Earnings Call Transcript - TPC Q1 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation First Quarter 2023 Earnings Conference Call. My name is Lucia and I will be your coordinator for today. 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. 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 are filing today 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

Good afternoon and thank you all for joining us. As we disclosed in a form 8-K that we filed on April 21, there was an unfavorable legal ruling recently handed down regarding our claims dispute on the completed George Washington Bridge Bus Station project in New York City, which required us to take a non-cash pre-tax charge of $83.6 million that impacted the building and specialty contractors segments in the first quarter of 2023. A number of years ago we were in arbitration pursuing recovery of our claim from the project's developer and were clearly winning in that process. Once it became clear they would owe us a significant amount of money, the developer stopped paying their lawyer and immediately filed for bankruptcy. Based on case law and the advice of preeminent bankruptcy counsel, we believed that we would be reimbursed for amounts owed outside of the bankruptcy proceeding. Unfortunately, the appellate courts ruled otherwise, so we took the charge. However, we are still pursuing recovery of significant amounts we believe are owed and entitled to collect through two other separate legal proceedings related to the project: one against the individual owners of the developer and another against the board of New York and New Jersey, who is the owner of the project, which has now succeeded the developer and taken it back. Separately, during the first quarter, we successfully negotiated more than $220 million of change orders for a civil segment mass transit project in California. However, these were lower margin and lower risk change orders that resulted in a temporary negative project catch-up adjustment of $28 million in the first quarter due to the treatment of these approved change orders under the percentage of completion accounting rules. You may recall that the same phenomenon occurred on the same project in 2022. As we indicated then, the negative financial impact will reverse itself over the remaining life of the project. It is a situation where we have a profit to date significantly higher than the specific earnings of the executed change order, and even though the profit goes up by the strike percentage at completion, we have to take this paper write-down until we're further along and it comes back. It is an oddity of percentage of completion when you have wild disparity among profits and certain changes as well as the contract. But we're dealing with it, and although it impacts us in any given quarter, it should reverse itself and in fact, go back the other way. Gary will go over the details of these impacts and our financial results for the quarter in a moment. Both factors negatively impacted our revenue and earnings for the first quarter of 2023. Our first quarter revenue also declined year-over-year due to reduced project execution activity on a Newark airport terminal A project that opened in January, which impacted all three segments, as well as the previously mentioned lingering effects of the COVID-19 pandemic, which delayed the awards of almost $11 billion in low bids or, in fact, ended the awards and rejected our bids. The bids were rejected because, due to the upswing in COVID costs, everything that we were low on was significantly over the owner's non-updated budgets. They are being reissued in 2024 in various stages, but nevertheless, between the ending of New York jobs and the enormity of those bids, which should have been awards generating revenue, not going forward has resulted in this dramatic reduction of revenue. As a result of these negative impacts as discussed, we reported a loss of $0.95 per diluted share for the first quarter of 2023. Some positive news for the first quarter includes operating cash flow of $21 million driven by solid collection activities, including collections associated with certain settlement negotiations that concluded in the fourth quarter of last year. We continue to make good progress in resolving various unapproved change orders and claims, which will continue to have a favorable impact on our cash flow throughout this year and next. We also anticipate our cash generation will be stronger in 2023 than our record operating cash in 2022. Depending on the timing and magnitude of disputes resolution this year, our cash generation could be significantly stronger. For the first quarter, we maintained our backlog at $7.9 billion, level with our year-end 2022 backlog. In the second quarter of 2023, we have already booked over $3.2 billion of new projects in backlog, including the recently announced $2.95 billion Brooklyn jail design build project with the New York City Department of Design and Construction, for which we executed a contract last week, as well as the $222 million Tinian International airport project in the Northern Mariana Islands that was recently awarded to Black Construction, our Guam subsidiary, and a $41 million electrical subcontractor for a healthcare project in South Florida. Our bidding pipeline remains significant and active with numerous additional opportunities, including in Guam and the United States, particularly on the East Coast. Some of the more significant awards and contract adjustments that we worked on in the first quarter of 2023 included $224 million of additional changes for a mass transit project in California, a $91 million educational facility in California, a $75 million facility renovation for the military in Colorado, a $62 million bridge repair in Minnesota, and a $56 million additional funding for a healthcare project in California. We continue to believe that demand for our services will remain strong and increase meaningfully as substantial funding from the infrastructure law increasingly flows to our customers this year and next. Hopefully, this will enable our customers to move forward with many more large civil projects that have been in the pipeline and have not yet been released. As I've said before, successfully growing our civil business, historically the part of our business that has been most resilient and successful during economic downturns, remains our primary focus and will continue to be the driver of our future growth and profitability. We are still awaiting a decision expected in the coming months on Frontier Cemeter's bid for the $500 million Great Lakes tunnel project. Other larger near-term opportunities include the $3 billion plus Queens jail, which will now bid in July, with an expected award in September and a notice to proceed in December of this year, a $2 billion Honolulu Rail Transit job which should bid in the fourth quarter of this year, which we were the low bidder in 2020, and it too was rejected as being over budget, and the $1.5 billion Inglewood automated people mover in Southern California, which should also bid in the fourth quarter. With the significant new orders mentioned earlier that have already been booked, we expect to report a significantly larger backlog at the end of the second quarter of 2023, potentially achieving a new record backlog by the end of this year as we capture other large projects. Our first quarter financial results make the achievement of our initial EPS guidance for 2023 challenging, which is why we are withdrawing our EPS guidance. However, we believe there are certain positive events that will occur later this year that could offset some of the negative results we experienced in the first quarter. Therefore, we plan to reassess our outlook over the next few months and intend to provide updated guidance when we report our results for the second quarter of 2023. Looking ahead, we continue to anticipate positive and normalized EPS performance in 2024 and beyond.

Gary Smalley, Executive Vice President and CFO

Thank you, Ron. And good afternoon everyone. I will start by discussing our results for the first quarter including cash flow, followed by some commentary on our balance sheet. As Ron mentioned, we generated solid operating cash of $21 million in the first quarter of 2023, which was a good result considering that we usually report cash usage in the first quarter due to the cyclicality of our business with reduced construction activity during the winter months. Operating cash was driven by strong collection activities, including collections associated with certain settlement negotiations that concluded in the fourth quarter of last year. We anticipate that we will continue to have strong operating cash generation for the rest of 2023 due to projected cash collections from project execution activities and the resolution of various other outstanding disputes, with larger amounts of cash expected to be collected in the second half of this year. As Ron indicated, we expect our operating cash flow for 2023 to be stronger than our record operating cash in 2022, and it could be much stronger again depending on the timing and magnitude of collections associated with certain dispute resolutions. Revenue for the first quarter of 2023 was $776 million, down 18% compared to the same period in 2022, with the decrease driven by reduced activity on the Newark project that is nearing completion, which affected all three segments, as well as the revenue reductions associated with the two significant negative adjustments that Ron mentioned. In addition, as we indicated last quarter, not being awarded projects totaling more than $10 billion over the last few years, particularly because of COVID-19 induced customer budgetary constraints, significantly reduced revenue for both the first quarter of 2023 and the first quarter of 2022 since it prevented us from replacing revenue from completing projects with new project revenue. Civil segment revenue for the first quarter was $350 million, down 10% compared to the first quarter of last year. Building segment revenue was $230 million, down 31%. Specialty Contractor segment revenue was $197 million, down 15% year-over-year. Regarding the $83.6 million non-cash pre-tax charge related to the adverse legal ruling on the George Washington Bridge bus station project as Ron mentioned, we are still pursuing recovery of significant amounts that we believe we are entitled to collect through two other separate legal proceedings. In spite of these ongoing legal actions to pursue amounts that we are rightly owed, we believe taking the charge in the first quarter was the appropriate action to charge negatively impacted income from construction operations for the building and specialty contractor segments by $72.2 million and $11.4 million, respectively. Regarding the approval of lower margin and lower risk change orders that negatively impacted income from construction operations by $28 million on the civil segment, keep in mind that, as Ron indicated, the negative impact is temporary and that we expect to reverse itself over the remaining course of the project. This is the same project with similar circumstances to what we experienced in 2022 in the first quarter of last year and then also in the latter quarters. We resolved this large number of change orders then, and we will do this again with the customer, which is a very good thing. However, the short-term impact due to the accounting rules related to cumulative catch-up adjustments and profit recognition caused an unfavorable impact in the quarter. I will point out that if not for these two significant negative impacts to earnings, we would have been on budget for the quarter. We would have reported positive pre-tax income, which in turn would have resulted in a vastly different and much lower effective tax rate for the quarter. Overall, we reported an $82 million loss from construction operations for the first quarter of 2023 compared to a $10 million loss from construction operations for the same quarter of last year. The civil segment reported income from construction operations of $18 million for the first quarter of 2023, compared to a loss of $1 million for the first quarter of 2022, which was impacted by two adjustments: one for a negative outcome on a legal ruling and the other for a successful negotiation of change orders that we've been discussing. The Building segment had a $70 million loss from construction operations compared to $9 million of income in the same period of last year, largely because of the GWB project negative impact to the segment of the $72.2 million that I just mentioned. The specialty contractor segment reported a $12 million loss from construction operations for the current quarter compared to a $4 million loss in the first quarter of last year, again largely due to the negative GWB project impact to the segment, this time for $11.4 million. Corporate G&A expense for the first quarter of 2023 was $16 million compared to $15 million for the same quarter of last year. Other income for the first quarter of 2023 was $6 million compared to $4 million in the first quarter of 2022. Interest expense was $22 million compared to $60 million for the same quarter last year, with the increased revenue attributed to the higher borrowing rate this year on a term loan B and also on a revolver. We reported an income tax benefit of $48 million in the first quarter of 2023 due to our significant pre-tax loss for the quarter, with an associated effective tax rate of 49.6%. This compared to an income tax benefit of $4 million in the first quarter of last year, with an effective tax rate of 17.1% for that period. The higher tax rate in the first quarter of 2023 was actually beneficial, providing additional tax benefits to help offset the impact of our pre-tax loss for the quarter. Net loss attributable to Tutor Perini for the first quarter of 2023 was $49 million, or a loss of $0.95 per share, compared to a net loss attributable to Tutor Perini of $22 million or a loss of $0.42 per share in the first quarter of 2022. As per our balance sheet, our net debt as of March 31, 2023 was $698 million, level with our net debt as of December 31, 2022. As of March 31, 2023, we were in compliance with the covenants under our credit agreement and we expect to continue to be in compliance in the future. Debt reduction continues to be our primary near-term focus for the use of cash. We paid down our term loan B in early April with a required excess cash payment of $44 million. The timing and magnitude of excess cash generation over the remainder of this year will determine when and how we will continue to reduce our debt. Our options could include, for example, some amount of open market purchases of our senior notes should they continue to trade at a significant discount, offering an enticing and financially rewarding yield to maturity. Longer-term, we may consider other capital optimization strategies. We are also mindful of our debt maturities and the springing maturity provision of our term loan B and revolver in January 2025, should we still have any of our senior notes outstanding at that time. Accordingly, we are closely monitoring the credit markets to determine the optimal window to refinance our debt. We currently believe that such refinancing is most likely to occur in the latter part of this year or the first part of next year. Finally, let me update you on some assumptions to consider for modeling purposes. G&A expense for 2023 is still expected to be between $250 million and $260 million. Depreciation and amortization expense is still anticipated to be approximately $47 million in 2023, with depreciation at $45 million and amortization at $2 million. Interest expense is still expected to be approximately $81 million, of which about $4 million will be non-cash. Our effective income tax rate for 2023 is now expected to be approximately 50% compared to the 22% to 24% range we provided last quarter. However, our actual effective tax rate for 2023 could end up being considerably lower should certain potential positive developments occur, as Ron alluded to earlier. We now expect non-controlling interest to be between $30 million and $40 million, and we continue to forecast approximately $52 million of weighted average diluted shares outstanding for 2023. Lastly, capital expenditures are now expected to be approximately $30 million to $40 million, of which about $15 million will be owner-funded and project-specific.

Ronald Tutor, Chairman and CEO

Thanks, Gary. To summarize, we generated solid operating cash, as previously stated, of $21 million in the first quarter of 2023 and entered the quarter with a backlog steady at $7.9 billion. We've already booked $3.2 billion of new awards into the backlog in the second quarter, increasing that backlog to over $11 billion, including the Brooklyn jail design build project and of course the Tinian airport. We also continue to anticipate that our cash generation will be stronger, and as previously stated, even stronger than 2022, as we resolve various disputed matters and collect the associated cash. Our end markets remain strong with solid demand for many prospective project opportunities we are pursuing, which should be bolstered by what we understand to be an influx of funding from the bipartisan infrastructure law. We look forward to delivering better earnings over the rest of this year and significantly improving financial results in 2024 and beyond as new projects that we've recently booked and other pending and prospective projects are awarded and contribute to those results. Thank you and I turn the call over to the operator for questions.

Operator, Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Steven Fisher with UBS. Please proceed with your question.

Steven Fisher, Analyst

Good afternoon. Congratulations on the Brooklyn jail project. Is there an upfront cash payment that you're going to get from that project? And if so, how much could that be?

Ronald Tutor, Chairman and CEO

Unfortunately, Steven, in our ability to release information with the prison's people, we are limited in what we can say. However, I will take the position that yes, without being specific, there is, but the job is broken into two phases. The Phase 1 will be the design phase as we conclude the design with the owner's input and approval. We hope to have a groundbreaking of construction by something in the order of June of next year. Not even June, let's say by March or April next year, we'll break ground. That's more accurate.

Steven Fisher, Analyst

Are there any other sort of uncertainties around this project that could keep the base case from happening?

Ronald Tutor, Chairman and CEO

The only thing remaining is it goes to the New York City Comptroller's office for certification so that we can actually start Phase 1. That's typically routine and pre-approved. But until that's done, we have a contract. We're allowed to announce it, but it isn't for certain until it is certified, which should be in roughly 30 days.

Steven Fisher, Analyst

Okay. It's helpful. And I know you're not giving formal EPS guidance right now. But can you just maybe set some expectations for operational performance in the civil and specialty sides of the business over the next two to three quarters? How should we think about revenue trends and near and medium term margins?

Ronald Tutor, Chairman and CEO

Our margins are holding up well, particularly in the civil side. We believe for the balance of the year, the building side is just a matter of getting these large jobs going. We can replace all the lost revenue from this period of time. Although we weren't initially affected by COVID, we worked through it. What most people don't realize, and it took us some time to understand, is with none of that $11 billion in low bids being awarded, which should have long been in construction and generating revenue, didn’t take place. All of a sudden, our revenue is down by 30%-35%. And that will not increase until we add more large work like the New York prison project, and that builds revenue back to where it’s always been in the $5 billion to $6 billion range, which we're hoping to accomplish by the end of the year.

Gary Smalley, Executive Vice President and CFO

So Steve, just a little bit more color. If you look at the first quarter revenue shortfall, again, these adjustments we talked about earlier had the most significant impact. Otherwise, we're not that far off of what the revenue was for last year. We expect as these new projects come on board to start generating revenue. That delta, that adjusted delta, will shrink. By the end of the year, we expect to exceed revenue from what we had last year.

Steven Fisher, Analyst

Okay. Then maybe a big-picture question here. Now, bear with me on this. Results at the company have been a little less than ideal for a little while now. The last couple of quarters, maybe even a little more variable with guidance withdrawal this quarter. To what extent is there any more sense of urgency to make some bigger changes within the company in any way that you can discuss, either operationally, strategically within any of the segments, or anything else just to kind of make some bigger changes?

Ronald Tutor, Chairman and CEO

I don't believe we've discussed all of the various issues, including their locations and ramifications. I don't see any short-term changes this year in the way we operate. There are certain areas where we're talking about change, but that won't be something that will take place over the next 8 to 12 months. We have yet to determine how we will handle it. So no, in the short term, there will be no major changes.

Steven Fisher, Analyst

Okay, thank you very much.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Ronald Tutor for closing comments.

Ronald Tutor, Chairman and CEO

Thank you, everyone, for your patience and involvement, and we'll see you next quarter.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.