Tutor Perini Corp (TPC) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation Third Quarter 2017 Earnings Conference Call. My name is Tim, and I will be your coordinator for today. (Operator Instructions) As a reminder, the conference call is being recorded for replay purposes. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Jorge Casado, Vice President of Investor Relations. Please proceed.

Good afternoon, everyone, and thank you for joining us today. With us 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 assessment of existing trends and information. There is an inherent risk that our actual results could differ materially. Please refer to our annual report on Form 10-K filed on February 23, 2017, for a disclosure about our risk factors that could potentially contribute to such differences.

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, and thank you all for joining us today. We had a good third quarter from a bookings and backlog perspective as well as from a cash flow perspective. The quarter included $1.1 billion of new awards, with bookings that were particularly strong in our higher-margin Civil and Specialty Contractors segments. I will review some of the more significant new awards we received a bit later. Notably, to date, we have booked more than $4.8 billion of new awards for the first 9 months' book-to-burn ratio of 1.36. Our total backlog was up 20% compared to the end of last year, and more importantly, our Civil segment's backlog, by far, the largest component, was up 61% over that same period. Strong Civil segment backlog growth to date has occurred ahead of the anticipated favorable impacts of various new state and local funding measures and without the favorable effect of the potential new federal infrastructure program, all of which should further add to our Civil opportunities.

The substantial backlog, combined with a growing list of large opportunities we continue to see ahead, we believe, bodes well in terms of our outlook for long-term growth and increased profitability. As mentioned, another positive aspect of the third quarter was solid cash generation, which Gary will delve into later.

While our backlog and cash flow were good this quarter, our financial results were lower than expected due to certain delays in the timing of new awards and project execution activities, including continuing delays, which shifted earnings that should have been enjoyed this year into next year. Therefore, we are reducing our guidance for 2017, which I will discuss later on the call.

Now I would point out certain major projects that we worked on during the third quarter. In our California -- in our Civil group, we're making good progress and strong contributions from the San Francisco MTA Central Subway Project, Los Angeles MTA Purple Line Segment 2 Extension and the California High-Speed Rail Project, CP1. Work on SF MTA project is progressing, with substantial completion expected in mid-2019. Construction activities on the Purple Line Section 2 Project are planned to begin toward the end of the first quarter of 2018. Until then, we will be doing the necessary design work on the design-build contract to get ahead of our construction start. The high-speed rail job also continues to progress, though it continues to be impacted by the owner's inability to obtain rights of way and permits.

In New York, the Civil group performed substantial work on several East Side Access projects, with activities on CM007, CS179 and CQ33 continuing to wrap up, while CM006 and certain of our other East Side Access projects are completing and being finalized.

Other Civil projects nearing completion include the SR99 project in Seattle, where work to complete the double-deck concrete highway within the already completed tunnel is expected to finish in the first quarter of 2018, and the Hudson Yards Platform in New York, which is expected to be completed in the first quarter of 2018. SR99 is currently scheduled to be substantially completed in the fourth quarter of 2018 and open to traffic in the first quarter of 2019. The work remaining after the first quarter will be commissioning, startup and turnover. However, we're in the process with the Washington DOT of determining if the remaining schedule can be improved upon in order to achieve these milestones earlier than currently scheduled.

The Building segment's work in the third quarter included various significant projects, mostly in California, Florida and Maryland. The largest revenue contributor for the group was the technology office facility project in Northern California, which is expected to be completed early in 2018. Other top contributors included the Pechanga Resort and Casino expansion, which is also nearing completion; Maryland Live! Casino expansion, which we just topped out; the Washington Hospital in Northern California nearing completion; and the W Hotel in Philadelphia. In addition, as I mentioned last quarter, we won a very large technology office campus project in Northern California worth an estimated $500 million and have completed early work on the project. For the early work, we booked $49 million of the project's total value in the backlog in the third quarter and expect to book the remainder of approximately $450 million in the current quarter or no later than the first quarter of next year.

In the Specialty Contractors segment, major contributors in the third quarter included Five Star Electric's work on CS179 East Access; Fisk's electrical work on the Transbay Transit Center in San Francisco; and Five Star's work on the Hudson Yards Tower A electrical package; as well as numbers of other smaller projects, New York, Southern United States and California.

Our Specialty Contractors segment is performing significantly more work for our Civil and Building units this year compared to last. And we believe that this trend will continue as they continue to service our own operations in addition to working for others. Demand for our specialty electrical, mechanical and shotcrete remains high from both internal and exterior customers, and our Specialty group's workload should grow in line with our long-term expectations.

We ended the third quarter with a backlog of $7.5 billion, level compared to last quarter and, as I mentioned earlier, up 20% compared to the end of last year. Our backlog composition at the end of the third quarter was 58% Civil, 21% Building and 21% Specialty. The Civil component continues to increase, reflecting ongoing shift toward longer-duration, higher-margin infrastructure projects that should enable improved profitability in time. The unprecedented volume of prospective opportunities and bidding activities for Civil project continues unabated and is, in fact, growing.

Next, I will provide some details regarding our new awards by segment, followed by major bidding opportunities. The Civil segment's new awards and adjustments totaled $463 million in the third quarter, resulting in our current backlog of $4.3 billion for Civil, another all-time record high for this segment. Significant awards included the Kemano hydroelectric station's second tunnel in British Columbia, Canada, valued at $274 million; the 35W and Lake Street project in Minneapolis, for which the country's portion of that joint venture is valued at $90 million; and a military training range for our Black Construction subsidiary in Guam worth $78 million.

The Building segment's third quarter new awards and adjustments were $284 million, resulting in a backlog of $1.6 billion at the end of the quarter. The segment's significant new awards, including -- included PMSI's U.S. Embassy renovation in Uruguay valued at $87 million and a previously mentioned $49 million for early work on a major technology office campus in California.

The Specialty Contractors segment booked new awards and adjustments totaling $394 million in the third quarter, resulting in a backlog of $1.6 billion at quarter-end. These new awards included an electrical subcontract of $154 million from the parent company for the Purple Line Section 2 Project and approximately $65 million in various smaller electrical projects in the Southern U.S. as well as $52 million for 3 new mechanical projects in New York City.

I'd also note that we continue to win and expect to be awarded significant other new awards in the current fourth quarter. For example, in our Civil segment, we announced earlier this week that we have been identified as the low bidder by the Maryland DOT for the $189 million Canton Viaduct replacement bridge and tunnel, and we anticipate this contract to be awarded in December.

In our Building segment, Roy Anderson Corp. on the Gulf Coast has been awarded a contract from the Texas General Land Office for FEMA-related Hurricane Harvey disaster recovery and repair services. The value of this contract is substantial but undetermined and will ultimately depend on the number of structures that we repair. Additionally, last week, we were selected to build a new casino project at something over $100 million for a confidential customer.

Finally, in our Specialty Contractors segment, Five Star has been awarded and will be working on a $45 million electrical contract on New York City's MTA new fare system. Major bidding opportunities currently taking place for the Civil segment include the $2 billion Long Island Railroad third track project that we have already turned in and are awaiting the results; and the $1.6 billion Newark Airport Terminal A, which we just turned in, which is a combination of Civil and Building. These proposals have been tendered, and we expect decisions on both of them over the next 2 to 3 weeks.

Our other Civil segment opportunities include the next section of the L.A. subway system, which we're in the process of bidding, namely a $1.8 billion Los Angeles MTA Purple Line Section 3, which adjoins our Section 2 we were awarded this year; the $950 million Portal swing bridge in New Jersey, which bids in 2018; and the $750 million Harry Nice Bridge replacement in Maryland bidding in early 2018.

We further include several large projects in Las Vegas: a $650 million Las Vegas Convention Center expansion and reservation -- renovation, for which we were prequalified and would assume the owner will award to one of the prequalified bidders by the end of the first quarter in 2018; the $400 million Ritz-Carlton hotel in San Diego; and the $250 million Ritz-Carlton project in Phoenix, which we hope to have a decision, literally, in days.

Our Specialty Contractors segment continues to field ample bidding opportunities, not the least of which is working with us on every proposal we are bidding in the United States. Based on our results to date and taking into consideration the revenue and profit timing shifts into 2018 that I mentioned earlier as well as our current backlog and expected awards, we are reducing our guidance for 2017. We now expect 2017 revenue to be $5 billion and diluted earnings per share to be in the range of $1.75 to $1.90.

Now before I turn the call over to Gary to review the financial results, I'd like to briefly tell you about a special study we recently commissioned and completed. As you know, historically, we felt our stock price has been constrained by significantly discounted valuation multiple relative to our peers in both the engineering and construction industry. As Tutor Perini's largest shareholder, I have always questioned this discount and what we may be able to do to provide increased shareholder value. So we recently commissioned our first-ever investor perception study with the objective to better understand our challenges by assessing how the company is perceived by Wall Street analysts/investors. We invited over 125 current and prospective sell-side analysts, buy-side analysts, portfolio managers and all of the significant Tutor Perini executives to participate anonymously in the study's interviews, which were conducted by an independent research firm. The study's conclusions and recommendations were very enlightening and revealed certain themes, both positive and negative, affecting both the company's valuation and our approach to achieving shareholder value.

The study confirms certain drivers of the investment appeal in Tutor Perini, including our strong market presence and unique capabilities in executing large, complex projects. In addition, participants recognized the strength of our backlog and believe, as I do, that the company is poised to benefit.

The areas of concern included, not surprisingly, our history of inconsistent cash flow generation, driven by our unbilled receivables issue and our debt level. In addition, certain participants noted that our results, at times, have not matched up with expectations set by management. When this has recurred, the result has been a reduction in confidence, which, together with the lower desired level of access to senior management, has impacted investors' valuations and management's credibility.

To all of you who participated, I thank you and want you to know that your views definitely matter to me and the rest of our investment team. I read with interest every one of your anonymous comments and recommendations, and we are taking them to heart. We will be using the results of this study to improve our communications and the frequency of Investor Relations' outreach, including management access. Even though I have never desired -- never withheld access to me by any of our shareholders, I will ensure that, that access is always available and there to be taken whenever questions occur that you need the CEO's input. In addition, we are going to schedule Investor Days, investor conferences and non-deal roadshows so that we can do more one-on-one to explain the depths of Tutor Perini and what we're really all about, and you can ask whatever questions and concerns you have for us to respond to.

The truth of the matter is we are a publicly held construction company in an industry where 90% of our peers are privately held. Ours is a very technical business, fraught with certain risks but also great rewards. I believe the only way we will achieve the valuation we should have is to better explain our industry and our company such as there is no longer the kind of disconnect we have in the perception of Tutor Perini and their significant executives and leaders and the investment community, who may do better with a better understanding of our industry.

Thank you for listening to my monologue. And with that, I'll turn the call over to Gary.

Thanks, Ron, and good afternoon, everyone. Our third quarter revenue was $1.2 billion compared to $1.3 billion for the third quarter of last year. The decline was due to a larger volume reduction associated with various Civil and Building segment projects that are nearing completion compared to lower revenue contributions from certain newer projects, particularly in the Civil segment, which are not yet generating the expected higher levels of revenue that they soon will after the projects get up and running and move further along. As Ron mentioned, revenue was also impacted by certain delays in the timing of new awards and project execution activities for previously awarded projects, which we expect will shift the timing of those revenue contributions to 2018.

Civil segment revenue was $396 million, down 14% year-over-year. The decrease was primarily due to reduced project execution activities on certain mass transit projects in New York and the SR99 project in Washington. The decrease was partially offset by increased activity on other mass transit projects in California and New York.

Building segment revenue was $494 million, down 9% compared to the same quarter last year, predominantly driven by reduced project execution activities on a biotechnology project and a courthouse project in California, both of which are substantially complete. The decrease was partially offset by increased activity on a hospitality and gaming project in California.

Revenue for the Specialty Contractors segment was $310 million, a decrease of 6% compared to the prior quarter, mostly due to reduced project execution activities on various electrical and mechanical projects in New York as certain projects have completed or nearing completion and newer projects have yet to fully ramp up. The decrease was partially offset by increased activity on various electrical projects in the Southern United States and in California.

Gross margin for the third quarter was 9.9%, our highest quarterly gross margin in almost 3 years, reflecting the benefit of higher job margins we have mentioned on newer projects we have been winning compared to the margins for some of the legacy projects we are still completing, particularly in our Specialty Contractors segment. G&A expense for the third quarter was $69 million, up 9% compared to the prior year third quarter, mostly due to higher compensation expense and business development costs.

We have hired various new executives and other employees over the last several months in order to help us address the increased bidding activity we have been seeing and to also help us prepare to execute what we believe will be a significant volume of new work in the future.

Third quarter operating income was $49 million compared to $61 million for the same quarter in 2016 due to the volume reductions I mentioned. Third quarter segment margins were 9.6%, 2.8% and 4.7% for the Civil, Building and Specialty Contractors segments, respectively. The Civil segment's margin after segment G&A for the third quarter of 2017 was in line with our budget expectations and roughly within our targeted 10% to 12% range, which indicates very good margin performance.

As Ron has discussed in the past, we believe that, over time, the Civil segment's target margin range should increase due to the anticipated surge in civil infrastructure spending, expected strong demand and limited competition from companies that can successfully perform work on the largest, most complex projects.

The Building segment's margin was also robust for the third quarter, up 160 basis points compared to last quarter and up 30 basis points compared to the third quarter of 2016 due primarily to improved performance on many projects in the segment's portfolio, including the large technology office project in California. We would expect normalized Building segment margins after segment G&A to be around 2%.

The Specialty Contractors segment margin improved significantly compared to last quarter due to improved project performance on various electrical and mechanical projects in New York. As we've previously indicated, the Specialty Contractors segment margin should be in the 5% to 7% range, and as you can see from the third quarter's performance, we're well on track to reach that level with Specialty.

Interest expense for the third quarter was $15.6 million, roughly level with the same quarter of last year. Third quarter net income attributable to Tutor Perini was $24 million compared to $29 million for the third quarter of last year. The reduction was due to the volume shortfall, as mentioned, partially offset by a lower effective tax rate in this year's third quarter. Our tax rate was favorably impacted primarily by the relief of certain tax liabilities due to the expiration of a tax statute.

Our third quarter diluted EPS was $0.47 compared to $0.57 in the third quarter last year. However, our diluted EPS for the first 9 months of this year was $1.33 compared to $1.32 for the equivalent period of 2016.

Let's shift gears now and discuss our balance sheet and operating cash. Our net profit -- or excuse me, our net project working capital declined a modest 3% sequentially in the third quarter of 2017 primarily due to a $64 million increase in advanced billings or what we refer to as billings in excess of cost when you look at our financial statements. Also, there was an increase in accounts payable, driven by the timing of payments to subs, partially offset by an increase in unbilled receivables or the costs and estimated earnings in excess of billings on our financial statements. It is noteworthy that our net unbilled receivables for the third quarter actually decreased by $12 million since the increase in advanced billings outpaced the growth of our unbilled receivables, contributing to our solid cash flow quarter.

We continue to make progress in negotiations to reduce some of our larger unbilled receivable positions. However, as we have discussed recently, this progress is being masked by increases in certain change orders and claims positions due to additional cost spent as the corresponding projects move closer toward completion. We expect more notable and improved progress in reducing our unbilled costs in the coming quarters once some of these larger disputes are ultimately resolved and when other projects are completed and not incurring more costs.

I will reiterate here what we have said before. It is quite difficult to estimate with precision when certain unbilled positions will settle. For the more sizeable cost issues, even with entitlement agreed, the negotiations can become prolonged and sometimes lead to mediation and arbitration. Sometimes, we have to be very close to discussions and often -- and, sometimes, trials before we can get what we believe is a fair, reasonable offer. We remain confident in our ability to collect the unbilled receivables reflected on our balance sheet as we have rightful entitlement. The collection of our unbilled receivables remains a top priority for us. We recognize that billing and then collecting these unbilled receivables is probably the key catalyst to significantly improve our stock multiple. So we are highly motivated to resolve these issues. The effort begins, of course, with Ron and the entire management team, and the organization is fully engaged to settle these positions.

Our total debt as of September 30, 2017, was $886 million, with our third quarter leverage ratio under 3.0 and well within the requirements of our bank covenants.

Now as Ron mentioned, cash generation was one of the positives of the third quarter as we generated $36.5 million of operating cash. We look for an even stronger improvement in operating cash flow generation in the fourth quarter given our continued intense focus in this area.

Finally, I will provide an update to our guidance-related assumptions. We're still forecasting interest expense for 2017 to be $68 million. Of the $68 million projected, $18 million will be noncash. We also still expect an interest expense reduction of between $8 million and $10 million in 2018 as a result of the refinancing we completed earlier this year.

Our forecast of $50 million for depreciation and amortization expense in 2017 remains unchanged. We are still forecasting approximately $15 million of cash -- of capital expenditures for 2017, excluding potential purchases of new equipment for significant new projects, which would be paid for by the projects. We now expect our effective tax rate to be approximately 36% for 2017.

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

Thank you, Gary. While our financial results for the third quarter were short of what we expected, our new awards and backlog continues to be very strong, and the volume of future project opportunity is substantial and growing. And our cash generation, I believe, has turned the corner, improving and continuing to do so. Our backlog is at a record high, and with 1 or 2 large project wins ahead, I think we will set a new backlog record sometime in the coming months. With these new opportunities before us, along with recently awarded projects, it is important to keep in perspective that our long-term outlook of improved profitability remains very favorable, keeping in mind that we have not factored into any growth or revenue the expected benefits of any federal or Trump administration bill that everyone is talking about pushing into the infrastructure.

California's SB1 transportation bill proposition and in Los Angeles, other propositions in Washington will afford us the significant opportunities we look forward to. Whatever the federal government finally moves forward with will simply be an add-on. As a matter of confirmation, there is now tremendous and continued bidding activity on the island of Guam, probably to the tune of $700 million to $800 million a year, evidenced by our $78 million contract award on the training range facility as well as our $100 million award on the expansion of the Guam airport. So we continue to see the opportunities of growth just within the current programs and what exists.

Having said that, I'll now turn the call back to the operator for questions and answers. Thank you.

(Operator Instructions) Our first question comes from the line of Bobby Burleson of Canaccord Genuity.

I guess, Ron, this is for you, just in terms of what we've seen in terms of the nice mix of civil in the backlog, how we should be thinking about the pace of that burning off next year in terms of revenue mix? And any kind of benefit to margins there?

Well, the only issue we've had in the Civil business and the revenue burn off and the profit that follows it was, frankly, in our California High-Speed Rail CP1 project that has grown to over $1.5 billion, that unfortunately has been delayed over 2 years by right of way issues. And as a result, 2 years and probably in excess of $300 million of revenue and all the ensuing profits associated with it, though they haven't been lost, they've been pushed from '16 and '17 into '18 and '19. Does not bode well, of course, for the fact we reduced our earnings sights this year, but we didn't lose the earnings, they went into next year. And so I think it would be safe to say that everything we are bidding now is bid with higher margins than we were a year ago and even 6 months ago.

And then in terms of the Gulf Coast work and in Texas, any kind of prospects there? I understand that you might partner in some cases for highway work and then your Fisk Electric, I think, has some exposure in Houston. Can you kind of give us a sense of the scope of what you guys might be doing...

Well, interestingly enough, we have done so much hurricane damage repair work. Between our work in Sandy and the previous, Katrina, we were awarded, although an indeterminate cost, a large contract in South Carolina and also in Texas. The only thing we don't know is how much it will be, but it will be significant. But the range is enormous. We just don't know. We expect to go to work immediately and I don't think we'll have a sense of how much revenue that will be until probably the latter part of December or the first part of January. But we expect that to be immediate revenue and relatively significant profits.

And is the profit being helped at all by kind of the expediency that needs to be done? Is it a regular bidding process or...

Yes. No, it's a -- the way the process works, you turn in your resumes and your experience, and they selected a certain number of contractors, of which we were one of the largest; then they determine your capacity, and then they give the work accordingly. It's an enormous program in the billions. It's very hard for us to get our arms around how much we'll receive but since they've been recently awarded, we expect to have our arms around that no later than January of 2018. And it is. It's highly accelerated work, very fast revenue and the profits that follow. Because the whole idea is it's emergency.

Our next question comes from the line of Steven Fisher of UBS.

Just a quick clarification first. You talked about the 2.99 leverage result at the end of the quarter. Can you just remind us what the covenant is there?

Yes, the covenant right now, Steve, is 4.0.

Okay. And just you took your revenue guidance down by roughly $500 million. How does that compare to the amount of revenues that were actually delayed?

Well, we lost $300 million of revenue delayed on one project, and the balance of them were really $20 million here, $10 million there. So to try to get specific, the biggest single one by far was high-speed rail. That accounted for probably 2/3 of the revenue loss. I shouldn't say revenue loss, Steve. Again, what makes this different, it's just pushed back; we don't lose it.

Right. So what kind of visibility do you think you have at this point to when that could actually start?

Which would start?

The California High-Speed Rail. To recapture that revenue.

We are, right now, approximately 50% complete. And we are absolutely all over the job. The only thing we've been unable to do is work delayed by right of way. So I believe by the end of the year, meaning next month, all the right of way will be delivered with the exception of one piece we'll get in February. So finally we have access to the entire length of the job. And we probably got $800 million worth of work to complete over what I would guess would be 24 months. We've had a great relationship with the owner. They continue to resolve our impacts on delays and payments for delays and resolve all change orders. I see no issues with the owner other than they've finally gotten out of our way with right of way. Now it's up to us to produce the work.

Okay. Directionally speaking, for 2018, what are you thinking about potential for growth in each of your segments at this point? This will be the first part of the question. And second part of the question would be, thanks for the comment on the survey. To what extent has that survey result been reflected in the revised guidance? And how do you think you'll incorporate that into the guide that you'll give in February?

Well, that's kind of a 2-part question. Run the first one by and then I'll talk about the survey.

Sure. The first part of the question was really just kind of as you think about directionally for 2018 for each of your segments, are you thinking that they could each be up, down, flat? How are you thinking about that?

Well, at the risk of being optimistic, I think that the segments will be up significantly, a, because civil will drive continued growth, and when we get contracts in civil, we drag Specialty along with us. And the building operation right now has a number of opportunities that I believe will close between now and January. So I believe that between January and February, we'll be able to do an in-depth analysis that will better project what we believe will be growth in 2018, and not growth and then delayed and deferred. We will come to you in '18 with what we think we will do. And then as far as getting to the survey, it was very unenlightening whether I agreed or didn't. The most important was the perception of the community. One of the things that I dealt most with was the thought that I was not accessible and available, which couldn't be further from the truth and I am going to aggressively meet and seek out all our largest shareholders and interested parties and create access, not only individually, but collectively through Investor Days, continued conferences, and you all will get a shot to talk to me and take a shot at me but you'll get the facts of Tutor Perini as best I can. One of the other things I got out of the survey, we have to do a better job of being more conservative in our projections. So we don't find ourself in a position of doing very well profit-wise compared to our peers, all of which are private, but not meet our own goals so The Street is disappointed. The simplest way to do that is just to become more conservative. And then we're in a position if what we hope takes place is an uptick as opposed to literally having to run a perfect year to meet your targets. So I think I learned a lot out of that survey. I intend to address it all, and hopefully, it will be for the better.

Our next question comes from the line of Sean Eastman of KeyBanc Capital Markets.

First one from me is just I'm looking at civil backlog, it's up 54% year-over-year. We've got more work stacking up into '18 now with some of these pushouts. I'm just wondering, at what point are you guys at full capacity in terms of what you can accomplish in fiscal '18? How should we be thinking about that?

Well, let me say we turned in a prize of over $1.5 billion for the Newark Terminal. We think we'll be very competitive and hope we get it. We'll know in 2 weeks. We are in at $2 billion for the Long Island Rail Road. We hope to God we get it. We think we're very competitive. We'll learn about that in 2 weeks. If the moon and stars aligned and we got both of them, we are going after or bidding Section 3 of the Purple Line. As you may all remember, we were $1.5 billion low on Section 2, and we think we have an excellent job. We could take all 3 of those with our existing people without adding anyone. The question will be -- and of course, that would be, if we were blessed to get all 3 -- would be over $5 billion added to the backlog. Once we get beyond that, as large as our organization is, I have to really start asking more questions about where the people are going to come from. So if I had to say there's additional backlog potentially -- but remember, if we add $5 billion over the next 6 months, we run off $2 billion. So I think we have the capacity to substantially increase our civil backlog. But at some point -- and it really ties to the numbers of jobs. If you told me I added $5 billion in 20 jobs of $250 million each, I'd tell you I can't do it. But if I had $5 billion in 3 jobs, we have the management to manage it. So I really am very optimistic in our ability to take on significantly more, but beyond the 3 very large jobs we've either bid or about to bid, if we were blessed and the impossible happened and we got all 3, we'd have to seriously look at what our limits might be from then on. Could we take on one more big job? Maybe, maybe not.

Okay. So it sounds like you still have quite a bit of capacity left. I'm sure you get this question all the time, but I just have to get an update. With all this work coming through, we've got, obviously, a lot of storm recovery activity going on. I'm wondering at what point does availability of labor overall start to become a problem and start to govern growth and margins for TPC? And I think it'd be quite helpful if you could maybe compare back to a previous up cycle you've experienced in your career in terms of how you see this playing out?

Sure. I've been doing this now for over 50 years, and probably on a very large scale for the last 40. With all the up and down cycles of the past, we've never been constrained by labor or management. However, having said that, as we go forward, this is an unprecedented level of civil activity even as we speak without the benefit of the federal funds. So I can't tell you from experience because we've never been labor constrained. I have met with the international president of the carpenters. I have met with the operating engineers, our 2 key crafts, and they assure me their training program and hiring processes are ongoing as they ramp up to meet what they feel they have to provide union contractors like ourselves. We do a certain amount of nonunion work in the South but 90% of our revenue is union driven and union supported. So the only thing we can continue to do is talk to our union leaders, be satisfied they'll be able to provide the manpower. And when a time comes if they can't, we simply will stop bidding because we can't build it with management.

Our next question comes from the line of Brent Thielman of D.A. Davidson.

On the high-speed rail, Ron, I wanted to confirm what I think I heard earlier. Once the owner gets the right of way resolved, there aren't any other right of way issues to come, you're cleared for the rest of the project?

No, there isn't. In fact, this owner has been doing a very good job of working with us. These right of ways are tied up in litigation and drama and politics. I'm really not faulting them other than we're both a victim of their inability to get right of way. However, these are all compensable events to us, and they have been decent, stepped up and we've already settled one major delay and we're in the process of resolving another. So I think, as I said, that it should be behind us, majority of it by December, the balance by February. So we should have a clear run ahead of us starting next year, for the first time since we set foot on the job.

That's great. And then as these civil projects ramp back up, should we expect to see the margins get back to that 10%-plus pretty quickly? There isn't anything else holding them back?

Absolutely. I don't think that's a question. I mean, we've been -- we've always felt 9% to 10% was the appropriate after civil G&A we should make. And my goodness, if we're going to increase our margin substantially, it should go up. The only thing that could affect that would be our own errors. And so far, we haven't made many in the civil sector.

And keep in mind, for the year, we're over 10%. We're just a nose under it for the quarter, but the other quarters, we're above 10% and within that 10% to 12% range that we've been...

And that really doesn't reflect the increased margins I'm talking about. Most of this is work awarded 2 and 3 years ago.

Got it. And then Ron, you brought up the Fed a few times in the monologue. I guess I got to ask, I know that the civil pipeline is obviously really healthy right now without any help there. But any sense if there's still some hang-up on pushing forward some of these larger civil jobs just waiting for kind of policy decisions from Washington?

Well, I've said it before and I'll say it again: There is an enormous amount of work funded and on the street that we're currently trying to deal with. And when I say trying, it's overwhelming in the amount of man-hours we're putting into these estimates. It's encompassing all that we've got. So whether it's engineering, estimating or construction, there's an enormous amount of work ahead of us before we get to the federal government. The only light I can shed on it, if it's one thing, our bizarre government can agree with, both parties, is they desperately need to spend a great deal on infrastructure. What I really can't tell you, as I'm sure you're struggling with, is it going to be 2018, 2019 or 2020? It's going to happen. It's just the question of when do they get off their butts and make their promises happen in the one area that both parties agree.

Okay. Maybe one more, Ron. The Specialty margins came back nicely this quarter. Are you feeling a lot better about your ability to sustain those levels? It looks like you worked through most of those issues.

Absolutely. I think we took a series of major write-downs in the Specialty group. We've increased margins, we've made the necessary changes. It was traumatic and difficult, but I believe we're in a position, as reflected this quarter, the next quarter. I think our Specialty group will continue to do very well and get the kind of margins they should. One of the changes we made, we're doing more and more work with Tutor Perini. As we grow our Civil Group, they grow with us. For example, on the Purple Line Section 2, Fisk received $154 million contract from us as an exclusive bidder, we took no other bids. Becho received a $30 million pile contract for all the drilled piles. Desert Mechanical got a $29 million plumbing and heating contract. So as we continue to grow our civil end, these subcontractors will reap the benefits, and so will we in that we get their support in capacity, pricing and competitiveness. So it's really a dynamic we're just beginning to finally enjoy the benefit of. And very frankly, when they work for us, their profits are much more consistent. We're their general contractor protecting them in all aspects. We are reducing the amount of work they do for third-party owners and general contractors and they're still able to maintain their revenues with -- if we used to be 30% of their revenue, and we're now 70%, I'm not saying they won't work for others, but we're diminishing that aspect.

Our next question comes from the line of Sameer Rathod of Macquarie Group.

My question is on cash flow. I appreciate the discussion earlier. But conceptually, why isn't TPC monetizing more of the contract capital if the backlog was flat quarter-on-quarter and projects are being completed? I think historically, TPC has said they -- you guys are investing in the backlog. But if backlog is flat, why isn't that contract capital more cash accretive?

Sameer, this is Gary. There are a couple of things that are really impacting it, but I would say the primary impact is the unbilled cost issue that we've talked about. We're executing the projects well. We're not -- we don't have surprises. We were collecting when we're able to build in a timely manner. And so it's just a matter of being able to get the negotiated change orders to -- get them approved so that we can bill. And that's really the hurdle that we've had over the last x number of years and that's what we continue to focus on. And as I mentioned earlier, we're starting to make progress. It's hard to see it. It's masked due to the accumulation of the cost until the issues are settled. But we're making good progress and we hope to see -- one of these quarters soon, we'd like to see that dam break and you see a lot of progress. But that's really what the major issues is. And then

I said there are 2 issues. There's the timing of receivable, collecting receivables, but there's no issue on the collection, it's just a matter of when we bill it and then waiting the contractual time to collect on those receivables.

This concludes today's question-and-answer session. I would now like to turn the conference back over to management for closing remarks.

Thank you, everyone, for being with us. We look forward to the next one.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.