Tutor Perini Corp (TPC) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation third-quarter 2016 earnings conference call. My name is Adam and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes. (Operator Instructions)

I will now turn the conference over to your host for today, Mr. Jorge Casado, Vice President of Investor Relations. Thank you. You may begin.

Good afternoon, everyone, and thank you for your participation today. With us today on the call are Ronald Tutor, Chairman and CEO, and Gary Smalley, Executive Vice President and CFO.

Before we discuss our results I will remind everyone that during today's call we will be making forward-looking statements which reflect our current analysis of existing trends and information. There is an inherent risk that our actual results could differ materially. You can find a discussion of our risk factors which could potentially contribute to such differences in our Form 10-Q, which was filed earlier today, and in our annual report on Form 10-K, which was filed on February 29, 2016. The Company assumes no obligation to update forward-looking statements whether as a result of new information, future events, or otherwise, other than as required by law.

With that I will turn the call over to our Chairman and CEO, Ronald Tutor.

Thank you, Jorge. Good afternoon, everyone, and thank you for joining us. We delivered third-quarter operating results that were generally in line with our budget expectations. Most notably, we generated very strong cash in the quarter and year-to-date as a result of our sustained, focused efforts on collecting the cash we are owed by our customers.

Our profitability this quarter was driven, as usual, by a solid Civil segment operating margin; and revenue was supported by the continued strong growth of our Building Group. We also saw a sequential and year-over-year improvement in our Specialty Contractors' operating margin. And while the margin is not yet what we expect, it is trending favorably and should return to the target levels we expect by second quarter next year. Gary will provide more details on all of this later in the call.

The Civil segment continued to make good progress this quarter with favorable execution on various large projects. The segment's top revenue contributors for the quarter included the SR 99 project, Seattle, also known as the Alaskan Way Viaduct; the New York MTA East Side Access projects that we are building; the California High-Speed Rail; the Hudson Yards Platform; the San Francisco Central Subway System; and the Verrazano-Narrows Bridge deck replacement in New York.

On the California High-Speed Rail Project, the state has increased its pace of property acquisition throughout the year, and we are now performing construction activities at nine different sites and early utility work at another four sites, which is in line with our earlier expectations for ramp-up in project construction. Tunneling operations on the SR 99 project have continued to go well throughout the year, and the tunnel drive is approximately 55% complete. The latest update provided to our customer, the Washington State DOT, estimates tunnel mining will be completed in June of 2017, with our concrete operations for the double-deck highway within the tunnel to be completed prior to Thanksgiving of 2017.

The Building segment had its ninth consecutive quarter of double-digit revenue growth as a result of increased work on multiple projects, primarily in California and Florida. The segment's top revenue contributors in the third quarter included a large technology office facility project in Northern California -- I'm all sure we know what I'm not supposed to say; a biotech facility in Southern California; the Panorama Tower in Miami; the San Diego Courthouse; the Washington Hospital in Northern California; and the Pechanga Resort Casino expansion in Southern California. Work at Hudson Yards in New York also continues to go well, with completion on the platform expected in 2017 and Tower D substantial completion expected in early 2019.

Specialty Contractors segment experienced improved operating performance and profitability this quarter compared to last year's third quarter. If you recall, the segment was challenged last year with significant write-downs in the third and fourth quarter related to various Five Star Electric projects in New York.

The segment's operating margin has improved substantially year-over-year as a result of better operating performance and improved margins and newer work added to backlog. As I mentioned earlier, while Specialty's operating margin has improved, it remains below expectations. However, it should be back to an acceptable mode sometime early next year.

The Specialty Group is important to us because it supports many of our Building and Civil projects, and their work is a critical component of most of our infrastructure projects. Demand remains strong for all our electrical, mechanical, and Shotcrete services, with particular emphasis on New York City.

Over the past two quarters we have experienced a relatively light new award volume across our business following a particularly strong first quarter of new awards. Therefore, it's important to remind everyone that in construction new awards in backlog tend to be very lumpy compared to the front-end engineering and design business, because our construction projects are typically much larger and are awarded more sporadically.

Year-to-date we have received approximately $3 billion of new awards and adjustments to existing contracts, compared to last year's level of about $3.4 billion. The Civil and Building segments have continued to be the major contributors to our new award activity this year; as a result, our backlog for the third quarter decreased year-over-year to $6.7 billion, which I can still consider a strong level, much of it represented by higher-margin Civil work. In fact, our backlog composition stands at 42% Civil, 33% Building, and 25% Specialty.

Beyond our existing backlog, the volume of prospective work we are tracking has increased to $45 billion across our businesses compared to $27 billion a year earlier. This substantial volume of prospective work, together with our strong existing backlog, should continue to support our long-term outlook for growth.

Our Civil segment had new awards and adjustments totaling $284 million and ended the quarter with a backlog of $2.8 billion, the same level as the end of third quarter last year. New awards included a $107 million Route 264 interchange in Norfolk, Virginia, and a $54 million project in Menasha, Wisconsin. In addition in the fourth quarter our subsidiary Frontier-Kemper anticipates receiving its share of an expected joint venture award for a $145 million sanitary sewer tunnel in St. Louis, Missouri.

The Building segment had new awards and adjustments totaling $270 million and ended with a backlog of $2.2 million, compared to $2.7 billion in the third quarter. Last year's strong third-quarter backlog included a few significant building projects that had been recently awarded and were in early stages of progress, including the large technology office project in northern California. New awards in the third quarter included the $125 million Rosewood Miramar Beach Hotel in Montecito, California.

The Specialty Contractors segment had new awards and adjustments totaling $206 million and ended with a backlog of $1.7 billion, compared to $2 billion for the third quarter last year. We have recently added a key business development senior executive to further drive broadening our pursuits and enhance our competitive positions in certain markets, those being sports and entertainment facilities, convention centers, and airport terminal construction. We are already seeing positive results from the intense revisions to our national marketing plans and expect to begin realizing the benefit of those shortly.

As mentioned, the total prospective volume of projects we are tracking has risen to $45 billion. This substantial level is up considerably, reflecting strong demand in California, New York, Florida, and Nevada.

The Civil segment's bidding volume is currently $22 billion of the $45 billion. Large projects include the $1.7 million Los Angeles MTA Purple Line segment 2, for which bids were submitted in May with a contract award expected in the fourth quarter of 2016; the $600 million George Washington Bridge project in New York that should bid in December; and the $550 million South Capitol bridge project in Washington, DC, which should bid on or about Thanksgiving; and last but not least, the $500 million line Canarsie Line tunnel, electrical, and track rehabilitation project in New York for which we submit our proposal in mid-November.

The Building segment's bidding volume now stands in excess of $20 billion. This volume includes approximately $7 billion of opportunities in California; roughly $3 billion of project in South Florida; and several projects in Las Vegas, Nevada, including the $1 billion Alon Hotel, the $1 billion potential Raiders NFL Stadium, and a $1 billion convention center expansion.

The Specialty Contractors' bid volume continues to be $3 billion, consisting of various electrical and mechanical projects in New York City, Florida, Texas, California, and secondarily other states beyond that.

As you have probably heard throughout this year's political campaign season, infrastructure spending appears to be the singular issue upon which our presidential candidates agree, with both pledging hundreds of billions of dollars in addition to the 2015-enacted $305 billion Highway Bill toward improving our nation's infrastructure. Following many years of underinvestment, causing badly deteriorating highways, bridges, etc., there is no question that our political leadership appears to have the will to significantly increase this spending.

We also will be watching in the election for the outcome of certain regional ballot measures that could significantly bolster infrastructure projects, such as Measure M in Los Angeles County which, if passed, is expected to generate $120 billion over the next 40 years for regional transportation in Southern California. This simply adds $0.005 to sales tax in Southern California for its use.

Finally, we continue to monitor for the possibility that California and certain other states may enact significant new transportation funding legislation that will also increase work in their states.

Based on our results to date, our current backlog, and the market reflected by the large volume of prospective projects, we are bringing down the upper end of our guidance for 2016, with revenue now expected to be in the range of $5.1 billion to $5.2 billion and diluted EPS now expected in the range of $1.90 to $2.00. The primary reason for the narrowed EPS guidance range is the anticipated full-year impact of approximately $0.13 per diluted share for transaction costs and incremental noncash interest expense associated with our refinancing efforts in 2016. In other words, had we not incurred those financing costs, we would be looking at EPS guidance of from $2.03 to $2.13.

Our guidance continues to assume a tax rate of 41% and 49.6 million shares outstanding. I will now turn the call over to Gary Smalley, our CFO, to resolve the details of our financial results.

Thank you, Ron, and good afternoon, everyone. Before discussing other aspects of our operating results for the third quarter, let's first talk cash.

We have spoken a lot this year of our focus on improving cash flow from operations. This quarter we generated $90 million of operating cash, which is the highest quarter of operating cash that we've reported in nearly five years.

This result is particularly impressive because it is not based on the settlement of any particularly large unbilled cost balance. Instead, it is a function of many things: improvements in invoicing, collecting cash more promptly, and also the resolution of certain unapproved change orders. We expect to continue to deliver strong operating cash results in the fourth quarter of 2016 and throughout 2017.

As a reminder, the goal that we communicated during our fourth-quarter 2015 earnings call in late February was to reduce our unbilled costs, the cost and estimated earnings in excess of billings identified on our balance sheet, from $905 million at the end of 2015 to about half that amount by the end of 2017 or two years later.

Although our total unbilled cost increased slightly in the third quarter by $9 million compared to the second quarter, we remain confident that we will achieve our goal of reducing unbilled costs by $450 million by the end of next year and remain highly committed to do so. While any increase in total unbilled costs may at first glance seem unfavorable, the underlying data actually reveals positives.

We made significant progress in the quarter by resolving and therefore reducing our unapproved change orders by $37 million compared to the second quarter. This reduction was partially offset by an $8 million increase in the claims category, which resulted from costs incurred on open claim positions still being negotiated, not any new disputed items.

Lastly, other unbilled costs -- the least concerning component of unbilled costs because our ability to clear them is dependent only on the timing of billings and achievement of certain existing contractual requirements rather than any change order negotiation -- they increased by $37 million. So the growth in these other unbilled costs, where there are already existing contractual terms, was a primary factor behind the slight increase in our total unbilled costs.

Besides the progress that we made during the quarter in resolving certain unapproved change orders, negotiations are continuing for numerous other unbilled cost positions including various claims that will eventually, and we believe soon, result in further reduction of unbilled costs.

Staying for a moment with the balance sheet, I will reiterate a point I made last quarter. Although our receivables have increased 17% in the first nine months of 2016, this growth does not signal any collection issues. In fact, for the third quarter, our trade receivables declined by $50 million compared to the second quarter. These were partially offset by an increase in retention receivables of $29 million.

The most significant driver in the year-to-date increase in receivables is the timing of project billings. In other words, billings were much higher in September than last December.

The largest contributors to the year-to-date growth in the receivables balance are recent project billings that are expected to be collected in the fourth quarter. So the year-to-date receivables growth actually gives us continued confidence as to the underlying strength of future cash collections; and the strong third-quarter and year-to-date operating cash flow were partially the result of the higher receivables earlier this year. Some of the growth in receivables was also due to our continued success in billing unbilled costs, which is also a positive.

Moving to the income statement, our third-quarter revenue was $1.3 billion, consistent with our third-quarter revenue for last year. Total segment revenue was $450 million, compared to $540 million for the third quarter of 2015.

The reduction was mainly due to reduced activity on the JFK runway project which was completed last fall, and to a lesser extent the Hudson Yards Platform project which is progressing towards completion next year. Segment revenue included strong incremental contributions from various projects, such as the SR 99 project in Seattle and the California High-Speed Rail Project, which partially offset the revenue reductions.

Third-quarter revenue for the Building segment was $543 million, a 14% increase compared to $475 million for the same quarter of 2015 due to continued strong execution activity on various projects, including the large technology facility project spoken of earlier and several other building projects in California and Florida. Specialty Contractors segment revenue was up modestly, up $332 million compared to $325 million for the comparable quarter of last year.

Our third-quarter G&A was $64 million compared to $61 million for the same quarter of last year. The modest increase was primarily attributable to slightly higher incentive compensation expense this year.

Third-quarter operating income was $61 million, an increase of 56% compared to $39 million for the third quarter of 2015. This resulted in operating margin of 4.6% this quarter compared to 2.9% for the prior year's third quarter.

Recall that last year's third-quarter operating income was unfavorably impacted by pretax adjustments of approximately $24 million related to the Brightwater noncash legacy litigation related matter in the Civil segment. The increase in operating income and operating margin for the third quarter of this year reflects improved performance from all the Company's segments.

Civil segment income from construction operations was $50 million compared to $43 million for the third quarter of last year. The increase was primarily due to favorable performance on the California High-Speed Rail Project and SR 99 project, as well as the absence in the current-year quarter of last year's legacy litigation charge, which was largely offset last year by favorable performance on the JFK runway project. Third-quarter operating margin for the segment was 11% compared to 8% for the same quarter of 2015.

The Building segment's income from construction operations was $13 million compared to $7 million for the third-quarter 2015. The segment's third-quarter operating margin was 2.5% compared to 1.4% for the same quarter of last year. The strong increase in the Building segment's operating income and the notable margin improvement was mainly attributable to a $4 million unfavorable adjustment in the prior-year third quarter related to the Tower C concrete placement project at Hudson Yards, as well as the strong increased volume in the current-year third quarter on various projects in California and Florida.

Specialty Contractors income from construction operations was $11 million for the third quarter of 2016 compared to $5 million for the same quarter of 2015. The segment's operating margin was 3.3% compared to 1.4% last year. The increase in operating income and margin was principally due to improved performance on electrical projects in New York.

Interest expense for the quarter was $15 million compared to $11 million for the same quarter of 2015. The increase was mostly due to an increase in noncash interest expense associated with fees related to two credit facility amendments that occurred earlier this year, as well as cash and noncash interest expense on the convertible notes issued in June of this year. We estimate that interest expense for 2016 will now be approximately $59 million, including approximately $11 million or $0.13 per diluted share of noncash interest expense.

Net income for the quarter was $29 million compared to $20 million for the third quarter of last year, mainly due to the reasons mentioned above that drove our increased operating income. Our resulting diluted EPS for the third quarter was $0.57 compared to GAAP diluted EPS of $0.40 for the same quarter a year ago.

The effective tax rate for the third quarter was 39.9%, an improvement from the 42% for the third quarter of 2015 due to various return to provision adjustments. We continue to anticipate a 41% tax rate for the full year of 2016.

Finally, our total debt as of September 30, 2016 was $793 million, compared to $818 million as of December 31, and $826 million a year ago. Regarding the senior notes offering that we launched Monday of last week, when the cumulative yield of the high-yield bond index was at a 52-week low, bond market conditions have deteriorated significantly since last Wednesday due in large part to political election uncertainties in the US. As such, and since our pursuit of the bond deal was purely opportunistic and not because we had to, we have decided to pull the current offering rather than chase pricing in order to complete it.

There is plenty of time remaining before our current high-yield notes mature in November 2018, so our plan will now be to work on delivering continued positive results for the next couple quarters and pursue a new notes offering at a more opportune time in the future, but no later than after announcing our results for the first quarter of next year. I should note that we have put together a new bank group made up of very supportive and significant institutions that was contingent upon closing the bond deal. As such we have also decided to defer the formation of the new bank group at this time.

I'd like to speak briefly about our leverage. In our 10-Q that we filed earlier today our leverage ratio calculated over a trailing 12-month period was 3.55, well under our 4.25 bank covenant. We estimate that our leverage ratio will drop below 3.0 at the end of the fourth quarter. The extent to which it will fall below 3 will depend on the strength of earnings as well as the pace of cash collections and debt reduction in the fourth quarter.

With that, Ron, I'll turn the call back over to you.

Thanks, Gary. We have delivered solid results for the third quarter and year to date, in line with our expectations and estimates, and we continue to see that our focus on generating cash is producing significant results. Last quarter, I expressed confidence that we would produce better operating results in the second half of the year, and we will deliver on that commitment.

I remain optimistic that we will continue to make substantial progress on collecting the large amount of cash that we are owed related to both claims settlements and simply change-order resolves and executions. We see significant market opportunities available for us in both growth and profitability, given not only our strong backlog and large volume of prospective work, but importantly a very favorable pro-infrastructure macroeconomic climate.

We believe that in the immediate future, we will see significant new funding mechanisms approved at the federal, state, and local levels that will allow us to grow our Civil businesses significantly and, of course, what that growth drag along our Specialty Group that service it.

I will now turn the call over to the operator for Q&A. Thank you.

(Operator Instructions) Steven Fisher, UBS.

It sounds like the notes deal was opportunistic. So is the base case now that you won't do it again unless the conditions give you a very attractive window? I'm really just trying to gauge your confidence in collecting the cash, versus your focus or needing to give yourself more breathing room on the debt.

Well, Steve, this is Ron Tutor. I'm more confident today than the last time we spoke that we will collect the dollars, and we are currently making great strides. I'm very positive.

We were led to believe or led ourselves to believe that we could generate this bond issue at a very favorable interest to our prior issue, which is currently at 7 5/8%. Unfortunately, that was not the case.

A combination of what I believe to be a concern over those unbilleds and the fact we were early in the process of reducing them significantly, coupled with a complete downward spiral from the start of our roadshow, which I participated in every day, drove the price to a point where I saw it going at or beyond the current rate of our bonds. And it simply made no sense.

We thought we could generate the 6% bond. When the price appeared to be rising beyond 7.5%, it just simply made no sense.

Our belief is that within one to two quarters we will be so much stronger that we'll be able to then go back out and get a much better transaction done. If in the meanwhile we collect, as we expect, we are reducing every day our need for that bond issue, even though it is our intent to replace the existing one in the near term. That pretty much sums up where we are with respect to the bond.

Okay. That's hopeful, Ron. Then maybe can you just give us your latest update on how you're going about trying to work down the $820 million unbilled balance? Are you equally focused on trying to resolve the claims versus the unapproved change orders versus the unbilleds? Are you just focused on where the low-hanging fruit is?

We're on a full-court press on every one of them. I have a list in my office of every single component of that unbilled, and we're making strides. It's significant.

I don't have the numbers in front of me, but the target I set of cutting it in half from $900 million to $450 million before the end of next year is an absolute mandate. And since I personally reviewed every single unbilled receivable, that is not only doable, it will be accomplished.

The burden is on the subsidiaries -- and both Gary and I are on them every day, along with our senior executives. And I fully expect that that will be done.

I can't tell you the week or the month, but I can tell you quarter by quarter. We're making the strides necessary.

Sometimes a $30 million resolve will almost be done in one quarter, be concluded in the next. But I'm very -- I'm as optimistic as I've been that that will be accomplished with what I said.

And it's our job to see to it we do better than that because, candidly, there's no excuse for how our unbilled receivables got out of hand. It's simply up to us to see to it that we collect them and that it never happens again.

Okay. Then can you just maybe give us some bracketing on what the fourth-quarter cash flow could look like?

I can't really tell you. It's early and I'm not even sure Gary can tell you, other than my assumption would be positive. There's no reason that I'm aware of that it could be negative. Can you add anything?

Yes, Steve, we anticipate that it's going to be positive, consistent with what we had said at the last earnings call. But we don't really have refined numbers that will help you a whole lot.

But the $90 million, I don't see us breaking for another record or having another five-year high. But at the same time, we've got some good things going on with the resolutions that Ron talked about and we're pushing hard. So we don't guide on quarterly cash flow, but we do see a positive coming.

Okay. Last question. I know it's a little early for 2017 specifics, but do you think the market conditions or your prospect list at this point is supportive of earnings growth next year?

I think we'll see some earnings growth because there is some very large jobs that are immanent that should support next year. But candidly, the enormity of civil work we're looking at and the number of billion-dollar-plus jobs that we think could be awarded between now and the first quarter next year are such that they could drive earnings.

The only negative of that is when you get awarded a billion-dollar job in February or March next year, you just about gear up and it doesn't hit our balance sheet until between the third and fourth quarter. So although I think next year will be a strong year, I'm looking for 2018 to be significant.

Okay. Thanks a lot.

Alex Rygiel, FBR.

Yes, good evening. A quick question on the backlog. Can you add a little bit more color as it relates to margins in backlog across each segment? And then talk a little bit about the pricing environment out there for projects that you are bidding on.

This is Ron Tutor. I would respond by saying the pricing in our Civil backlog remains strong, as you can see in the average margins we recorded in the third quarter of approximately 11%. Without question, our Specialty Group margins are improving. We have raised all of our margin expectations across all of the companies. And the marketplaces that we are most significant -- namely California, New York City, and South Florida -- there's tremendous revenue and we're able to accomplish those margins.

The Building Group margins have slightly increased across the board, maybe between 0.25% and 0.5%. But there is always pressure on the Building business because of the amount of competition, which is the opposite of our Civil and Specialty groups, where in the very large work there is very limited competition. So I think what you'll see this continued upticks in the profitability both Civil and Specialty, and pretty much marginal increases in profitability in the Building group.

And, Ron, what is the normal Specialty Contracting margin range?

We should make gross profit at the job level between 13% of 15%, and assuming between a 6% to 7% G&A. In my opinion, if we get it to where it should be, we should be making 7% to 8% pretax with all the ups and downs. That's where we should be, as opposed to 3.5% to 4% where we currently are.

And as it relates to the Building segment, the $7 billion bid pipeline in California, any particular projects stand out?

There's a number of hospitals that our Rudolph and Sletten group is pursuing. There's just -- we're in the final throes of an $800 million condo in Beverly Hills where we've done all the preconstruction and site work. There is such a flow of major building projects in California, it's remarkable.

The East Coast, on a lesser scale. Florida, relatively similar. And across the country, just various pursuits that fall into our strengths, namely hotels, casinos, convention facilities. And our latest pursuits is sports facilities.

Very helpful. Thank you. Nice work on the cash collecting.

Thank you.

Ryan Cassil, Seaport Global.

Good evening. You mentioned certain state-level transportation funding bills. California, in particular, hearing that increased likelihood we might see something after the election in November. Any comment there? Do you share that optimism?

Well, I think it's all we hear from our friends in public services: they are waiting for the election so that monies otherwise appropriated will be released. I think there's a certain truth to it.

I, however, don't think they're going to be released on November 9 or 10. I think it's probably more like first or second quarter next year.

But there is just in an enormity of Civil work waiting to go out that's been previously funded and ready. And since both of our fearless leaders for the presidency are very supportive of infrastructure, we look for a big influx of new Civil work starting second quarter of 2017.

Okay. And then just on the Building segment, the bid table for large projects seems pretty robust. Have you seen any push-outs in awards on things you have already bid on here in the near term? Or any sign that things are slowing there?

No slower than normal. Typically on negotiated building work, you make proposals; you have lengthy meetings. I don't see anything delayed more than it normally has.

You've got to remember most of our owners in the Building segment, although private, are institutional owners: large corporations, hospitals, universities. We don't do a lot of bank finance developer private work; that's just a small percentage.

So our large institutions like Kaiser or Gilead, they self-finance much of what they do or with limited third-party financings. So they are pretty much in control of their own start dates and their own budgets.

So we wouldn't be as affected if we were doing developer-led work, relying on bank debt and/or bond debt that financed. So it isn't quite the same.

Okay. Then last one for me, just on the balance sheet. The claims and other buckets ticked up a little bit. That can just be the normal timing of billing cycles and new projects coming on. Is there a normalized level we can look at, either from a dollar value or percent of sales basis for those buckets as we move forward?

In other words, when we reduce it, what can we look -- what should we expect on a normal case?

Yes.

Is that what the question is?

Yes.

I would think that given our size and the breadth of our organization and the fact we deal with changes to contracts on a constant basis, a typical exclusive of claims of changes in process are going to be in the range of $150 million to $200 million that are just changes with entitlements clear and in-process. That usually takes four to six months to be able to get an executed agreement and get paid.

And then I think we would have $100 million plus or minus of claims disputes, potential litigations, most of which never try but resolve themselves. So if I look for a number to tell you when that $800 million gets down to $300 million or less, it's a fairly stable amount of what we call unbilled receivables, that it is -- by the nature of our business, it can never go to zero.

Okay. Most of that should be in claims or other as opposed to unapproved change orders, right?

No, I think we're always going to have that $100 million to $150 million of unbilled change orders. Because the way the process works -- and particularly in New York where we have such a large presence -- you get a change order that says we recognize you're entitled to payment, and we direct you to proceed with the following scope of work. Once you have priced the work and we negotiate an executed change order, an agreement on price, we'll pay you.

So what happens, you are directed to proceed -- which is within their contractual rights. We commence to perform the work. Generally it takes four to six weeks to give them a detailed quotation, and anywhere from three to six months to agree on price.

And unfortunately usually you finish the change order. The minute you've agreed on price you then can bill and get paid.

So that process, realizing that we always have a certain percentage of all our contracts in extra work, is just always generating what I said would be $100 million to $150 million of entitled change orders in various stages of collection. There is just unfortunately no way around it.

Ours is a crazy industry that allows owners to order us to proceed with extra work, promise to pay us, but not pay us until we resolve it. There's probably no other industry that would ever permit that.

Understood. Thank you.

John Rogers, D.A. Davidson.

Hi. Good afternoon. A couple of things. First of all, just in terms of the Civil opportunities, I'm curious. How much of the -- I mean, you gave us some of the upcoming projects -- are in New York and California? Are those the two big areas for you?

Not necessarily. We're bidding a $500 million bridge in Washington, DC. We're getting ready to bid first quarter a $500 million highway job in the Orlando area in Florida.

John, we just look at all the very large projects as opportunities all over the country. As you know, Lunda, our Midwest subsidiary, bids all the big bridge and highway jobs in Minnesota, Wisconsin, Iowa, and that whole Midwest area.

So we never limit herself to where it is, but just what we want to do is pursue the very large projects, where we have a substantial advantage and they're simply too big for the small, family-owned businesses that reside in the locale. So our playing field is other large national companies like ourself, none of the local players.

Okay. Then as it relates to the projects in Las Vegas, particularly the convention center and the stadium that you mentioned, could -- do those projects offer the higher margin potential that you've seen on like airport jobs in the past? Or is this going to be more typical Building type work?

I think it will be closer to Buildings. The margins, I would hope, would be a little more than we get on our traditional Buildings. But the fact that they are negotiated contracts, we are the dominant power in Las Vegas and have been for 30 years -- but they are closer to the Building business. And the minute you negotiate there's just a limit the market will allow you to have in fees.

Okay. And then lastly, in terms of your guidance, especially for the fourth-quarter revenue, looking at the numbers there is an uptick coming or you're expecting in terms of revenue in the fourth quarter versus I guess what I would expect normally seasonality. And I assume it's project timing. Is there one big project that's starting up or something in the quarter?

No, John. Yes, what we're going to see -- there's not a big project starting up, but we're going to see High-Speed Rail kick in to generate more revenue than what it has, because it's starting to pick up the pace in revenue generation. Other than that, it's just solid growth across the board, and we feel comfortable with where that range is.

Okay. So it is in the Civil side, though? Okay. That's good.

Yes, High-Speed Rail has ramped up dramatically. As I tried to point out, suddenly we are all over it. The owner is getting out of our way with their increased right-of-way, procurements, and we are beginning to drive revenue substantially on High-Speed Rail. And remember in California, there is no winter, so we work 12 months out of the year. Nor is there one in Florida.

New York -- most of our work in New York seems to be underground so it's unimpacted. The Midwest, of course, has -- usually December and January are challenging months. But we think fourth quarter will be strong in revenue.

Okay, great. That's all I had. Thank you.

(Operator Instructions) Rob Norfleet, Alembic Global Advisors.

Good afternoon. Just a couple of quick questions. The first one on the unbilled balance, I know you talked about this a lot. I know the goal is to collect 100% of every dollar you are owed.

But do you guys -- do you have a certain threshold level that you're willing to take in order to get an expedited recovery of those funds? For instance, $0.90 or $0.95 on the dollar? I'm just curious if you are willing to negotiate with customers and to what level, really to understand the process of collection.

We are pretty good normally at collections and resolves of disputes. In the past, we have very seldom taken any write-downs in those resolves.

I'm determined to collect all those receivables as discussed. But I'm not going to allow any owner to take the advantage of that resolve.

We'll collect what we're due like we always do. It will be the hard way or the easy way.

What I'm relying on, my statistics, are really resolving issues where I have a personal confidence they will be settled without dispute resolution or, frankly, litigation. That's what we're counting on. That's what I base my commitments on.

And I'm not going to sacrifice earnings to get cash that we're rightfully due. Having said that, of course, that's predicated on me collecting that first $400 million-plus that I feel is just a burden, addressing it, and going after it with senior management where it's really not a matter of dispute. It's bringing things to conclusion and resolves where there's no real disputes between the parties.

As you get into reducing it from where we said we'd be at $450 million, down to $250 million to $300 million -- which is a typical level that you can live with, given whatever that makeup is -- that will be a little more difficult. However, we have certain significant disputes, all of which either try or have a trial date on or before the first quarter of 2018.

And if we filed 50 lawsuits, five or six of them have never got to trial because the owners have capitulated, as they traditionally do when they know they're going to get beat on the courthouse steps. So since we haven't got a court date beyond April of 2018, it leads me to believe that we'll even do better than I anticipated.

Yes, so 90% do not go to trial is what we're saying.

Understood. Great. Thank you, guys; very helpful.

And we have a reputation to uphold with our owners, if any of them are listening: that you pay us what you owe us, or we do it the hard way.

Understood, understood. Just my second question, Ron, is just -- I know in the past you talked about, discussion on the Civil side, increased competition from foreign entities in several of your markets. Can you discuss that trend and how it's impacting price? Have some of these guys decided to exit the market, or is that still a headwind you are facing?

Well, it's hard to say. I can only tell you the results of what I believe I know, and that's the Europeans have come into this market with a vengeance. I'd say it's safe to say they've failed miserably across the board.

Certain of our major agencies won't even permit them to bid because of their past failures. Others continue to take their low bids and award do because they provide bonds.

From my relationships with three or four of the largest, who are very nice people and solid businessman, they are losing substantial amounts of money. They all come from a background of negotiated budgets and all issues resolve. And when they come to America where you've got to be low bidder and be cost effective and cost efficient, they are finding it's a much more difficult market than they anticipated.

And even if they were listening, I would tell them they are no different than the Japanese were in the 1990s. The three or four Japanese giants came into this marketplace, took a lot of work, got slaughtered and left and never returned. I expect the same of the Europeans.

Their only hope is to try to buy large, American firms and throw the weight of their support behind them. So far that hasn't taken place, and this certainly won't be the first.

Great, and just my last question, just for Gary. Gary, obviously, if you guys are successful in collecting the $450 million, which I assume you will be, and then looking at cash on hand and free cash flow, by the end of 2017 you're going to have a pretty solid balance sheet. You could effectively say net debt zero.

How does that change capital allocation policies for you guys? And how are you positioned to take advantage of that, whether it's M&A, buybacks, or just other -- a variety of things?

We are highly motivated to pay down debt, first and foremost. With respect to M&A, we have no interest in the immediate or we'll say extended term. So within the next few years we're really not interested in any M&A activity.

We're still digesting some of the M&A transactions from the past, and we want to build our tangible net worth, build our cash balance where we have sizable cash in the banks as we used to. Then after some point in time then, yes, that might be something that we'd look at on an opportunistic basis, more likely than not in the Civil area.

At some point in time, a couple years or so down the road, as the cash comes in -- as we're talking about it will -- then we will entertain restoring the dividend as we once did. And as Ron as outlined here, we would not be extravagant, and the dividend that we would pay would certainly always be less than half of consolidated net income.

But we would like to pay a dividend at some point in time. But we're looking at that being a couple years or so down the road. Summer of 2018 we would think we would be in a position to go to the Board and discuss that again.

Great. Thanks so much.

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I would like to turn the floor back over to Mr. Ronald Tutor for closing comments.

Thank you, everyone, for once again another quarterly call. Look forward to the next. Thank you.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.