Earnings Call Transcript - TPC Q4 2025

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation's Fourth Quarter 2025 Earnings Conference Call. My name is Latanya, and I will be your coordinator for today. As a reminder, this conference is being recorded for replay purposes. I will now turn the conference over to your host today, Jorge Casado, Senior Vice President of Investor Relations. Thank you. You may proceed.

Jorge Casado, Senior Vice President of Investor Relations

Hello, everyone, and thank you for joining us. With us today are Gary Smalley, CEO and President; Ron Tutor, Executive Chairman; and Ryan Soroka, Executive Vice President and CFO. 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. You can find our disclosures about risk factors that could contribute to such differences in our Form 10-K, which we are filing today. 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. In addition, during today's call, management will be referring to certain non-GAAP financial measures. You can find information and a reconciliation of these non-GAAP financial measures in the earnings release that we issued today and in the Form 10-K being filed today, both of which can be found in the Investors section of our website. Thank you. And with that, I will turn the call over to Gary Smalley.

Gary Smalley, CEO and President

Thanks, Jorge. Hello, everyone, and thank you for joining us. Tutor Perini had a tremendous year in 2025, perhaps our best year ever. Our results were highlighted by a record $5.5 billion of revenue, a return to strong profitability that produced $4.29 of adjusted earnings per share, a fourth consecutive year of record operating cash flow with $748 million of cash that shattered last year's record. This enormous cash generation was largely due to the contributions from new and ongoing projects and our record revenue is driven by double-digit backlog growth that we expect will fuel even higher revenue and earnings, increased profitability and continued strong cash flow in 2026 and beyond. A year ago on our earnings call, I shared some of my top priorities as Tutor Perini's then newly appointed CEO, which included a sustained focus on cash, the return to profitability and providing ambitious yet reasonable earnings goals, all with the goal of significantly increasing short- and long-term shareholder value. I'm pleased to report that we have delivered on each of these priorities, which together have helped us to achieve unprecedented share price performance and record returns for our shareholders. There's a lot of enthusiasm here at Tutor Perini and among investors and other business partners about the progress we have made and especially about what the future holds. So it continues to be an exciting time to be a Tutor Perini shareholder, and we want to thank those of you who are shareholders for your support. Our revenue growth accelerated progressively throughout each quarter of 2025, and our record revenue was primarily driven by contributions from various larger, higher-margin projects. As many of these projects continue to ramp up, we expect they will generate further double-digit revenue and earnings growth over the next 2 years. The Civil segment, our highest margin segment, generated more than $2.8 billion of our total revenue in 2025, the highest ever annual revenue for the segment. Consolidated operating income was up significantly in 2025, driven by our larger, higher-margin projects as well as significantly less negative impacts on earnings from legacy dispute resolutions as compared to 2024. In addition to generating record annual revenue, the Civil segment produced its highest ever annual operating income and operating margin in 2025. The Building segment's operating income for 2025 was its highest since 2011. And importantly, the Specialty Contractors segment returned to profitability in the second half of 2025 ahead of expectations. We see higher margins ahead for the Building and Specialty Contractors segments and sustainably strong margins for the Civil segment as many newer large projects continue to ramp up. We concluded 2025 with a robust backlog of $20.6 billion, up 10% year-over-year and had a solid book-to-burn ratio of 1.34x for the year. Our backlog growth was driven by $7.4 billion of new awards and contract adjustments that we booked during the year, the largest of which included the $1.87 billion Midtown bus terminal replacement Phase 1 project in New York, the $1.18 billion Manhattan Tunnel project, also in New York, the UCSF Benioff New Children's Hospital in California valued at approximately $1 billion, a $538 million health care project in California, $241 million of additional funding for the Apra Harbor Waterfront repairs project in Guam, a $182 million military defense project in Guam, the $155 million Diego Rivera Performing Art Center at City College of San Francisco, $131 million of additional funding for an electrical project in Texas and an electrical project at Cook Children's Medical Center in Texas valued at more than $100 million. Looking back a bit further, over the past 3 years, we have won 9 mega projects totaling approximately $16 billion, each valued at approximately $1 billion or more. Three of these were among our major awards of 2025 and all but one were awarded since the summer of 2024. These projects all have very healthy margins, more favorable contractual terms and longer durations than many other large projects we have booked in the past. They also provide us with excellent visibility into our future revenue and earnings over the next several years. We believe our backlog will remain strong in 2026 and beyond. We anticipate booking approximately $1 billion into backlog later this year for the finished trade scope of work for Phase 1 of the Midtown bus terminal project in New York City. And earlier this month, we received $204 million of funding for the Eagle Mountain Casino Phase 2 expansion project in California, a project that was originally awarded and announced last summer. In addition, our subsidiary, Rudolph and Sletten was recently selected for a large new multibillion-dollar health care project in California, which is currently in the preconstruction phase. We expect to book significant additional backlog as this and several other Building segment projects also currently in the preconstruction phase advance to the construction phase over the next several years. Furthermore, we continue to see numerous major bidding opportunities for our Civil and Building segments, many of which should include significant work for our electrical and mechanical business units within the Specialty Contractors segment. Our most significant bidding opportunities over the next 12 to 18 months include a program believed to be valued at approximately $12 billion for the Sepulveda Transit Corridor, the $3.8 billion Southeast Gateway Line and the $700 million Metro Gold Line Foothill extension, all 3 of which are in California, as well as the multibillion-dollar Penn Station transformation project in New York, the $3 billion Newark Liberty International Airport Terminal B project in New Jersey, very similar to the award-winning Terminal A project that we recently completed, the $1.4 billion I-535 Blatnik Bridge project in Minnesota and the $1 billion I-69 ORX Section 2 project connecting Indiana and Kentucky. There are also several large hospitality and gaming opportunities we are pursuing, mostly in the Southwest of the United States. In addition, we continue to have significant Indo-Pacific opportunities driven by the federal government's Pacific Deterrence initiative. Black Construction, our Guam-based subsidiary, has been tremendously successful winning various new projects throughout the region and continues to be well positioned to capture additional major projects over the coming years. We remain highly selective as to which opportunities we will pursue with a continued focus on bidding projects with favorable contractual terms, limited competition and higher margins. Due to the timing of our significant prospective opportunities, most of which start bidding around the middle of 2026 and continue through the first half of next year. And because of the significantly higher revenue we expect to recognize for work already in backlog, we anticipate a modest backlog reduction in the near term, followed by resumed backlog growth as we capture our share of major new projects. So expect a bit more lumpiness in our backlog as we move forward with growth still expected over the medium to longer term rather than the steady backlog increases we have seen virtually every quarter over the past 2 years. That said, growth remains a priority for us in this environment, and we believe we can scale up resources as necessary. While our civil business is expected to continue to drive most of our future growth and profitability as it typically does, a substantial proportion of our Building segment backlog is operating at significantly higher margins than what we have seen historically. For example, our 2 New York City Jail mega projects carry margins that are consistent with large complex building projects of a fixed price nature. In addition, today's large health care campus projects are more technically complex than more traditional commercial office building projects in the past and therefore, also command higher margins. Last November, our Board of Directors authorized our first-ever quarterly cash dividend of $0.06 per share as well as a share repurchase program totaling $200 million. And today, the Board declared another $0.06 quarterly dividend, which we paid on March 26. Next, let's turn to our outlook and guidance. Tutor Perini continues to benefit from favorable macroeconomic tailwinds that are driving strong sustained market demand for construction services across all segments. We believe these tailwinds will persist due to the substantial amount of funding that is in place and because our country has, for decades and until recently, inadequately funded and prioritized the types of substantial infrastructure investments being made today. Based on our assessment of the current market and business outlook, we anticipate double-digit revenue growth and strong earnings in 2026 with even higher earnings expected in 2027, by which time newer large projects should be in the construction phase. For 2026, we expect adjusted EPS in the range of $4.90 to $5.30. As we did last year, we have factored into our guidance a significant amount of contingency for unknown or unexpected outcomes and developments in 2026, including the possibility of a lower-than-anticipated success rate for future project pursuits, the potential for project delays, slower ramp-ups for our newer projects and any unexpected settlements and/or adverse legal decisions associated with the resolution of disputes. We also continue to expect strong operating cash generation in 2026 and beyond due to increased project execution activities and the anticipated resolution of remaining legacy disputes. We have continued to chisel away at our remaining legacy disputes and made excellent progress in 2025, resolving certain long-standing matters. We are already off to a strong start this year, having recently reached an agreement in principle regarding one of our larger disputes related to a long-completed project. We believe that we will finalize a settlement agreement in the coming days, which will not have a material impact on our earnings. However, the settlement is expected to result in the collection of approximately $40 million for Tutor Perini in the near term. Because of our tremendous backlog and ample bidding opportunities, the outlook for Tutor Perini remains incredibly positive even beyond 2026. Thank you. And with that, I will now turn the call over to Ryan to discuss the details of our financial results.

Ryan Soroka, Executive Vice President and CFO

Thanks, Gary. Good day, everyone. I will start by discussing our results for the year, after which I will review the fourth quarter and then provide some commentary on our balance sheet and our 2026 guidance assumptions. All comparative references will be against the same period of last year, unless otherwise stated. Operating cash flow was certainly one of the most noteworthy highlights of 2025. As Gary mentioned, we generated a new record operating cash flow of $748 million for the year, up 49% compared to the previous record of $504 million for 2024. This was our fourth straight year of record operating cash, and it was driven by strong collections on newer and ongoing projects, reflecting a significant increase in project execution and improved working capital management with less contribution from dispute resolutions in 2025 compared to previous years. We expect that we will continue to generate strong cash flow in 2026 and beyond, with most of our cash to be generated from organic operations, that is from new and existing projects and occasionally enhanced by dispute resolutions. Revenue for 2025 was $5.5 billion, up 28% with robust growth primarily due to the increased project execution activities on certain large newer civil and building segment projects in the Northeast, Hawaii and Guam. This included, among others, the Newark Airtrain replacement, the Midtown Bus Terminal Phase 1 project, the Brooklyn and Manhattan jails, the Honolulu Rail project and the Apra Harbor Waterfront repairs project in Guam. Civil segment revenue was $2.8 billion, up a solid 34% due to increased project execution activities on certain large, higher-margin projects in the regions I just mentioned, all of which have substantial scope of work remaining. It was the Civil segment's highest annual revenue ever, reflective of the robust sustained demand that Gary noted, we are seeing for our services. Building segment revenue was $1.9 billion, up 15%, primarily due to increased activities on the Brooklyn and Manhattan Jail projects in New York and a large health care campus project in California, all of which also have substantial scope of work remaining. The Building segment delivered its highest annual revenue since 2020. Specialty Contractors segment revenue was $844 million, up a strong 43% with the growth primarily driven by increased activities on various electrical and mechanical components of some of the large civil and building projects I mentioned. The Specialty segment revenue really started to show strong growth in the second half of 2025, and we expect this growth to continue this year and next year as these and other newer projects advance. Our operating income was driven by higher margin contributions from various Civil and Building segment projects as well as the absence of certain net unfavorable adjustments that impacted our results last year. Operating income was up significantly despite a $110 million increase in share-based compensation expense tied to the near tripling of our stock price in 2025, which affected the fair value of liability classified awards. Our share-based compensation expense is expected to decrease in 2026 and decline much more significantly in 2027 as some of these liability classified awards have now vested and most of the remaining awards will vest by the end of 2026. We are no longer issuing liability classified awards, which should meaningfully reduce earnings volatility. Civil segment operating income for 2025 nearly tripled to $391 million compared to $138 million in 2024, with a segment operating margin of 13.7% for the year within the range of 12% to 15% that we had expected. It was the segment's highest ever operating income and operating margin of any year. The strong increase was primarily due to contributions related to the segment's increased project activities that I mentioned and the absence of certain prior year net unfavorable adjustments. Earlier in 2025, we recorded favorable adjustments that resulted from the settlement of certain change orders and changes in estimates due to improved performance and a favorable project closeout on a domestic mass transit project. These were mostly offset by an unfavorable adjustment in the fourth quarter, which was mostly noncash and associated with the settlement of a legacy dispute on a tunneling project in Canada. Building segment operating income was $58 million, a substantial turnaround compared to the operating loss of $24 million in 2024. The segment's margin for 2025 was 3.1% compared to a negative 1.5% last year. The significant improvement was driven by contributions related to the increased higher-margin project activities I mentioned and the absence of certain prior year unfavorable adjustments. We anticipate Building segment margins in the range of 3% to 6%, fueled by contributions from certain higher-margin projects. The Specialty Contractors segment returned to profitability in the second half of 2025, ahead of expectations, but posted a slight operating loss of $7 million for 2025 compared to a loss of $103 million in 2024. The significant improvement was primarily due to contributions related to the increased activities I mentioned on the electrical and mechanical components of certain Civil and Building segment projects. Many of these projects are in the early stages and are expected to ramp up considerably over the next several years. The improvement was also driven by the absence of certain prior year unfavorable adjustments on several completed projects. Corporate G&A expense was $211 million in 2025 compared to $110 million in 2024, with the increase primarily due to the substantially higher share-based compensation expense that we had in 2025, as discussed earlier. Income tax expense was $61 million in 2025 with an effective tax rate of 30% for the year compared to a tax benefit of $51 million with an effective tax rate of 29.3% in 2024. Net income attributable to Tutor Perini for 2025 was $80 million or $1.51 of GAAP earnings per share compared to a net loss attributable to Tutor Perini of $164 million or a loss of $3.13 per share in 2024. Excluding the impact of share-based compensation expense, net of the associated tax benefit, adjusted net income attributable to Tutor Perini for 2025 was $229 million or $4.29 of adjusted earnings per share compared to an adjusted net loss attributable to Tutor Perini of $124 million or an adjusted loss of $2.37 per share in 2024. Now let's turn to the fourth quarter results. We had a solid turnaround performance across all segments in the fourth quarter in terms of revenue, operating income and margins. As Gary mentioned, our revenue growth accelerated sequentially throughout 2025 with particularly strong growth in the second half of the year that is continuing into 2026. Revenue was $1.5 billion, up 41% compared to $1.1 billion for the fourth quarter of 2024. Civil segment revenue for the quarter was $732 million, up 32%. Building segment revenue was $512 million, up 45% and Specialty Contractors segment revenue was $263 million, up 63%. The strong growth was due to the increased project activity, as I mentioned earlier, on various projects that are ramping up and have significant scope of work remaining. Civil segment operating income was $72 million for the fourth quarter of 2025, up very substantially compared to $4 million of operating income for the fourth quarter of 2024. The significantly lower-than-normal operating income and margin in the 2024 period was due primarily to a temporary earnings reduction of $32 million that resulted from the successful negotiation of significant lower margin and lower risk change orders on a West Coast project. The Civil segment's operating income and margin for the fourth quarter of 2025 would have been substantially higher had it not been for the unfavorable adjustment I mentioned earlier. Building segment operating income was $11 million for the fourth quarter of 2025 compared to a loss from construction operations of $41 million for the fourth quarter of 2024. The improvement was driven by contributions from certain higher-margin projects as well as the absence of prior year unfavorable adjustment on a government building project in Florida. Specialty Contractors segment operating income was $11 million for the quarter, with a margin of 4.4% compared to a loss of $20 million in the fourth quarter of 2024. The segment's performance has continued to improve significantly as their involvement in our large civil and building projects grow. We expect the segment to eventually and consistently generate margins in the 5% to 8% range. For the fourth quarter of 2025, net income attributable to Tutor Perini was $29 million or $0.54 of GAAP EPS compared to a net loss attributable to Tutor Perini of $79 million or a GAAP loss of $1.51 per share in last year's fourth quarter. Adjusted net income attributable to Tutor Perini for the fourth quarter of 2025 was $58 million or $1.07 of adjusted earnings per share compared to an adjusted net loss attributable to Tutor Perini of $78 million or an adjusted loss of $1.49 per share in the fourth quarter of 2024. And now I'll address the balance sheet. In 2025, we paid down our total debt by 24% and reduced our CIE by 13%. The CIE reduction was mostly driven by billings and collections, including those associated with the resolution of various previously disputed matters. Our CIE is expected to continue to decrease over time as we resolve the remaining legacy disputes. Due to our record cash generation, we ended the year in a healthy net cash position with cash and cash equivalents exceeding total debt by $327 million as compared to our $79 million net debt position at the end of 2024. Cash available for general corporate purposes was $271 million at the end of 2025. Overall, our balance sheet is healthier than it's ever been, and our solid net cash position provides us with excellent capital allocation flexibility. Lastly, I'll provide some assumptions regarding our guidance for modeling purposes. G&A expense for 2026 is expected to be between $400 million and $410 million. Depreciation and amortization expense is anticipated to be approximately $50 million in 2026, with depreciation at $48 million and amortization at $2 million. Interest expense for 2026 is expected to be between $40 million and $50 million, of which about $3 million will be noncash. Our effective income tax rate for 2026 is expected to be approximately 27% to 30%. We anticipate noncontrolling interest to be between $75 million and $85 million. We expect approximately 54 million weighted average diluted shares outstanding for 2026. And capital expenditures are anticipated to be approximately $125 million to $135 million, with the vast majority of the CapEx in 2026, approximately $75 million to $85 million being owner-funded for large equipment items on certain large new projects. Thank you. And with that, I will turn the call back over to Gary.

Gary Smalley, CEO and President

Thank you, Ryan. In summary, we had our best year ever in 2025, marked by record operating cash flow, record revenue that grew 28% year-over-year, strong operating income and profitability with record annual results for our high-margin Civil segment as well as robust year-end backlog of $20.6 billion that was up 10% year-over-year. With this tremendous backlog, we are confident in our ability to produce double-digit revenue and earnings growth and continued strong annual cash flow in 2026 as our newer projects progress through design and into construction. The outlook for Tutor Perini remains very bright over the next several years as we continue to benefit from favorable macroeconomic tailwinds and strong public and private customer funding that is fueling sustained market demand and numerous major bidding opportunities. As I mentioned earlier, it's an exciting time to be with Tutor Perini, whether as an employee, an investor or other business partner. Thank you. And with that, I will turn the call over to the operator for your questions.

Operator, Operator

The first question comes from Steven Fisher with UBS.

Steven Fisher, Analyst

Sorry for the background noise here. Congratulations on a very strong 2025. Just a couple of questions to start off on the guidance. Wondering if you could just talk about the coverage you have in your backlog on the outlook. I would think it would be pretty strong in light of all the bookings that you have. But just curious if there's any particular things you need to see still happen and get booked to hit the numbers. And then just from a cadence perspective, first quarter tends to be fairly light relative to the full year due to seasonality, and we've obviously had some pretty tough weather here in parts of the country in the first quarter. So I'm just curious if there are any expectations you want to set there?

Gary Smalley, CEO and President

Yes, Steve, thank you for the congratulations. This is Gary. First of all, we have clear visibility into our results for 2026 and even further ahead. There isn’t much that needs to occur for us to achieve the numbers we have projected. There will be some additional awards that could boost our performance, along with some expected awards that we rely on to meet our targets, and we are confident this will occur. We’re not depending on any major projects coming in to reach our 2026 goals. Regarding seasonality, you are correct; Q1 is typically slow for us, and this year will be no different. The significant snowstorm in New York will not have a major effect on us as we have a contingency plan in place. We had already anticipated Q1 to be light in our budget. Also, we have resumed work on the Manhattan Tunnel after a two-week pause, and this has been factored into our guidance as well. Overall, we feel optimistic.

Steven Fisher, Analyst

That's great. From a backlog perspective, it seems you anticipate some variability, as you mentioned, but you've pointed out possible larger contracts in the latter half of the year. Should we expect some net burn this year in the backlog, or do you believe there's enough opportunity to maintain our current levels? Additionally, regarding the civil side, do you have any insights on our position in the cycle of larger projects? I understand there has been relatively little competition in this area recently, and I'm curious about your perspective on where we stand in the broader cycle.

Gary Smalley, CEO and President

Sure, Steve. Regarding the last part of your question, we have good visibility on many of these larger civil projects. They are progressing as we expected, and we don't disclose every significant project, only the largest and those most likely to occur in the near future. Could you remind me of the first part of your question?

Steven Fisher, Analyst

Yes, do you think it will be net burn in the backlog this year?

Gary Smalley, CEO and President

We believe that by the end of the year, we should see growth in our backlog, reflecting a slight increase from our current position. We want to address the concept of fluctuations in backlog because we might have set high expectations over the past two years with consistent growth each quarter. This quarter did not follow that trend, showing only a modest change in percentage terms. It's important to understand that the growth may be less consistent than in the past few years where we seemed to set new records each quarter. However, our pipeline remains strong with plenty of promising opportunities. We have secured 9 out of 11 major awards in the last 1.5 years. While we may not maintain that same winning rate, we believe we will continue to have a good chance of success, as we focus on projects that align well with our expertise. This should contribute to our backlog growth, whether it occurs by the end of this year or into next year. While it's difficult to predict the specific timing of these new projects entering the backlog, I want to highlight that the growth may be uneven, but we are confident in our trajectory. Additionally, we are on track to generate record revenue, with projections for 2025 being our best yet, followed by even higher expectations for 2026 and 2027. To maintain our backlog, we will need significant new awards, which is why I urge some caution in our outlook.

Alexander Rygiel, Analyst

Gary and Ryan, very nice quarter. Congratulations. A couple of questions. Gary, can you go a little bit deeper on sort of the improvement in contract terms on new awards and talk about what that means longer term for Tutor Perini?

Gary Smalley, CEO and President

In the past, when competition was intense for the larger projects we pursued, we found it challenging to negotiate better contractual terms since there was always another party willing to accept the existing ones. However, with reduced competition, we have successfully collaborated with our clients to establish improved payment terms and conditions regarding delays and differing site conditions. This is especially important in New York, where provisions like no damage for delay can be particularly challenging to navigate in court. By eliminating such provisions from our contracts, we anticipate a decrease in disputes going forward. This is largely due to clearer terms and a more favorable negotiation landscape, which I believe will help us avoid court cases and foster more productive negotiations before any issues escalate legally.

Alexander Rygiel, Analyst

And then secondly, I believe as it relates to Rudolph and Sletten, just from a clarity standpoint, did you say it was looking at a multibillion-dollar health care facility? So maybe expand upon that. And then any commentary about opportunities over the next handful of years as it relates to high-tech manufacturing and reshoring?

Gary Smalley, CEO and President

Yes. First, regarding the multibillion-dollar project, it is confidential, so there is limited information we can share. The estimated cost is closer to $2 billion rather than any amount higher than that. However, we are in the preconstruction phase, and historically, this stage indicates a greater than 90% likelihood of progressing to actual construction. We expect it will result in a construction contract for us, with some elements possibly starting this year, though most of it is anticipated to take place in 2027. Could you elaborate on your second question?

Alexander Rygiel, Analyst

And then are you seeing developing opportunities from large manufacturing facilities, fab plants and whatnot and how that might play out over the next handful of years?

Gary Smalley, CEO and President

No, not really. Of course, that doesn't hit us on the civil side. But on the building side, the focus right now is on health care, some educational facilities and some multipurpose facilities, hotels, casinos, things like that. But that's really where our focus is.

Adam Thalhimer, Analyst

Congrats on the strong year. I wanted to start by asking if you could provide more details on the Canadian project. Additionally, how much did Civil experience a negative impact in Q4?

Gary Smalley, CEO and President

Yes. In Q4, I think it was $42 million, as I recall. And that's a consolidated joint venture. That's the joint venture portion of it. And there was, call it, a dozen, $12 million or $13 million earlier in the year. That's behind us. It's roughly offset by a Midwest project that really of the same magnitude, maybe a little bit more that we recognized over probably the last 3 quarters of the year. So anyway, it's one of our larger disputed items. We just felt that it was better to resolve that one than to proceed down the path of litigation.

Adam Thalhimer, Analyst

Yes, absolutely. And then how many legacy jobs are left to settle?

Gary Smalley, CEO and President

Yes, let's just say around a dozen. We have about a dozen significant items remaining, while there are some smaller amounts that are less meaningful. As Ryan pointed out, we started with about 50, so we've decreased from about four dozen to a dozen, and we are making progress on the remaining items. Recently, one was cleared in the last one and a half weeks. We will continue to focus on this, and we are optimistic that some will turn out favorably for us. Some are write-ups rather than write-downs, and we hope that holds true for the remaining items, but we'll have to wait and see. In the meantime, we've set aside contingency funds not only for this but also for various unknowns. We believe we have sufficient contingency to address any unexpected delays and any unforeseen write-downs resulting from litigation outcomes.

Adam Thalhimer, Analyst

Okay. So it really was a great quarter if you strip that out. And then...

Gary Smalley, CEO and President

Yes, it was.

Adam Thalhimer, Analyst

I wanted to ask about your comment regarding construction starts in 2027. While I don't expect you to provide guidance for that year, I would appreciate it if you could elaborate on what you meant by the visibility for 2027.

Gary Smalley, CEO and President

Yes. And Adam, you just said it was a great quarter. given that, well, look, even with that write-down, it was a great quarter. I think that shows the strength of what we're building here with this new work that we have. And that new work carries us past '26 into '27. And you're right, we don't guide multiyear, but '27 is going to be better than '26. I think that's clear. We've said last year around this time, we're saying '25 is going to be good, '26 is going to be better and '27 is going to be better yet, and there's nothing that's changed from that guidance.

Liam Burke, Analyst

Ryan, you are bidding on larger and larger, more complex projects. Is there any risk of being resource constrained? And how would that affect your bidding process?

Ryan Soroka, Executive Vice President and CFO

Yes. I think at this point, we certainly haven't seen any of the constraints on resources. It's probably important to point out that the majority of our labor is sourced from the union halls. And so we've got agreements in place, whether project-specific or with the union itself for that labor to be supplied. So from our perspective, the day-to-day craft workers, we don't see any constraints, and we don't really see that going forward.

Gary Smalley, CEO and President

And from a management standpoint, I think we've talked in the past about that's really where our focus has been because the unions have always done a great job providing us skilled labor when we needed it. But as we've grown, we've been very aggressive and, in fact, in a constant recruiting mode to bring in the project managers, project executives that are needed to manage this work. And we feel that we're well equipped there. We're always looking. Anyone out there listening, you want to apply, we're always looking. But at the same time, we think that we're already staffed at an appropriate level for future growth.

Liam Burke, Analyst

Great. And you mentioned in your earlier comments that the specialty margins could be in the, we'll call it, mid-single-digit range. It's a business that's traditionally been marginally profitable at best. Is it the same game plan as building and civil? Or is there something different about the business where you're going to have a pretty meaningful change in profitability?

Gary Smalley, CEO and President

Yes. I believe we have successfully eliminated some of the less favorable contracts that had poor terms and lower margins. Now, we're focused on higher-margin work with better terms. Most of the litigation and disputes are now behind us. If you analyze the last two quarters of 2025, we achieved a 2.7% operating segment margin and a 4.4% operating margin for that segment. That's the current trend driven by our ongoing work. Our estimate of 1% to 3% includes a contingency for unforeseen circumstances. We are confident that the work we currently have will yield a mid-single-digit margin. Looking ahead to 2026, we anticipate reaching the 5% to 8% range that we've mentioned previously.

Michael Dudas, Analyst

Gary, as we approach 2026, you mentioned the nine mega projects with a backlog of $16 billion. Moving through 2026 and 2027, how should we expect the revenue conversion from the enhanced T&C, a stronger backlog, or a backlog with better margins that have been secured? Given the targets you have set in the market, should we anticipate similar margin expectations? Are there any ranges or opportunities elsewhere as we look ahead?

Gary Smalley, CEO and President

I believe that margins will gradually improve over time, particularly as the major projects move into full production. This should positively affect both earnings and revenue generation. As these projects advance, I anticipate some enhancement in margins. Our strategy has been to pursue more work and, while it may sound aggressive, we are aiming for larger margins. Each new project allows us to raise our margin expectations for future projects, though this can vary based on competition. I can't guarantee that there will always be room for margin growth, but for now, that's our focus and the environment we are operating in.

Michael Dudas, Analyst

And the clients are becoming more comfortable with that environment given the tightness in the market, even if they might not like it.

Gary Smalley, CEO and President

Yes, that's one way to put it, Mike. Another way to express it is that they appreciate what we do. They value us and the performance we deliver. They recognize the quality and the timeliness of our work. Additionally, when we consider that some competitors are not bidding, or in some instances, we clearly offer the best product in terms of both quality and price, it strengthens our position. We are actively bidding for work; it's not simply handed to us. I believe we have a promising future ahead. Our past success is paving the way for our future, which has been built on solid execution. While we are increasing margins, it's driven by the market conditions we face. It would be unwise not to take advantage of this, especially as we evaluate the competition and what lies ahead.

Ryan Soroka, Executive Vice President and CFO

Yes. I'll answer your questions in order. Starting with our balance sheet, the current debt of 11.8% is quite burdensome, and we are looking to refinance around midyear to achieve significant interest savings, targeting a 500 basis point reduction. We feel comfortable with our debt around the 400 million mark, especially if we extend it for a longer term. This gives us certainty in liquidity and a favorable long-term outlook. Over the past three years, we have generated operating cash and free cash at a record pace, which enhances our long-term liquidity and instills confidence in other stakeholders, such as sureties, as we aim for future opportunities without needing a joint venture partner. In 2026, we expect noncontrolling interest to reach around $75 million to $85 million, and we want to keep that in-house.

Gary Smalley, CEO and President

I believe that's a strong point. I'd like to mention another aspect we've not discussed much. Earlier in the call, we touched on improved contractual terms and I noted our decrease in litigation. We have invested significantly in litigation expenses over the last few years, but we are observing a reduction in those costs as we've progressed. We anticipate this trend will continue. While legal expenses are an essential part of doing business, especially in this industry, you can expect our legal costs to decrease, which will contribute to enhancing our profits.

Michael Dudas, Analyst

That's not a terrible thing, is it? Just to clarify, Ryan, your interest expense guidance doesn't assume any refinancing recapitalization, correct?

Ryan Soroka, Executive Vice President and CFO

So we did broaden the range. And so...

Gary Smalley, CEO and President

Half the year...

Ryan Soroka, Executive Vice President and CFO

Yes, yes. So I mean what we've assumed a refinancing, call it, roughly midyear.

Operator, Operator

Thank you. At this time, I would like to turn the floor back to Gary Smalley for closing remarks.

Gary Smalley, CEO and President

Thank you all again for your interest and participation today. We look forward to continuing to deliver strong results as we go forward. We'll talk to you again next quarter. Thank you.

Operator, Operator

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.