Tutor Perini Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Tutor Perini Corporation's First Quarter 2023 Earnings Conference Call. My name is Alicia, and I'll 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.

Operator

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

Speaker 1

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 ks, which we filed on March 15, 2023.

Speaker 1

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.

Speaker 2

Good afternoon and thank you all for joining us. As we disclosed in the Form 8 ks 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 $83,600,000 that impacted the Building and Specialty Contractors segments in the Q1 of 2023. A number of years ago, we were in arbitration Pursuing recovery of our claims from the project's developer and we're clearly winning in that process. Based on case law and the advice of preeminent bankruptcy counsel, we believe that we would be reimbursed for amounts that we were owed outside of the bankruptcy proceeding. Unfortunately, the appellate Courts ruled otherwise, so we took the charge.

Speaker 2

However, we are still pursuing recovery of significant amounts of money we believe are owed and entitled to collect through 2 other separate legal proceedings related to the project, 1 against the individual owners of the developer and another against the Port of New York and New Jersey, who is the owner of the project, who has now succeeded the developer and taken it back. Separately, during the Q1, We negotiated more than $220,000,000 of change orders for a civil Segment Mass Transit project in California. However, these were lower margin and of course lower risk change orders that resulted And once again, a temporary negative project catch up adjustment of $28,000,000 in the first quarter due to the treatment of these approved change orders under the percentage of completion accounting rule. You may recall that the same phenomenon occurred on the same project in 2022 and that 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 an earned profit to date that is significantly higher than the Specific earnings of the executed changeover.

Speaker 2

And even though the profit goes up by the strict percentage of completion, We have to take this paper write down until we're further along and it comes back. It is an oddity A percentage of completion when you have wild disparity amongst profits in certain changes as well as the contract, But we're dealing with it and although it impacts us in any given quarter, they should reverse themselves 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 Q1 of 2023. Our Q1 revenue also declined year over year because of reduced project execution activity on the Newark Airport Terminal A project that opened in January, which impacted all three segments, as well as previously mentioned the lingering effects of the COVID-nineteen pandemic, which delayed the awards of almost $11,000,000,000 in low bids or in fact We ended the awards and rejected our bids.

Speaker 2

The bids were rejected because thanks to the upswing in COVID costs, Everything that we were low on was significantly over the owners' non updated budgets. They're rejected. They're coming back out in 2024 in various stages, but nevertheless between the ending of Newark And the enormity of those bids, which should have been in awards and generating revenue not going forward, As a result of these negative impacts as discussed, we reported a loss of $0.95 per diluted share for the Q1 of 2023. Positive news for the Q1 including operating cash flow of $21,000,000 driven by solid collection activities including Collections associated with certain settlement negotiations that concluded in the Q4 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 Well, throughout this year and next.

Speaker 2

We also continue to anticipate our cash generation will be stronger in 2023 than our record operating cash in 2022 and depending on the timing and magnitude of disputes resolution this year, With our year end 2022 backlog, on our last earnings call, I mentioned that we had more than 3,000,000,000 Pending new awards and I am pleased to report that in the Q2 of 2023, we've already booked a contract More than $3,200,000,000 of new projects in the backlog, including the recently announced $2,950,000,000 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 $222,000,000 Tinian International Airport Project in the Northern Mariana Islands that was recently awarded to Black Construction, our Guam subsidiary, and a $41,000,000 electrical subcontract to Fisk Electric for a healthcare project in South Florida. Our bidding pipeline remains significant and active with numerous additional opportunities, including Guam and the United States, in particular, the East Coast. Some of the more significant awards and contract adjustments We worked in the Q1 of 'twenty three included the $224,000,000 of additional changes for a mass transit project in California, a $91,000,000 educational facility in California, A $75,000,000 facility renovation for the military in Colorado, a $62,000,000 bridge repair And a $56,000,000 of additional funding for a healthcare project in California.

Speaker 2

We continue to believe the 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 As I have said before, successfully growing our Civil business, which has 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 We are still awaiting a decision expected in the coming months on Frontier Campers bid for $500,000,000 Great Lakes Tunnel Project. Other larger near term opportunities include the $3,000,000,000 plus Queens Jail, which will now propose in July with an expected award in September and a notice to proceed in December of this year. The $2,000,000,000 Honolulu rail transit job, which should bid in the Q4 of this year, which of course was the project we were low bidder in 2020 and it too was rejected as being over budget. And the $1,500,000,000 Inglewood Automated People Mover in Southern California, which should bid in the 4th quarter.

Speaker 2

With significant new awards mentioned earlier that have already been booked, we expect to report a significantly larger backlog at the end of the second quarter of 2023 and what could potentially be a new record backlog by the end of this year as we capture other large projects. Our Q1 financial results make the achievement of our initial EPS guidance for 2023 challenging. Accordingly, we're drawing our EPS guidance. However, we believe there are certain positive events that will occur later this year, which could set some of the negative results we experienced in the Q1. Therefore, we plan to reassess our outlook over the next few months and intend to provide an updated guidance when we report our results for the Q2 of 2023.

Speaker 2

Looking ahead, we continue to anticipate positive and normalized EPS performance in 2024 and beyond. Thank you. With that, I turn the call over to Gary Smalley to review the financial data.

Speaker 3

Thank you, Ron, and good afternoon, everyone. I will start by discussing our results for the Q1, including cash flow, followed by some commentary on our balance sheet. As Ron mentioned, we generated solid operating cash of $21,000,000 in the Q1 of 2023, which was a good result considering that we usually report cash usage in the Including collections associated with certain settlement negotiations that concluded in the Q4 of last year. Cash collections both 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 as Ron noted, depending on the timing and magnitude of collections associated with certain dispute resolutions.

Speaker 3

Revenue for the Q1 of 2023 was $776,000,000 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 2 significant negative adjustments that Ron mentioned. In addition, as we indicated last quarter, not being awarded projects totaling more than $10,000,000,000 over the last few years When we were the lower preferred bidder, primarily because of COVID-nineteen induced customer budgetary constraints, significantly reduced Revenue for both the Q1 of 2023 and the Q1 of 2022 since it prevented us from replacing revenue on completing projects with new project revenue. Civil segment revenue for the Q1 was 350,000,000 down 10% compared to the Q1 of last year. Building segment revenue was $230,000,000 down 31%, and Specialty Contractors segment revenue was $197,000,000 down 15% year over year. With respect to the $83,600,000 non cash pre tax charge related to the adverse legal ruling on the George Washington Bridge bus station project or GWB project, as Ron mentioned, we are still pursuing recovery of significant amounts that we believe we are entitled to collect through 2 other separate legal In spite of these ongoing legal actions to pursue amounts that we are rightly owed, we believe taking the charge in the Q1 was the appropriate action.

Speaker 3

The charge negatively impacted income from construction operations for the Building and Specialty Contractor segments by 72 point $2,000,000 $11,400,000 respectively. Regarding the approval of Margin and lower risk change orders that negatively impacted income from construction operations by $28,000,000 on the Civil segment project. Keep in mind that as Ron indicated, the negative impact is temporary and that is expected to reverse itself over the remaining course of the project. This is the same project with similar circumstances to what we experienced in 2022, first in the Q1 of last year and then also in the latter quarters. We resolved this large amount of change orders then as we did this time with the customer, which is a very good thing, But the short term impact due to the accounting rules related to cumulative catch up adjustments on profit recognition caused the unfavorable impact in the quarter.

Speaker 3

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 $82,000,000 loss from construction operations for the Q1 of 2023 compared to a $10,000,000 loss from construction operations for the same quarter of last year. The Civil segment Income from construction operations of $18,000,000 for the Q1 of 2023 compared to a loss of $1,000,000 for the Q1 of 2022, which was impacted by 2 adjustments, 1 for a negative The Building segment had a $70,000,000 loss from construction operations compared to $9,000,000 of income in the same period of last year, largely because of the GWV project negative impact to the segment of the $72,200,000 that I just mentioned. And the Specialty Contractors segment reported a $12,000,000 loss from construction operations for the current quarter compared to a $4,000,000 loss in the Q1 of last year, again largely due to the negative GWB project impact to the segment, this time for $11,400,000 Corporate G and A expense for the Q1 of 2023 was $16,000,000 compared to $15,000,000 for the same quarter of last year.

Speaker 3

Other income for the Q1 of 2023 was $6,000,000 compared to $4,000,000 in the Q1 of 2022. Interest expense was $22,000,000 compared to $16,000,000 for the same quarter last year with the increase driven by higher borrowing rates this year on our Term Loan B and also on our revolver. We reported an income tax benefit of $48,000,000 in the Q1 of 2023 due to our significant pre tax loss for the quarter with an associated effective tax rate of 49.6 percent. This compared to an income tax benefit of $4,000,000 in the Q1 of last year with an effective tax rate of 17.1 percent for that period. The higher tax rate in the Q1 of 2023 was actually beneficial and that it provided additional tax benefits to help offset the impact of our pre tax loss for the quarter.

Speaker 3

Net loss attributable to Tutor Perini for the Q1 of 2023 was $49,000,000 or a loss of $0.95 per share compared to a net loss attributable to Tutor Perini of $22,000,000 or a loss of $0.42 per share in the Q1 of 2022. As for our balance sheet, our net debt as of March 31, 2023 was $698,000,000 level with our net debt as of December 31, 2022. As of March 31, 2023, we were in compliance 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 Cash. We paid down our term loan B in early April with a required excess cash payment of $44,000,000 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.

Speaker 3

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 enticing and financially rewarding yield to maturity. Longer term, we may consider other capital optimization strategies. Also, we are mindful of our debt maturities and the spring immaturity provision of our Term Loan B and revolver in January should we still have any of our senior notes outstanding at that time. Accordingly, we are closely monitoring the credit markets 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 1st part of next year.

Speaker 3

Finally, let me update you on some assumptions to consider for modeling purposes.

Speaker 4

G and

Speaker 3

A expense for 2023 is still expected to be between $250,000,000 $260,000,000 Depreciation and amortization expense is still anticipated to be approximately $47,000,000 in 2023, with depreciation at $45,000,000 and amortization at $2,000,000 Interest expense is still expected $81,000,000 of which about $4,000,000 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 have provided last quarter. However, our actual effective tax rate for 2023 could end up being considerably lower than this should certain potential positive developments occur that Ron alluded to earlier. We now expect non controlling interest to be between $30,000,000 $40,000,000 and we continue to forecast Approximately $52,000,000 of weighted average diluted shares outstanding for 2023. Lastly, capital expenditures are now expected to $30,000,000 to $40,000,000 of which about $15,000,000 will be owner funded and project specific.

Speaker 3

Thank you. And with that, I'll turn the call back over to Ron.

Speaker 2

Thanks, Gary. To summarize, we generated solid operating cash as previously stated of $21,000,000 in the Q1 of 2023 and entered the quarter with a backlog steady at $7,900,000,000 We've already booked $3,200,000,000 of new awards into the backlog in the second quarter, Increasing that backlog to over $11,000,000,000 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 continuing various disputed matters and collect the associated cash. Our end markets remain strong with solid demand from any 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 improved Financial results in 2024 and beyond as new projects that we've recently booked and other pending and prospective

Operator

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

Speaker 4

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?

Speaker 2

Well, unfortunately, Stephen, in our ability to release with the prisons people, We're limited to what we can say, but I will take the position that, yes, without being specific, there is. But the job is broken into 2 phases. That's the Phase 1 will be the design phase as we conclude the with the owner's input and approval and then hopefully a groundbreaking of construction by something in the order of June of next year. Well, not even June is make it we're in May now. Let's say, By March or April of next year, we'll break ground.

Speaker 2

That's more accurate.

Speaker 4

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

Speaker 2

The only thing that's remaining is it goes to the New York City Controller'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, but It isn't for certain until they certify, which will be in 30 days or roughly 30 days.

Speaker 4

Okay. That'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 side of the business over the next 2 to 3 quarters, like how should we think about Revenue trend and near and medium term margins?

Speaker 2

Our margins are holding up well, particularly in Civil end. And we think for the balance of the year, the building end, it's just a matter of getting these large jobs going, So we can replace all the lost revenue by this period of time where although we weren't initially affected by COVID, we worked through it. What most people don't realize and it took us a time to understand is with none of that $11,000,000,000 in low bids Being awarded, which should have long been in the construction and generating revenue, didn't take place. So All of a sudden our revenue is down by 30%, 35% and that will not increase until we add more large work As in

Speaker 3

the New York prison and the like, and that builds the revenue back to where it's always been in the $5,000,000,000 to $6,000,000,000 range, And that's what we're hoping to accomplish by the end of the year. Yes. So Steve, just a little bit more color. If you look at the Q1 revenue shortfall, Again, these adjustments that we talked about earlier, they had the most significant impact. Otherwise, we're not that far off of what The revenue was for last year.

Speaker 3

We expect as these new projects come on board start to generate revenue that delta That adjusted delta will say will even shrink and by the end of the year we expect to exceed revenue from what we had last year.

Speaker 4

Okay. Then maybe a big picture question here. You have to bear with me on this. Results At the company have been a little less than ideal for a little while now. And I guess the last couple of quarters maybe even A little more variable with guidance withdrawal this quarter.

Speaker 4

So 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?

Speaker 2

No, I don't believe we've discussed all the various issues, where they're located, the ramifications. I don't see any short term changes this year in the way we operate. There are certain areas we're talking about change, but That won't be that's something that will take place over the next 8 to 12 months and we've yet to determine How we handle it. So no, in the short term, there'll be no major changes.

Speaker 4

Okay. Thank you very much.

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.

Speaker 2

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

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Earnings Conference Call
Tutor Perini Q1 2023
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