As the graphic on the slide shows, if we burn the whole $124 million in the quarter, this leaves us with $655 million of work for 2019 through 2021.

Looking forward, we have several major opportunities we're pursuing, such as the next phase of a mega data center, 8 major healthcare projects with HCA, UHS and several regional players. We also have a large healthcare project at Ohio State University. Several years ago, we secured and successfully delivered a hospital with a total constructed value in excess of $1 billion at OSU. This is a similar sized product, and we believe we have a very strong chance of securing it.

The Bedrock opportunity in Detroit, which we mentioned in our last call continues to develop in our preconstruction services. While the engineering and preconstruction services are in backlog, these projects will provide revenue to our mission and operation through 2022.

We're also tracking a number of Disney projects in Orlando, where we continue to be viewed as a very respected mechanical contractor on the Disney properties. As previously commented, there is a major update to EPCOT that is going on, and we're pulling in our fair share of that business.

Florida is red-hot right now and we have done a really terrific job at staying disciplined with smart profitable growth. Our expansion into Southeast Florida is going extremely well, actually better than expected. We're also looking at our next step in Florida for possible expansion into Jacksonville where we're completing our first net zero building.

Of our 12 business units, 10 reported year-on-year growth in the quarter with Southern California, New England, Ohio and Florida tracking ahead of plan. I want to note one engagement that occurred during the quarter in New England. You may recall the [utility and] gas explosions that occurred recently in the greater Boston area. We were hired by Gilbane to inspect residences and businesses throughout the region to check on systems to get the service back on. We have been engaged with the program since September on a time and material basis. We have 60 plumbers plus management staff working overtime, engaged in the program and it will continue through early December. This is the testament to our reputation in the region. It will also help us with improving our bottom line results for the year. That work was not expected.

Turning now to Slide 7. On this slide, we provide a recap of our year-to-date results as reported, comparing those same figures by excluding Mid-Atlantic. In the third column, we also have our plan for the year for the business excluding Mid-Atlantic. As you can see, revenues are a bit ahead of plan but EBIT is a remarkable 66% ahead of our plan. Our success in controlling our SG&A expense coupled with upward pricing by us is translating into improved profitability, excluding Mid-Atlantic.

Let's move on to Slide 8, where I'll address the Service segment where all aspects of the segment are performing well. Year-to-date service sales of $83.3 million were up 46% from the prior year. Maintenance contract sales for the year as of September were just above $3 million, a record amount year-to-date since we started our rapid service expansion program back in 2013.

Our growing maintenance base at September 30 is now a record $14.8 million, positioning us well to hit our 2018 exit goal of $15 million. This brings our year-on-year growth for our maintenance base to a healthy 15.6% growth. We ended the quarter with Service segment backlog of $51.7 million, which was a sequential increase of 9.5%.

The service pipeline continues to expand from the investments made with additional sales personnel and we see no shortage of opportunities. We believe the tax cut is fueling some of the expansion especially on the project side of our Service segment.

Our revenue split between segments are tracking 19% Service, 81% Construction. We remain focused on moving the Service revenue to 25% of overall revenue in the midterm.

I'm now moving on to Slide 9. I'd like to fill you in on several of the moves the company has made or in the process of making. The company has doubled its size organically since 2014 and we expect that growth to continue. We decided to step back, look at the management structure and policy and processes to allow us to continue our growth, both organic and through acquisition.

Here is summary of the actions taken. Number one, we employed a consultant in August to review our construction project administration around our policy and processes. They found we have very strong daily, weekly and monthly management practices, which candidly were not properly executed in Mid-Atlantic. Number two, we have been engaged with the review of those processes since Q4 of 2017 to further refine it and the introduction of better forward metrics. We refer to this as our Big Data project. More timely data and holding people accountable to core indicators will allow us to improve profits. We have piloted the program in our Florida business units since late 2017. In 2018, our Florida business through September had only $206,000 in write-downs and over $2 million in write-ups on approximately $63 million in revenue. Timely data is making a huge difference in our financial performance. Number three, we are moving into the center additional training and audit resources in 2019 to better assist with orientation of new staff and the development of human capital to execute the Limbach standards. Number four, we are continuing to take advantage of our engineering resources and employing technology to minimize field fabrication. In 2019, we'll be assembling a plan to introduce manufacturing centers to reduce the need for field craft levels, which will improve profitability and allow safer construction execution. Basically, more plug-and-play like our corridor racking systems. Number five, we instituted 12-month labor look-aheads, staying within our capacity to deliver self-performed work or determining a subcontracting plan like we did on the Red Wings arena, the largest contract in the company's history.

In terms of recruitment of human capital, our executives and our company have stellar reputations in our local markets.

Limbach is a very, very attractive employer. However, in this heated labor market and the booming construction industry, we have to be more careful in looking at our forward projections for our needs for manpower. And again, we need to determine how many people we can hire within a region in a given period, and we expect to continue to grow but also employing more subcontractors to execute our work and we maintain excellent relationships with our subcontracting community.

We are also reintroducing superregional oversight. Prior to the Great Recession, Limbach employed regional presidents with 1:4 ratio with the business units. With the growth we have experienced along with the expected continued growth, we are reintroducing that structure and elevating a proven existing business unit manager to be Co-Chief Operating Officer. This will take effect December 1. This move is coming out of our management review tied to the needs of our 2019 business plan.

And now turning to Slide 10. I want to spend a few minutes introducing our LEAP program. LEAP stands for Limbach Energy Assessment for Performance. For years, Limbach has performed various energy performance-related projects known as performance contracting. We also installed building control systems. During our acquisition pursuits, we came across a technology solution that would enhance our ability to sell more building automation systems, energy projects and service related work all direct to building owners. We have piloted the program earlier this year and the results have been very positive.

As we move into 2019, we'll be launching Limbach Energy Assessment for Performance or LEAP into a couple of our business units. This service sets us apart from our competition by collecting energy performance data on various pieces of equipment in complex buildings, allowing us to recommend projects to building owners to achieve optimal building performance.

We will be focused on ramping up the service in our Ohio and Michigan business units, providing we realize the continued success where we'll introduce the offering to our other business units. It allows us another offering to expand our direct-to-owner services, which tend to be the most profitable and cash flow well for us.

At this point, I'm going to hand our comments off to John for review of our balance sheet and financing discussions.

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

Let me begin right away to address our current plans surrounding the refinancing of our senior debt obligations.

During the period, our managing bank Fifth Third made us aware that they wanted to work with us to ensure smooth transition to a new senior lender. We have enjoyed a 2.5-year relationship with the existing bank group and an 8-year relationship with Fifth Third. We appreciate their support as we work through a transition. This has been a supportive and productive process so far.

Our top priority right now is to finalize our negotiations with Fifth Third and expect to have an agreement in place by November 30. Key terms of the restructured credit agreement with the existing bank group are expected to be: the revolver and term loan maturity date will be March of 2020. The bridge loan matures in April of 2019. Secondly, a reduction of the total revolver from $25 million to $20 million between now and January 31. Also, simplified covenants including a minimum adjusted EBITDA in the fourth quarter of 2018, fixed charge coverage ratios in 2019 and enhanced bank reporting. Fourthly, specific milestone dates associated with the refinance process. Fifth, limitations on the incurrence of new debt and acquisition activity. And finally, a potential increase of the interest rate if the amendment is not executed by November 30.

To assist in the refinancing effort, the company has engaged a middle-market financial institution that is currently a member of Limbach's existing bank group. This institution is seeking to underwrite and hold approximately $15 million of a $30 million revolver credit facility and syndicate the balance of the revolving credit facility. The $30 million revolver is an increase over our current revolver and provides capacity to draw as needed for working capital purposes to fund organic growth.

Over the past quarter, our average revolver draw has been $7.7 million. There is capacity in the revolver to support working capital needs and potential acquisitions as well.

The new lender will place up to a $50 million term debt. The proceeds of the new term financing will be used to retire the company's existing indebtedness, pay fees and expenses, provide undrawn capital for M&A financing and for general corporate purposes. The contemplated financing remains subject to underwriting, syndication and other customary terms and conditions.

The planned refinancing with anticipated draws at levels below the total available keeps the total debt ratios within levels we're comfortable operating the business on an organic growth basis as well as with M&A earnings included. As of September 30, the term loan and bridge loan combined totaled $23.2 million.

Turning now to Slide 11. The company believes that it will have sufficient liquidity with its current cash balances and borrowing capacity under the amended credit agreement and new revolver to meet its short-term cash needs. To supplement our cash availability and borrowing capacity and consistent with the fourth quarter of 2017, the overall volume of work being performed is increasing.

September was the largest billing month of the year. This overall increase in volume is expected to generate positive cash flow in the fourth quarter and into the first quarter of 2019.

The gas line repair project in New England that Charlie referenced will be a big contributor to cash flow and gross profit in the fourth quarter.

During the quarter, our net overbill position improved as well. The net overbill position increased by $8.8 million from June 30 to September 30. This improved overbilling will generate cash flow in the fourth quarter.

Moving to the P&L. The total revenue for the quarter was $135 million, an 11% increase over the third quarter of 2017. Year-to-date revenue was $395 million, also an 11% increase over September 30, 2017 year-to-date.

On a year-to-date basis, the Service segment grew 6.1% and Construction grew 12.9%.

Year-to-date service gross profit grew by 120 basis points to 21.3% compared to 20.1% in 2017. Construction gross profit contracted year-over-year due to the Mid-Atlantic write-downs.

As Charlie previously mentioned, the business without Mid-Atlantic write-downs is performing well. Year-to-date gross profit without Mid-Atlantic write-downs was 15.3% compared to 13.4% year-to-date 2017 without Mid-Atlantic.

Our selling, general and administrative expenses while up year-over-year are running below plan for 2018. We expect that trend to continue in the fourth quarter.

Moving to Slides 12 and 13, we showed the FMI forecast for nonresidential construction and our key verticals. This data is pulled from their Q3 2018 report and is supportive of a positive outlook for the next several years with total nonresidential compounded annual growth rate of 5.3% for the period 2018 to 2022.

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

Thanks, John. I'm now on Slide 14, folks. Let me move on to some general comments on 2019. As John noted, macro conditions remain favorable. Overall, the U.S. economy is going well and our key verticals are forecast to continue to grow as well.

Our booked backlog and promised work has set us up well for 2019 into 2020, allowing us to be disciplined in our sales and execution. We have taken a conservative approach when it comes to forecasting, particularly with respect to Mid-Atlantic. We also continue to pursue claim recoveries, where we feel we have a strong case.

Let me now shift to a discussion on Dunbar, mergers and acquisitions and setting up Limbach for 2019.

With Dunbar, we made the seller aware of our Mid-Atlantic issues and that it would delay our ability to close the deal in the prescribed time frame due to financing matters. As a result, their management did exercise their right to terminate the transaction. We understand the position and look to remain in a proactive discussion with their management to stay engaged in the process. It's a terrific company with a great leadership team, and we continue to work on a large joint venture in the greater Toledo area together.

In addition to the Dunbar transaction, we have 2 other transactions possibly entering the LOI stage. We like both companies. We clearly understand we have to arrange for financing. And once that is complete, we can concentrate once again on our focus around M&A strategy.

Mid-Atlantic is a setback for us, but we are confident we'll work our way through the current period issues and move forward as we have in the past when faced with setbacks in the business.

On 2019, our business planning process is concluding and we'll be providing guidance on our next call. What I will share with you is both segments have strong forward indicators. Our construction backlog is strong with improving margins along with our continued robust pipeline.

Our Service segment is growing well with a strong growing maintenance base in addition to the management expansion along with the growth in training and development and internal audit, we have good visibility for 2019.

We expect the number of our business units to show strong growth, while stepping back in Mid-Atlantic to bring that business back to profitability.

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

(Operator Instructions) Our first question comes from the line of Brent Thielman with D.A. Davidson.

Great. Charlie, thanks for all the opening commentary, very helpful actually.

Brent, I wanted to provide a lot of detail, so people would have a handle on where we stand.

Charlie, I guess my first question, not to be too short-term thinking, but with the guidance you're talking $6 million to $8 million in EBITDA in the fourth quarter to get to that full year level. I mean, that's a pretty big snap back here in the fourth quarter. Can you kind of provide us a bridge and help us get comfortable with that sort of number for the fourth quarter?

Yes, absolutely, Brent. So I'm going to ask John to step in here in a moment. If you go back in history with the company, we've always had a strong second half. Putting aside the Mid-Atlantic business, the business did quite well, actually through the course of the year, we're doing extremely well. But the fourth quarter of 2017 we had very, very strong results and we expect to see a similar set of results in this fourth quarter. John, please comment a bit more.

Sure, Brent. As far as our expectation for the fourth quarter, as Charlie referenced, we've always been strong at the second half of the year. Several branches are really executing well at a very high volume but well under control. Those being the Florida operations and Ohio. In addition, the gas pipeline project that we mentioned up in the New England region is expected to produce substantial gross profit with basically no additional SG&A. That will be very accretive to the fourth quarter results. As well as on some of the other branches, we have some significant projects that are wrapping up that we think will potentially provide some additional upside on projects that we've not been able to recognize year-to-date, just because of the project completion status as of the end of the previous quarters. So we feel pretty confident that fourth quarter activity, to get from a roughly $2 million of adjusted EBITDA to the $8 million to $10 million is very achievable. We started strong in September. As I mentioned, the volume, we see that volume of just the organic business continuing to be at a very high level for the fourth quarter.

I guess the other thing I could add in there is -- Brent, our service business -- the sales are up 46% year-on-year and that work is all quick hitting, so as we sold this work in the previous quarters, that work's being executed now. And quite frankly, the pipeline on that service work isn't slowing down at all. It's been very, very robust. And I, when we step back and we think about what's going on there, I do think a lot of these smaller type projects are being influenced by the tax cuts and there's just a lot of deferred maintenance that was held off. Now people are moving on it, so our service business is really cranking, really cranking well.

Okay. And I guess, just a follow up there then, could you tell us what you're embedding for the Mid-Atlantic operations into that guidance for the fourth quarter?

Brent, we have no expectation of any earnings out of Mid-Atlantic in the fourth quarter. We purposely put that at 0, knowing some of the challenges that we've had. We don't anticipate any other changes right now, but there is no, and no assumed earnings out of Mid-Atlantic in the fourth quarter.

Okay. Okay, great. And then, I guess, now kind of shifting to '19 and thereafter, how are you thinking about bidding work in that region, over the next, call it 6 months? How do we think about that region growing as a whole? And Charlie, I mean, how quickly do you think you can work though these issues?

Sure. Well, what we decided to do and I mentioned this in my comments that, one, let me just talk about the business unit leader, the gentleman that's going to be running that business for us has an excellent resume of working with businesses that have had challenging times. He's got a very strong educational backgrounds: master's in nuclear engineering; M.B.A. and he's been working with specialty contractors with a -- for a number of years. So we're very excited that he's joining us and he started on November 5. As far as what we did to kind of settle the business down, my uncle -- I'll never forget this advice he gave me when I was young and my career was taking off, and he just said Charlie, you got to walk before you run. And I told him, "Look, I like to run." And he looked at me and he said, "You'll learn." Now I was in my 20s at that point, when I got that advice. So here we are today, dealing with a business in this situation, we have to step back, we're going to walk before we run again. And in the case of settling it down, on the craft level, right? So what happened here, when you really dissect it, the people we have there are just terrific people. I mean they're very, very talented people. I think management, at a senior level, didn't watch it close enough. And that's why we made a senior management change. But when you look at the craft we have there, we're comfortable with the foreman at a level of 175 to 225 craft workers. We have sufficient supervision for that. When we grew to 350, we just didn't have enough foremen and superintendents to make sure they were installing quality work, and it just wasn't planned well and the delays that we faced on all of these jobs, it just stacked up. We just never expected to see that kind of craft level. And then when you take this market the way it is right now, it's next to impossible to find good people. So the guys did a good job finding good people, we kept our customers satisfied with getting their schedules done, but we paid a price for it. So going forward, we have slowed our sales down on major projects. Our service group, it's going full out. We're not stopping on service, our electrical expansion, it's not very large, but we self-perform, and that's gone extremely well, it's very profitable. And then finally, on the mechanical and plumbing side, as I said, on the major projects, we have sufficient backlog with work we've already sold through the middle of next year and those projects are well in hand. We're going to bring our craft level down to that 175 to 225, and the work that we're talking to our customer base with right now, we're only looking at proposing on projects that would commence in the second half of '19 and then obviously, further into '20 and 2021. Brett, is that enough color on that? Does that -- did I answer the question?

That is. No, thank you. And Charlie, I guess, outside of the Mid-Atlantic, how are you sort of dealing with these labor issues? I mean, it seems like it's sort of a national issue, not just regional. So how are you kind of combating that right now?

Sure. I think when you look at what we did on the Red Wings' arena, it's just an excellent example, and you guys have heard us talk about this project. We just had -- we have a great leader up there. He did a fantastic job of presenting to management how he was going to execute that project. We ended up subcontracting out to our competitors and local businesses over 40% of that arena. And when you look at the Bedrock program that we have up there, where we have 4 major projects in preconstruction, we're going to take exactly the same tact. We're going to be subcontracting out a big portion of the work. What's great about our company is our customer base really like our front-end engineered services. It's -- very few have the capacity like we have and we have become known as the go-to guys. If you're going to have challenging projects, we really have modular construction down, prefabrication, engineering, our estimates are good, but we also were upfront with our customers to say, look we can take this on, but here's our contracting strategy. And providing they want to do it, that's great, we'll take the work on. But we are looking at that very carefully. The other thing that we instituted months and months ago, was the issue of 12 month look-aheads. So our guys, every month have to present their business units to management, I sit in on those calls, and they have to present how their labor's trending, they list their jobs and their promised work, and then if they have any jobs that they're feeling really good about, that they think is going to come into promise or into backlog, they project that out too. And then we get to see the trends of where their labor's at. Now I expect we can continue to add reasonable labor growth, as well as project management administration. At 8%, 10%, 12%,15%, we can do that. But to grow 30% in a year, 40% a year, that's not manageable in this market. Maybe in a calm market where there's not much activity going on, we have an excellent, excellent brand reputation in the industry. We're one of the safest contractors out there. Craft want to work for us, we treat our people extremely well. And so it's not really a huge issue. However, in this market, we can't just rest on our great reputation to get all these folks. So 5%, 8%, 10%, 15%, that range of organic growth within a business unit, that's what we're targeting. And quite frankly, we're going to be very, very focused on our bottom line in terms of margin improvement. So we're going to be a lot more selective with the pipeline that we have.

(Operator Instructions) Our next question comes from the line of Gerry Sweeney with Roth Capital Partners.

I want to follow up a little bit what you were just talking about, and what Brent was just asking, and I realize, not necessarily an easy question, but at the end of the day, I think Mid-Atlantic was and is probably, I think one of your oldest areas that you've done work, probably the most solidified in terms of processes and et cetera, but as we move forward in growth for Limbach, and you're growing -- you're attempting to grow in multiple different fashions, at some point, does it make sense that less is more? Maybe go after less projects, become a lot more selective, really focus on execution across the board?

Yes, Gerry, look, good question. We're stepping back and looking at the business as a whole. To continue our growth, and again, we've doubled since 2014, and we weren't public during this period, just to make it a bit more challenging. But I'm very comfortable now that we're a public company, we've got all of our processes in place. We've reduced our overhead expenses and getting up to speed. So that's behind us. But going forward, to continue to grow, you've got to start with leadership, and we have a pretty good leadership development program, it's called LLDP, Limbach Leadership Development Program, and we have annual classes, I kick off that class in January, I discuss strategy with the rising stars, our [CLOs] are going to be involved just going through operations. John will be involved with finance and we have other facilitators come in that are outside from the company to help them with some other development. And we've seen great success with that. Many of our leaders today, whether it be at the branch management level or the Operations Manager, General Service Manager, Project Executives, came through that leadership homegrown program. So we're going to put a bigger focus on that this coming year. And normally the class is around 15 to 18. We've elevated that now to 25, and we're going to continue to push that program in a very aggressive way. So from a leadership perspective, because I think it all starts with that, and if I look at the Mid-Atlantic region, quite frankly, the former leader fell asleep at the switch, and it caused us this pain. I think he should have been more proactive in thinking through the subcontracting strategy. Another point I want to make is, when you look at the business, and I've said this in previous calls, while construction, and I'll come back to construction in a second, construction is what our company does and we do it well, and some of our top customers, whether it be Turner Construction, that we do a lot of business with, or Gilbane, that gas situation, they called us up and said, "Could you get down here right away?". And overnight, we found 60 plumbers who went to work. And when I said we found them, they were existing employees to other folks that we just networked and they came over to help us. With all that said, coming back to the Service side of our business, we see that as extremely profitable, and if you look at a profit per employee basis, it's about triple our construction returns. So we want to continue to push that very aggressively, and we are. We keep investing in more staff, to get out, to sell more maintenance in more buildings. And you can see our maintenance base keeps growing. We want to keep pushing that very aggressively. On the Construction side, coming back to that, we're going to be very selective in this heated market. I just want to reinforce the labor projections, that 12-month look ahead. We [only] work with our top-tier customers in this market, and we have to get a decent return for the work we're doing. So I know we've become more selective in what we're pursuing. I think the Mid-Atlantic, it's an anomaly. If you look across our business, the success we're having, kudos to our Florida business. There's so much work down there right now. And they've delivered, through September 30, approximately $63 million of revenue. You could easily do $100 million there. Overnight, we can do $100 million. But we're being very careful, we're having meetings with the Disney representatives and we're specifically saying, "We can take on this ride, that ride, and this ride. We can't take on any more than that." Hospital Corporation of America, we're having very direct conversations with them about what we feel comfortable taking on and what we're going to pass on. We did that a couple of years ago, they offered us 5 buildings, and we said we could do 2, those projects are in final construction phases right now, down in Southeast Florida. So we are being much more selective. It's a great market to be able to do that. Sometimes it upsets our customers because they want us to bid everything. And we're basically saying, "Look, we'll help you with budgeting because we have a long-term relationship, but in all reality, we want that job, that job, and that job and that's it." So we're getting a lot more selective. So to wrap it up, leadership development, big focus on that so we can continue our expansion. A big focus on the Service expansion because it derisks the business and it's extremely profitable, and then finally, on the Construction, being very selective, looking at the labor forecast and picking and choosing what jobs we want to take on at good returns.

Just one quick follow-up question. Any fees by either party for the termination of the Dunbar acquisition that's material?

No, we had a financing contingency in there. And since we worked hard and they're great people, I really wanted to see that deal get done and we hope we can reengage, if they want to in the future, once we square away our financing situation, that we can get something going again. But that will be up to both parties. But no, there is no cancellation or termination fees.

Our next question comes from [Joseph Nicholas], private investor.

And sorry if this was touched on earlier in the Q&A and I missed it. One core question and then one quick follow-up. I was wondering, if you went back to sort of mid-September, I'm just kind of curious to get a sense of sort of how internally communications, and just sort of I guess reporting controls worked? So if we were back in mid-September, what was sort of -- I guess, how much did you and John kind of realize there was sort of a reoccurring Mid-Atlantic issue and just sort of how much, to what degree, and sort of the magnitude of it relative to what the ultimate, sort of $9 million figure ended up being for the quarter? And then just a quick follow-up.

Sure. [Joseph]. Look, it was -- when I look back at what happens in our company, right, every month, you have a project team, they have a responsibility, we have set processes, we have things to required standards, and the project teams have to come in and present once a month to the local management team and present where the project stands the issues. It's a set formula, there's a set standard agenda, including cost to complete and where we stand with profitability, change orders, with the -- just delays, how we're dealing with that, any customer issues, and that happens every month on every major project. So in this case, it was towards the end of September where the guys were presenting their August results. It's actually like a one-month lag, and of course, it was other occurring things, they know what's going on in the job during the month they're presenting, but they presented, in this particular case, late September to the management team in Mid-Atlantic. And our COO immediately reached out to John and myself and made us aware that something came up. He didn't understand where the numbers stood yet, he was just starting to be briefed on it, but he called us immediately. Following that, we got together and huddled and put a work plan together because we saw the bleeding earlier in the year, and as it was explained to me, it was a combination of things. Just further delays outside of our control, but also rework, that we had to remove some systems -- so look, what happens is, right, you rough-in all the piping and after the piping's in, you test it, and then you start closing things in. And what we found out was, there were systems that weren't properly tested. We found out there were systems that were leaking, we found out some systems were not where they were supposed to be, meaning outside of walls and we had to go back in, remove the -- what was installed, reinstall it and all of that was done on premium time. So we could keep up with the demands of the general contractors' schedule, which we're obligated to do. So there was the rework and then some of these delays, like on the Columbia Marriott, there was just no drywall to trim out. So we had to wait for the contractor of the subcontractors working for the general contractor to finish their work so we could install. That hotel was supposed to complete in September, it actually didn't have heads-on-beds, as they call it, until early November. So the building is now open, but it cost us another 6 weeks of supervision, labor, all of that. So it's a combination of things that happened, but the work plan that we put together, that our COO executed, he dug in during the month of October with the project he used to understand the depth of what we were looking at. I didn't want to -- I did not want to hear about, further write-downs. If we have information on hand, if we understand there's some rework going on, let's take a look at the work, get quality control people out there, one particular job we flooded with free QA/QC people, to just get ahead of it. And that definitely helped. And we just unfortunately had to do a lot of rework during the month of September, but we found out about it late September. October, we did a full analysis of 2 elements: one, we took a look at the cost to complete with the Mid-Atlantic major projects that we're doing, and also there's a lot of change orders outstanding and we had to make sure we felt comfortable on recovery of the change order. So those change orders, we discounted them to a degree, so we felt comfortable with them, that we could collect that money and hopefully there's going to be future upside through good, solid negotiations with our customer base. So [while] it all ended up coming together at the end of October. We presented that to, obviously, all of the stakeholders, the auditors, the surety, the banking group and made them aware of the scale of the issue. So -- and then we just worked our way through it, and here we are today, sharing the news with investors. So that -- Joseph , does that provide the color you're looking for?

Yes. Just -- I mean, to get even more granular, I mean, can you say approximately how much of the $9 million write-down transpired specifically during the month of September? Just ballpark.

I don't have that broken out that way. I just -- because it's a combination of the hits we took in September, plus the cost to complete for the remainder of those projects. That's how we categorized it. So I -- John, I don't think we have that broken out that way.

No, [Joseph]. We don't have that analysis on a month by month basis. It was a quarter approach, comparing the job statuses as of the end of second quarter until the end of the third quarter, and as Charlie mentioned, there are costs included in those write-downs to complete the projects through project completion, so there are future costs to be incurred. The projects as we've referenced are wrapping up in the fourth quarter, a couple will bleed over into the first quarter of 2019. But because some of these write-downs actually put the projects in a loss position, we -- by GAAP, we are required to take that full loss when the loss is identified. So the full loss on the project is fully recognized in the third quarter write-downs.

And [Joseph], where we see opportunities for recovery, which we also study that, we have people on the ground working through the project documentation, looking at opportunities for recovery, but we don't -- we can't book that recovery. We don't know what's going to be yet So I mentioned the Santa Monica [AET] Project out west, in Southern California, that was a project that was completed some time ago. We were delayed on the project, we submitted it to the general contractor, along with other subcontractors, and I believe even the general contractor submitted something to the owner, and then we had to work our way through our negotiation. Eventually, it lead to a settlement that took place several weeks ago, and that capital will be coming into the company, and it's 7 figures, it's coming into the company during Q4 and we'll have a modest profit write-up in our Southern California business. So it's -- we're still in that process of identifying opportunity for recovery, which would happen in a future period, but because of GAAP, we had to take the pain through the books in Q3 since we identified the cost.

And then my follow-up question was, as we just look into 2019, so I guess these specific 5 projects that accounted for the current write-down, there will still be -- 2 of those will still be going on in the beginning of 2019. So I guess a 2 part question: One, is it fair to assume that there may be some write-down associated with those 2 projects, that will still sort of flow through in '19? And then the second part of the question is, are there any additional projects beyond those 2, or beyond the 5, for the current write-down, that maybe didn't happen in Q3 but have started or are ramping up just where -- at least there's a possibility that there may have sort of that same issue around the labor occurring but, so sort of above and beyond the current 5 projects that you guys highlighted, but they just maybe haven't kind of ramped up yet or even begun yet, but will between now and 2019 -- beginning the first half of 2019?

Sure. Let me take the second question. And I'll ask John to come back on the first part of that question. So as far as the work going forward, what we did was we stopped sales on major projects in Mid-Atlantic region for any work that would commence between now and June 30. We have adequate backlog in the business to maintain our craft levels that we feel comfortable with that 175 to 225 craft, that's maybe plumbers and pipefitters. We're very comfortable with that level. So we're going to get the business back to its normal operating, acceptable levels, where they make good money and, again, you got to remember, there's a 10 year track record of this business doing extremely well. They've got great customer relationships. Great relationships with the craft and we have terrific people working in the branch. We're just going to get the business back to those levels where we can enjoy profitability again. So we stopped sales, and the work we have, and I just want to be clear, when you step back and look at all of these projects, we didn't have estimating problems. Maybe we missed something here or something there, but there's usually something else we pick up, some good news, it all washes out. It's just the way estimating works on these big jobs. But we don't have estimating problems here. The real culprit really was the issue of this massive ramp up of labor, and we just didn't have the supervision to properly administer it, some of it in our control, some of it out of our control. So going forward, we're going to get the business back to its normalized levels. We feel comfortable with the work we have in backlog. Every job has its challenges, it is a construction process, but we have great talent in the business, and we're going to focus on that talent and keep it at that level. We'll get back to growth in 2020, right now in 2019, we just want to stabilize. John, can you answer the other part of the question?

[Joseph], as I mentioned a few minutes ago, the 2 projects that are continuing into 2019 are actually at a loss position already. So as I said, we've taken that full loss through the books, through the end of the third quarter. So as of right now we do not anticipate any further write-downs on those projects, as they get completed in the first quarter of 2019.

I just want to be clear with everybody though, folks, what we did was we took the schedules we have today and we looked at what we were going to have to work around and we budgeted for all of that to complete these jobs. Some of these are government-related projects. This project, the turbine project, should have completed months ago, but there's just ongoing delays. They won't let us start up the system. Stuff outside our control, change order work, just design issues, all sorts of things. If we see that on some of these other projects that we're completing, such as rail to Dulles, we're working hard at getting that project complete, and we budgeted for everything we know today. If they decide to delay that project by 3 or 4 months, 2 things are going to happen: one, there's going to be increased cost; two, they're going to get to a claim. So -- sure hope it doesn't happen, but as of right now all the cost that we've taken through the pain, reflect what we know today. They should be able to complete on the schedules that we've been told, there's no reason they shouldn't, but I just know on these government jobs they tend to get pushed out due to things outside of our control. And then we'll pursue our money.

Our next question comes from the line of Justyn Putnam with Talanta Investment Group.

I was wondering if we could get a little more detail around your financing situation, specifically, your relationship with your lenders. I mean, my specific question is, the [nearest] I'm hearing on this call, and quite frankly I heard on the last call was that, there's your onetime issues you're working through in the Mid-Atlantic; otherwise, the business is doing well. But yet the reaction to your lenders seems to be not proportional to that narrative. So I was wondering you could give us a little more detail around that.

John, please take that?

Sure. Justyn, thank you for the question. As far as the relationship with the lenders, I can't tell you what their thought process was, to come to the conclusion that they would like to remove themselves from the credit. We've had a strong relationship with them for the last 8 years, and we continue to have very productive conversations with them as we work through this transition process. As far as the refi process, it's well underway with one of the lenders that's in the existing bank group. There are 4 banks in our existing bank group, one of those lenders has elected to step up and take the lead, and be the lead bank in a potential new lending structure. We're working very closely with them on a daily basis. We have an agreement in place to have them be part of a syndicate to provide the $30 million revolver, as well as they will arrange for a $50 million term loan. Now both those amounts are total capacity. As I mentioned, our draws will be significantly less than the total capacity. So from a business perspective, we feel that we're in a good -- we're in good shape with the refi process, with the, with the potential new lender group. We're kicking off due diligence here very soon to work through and we have very specific milestones that we will be hitting over the next few months, to work through the transition process to pay off existing lenders and have a new credit facility in place.

Okay, so your current lenders are not articulating any issues with your business that concerns them, other than what we've seen out of the Mid-Atlantic?

Correct. They have not expressed any concern about the rest of the business. They have -- they see all of our financials. We meet with them, we talk with them on a regular basis. We provide them all the data that we see internally as well as what we file externally. We've not heard any concerns from them about the other branches. It has all been focused on the Mid-Atlantic operation.

And this concludes our question-and-answer session. I'd like to turn the floor back to Mr. Bacon for any final comments.

Well, look folks, it was a tough quarter, but again, I want you to all please take a look at the business without Mid-Atlantic. We're going to continue to work extremely hard at correcting Mid-Atlantic, but the rest of the business is doing extremely well and I've shared this with investors in the past. When you start thinking about a construction company, you got to think about diversity. We have a huge, diverse footprint. We've got diversity in market sectors and we have 2 segments, Construction and Service, a very nice growing Service business, which balances out the business. It was a very tough quarter. I think [Joseph's] question, that he asked about the write-downs and the hits and we explained what happened during the quarter, it's a great question. And it just was a very painful event. We had to get through it. I look forward to working our way through some future recovery. That can't be promised or committed, that's why it's not on the books, but we hope to see someday in the future, recovery like the Santa Monica [AET] project. So -- but the overall diversity of the business allows us to deal with issues like this.

I want to thank you for all your support and if any of you have any further questions, or would like to follow-up with us, we welcome phone calls. Please reach out to The Equity Group, and they will reach out to us, and we'll get something set up. Thank you very much for your time, and Happy Thanksgiving.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.