Q3 2024 Tutor Perini Corp Earnings Call
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Matt: Good day, ladies and gentlemen, and welcome to the Tudor Perennial Corporation 3rd Quarter 2024 Earnings Conference Call. My name is Matt and I'll be your coordinator for today. All participants are currently in a listen-only mode. Following management's prepared remarks, we'll be opening the call for our question and answer session.
Matt: As a reminder, this conference call is being recorded for replay purposes.
Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker Change: I now turn the conference over to your host, Mr. Rory Casado, Vice President of Investor Relations. Thank you.
Speaker Change: Gary Smalley, President, and Ryan Soroka, Senior Vice President and CFO.
Speaker Change: Before we discuss our results, I will remind everyone that during this call, we will be making forward-looking statements, which are based on management's current assessment of existing trends and information. There is an inherent risk that our actual results could differ materially.
Speaker Change: You can find our disclosures about risk factors that could potentially contribute to such differences in our Form 10-K, which we filed on February 28, 2024, and in our Form 10-Q that we are filing today.
Speaker Change: The company assumes no obligation to update forward-looking statements, whether due to new information, future events, or otherwise, other than as required by law. Thank you, and with that, I will turn the call over to Ronald Tutor. Thank you, Jorge. Good day, and thank you all for joining us.
Speaker Change: As you can tell from our earnings release today, we delivered mixed results for the third quarter of 2024.
Speaker Change: highlighted by amazing backlog growth in year-to-date operating cash flow but negatively impacted by certain charges from recent dispute resolutions and litigation.
Speaker Change: Cash flow for the fourth quarter is expected to be outstanding, should allow us easily to break last year's record, and enable us to prepay certain debt.
Speaker Change: Our backlog soared to $14 billion, up 35% compared to the prior quarter, setting a new record since the 2008 merger of Tutor, Saliba, and Perini, and substantially above our previous record of $11.6 billion.
Speaker Change: The strong backlog growth was driven by the awards of several new projects during the quarter, namely the $1.66 billion
Speaker Change: City Center Guideway and Stations Project in Honolulu, the $1.1 billion Kensico Eastview Connection Tunnel in New York for Frontier Kemper, and a major health care campus project in California worth over $1 billion for Rudolph and Slatton.
Speaker Change: Our new awards continue to be strong in the fourth quarter, as we recently won and announced the $331 million APRA Harbor Waterfront Repairs Project in Guam, which will be managed by our subsidiary, Black Construction.
Speaker Change: The contract includes nine options for additional anticipated scope.
Speaker Change: items that if exercised could add another 230 million of backlog. We are confident they will all be exercised.
Speaker Change: In addition, this morning we announced that our joint venture with ONG Industries, in which we are the managing partner, has been identified as the apparent selected proposer for the multi-billion dollar Manhattan Jail in New York.
Speaker Change: and we are entering into contract discussions with the expectation that we be awarded that design-build contract after those discussions have concluded in the short term.
Speaker Change: By the end of this year, the company's total backlog could reflect additional significant growth.
Speaker Change: as we are also expecting owners decisions and a potential awards this quarter for other large projects in suiting the 1.5 billion dollar air train that we recently bid.
Speaker Change: and the $550 million Raritan River bridge replacement that is bidding tomorrow.
Speaker Change: Other projects we are bidding in the months of November.
Speaker Change: December and January are the 750 million dollar Manhattan Tunnel in New York on November 22nd and the 2.2 billion dollar Midtown bus terminal replacement in New York in February of 25.
Speaker Change: In addition, Rudolph and Slutton has various current health care and education projects underway that are in the pre-construction phase with only a modest amount of our current backlog represented by those projects.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Over the next two years, these projects are expected to advance into the construction phase and anticipate that we will book significant additional backlog.
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Speaker Change: As we've discussed in the past,
Speaker Change: Most of our newer existing and prospective civil projects are higher margin, longer duration projects with improved contractual terms compared to other projects booked several years ago.
Speaker Change: This is a result of renegotiations of traditional terms into terms far more favorable and reasonable for the general contractor, so our contracts are no longer one-sided but equally fair.
Speaker Change: This provides us with excellent visibility and confidence in our outlook for strong revenue growth and continued earnings performance in the years ahead.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Assuming we are successful in continuing to increase our backlog over the next few months, depending on the projects and in what part of the country, we may decide to take a short-term hiatus from bidding for some of the larger pursuits depending on the markets.
Speaker Change: That period of time might be up to a year, but at that point, with a record backlog,
Speaker Change: at such a level as to sustain us for the next five years, we will probably stop bidding or at least reduce that commitment.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: However, as we look ahead over the next
Speaker Change: year to two. Some of the more prospects include and are of interest the 3.8 billion dollar Southeast Gateway line, a transit project in Southern California bidding within the next 18 months.
Speaker Change: that would be a perfect tie-in to the completion of the two billion and a half dollar Purple Line projects we're currently in a completion phase with L.A. Metro.
Speaker Change: So that might tie in dramatically to work we're completing. Secondarily, the $1.8 billion South Jersey Light Rail in New Jersey, which will be proposed the end of next year or mid-year 2026.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Those are the only projects of substance we are reviewing and keeping a finger on over the next year to 18 months.
Speaker Change: As we announced a few weeks ago, we made substantial progress during the third quarter of 2024 in resolving various matters, including seven of our largest outstanding disputed balances, with four of the seven having favorable outcomes for Tutor Perini.
Speaker Change: A couple of these resolved, two to be exact resulted in very, well maybe three, very unexpected and inexplicable legal decisions which we strongly disagree with and are appealing.
Speaker Change: Overall, the recent resolutions negatively impacted our third quarter income by approximately $152 million and EPS by $2.13.
Speaker Change: In appeal, we hope to reverse much of this negative impact, but that will be determined over time.
Speaker Change: A positive is that we expect to collect over the next 30 to 60 days $180 million associated with these resolved, most of which we will collect in the fourth quarter.
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Speaker Change: We anticipate that we will continue making substantial progress in resolving the remainder of our disputed matters.
Speaker Change: compared to the dozens of such disputed
Speaker Change: matters that we had a few years ago that backed up during COVID.
Speaker Change: Because of the substantial progress we have made over the last two to three years, we are now essentially down to a dozen or so matters of any significance.
Speaker Change: We expect to resolve these remaining legacy disputes and continue to collect substantial amounts of cash over the next 12 to 18 months.
Speaker Change: which combined with cash generated from normal operations
Speaker Change: Significant cash flow in 25 and 26.
Speaker Change: As we mentioned in our recent announcement, we expect...
Speaker Change: Tremendous fourth quarter operating cash flow in the range of a minimum of $250 million up to $400 million, much higher than we were anticipating on our last call.
Speaker Change: As a result, our full year 2024 operating cash flow is now expected to be $425 to $575 million.
Speaker Change: with even the low end of this range far exceeding our prior annual operating cash flow record of $308 million last year.
Speaker Change: This will represent the third consecutive year that the company has generated record operating cash flow.
Speaker Change: Note that any shortfall in achieving the estimated 575 million of operating cash at the upper end of the 2024 full-year range is expected to be collected in the first quarter of 2025.
Speaker Change: based on the adverse charges to earnings in the third quarter for the resolution of disputes that I mentioned earlier.
Speaker Change: We have withdrawn our EPS guidance for 2024. However, still expect to initiate 2025 guidance in February when we report our full year results.
Speaker Change: We very much look forward to a significant return to profitability in 2025.
Speaker Change: and our confidence has increased around our expectations.
Speaker Change: for significant increases in revenue and earnings.
Speaker Change: growth in 26 and beyond as these projects grow into fruition and operation.
Gary Smalley: Thank you. And with that, I turn the call over to Gary.
Gary Smalley: Thanks, Ron.
Gary Smalley: We see truly exciting times ahead with a future brighter than ever before, as we continue to put a significant number of disputed legacy items behind us and utilize another record year of cash generation to further deleverage our balance sheet, which has been a key capital allocation objective.
Gary Smalley: We are pleased that the collection of large amounts of cash that we have foreseen and talked about for some time now is finally upon us.
Gary Smalley: As we announced in October,
Gary Smalley: From these cash collections, we plan to prepay $100 million to $150 million of our term loan B debt in the fourth quarter, with further prepayments of $50 million to $75 million expected in the first quarter of 2025.
Gary Smalley: So in total, you can expect our term loan to be paid down between $150 million and $225 million in the next few months.
Speaker Change: Of this total expected payoff of the term loan, I should note that we have already paid down $50 million of the balance since our announcement in October, so we are well on track to do what we said we would do.
Speaker Change: Of course, the reduced debt level should result in a significant decrease in interest expense.
Speaker Change: With interest rates unpredictable but expected to come down more,
Speaker Change: It is hard to predict the precise impact.
Speaker Change: But using current rates, we estimate that we will have annual interest expense savings beginning in 2025 of between $15 million and $22 million, which translates to additional EPS of between 21 cents and 32 cents.
Speaker Change: With unprecedented cash flow and a record and growing backlog built on new awards with better margins and contractual terms, this is the dawn of a new era for Trudeau Perennial.
Speaker Change: The expected abundance of cash should give us the ability to continue to significantly pay down our debt, and our very strong backlog provides excellent visibility as to what we expect will be a profitable multi-year revenue stream.
Speaker Change: Thank you and with that I will turn the call over to Ryan to review the financial results.
Speaker Change: Thank you, Gary, and good afternoon, everyone.
Ryan Soroka: As Ron and Gary mentioned, our operating cash is certainly one of the major highlights of our year-to-date results and those anticipated for the full year of 2024. We expect strong cash flows in 2025 and 2026 that will continue to be enhanced by the anticipated resolutions of disputes.
Ryan Soroka: As Gary mentioned, we've already paid down $50 million of our Term Loan B in the fourth quarter and plan to further deleverage our balance sheet significantly in the near term by using any excess cash for debt reduction. We're delivering on our promise to improve our balance sheet and capital allocation.
Ryan Soroka: Now, let's discuss our P&L results.
Ryan Soroka: Revenue for the third quarter of 2024 was $1.1 billion, up slightly compared to the same quarter last year.
Ryan Soroka: The growth was primarily driven by increased activities on certain building and civil segment projects, including various health care and educational facility projects in California, and the Brooklyn Jail Project in New York, as well as civil segment projects in California, the Northern Mariana Islands, and British Columbia.
Ryan Soroka: Civil segment revenue for the third quarter of 2024 was $546 million, up 5% compared to the third quarter last year.
Ryan Soroka: Through the first nine months of 2024, civil segment revenue was up 10% compared to the same period in 2023.
Ryan Soroka: Building segment revenue for the third quarter of 2024 was $436 million, up 19% year-over-year, mostly driven by the increased activities I mentioned on health care and educational facility projects in California, as well as on the Brooklyn Jail Project in New York.
Ryan Soroka: Specialty contractor segment revenue was 101 million, down substantially compared to the third quarter of last year, primarily due to reduced activities on various electrical and mechanical projects in New York and Florida, all of which are complete or nearing completion.
Speaker Change: Thank you for watching!
Speaker Change: As Ron mentioned, and the company previously announced in October, we recorded net charges that now total approximately $152 million in the third quarter of 2024, related to the progress we made in various decisions for which we expect to collect $180 million of cash, mostly by the end of this year.
Speaker Change: Consequently, we reported a loss from construction operations of $107 million for the third quarter of 2024, compared to a loss of $13 million for the same quarter last year.
Speaker Change: Like last quarter, third quarter earnings were negatively impacted by $13 million of higher unrealized stock-based compensation expense compared to the same quarter last year.
Speaker Change: that was due to the impact of a significant increase in our stock price in 2024 with the recognition of certain long-term incentive compensation awards.
Speaker Change: As a reminder of what we said last quarter, over the past few years, we've had to issue some incentive compensation awards as cash-settled performance share units, or CPSUs, due to the combination of a somewhat depleted share pool and a very low stock price at the time of those awards.
Speaker Change: because a low stock price causes dollar-based equity awards to eat into the share pool at a faster clip.
Speaker Change: The use of CPSUs was really a short-term solution to deal with a depleted chairpool and a low stock price.
Speaker Change: Since these awards will be paid out in cash, they are accounted for as liability awards and therefore require quarterly remeasurement to fair value, with any changes in fair value reflected in earnings.
Speaker Change: We expect that future equity awards to management will be settled in stock, not cash, as done previously. This will eventually eliminate the earnings volatility we have seen this year due to the large increase in share-based compensation expense compared to last year.
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Speaker Change: The civil, building, and specialty contractor segments reported a loss from construction operations for the third quarter of 2024 of $13 million, $4 million, and $57 million respectively.
Speaker Change: The civil segment's third quarter operating income was negatively impacted, in particular, by a previously announced unfavorable adjustment of $101.6 million.
Speaker Change: related to an unexpected adverse arbitration decision on a legacy dispute related to a bridge project in California, which the company will appeal.
Speaker Change: The building segment, third quarter operating income, was adversely affected by an unfavorable adjustment of $20 million for a settlement on a legacy dispute related to a government facility project in Florida, mostly offset by the increased activities I mentioned earlier.
Speaker Change: The specialty contractor segment's third quarter operating income was negatively impacted by a reduced volume, as previously mentioned, and several immaterial unfavorable adjustments that totaled $43.4 million.
Speaker Change: The financial impacts of the recent...
Speaker Change: dispute resolutions unfortunately masked otherwise solid operational performance. In other words, had it not been for the significant charges we took in the third quarter, both our revenue and operating income would have been significantly better than the reported results and consistent with what we had budgeted.
Speaker Change: Corporate G&A expense was $33 million in the third quarter of 2024 compared to $21 million for the same quarter last year. The increase was primarily due to the increase in long-term incentive compensation expense that I just mentioned.
Speaker Change: Other income was $4 million compared to $3 million for the third quarter last year.
Speaker Change: Interest expense was $21 million this quarter compared to $20 million for the same quarter last year.
Speaker Change: I think it's important to reiterate that our planned debt reductions in the fourth quarter of this year and first quarter of next year should result at current interest rates and a significant decrease in interest expense.
Speaker Change: of between $15 million and $22 million annually translating to additional EPS of between $0.21 and $0.32.
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Speaker Change: Income tax benefit was $34 million in the third quarter of 2024 with a corresponding effective tax rate of 27.5% compared to an income tax benefit of $4 million with an effective tax rate of 13.7% for the same quarter last year.
Speaker Change: Remember that the net operating losses we generated recently are helping to reduce our cash outlays for income taxes this year and will continue to help in future years.
Speaker Change: Net loss attributable to Tutor Perennial for the third quarter of 2024 was $101,000,000 or a loss of $1.92 per share, compared to a net loss of $37,000,000 or a loss of $0.71 per share in the third quarter of 2023.
Speaker Change: As Ron indicated earlier, the recent resolutions negatively impacted our 3rd quarter UPS by $2.13.
Speaker Change: Our third quarter EPS was also negatively impacted by $0.23 due to elevated share-based compensation expense I mentioned earlier. Now let me discuss the balance sheet.
Speaker Change: Our total debt as of September 30, 2024 was $681 million, down $218 million, or 24% compared to $900 million as of December 31, 2023.
Speaker Change: mostly because of the 91 million dollar payment we made earlier this year on the term loan B and the refinancing we completed in the spring in which we replaced 500 million of 2017 senior notes with 400 million of new 2024 senior notes.
Speaker Change: As of September 30, 2024, we are in compliance with the covenants under our credit agreement and expect to continue to be in compliance in the future. I'd like to point out that for the first time since 2011, we are in a net BIE or net Billings in Excess position, whereby our BIE exceeds our CIE or Costs in Excess.
Speaker Change: As a reminder, BIE is essentially deferred revenue and represents billings that we have issued and payments that we have received in advance of incurring anticipated costs on our projects, whereas CIE represents costs that we have incurred on projects which we are not yet contractually able to bill to our customers.
Speaker Change: So being in a net BIE position is a great thing from our perspective as it means that we are operating in a net cash positive position across our portfolio of projects using our customers money instead of our own to fund the projects.
Speaker Change: Thank you and with that I'll turn the call back over to Ron.
Ron: Thanks, Ryan. To recap the highlights, we delivered 35% backlog growth.
Ron: in the third quarter compared.
Ron: to 2024 with further pending awards that we hope will increase that backlog between now and the end of the year.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: We have also generated strong operating cash flow through the first nine months of the year with potential for a record shattering
Speaker Change: operating cash flow for the full quarter and the full year 2024.
Speaker Change: As previously stated, we've already paid down the debt $50 million and will expect to pay our term loan down significantly by year-end, and I believe paid off by the end of the first quarter.
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Speaker Change: We have made excellent progress in resolving many of our legacy disputes.
Speaker Change: with only about a dozen or so matters of significance left to be resolved, which I would expect would occur over the next 12 to 18 months.
Speaker Change: And by the end of that period, only a handful of open issues remaining.
Speaker Change: We anticipate that our operating cash flow will continue to grow and be even stronger in 2025 and 2026.
Speaker Change: with revenue growth and a significant return to profitability in 2025 with even higher revenue and earnings in 2026 as these newer projects progress from design to the construction phase.
Speaker Change: Thank you and with that I turn the call over to the operator for your questions.
Speaker Change: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys.
Speaker Change: One moment, please, while we pull up for questions.
Speaker Change: Thank you.
Speaker Change: First question here is from Stephen Fisher from UBS. Please go ahead.
Stephen Fisher: Thanks, good afternoon and congratulations on all the project awards and cash flow continued improvement there.
Stephen Fisher: I wanted to ask now, you know, sort of the next step on all these awards is really kind of getting them into burning revenues. Can you talk about what the shape of the curve looks like there on all these projects? When we really start to see that substantively coming through your revenues, is it...
Speaker Change: It's sort of like second half of 25, is it 26, is it first half of 25? How do we think about that curve and how it kind of works towards the peak? The way these work is we initially have significant buildings on a ward.
Speaker Change: because we post bonds and insurance and then there is a design phase so before you see, for example, if it's a two billion dollar job over five years before you see 400 million a year of cost it takes
Speaker Change: between six and nine months.
Speaker Change: to get design completed up to where it gets ahead of construction. So all of these awards you're seeing currently...
Speaker Change: You'll see major construction beginning somewhere between June and September of next year. So although there'll be some significant increase in value in the second half of the year, where it will hit remarkably will be in 26.
Speaker Change: N-27, N-28, because these are all five-year jobs with steady income streams and significant profitability.
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Speaker Change: That's very helpful. And then just thinking about what happens with the specialty business earnings from here, how much does all these wins sort of get involved, get your specialty group involved? And how do we think about that inflecting back to profitability and the ramp of the profit curve there?
Speaker Change: Well, as you can see, the specialty group in the quarter.
Speaker Change: was down to a relatively low revenue. And what we've done is shrunk...
Speaker Change: finished off all of the bad work, and conversely, almost every one of these jobs has a large component, when I say large, relative to the job size, components set aside for our various specialty contractors, be it East Coast or West Coast.
Speaker Change: That revenue will ramp up in specialty, and as we have, they have significant margins and should do significantly better going forward in the marketplace we're in today as opposed to where we were three, four, and five years ago.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Okay, I guess a very timely question here. Curious if if you guys have any thoughts on the election outcome and what it might mean for the construction industry.
Speaker Change: For more information, visit www.FEMA.gov
Speaker Change: Well, as Ron Tudor, I'm elated that Trump won and wiped Kamala Harris out. I know that's not, I'm not supposed to say things like that, but I'm delighted. But I don't know that it'll have an impact one way or another on us.
Speaker Change: Most of these are federally funded, approved, and moving forward, or is in New York City and state funded. So I don't know that it has a plus or a minus.
Speaker Change: I've always considered Trump good for business and since his background is construction I can't imagine him being anything but positive.
Speaker Change: Okay, terrific. I will leave it there. Thanks a lot.
Speaker Change: The next question is from Adam Dalheimer from Thompson-Davidson Company. Please go ahead.
Adam Dalheimer: Hey, good afternoon, guys.
Speaker Change: Thank you. Bye.
Speaker Change: The jobs that you guys are winning today, can you remind us how the contracts differ at all from legacy projects? And Ron, you mentioned in your prepared remarks that you see the contracts as equally fair. Just hoping you can expand on that a little bit.
Speaker Change: Well, in the past, in my entire career over the past, let's call it 60 years.
Speaker Change: All contracts were written by owners completely one-sided, onerous, and dictatorial.
Speaker Change: And as long as they had five to seven bidders on every job, regardless of comment, when I would protest, the answer would be, well, then don't bid if you don't like our terms.
Speaker Change: So over the years we came to accept onerous terms, negative terms, no mobilization, excessive retentions and so on as a part of doing business.
Speaker Change: Well, as you can see, over those years, the 7 and 8 bidders have shrunk to 1 and 2. And the handful of us that are left that are quoting these jobs, we now sit down.
Speaker Change: and talk terms in everything that's unreasonable, including excessive retention.
Speaker Change: any excessive liquidated damages, schedules that are too short. We basically take the position.
Speaker Change: that you either negotiate with us something reasonable and acceptable to us or we don't bid. And when you have only two prospective bidders, if one of it says he's not going to bid, now you're down to one, you can't bid it.
Speaker Change: So we've been able to negotiate upfront mobilization payments that heretofore were difficult.
Speaker Change: reduced retention, better contract terms in terms of cure periods, and the inability for them to assess consequential damage. Literally every onerous term has been eliminated, and I'll give you a classic example.
Speaker Change: when I first got the original contract terms from the New York City Department of Corrections on the New York City jails.
Speaker Change: I read them with our legal department, sent them back a letter and said your terms are so onerous, although we appreciate the size of the projects.
Speaker Change: and your needs, by looking at your contract terms, we've decided they're entirely two owners. We will not be a bidder. Thank you. And that was the end of it.
Speaker Change: Three months go by, get a letter back and says basically you're right, they're entirely too onerous, we want you to bid, we'd like to discuss and meet what you expect.
Speaker Change: We met, we got every single term of reason, and it isn't that we were unreasonable. It's fair terms that are equally reasonable with upfront cash payments on the theory. We bill these projects with your money, not our money.
Speaker Change: So, that's across the board in every job we now bid.
Speaker Change: Better terms, better schedules, or the response is simple. We're not bidding, and with us being one of the few remaining risk takers that will bid these big jobs, it typically generates the changes we need.
Speaker Change: Okay, great color, and then...
Speaker Change: As investors, how should we think about, as you execute on these jobs at these terms,
Speaker Change: What kind of margin ranges people should expect as you think out the 25 and 26 and 27?
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: I don't understand, what do you mean by 25, 26? What kind of margin ranges do you think you can do in the segments as these jobs turn into profit?
Speaker Change: Thank you for watching!
Speaker Change: I know what the ranges are. The interesting aspect is, is this something we normally don't discuss in a public forum are bid profits. Let me gauge it with this. You've seen the margins we've produced in civil, building, and specialty in the past.
Speaker Change: Significantly, a particular emphasis on both building and specialty.
Speaker Change: because over seven billion or excuse me almost six and a half billion of the backlog
Speaker Change: is going to the building end in New York City with significantly increased margins.
Speaker Change: Far more than the building group normally gets.
Speaker Change: and all of our civil group in the new backlog, I would say starting in 2000, the end of 2000, 23 and certainly 24 significantly increased with the margins you're used to in past civil where they made 11 to 12% on revenue.
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Speaker Change: Does that help? Okay. That's perfect. And last one, I know we're focused on the long term, but we have to stick something in the model for Q4. I'm just curious if you expect that to be a profitable quarter or how we should model that.
Speaker Change: The only thing I can say is I believe you can interpret in the numbers we presented that Q3 would have been profitable and you can probably back into the earnings it would have been were it not particularly for Shast and all of the write-offs.
Speaker Change: I don't see anything major in the fourth quarter, but I've got...
Speaker Change: four or five virtual disputes in various stages of negotiation and potential settlement that I think will get settled by mid-December. I really can't tell until then.
Speaker Change: It's not going to be anything resembling this third quarter, but I'm reluctant to say we're going to make the margin in the fourth quarter, because as you can see, I'm pushing to be rid of all these legacy disputes, collecting a lot of cash and moving into this tremendous
Speaker Change: backlogged with reduced debt and significant cash balances so we can earn what we gotta earn.
Speaker Change: Okay, great color. I think I danced around it, but it's the best. No, no, no. Very clear. Thank you. We've got profit forecast in the fourth quarter.
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Speaker Change: Okay.
Speaker Change: Thanks again.
Speaker Change: Our next question is from Alex Reggio from B-Rally Securities. Please go ahead.
Alex Reggio: Thank you and a very nice quarter. Congratulations on the wins there. A couple quick questions. Could you help us could you help us to bracket sort of the value potential in disputes that are remaining?
Speaker Change: I'd say between now and the end of next year.
Speaker Change: between 450 and 500 million
Speaker Change: And then, very helpful. And then,
Speaker Change: I have a two-part question. Can you talk about the
Speaker Change: CapEx needs and working capital needs as you start to step into this really big backlog build. And then when you think about your capital structure, what's the optimal leverage on the business and
Speaker Change: You know, what do you plan on doing with your cash after you get to that point?
Speaker Change: Well, let me try to deal with it. First, the way we bid these jobs.
Speaker Change: We bid them on the basis that the owner provides all of the cash necessary in the mobilization up front.
Speaker Change: If our backlog goes to $20 billion, our existing working capital doesn't finance it, the owner payments do. And that we've insisted on and been 100% successful. We don't finance any of the work of their payments to us finance their own work.
Speaker Change: secondarily the capital expenditures
Speaker Change: are consistent with the past.
Speaker Change: We own most of the equipment necessary for this work.
Speaker Change: and that which we don't, the jobs pay for as they're four to five year rentals and the cost is baked into the job. So you're not going to see any significant capex beyond what it's been in the past between 25 and 30 million a year.
Speaker Change: And then your optimal capital structure.
Speaker Change: Pardon me?
Speaker Change: What is the optimal capital structure of this business? In other words, what kind of debt-to-cap ratio do you want to run at? When you get there, what are you going to do with the excess cash?
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Well, my optimal basis would be to pay off all our debt with the exception of that abysmal bond issue where we were unfortunate enough to finance it at 11 and 7 eighths.
Speaker Change: And as we continue to generate these significant levels of cash, that's a decision that we and the board are going to have to make over the next 12 months, because I think I've made it clear we're going to pay off all debt and have a revolver as needed.
Speaker Change: But we expect the needs of that revolver to be minimal, and it's there as insurance. And as we continue to accumulate cash, we're going to have to make a decision what we do with it.
Speaker Change: For more information, visit www.FEMA.gov
Speaker Change: Very helpful. Great quarter. Thanks.
Speaker Change: Thanks.
Speaker Change: Our next question here is from Michael Dudas from Vertical Research Partners. Please go ahead.
Michael Dudas: Good afternoon, gentlemen.
Michael Dudas: Ron, you mentioned in your program remarks about taking the hiatus from bidding, so a little more thoughts on that.
Speaker Change: Is there like your win rates probably have been getting much better and you have a lot of opportunities over the next few months which you've highlighted.
Michael Dudas: Is that like kind of close to like the capacity like you're comfortable with of those type of large projects on board given your risk mitigation your profile?
Michael Dudas: and that is the market you know I assume that others are others looking the same way that there's just everybody's getting very busy and that capacity getting tight so maybe some owners might be a little bit nervous on that front.
Speaker Change: Well, I can't really speak for our peers, because there's very few of them that compete with us.
Michael Dudas: But all of the major jobs, 500 million and up, which is what we call a major project, essentially come across my desk for approval to bid and then review of estimates.
Michael Dudas: And we try to look at the entirety of the company, where it's located, if it's East Coast Civil, it's a matter of their capacity in-house, do they have the people, do they have the resources.
Michael Dudas: If they do, we don't hesitate to support them. If we don't, we turn off the tap and say you've got an adequate backlog with significant cash flow and major earnings. Go out and deliver it.
Michael Dudas: will talk. Meanwhile, all of the operations have day-to-day bids to sustain themselves. Our civil group in the Midwest, Lunda, is a consistent profit earner.
Michael Dudas: They bid anything and everything they like up to that $500 million without a lot of needed approval from me because of their record. So we keep a tab on them, and all we want to be sure is you have the resources and people.
Michael Dudas: to build the work and be certain there are no owner's contract terms.
Michael Dudas: So, as long as that continues, when I say we'll shut off the work, it's in the billion-plus category. The day-to-day hundred, $200 million jobs will continue across the board. Those are typically 18-month to three-year jobs that the subsidiaries will determine on their own.
Gary Smalley: And Mike, this is Gary. Just to clarify, we're not at that point yet, right? We haven't shut off the
Speaker Change: We continue to pursue the work, but it's just the potential pause if we continue with the win rate, the improved win rate that you mentioned, and then some of the business units, implied with what Ron was saying, some of the business units won't be impacted at all.
Gary Smalley: not just because of the size of the work but just because they're not at anywhere close to that capacity.
Speaker Change: That's very helpful. All good issues to have. Thanks, gentlemen.
Speaker Change: Thank you.
Speaker Change: Our next question is a follow-up question from Adam Thelheimer from Thompson-Davison Company. Please go ahead.
Adam Thelheimer: Oh, thanks guys. Hey, Ryan, can you expand, you said that share based compensation is going to change a little bit, I think to the point where it won't be revalued.
Speaker Change: every quarter. Is that something that happens in 2025? I didn't quite follow that.
Speaker Change: yeah it's a good question so the
Speaker Change: What we anticipate is structuring the awards to be settled in shares in the future. We still have outstanding awards that are out there today that are liability classified that we'll have to continue to remeasure, although we anticipate, like I said, the future awards will be settled in shares.
Speaker Change: So you won't see the volatility that spikes up or spikes down related to the comp expense.
Speaker Change: It doesn't go away in 25, but it starts to taper from 25 on.
Speaker Change: That's fair, yes.
Speaker Change: Okay, perfect. Thanks.
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Speaker Change: No problem.
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Speaker Change: This concludes the question and answer session. I'd like to turn it back to management for any closing comments.
Speaker Change: Thank you, everybody. Very positive meeting and look forward to more of the same.
Speaker Change: https://www.youtube.com
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.
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