Earnings Call Transcript - TPC Q2 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation Second Quarter 2023 Earnings Conference Call. My name is Doug and I will be your coordinator for today. All participants are currently in a listen-only mode. Following management’s prepared remarks, we will be opening the call for a question-and-answer session. As a reminder this conference call is being recorded for replay purposes. I will now turn the conference over to your host for today Mr. Jorge Casado, Vice President of Investor Relations. Please proceed.

Jorge Casado, Vice President of Investor Relations

Hello, everyone, and thank you for your participation 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 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 potentially contribute to such differences in our Form 10-Q, which we will be filing tomorrow and in our most recent Form 10-K, which we filed on March 15, 2023. 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 I will now turn the call over to Ronald Tutor.

Ronald Tutor, Chairman and CEO

Thanks, Jorge. Good day and thank you all for joining us. Our second quarter results were highlighted by strong revenue and backlog growth, as well as solid operating cash flow. Our consolidated revenue was up 19% year-over-year due to contributions from certain civil segment mass transit projects in California that had significant work remaining. Our revenue growth this quarter followed more than two years of quarterly year-over-year declines attributable to COVID. And we believe our revenue has reached an inflection point now that our business is beginning to normalize and we are beyond most major COVID impacts. As we have discussed in the past, COVID temporarily halted major bids and awards of large civil projects which were in the range of two-plus years and prevented the award of four large projects valued at almost $11 billion, for which we had been the lower preferred bidder. Most of these projects that were not awarded us, if not all of them, are now expected to be rebid in 2024 and in the first half of 2025, so we will have another opportunity to capture the same contracts. We believe we will continue to see modest revenue growth over the remainder of this year, with higher growth expected next year and much stronger in 2025 as we should be entering the construction phase of multiple large projects beginning in mid-2024. Our second quarter operating cash flow was a solid $56 million, bringing our operating cash flow for the first six months of 2023 to $78 million, the second highest result for the six months of any year since the merger of Tutor-Saliba and Perini Corporation in 2008. We remain confident that our cash generation in the second half of this year will be even stronger as we expect to resolve various long-standing disputes either by negotiation or litigation and collect significant amounts of cash, and that our operating cash flow for 2023 will exceed the record $207 million we generated last year. As we mentioned last quarter depending on the timing and magnitude of dispute resolutions this year, our cash generation could be much stronger. We plan to use this anticipated cash to reduce our debt and position ourselves favorably for a refinancing early next year. Our second quarter backlog increased to $10.9 billion, up 27% compared to $8.5 billion for the same quarter last year. The strong backlog growth was driven by the large award of the $3 billion Brooklyn Jail design-build project, which includes more than $600 million of electrical and mechanical work that is expected to be performed by our Specialty Contractors segment. And we also booked nearly $1 billion of other new awards and contract adjustments including Black Construction's new $222 million Tinian International Airport project in the Northern Mariana Islands and $102 million of additional funding at a Rudolph and Sletten health care project in California. From an earnings perspective, we had a very strong performance and contributions in the second quarter from our civil segment, but experienced some continuous challenges particularly in our specialty contractors group, which Gary will address further in a moment. Overall, we reported a consolidated pretax loss of $17 million and ended the second quarter with a loss of $0.72 per diluted share after adjusting for noncontrolling interest. We continue to have a full bidding pipeline with numerous large project opportunities across various locations, including Guam and the Western Pacific. Some of our more significant opportunities include the estimated $3 billion Queens facility and a decision of which will be made in January with all proposals in. The owner has indicated a timeline for award. In October, we will be busy bidding on numerous projects including the $1 billion plus Frederick Douglass tunnel in Maryland, as well as the $500 million Fulton line communications train control projects in New York and the $500 million Amtrak Connecticut River Bridge Replacements. We also expect a decision in the fourth quarter on Frontier-Kemper's proposal for the $500 million Great Lakestone. Other larger near-term opportunities include the $1.5 billion Inglewood people mover project in Southern California and the $500 million Amtrak East River tunnel rehab in New York, both bidding later this year. To follow will be the $2 billion Honolulu Rail Transit Project, which is now expected to bid in the first quarter of 2024, which I'll remind you all we were the low bidder two years ago on that project. We anticipate that once again, we will capture a significant share of these projects and continue to grow our backlog substantially over the next 12 to 18 months, providing that foundation for significant future revenue growth and improved profitability. Recent data supports our projections that the US economy continues to be strong and resilient, despite the effects of inflation and higher interest rates, particularly in the area of public works with diminishing concerns about the threats of a recession. Some of this strength can be attributed to funding toward investments in infrastructure by the bipartisan infrastructure law. Demand for our services remains extremely strong and is expected to increase as substantial funding flows to our public owners over the next several years. I will reiterate that we are focused on successfully growing our civil business which will continue to be the driver of our future growth and profitability. Based on our year-to-date financial results combined with various uncertainties in the second half of the year, we have decided not to provide new guidance for 2023. Various risks exist both with respect to dispute resolution negotiation and the results of major litigation decisions, which are in play to conclude in the fourth quarter. There are also a wide range of potential outcomes related to our effective income tax rate that give us cause to pause. There are several additional positive events that could transpire later this year, which could offset to some degree any negative that might occur. Needless to say, we don't feel it appropriate to make a statement for the balance of the year. Thank you. And with that, I will turn the call over to Gary to review the financial results.

Gary Smalley, Executive Vice President and CFO

Thank you, Ron and good afternoon everyone. I will start by discussing our results for the second quarter including cash flow, followed by some comments on our balance sheet, as well as some modeling assumptions. As Ron mentioned, we generated a solid $56 million of operating cash in the second quarter of 2023 and $78 million in the first six months of 2023, which is the second best result for the first six months of any year since the 2008 merger and only behind last year's operating cash performance for the equivalent period. Our operating cash was again driven by strong collection activities including collections associated with certain settlement negotiations that concluded in the past few quarters. We remain confident that we will deliver stronger operating cash flow for 2023 compared to 2022 due to projected cash collections both from project execution activities and the resolution of various other outstanding disputes. Revenue for the second quarter of 2023 was just over $1 billion, up 19% compared to the same period in 2022, with the increase driven by contributions from certain civil segment mass transit projects in California. Civil segment revenue for the second quarter was $554 million, up a strong 37% compared to the second quarter of last year due to the mass transit projects I just mentioned. Building segment revenue was $331 million, up 24% and Specialty Contractors segment revenue was $136 million, down 28% year-over-year. The revenue increase for the Building segment was primarily due to increased project execution activities on certain projects in California, Northeast Oklahoma and Florida, partially offset by reduced project execution activities on certain other projects in Arkansas and California that are nearing completion. The decrease for the Specialty Contractors segment was principally due to reduced project execution activities on the electrical component of a transportation project in the Northeast that is nearing completion, as well as unfavorable non-cash adjustments, due to changes in estimates on that same project associated with the change in expected recovery on certain unapproved change requests and an adverse legal ruling on an educational facilities project in New York, both of which were partially offset by positive contributions from a technology facility project in Arizona. Overall, we reported $2 million of income from construction operations for the second quarter of 2023 compared to a loss from construction operations of $91 million for the same quarter of last year. Our second quarter results for this year were dominated by very strong profit contributions from the Civil segment, which delivered $105 million of income from construction operations and a strong segment operating margin of 19%. This quarter's strong Civil segment performance was due to solid contributions from the previously mentioned mass transit projects in California, including favorable adjustments of $58 million on one of those projects based on improved performance. The Building segment, however, despite posting good revenue growth for the second quarter, posted a loss of $14 million for the quarter, primarily due to unfavorable adjustments on certain projects in the Northeast, California and Florida that were immaterial individually but totaled about $16 million in the aggregate. The Specialty Contractors segment posted a loss from construction operations of $70 million in the second quarter, that was largely attributable to unfavorable non-cash adjustments of $36 million due as I just mentioned to changes in estimates on the electrical and mechanical scope of the transportation project in the Northeast, that were associated with the change in the expected recovery on certain unapproved change requests as well as a non-cash charge of $25 million on the educational facilities project in New York that resulted from an adverse court ruling for no damages for delay clause. Corporate G&A expense for the second quarter of 2023 was $19 million compared to $14 million for the same quarter of last year. Other income for the second quarter of 2023 was $3 million compared to $1 million in the second quarter of 2022. Interest expense was $22 million compared to $16 million for the same quarter of last year with the increase driven by higher borrowing rates this year on our Term Loan B and revolver. We had a slight income tax expense of $194,000 for the quarter with an associated effective tax rate of a negative 1.2% compared to an income tax benefit of $44 million in the second quarter of last year and an effective tax rate of 41.3%, which resulted from a pretax loss of $106 million in the prior year period. Our effective tax rate for each quarter depends on the pretax results that are forecasted for the full year. When we forecast a pretax loss, tax benefits that would normally reduce the effective tax rate when we report profits instead increase the rate. Also the impact of tax benefits is magnified when the benefits are disproportionately large compared to the pretax income or loss for the year. In cases where forecasted pretax losses decrease as the year progresses, volatility occurs because we have to true up the tax expense or benefit for the year or for the period that we're reporting to align with the expected annual tax provision. So as we continue through this year, you may see higher or lower rates than normal increase volatility in the rates from quarter-to-quarter. Net loss attributable to Tutor Perini for the second quarter of 2023 was $38 million or a loss of $0.72 per share compared to a net loss attributable to Tutor Perini of $62 million or a loss of $1.23 per share in the second quarter of 2022. The smaller loss was due to the various factors I mentioned earlier that drove our income from construction operations in the current second quarter, again primarily in the Civil group. As for our balance sheet, our net debt as of June 30, 2023, was $663 million down $36 million or 5% compared to our net debt as of December 31, 2022. As of June 30, 2023, we're in compliance with the covenants under our credit agreement and we expect to continue to be in compliance in the future. Our first lien net leverage ratio for the second quarter of 2023 was 2.23:1 well within the limit for the quarter of 3:1. As a reminder the leverage ratio will step down to 2.5:1 for the third quarter of this year and 2.25:1 for each quarter thereafter. Debt reduction remains our primary near-term focus for the use of cash. We still expect even more significant cash collections in the second half of this year, much of it associated with anticipated resolutions of various disputes. The timing and magnitude of excess cash generation over the remainder of this year will determine when and by how much we will continue to reduce our debt. We continue to be very mindful of our debt maturities and the springing maturity provision of our Term Loan B and revolver in January 2025, and we remain confident that we will be able to refinance as needed by early next year. Finally, I will update you on some assumptions for modeling purposes. G&A expense for 2023 is now expected to be between $245 million to $255 million. Depreciation and amortization is still anticipated to be approximately $47 million in 2023 with depreciation of $45 million and amortization of $2 million. Interest expense is now expected to be approximately $84 million of which about $4 million will be non-cash. Our effective income tax rate for 2023 is now expected to be approximately 40% to 50% compared to the 50% I indicated last quarter. We now expect non-controlling interest to be between $45 million and $50 million and we continue to forecast $52 million weighted average diluted shares outstanding for 2023. Lastly, capital expenditures are now expected to be approximately $45 million to $50 million, most of which is project-related. Thank you. With that, I'll turn the call back over to Ron.

Ronald Tutor, Chairman and CEO

Thank you, Gary. To summarize, we experienced strong revenue growth in the second quarter, primarily due to contributions from certain civil mass transit projects in California. Our backlog increased to $10.9 billion in the second quarter, a 27% rise. We generated solid cash flow of $56 million from operations and $78 million to date, and I expect much stronger results for the remainder of the year as we address the disputed issues and ongoing litigation expected to conclude this year. Our bidding pipeline continues to expand with a significant amount of major work in very limited competition. We are poised to deliver improved earnings, and I am confident in significant financial results for the second half of this year and even more next year as we resolve these long-standing disputes and collect the capital owed to us. We anticipate strong and sustained profit contributions from various large ongoing civil projects, which will positively impact our earnings for the next several years. Additionally, our Civil segment reported strong profits in the second quarter, although these gains were largely offset by ongoing losses in our Specialty Contractors segment and, to a lesser extent, our building group. Now, I will turn the call over to the operator for questions. Thank you.

Operator, Operator

Thank you. Our first question comes from the line of Alex Rygiel with B. Riley Securities.

Alex Rygiel, Analyst

Thank you. Good evening, gentlemen. A couple of quick questions here. Were any of the recent awards funded by the IRA or other kinds of recent federal funding initiatives? And if not do you see this money start to work its way into the market yet?

Ronald Tutor, Chairman and CEO

Well, this is Ron. No, the Brooklyn prisons are funded in New York as a part of the federal judges dictating that Rykers be replaced and that's all state and city funds. And frankly we hear about the infrastructure bill. We're convinced there's been more funding directed to owners and financing drawing and getting things up, but we don't think a significant commitment of funds has yet hit the market. But we're in contact with three or four of our major billion-dollar-plus civil jobs that appear to be getting funding and will hit the marketplace for us to propose on in the first and second quarter next year. So it's having an effect; it's just been very slow happening.

Alex Rygiel, Analyst

That's helpful. Ron, this year has clearly been challenging regarding reported earnings due to various dispute settlements. You expressed hope that this situation will come to an end. Do you think it might be resolved in 2024, or is there a possibility it could extend into 2025?

Ronald Tutor, Chairman and CEO

No, I don't think there'll be any litigation or claims that go into 2025. And if there are, they'll be small to a point that it won't affect anything. 2023 and 2024, good or bad, is collecting money and settling these long-standing claims and disputes that stood still for three years during COVID. Every one of which has court dates, mediations and we're trying cases and litigating them through verdicts. And that's just what's going to take place through the end of next year, where I expect that 90% of all of our claims will be adjudicated one way or the other, and I expect us to win and collect most of our money.

Gary Smalley, Executive Vice President and CFO

Ron, if I could add this. Hi, Alex. Just want to remind everyone that our history isn't to always take write-downs when we litigate and arbitrate these things. We've got a history and, perhaps not in the recent months, not what we've reported. But we do have a history of prevailing quite favorably a lot of the time. So we're looking forward to some of the positions that are coming up that are being litigated and arbitrated. We look forward to not just having negative results, but positive results. In fact, we've had that in the last…

Ronald Tutor, Chairman and CEO

No, you're absolutely right, Gary. And if I said something to the contrary, that isn't what I meant to infer, because we have still won many litigations in excess of what we booked. And the only place we don't is when we elect to settle to get the cash and avoid the litigation. In other words, we're trying a number of cases and our history has been successful.

Gary Smalley, Executive Vice President and CFO

Yes, Ron, there was nothing you said. I just want to make sure that it was understood based on the question, but we've even had some positive outcomes in the last year or so, but they've just been masked by larger negative results. So anyway.

Alex Rygiel, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.

Steven Fisher, Analyst

Thanks. Good afternoon.

Ronald Tutor, Chairman and CEO

Hi, Steven.

Steven Fisher, Analyst

Hi. Can you provide an estimate of how much will be adjudicated in the second half of the year? Specifically, what is the total amount of claims that are pending adjudication? I believe you mentioned that 90% of claims will be addressed eventually. How much do you anticipate adjudicating in the latter half of this year? Ron, it might be better for you to discuss this in general terms.

Ronald Tutor, Chairman and CEO

Well, that's what I was going to do. I'd say, just quickly in my mind adding up what should resolve, I'd say, in the neighborhood of $200 million more.

Steven Fisher, Analyst

That's helpful. Last quarter, you anticipated reinstating the guidance this quarter. I'm curious about what has changed your perspective compared to three months ago, considering the uncertainties for the rest of the year.

Ronald Tutor, Chairman and CEO

We have a lawsuit that tries for well over $100 million in a three-panel arbitration. And although I believe we will win, the swing could be such as to try to predict that lawsuit, even as optimistic as I am we discussed and decided it would be inappropriate. The results will be in November and there's nothing else that compares to it going forward into the following year.

Steven Fisher, Analyst

Okay.

Gary Smalley, Executive Vice President and CFO

And if I could add this, Steve. In my remarks, I was talking about the tax rate, which is a significant part of the challenge. It's difficult for us to determine what that tax rate will be or what its impact will be. Our tax rate is based on our annual forecast, and as we reduce the loss from the first half of the year, the impact on the tax rate becomes more pronounced. As that loss decreases, it creates more volatility and complicates matters. We would have a better chance of predicting consolidated pre-tax income, but due to the volatility of the tax rate and in addition to what Ron mentioned, it makes it nearly impossible for us to confidently provide an earnings per share range.

Steven Fisher, Analyst

Thanks, Gary. Have you had discussions with lending groups to determine how much cash you need to collect in order to reasonably refinance the debt at the beginning of next year?

Gary Smalley, Executive Vice President and CFO

Yes, I can answer that. We've had discussions with various groups, and the short answer is the more cash we can generate, the better. However, there isn’t a specific minimum amount we’ve been advised on. It's essential for us to improve our performance, and generating cash flow is a good sign. Currently, our bonds are trading at 86%, which is a significant improvement from last quarter. If we continue to see enhancements in this area, it bodes well for us. Reducing our leverage has been a key focus, and we've made some progress there. Based on the guidance we're receiving, if we maintain or slightly improve our earnings for the remainder of the year, we believe we’ll be in a strong position. Additionally, as Ron mentioned, we have ongoing litigation and arbitration that we expect will bring in more cash from settlements, providing us with further support.

Steven Fisher, Analyst

Okay. And it sounds like the environment is such that there are going to be plenty of things to bid on, particularly in the civil construction area. I guess I'm just curious can you talk about your surety capacity at this point? What's the status of that? Has that been affected at all by sort of leverage, cash collections, and some of the legal settlements? What's your surety bond capacity? And where does that stand at the moment?

Ronald Tutor, Chairman and CEO

We have a substantial capacity because, unlike the public markets, sureties consider our net worth, which is over $1.2 billion, our positive cash flows that are improving, and our performance in major civil work, which is our focus. It’s disappointing regarding the collections, disputes, and write-downs, primarily in New York, which is quite a challenging environment. However, the sureties remain fully supportive of us as we pursue this significant work. Despite the write-downs and lack of earnings, we possess a strong net worth, which is essential from a surety and capacity perspective. Everything is fine, but we need to resolve these claims and return to normalcy, whatever it takes.

Steven Fisher, Analyst

Okay. And then just lastly, on the specialty business. Obviously, lots of moving parts in there. I wonder if you could just give us a sense of what the underlying performance of that business is and if you have any plans to do anything differently there. Because from the outside, it's hard to see that it's moving in the right direction. But maybe you can just help us with what's going into the backlog and how and when that might flow through to give us a sense that this is a business that still makes sense to pursue.

Ronald Tutor, Chairman and CEO

Let me provide some clarity on the Specialty business to differentiate between the positive and negative aspects. We have a successful operation called Fisk Electric in Texas and California, both of which consistently generate profits. Additionally, we have a mechanical company in South Florida, Nagelbush Mechanical, that also has a strong track record. The issues within the Specialty group are not widespread; rather, they stem primarily from our mechanical and electrical operation in New York City, which accounts for half of our claims. Most of the significant losses attributed to the Specialty group originate from this area. New York presents a unique challenge due to its legal environment, which tends to favor public agencies and complicates matters for contractors. Despite these challenges, our performance in New York remains stronger than many of our peers, leading us to be one of only a couple of firms capable of handling major projects. Consequently, we are raising our prices and insisting on contract modifications, which we have successfully implemented. The Specialty group in New York, where the issues have arisen, has been significantly downsized. For the foreseeable future, they will only submit bids in support of our Civil group and will not engage directly with other contractors, developers, or agencies. As a result, their revenue has likely decreased to about 25% of what it was four years ago, and they will continue to operate solely to support us. We aim to resolve all existing issues and, if the division is to grow again, it will depend solely on their performance, which has been difficult at best thus far.

Steven Fisher, Analyst

Thank you very much, Ronald.

Operator, Operator

There are no further questions in the queue. I'd like to hand the call back to Mr. Tutor for closing remarks.

Ronald Tutor, Chairman and CEO

Thank you everybody for bearing with us. We'll turn this corner, and I look forward to the next call. Thank you.

Operator, Operator

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