Andlauer Healthcare Group Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 6 speakers on the call.

Operator

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 Quezada, Vice President of Investor Relations.

Operator

Please proceed.

Speaker 1

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 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

Thanks, Jorge. Good day and thank you all for joining us. Our 2nd 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 Large civil projects were in the range of 2 plus years and prevented the award of 4 large projects Valued at almost $11,000,000,000 which we had been the lower preferred bidder. Most of these projects that were awarded that were not awarded us, if not all of them are now expected to be rebid In 2024 and in the first half of twenty twenty five, so we will have another opportunity to 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-twenty 24.

Speaker 2

Our Q2 operating cash flow was a solid $56,000,000 bringing our operating cash flow for the 1st 6 months of 2023 to $78,000,000 the 2nd highest results for the 6 months of any year Since the merger of Tudor, Saliva and Perini Corporation in 2,008. We remain confident that our cash generation in Half of this year will be even stronger as we expect to resolve various long standing disputes, Be it either by negotiation or litigation or 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 refinancing early next year. Our 2nd quarter backlog Increased to $10,900,000,000 up 27% compared to $8,500,000,000 for the same quarter last year. Strong backlog growth was driven by the large award of the $3,000,000,000 Brooklyn Jail design build project, which includes More than expected to be performed by our Specialty Contractors segment.

Speaker 2

And we also booked nearly 1,000,000,000 Other new awards and contract adjustments, including Black and

Speaker 3

Sea in International

Speaker 2

Airport Project In the Northern Mariana Islands and $102,000,000 of additional funding at a Rudolph and Slueton 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 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 $3,000,000,000 Queens facility on a decision of which will be made in January with all proposals in. The owner has indicated that as a timeline for award. In October, we will be busy bidding on numerous projects, including the $1,000,000,000 Tunnel Frederick Douglass Tunnel in Maryland as well as the $500,000,000 Fulton Line Communications Train control projects in New York and the $500,000,000 Amtrak Connecticut River Bridge Replacements.

Speaker 2

We also expect the decision in the Q4 on Frontier Kemper's proposal for the $500,000,000 Great Lakes stump. Other larger near term opportunities include the $1,500,000,000 Inglewood People Mover Project in Southern California and the $500,000,000 Amtrak East River Tunnel Rehab in New York, Both bidding later this year expected to bid in the Q1 of 2024, which I'd remind you all we were low bidder 2 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 U. S.

Speaker 2

Economy continues to be strong and resilient despite the Specs 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 Sprint Infrastructure By the Bipartisan Infrastructure Law, demand for our services remains extremely strong and is expected to increase substantial funding flows to our public owners over the next period of 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 to not provide new guidance for 2023. Various risks exist both with respect to dispute resolution negotiation and the result of major litigation decisions which are in play to conclude in the 4th quarter.

Speaker 2

There is 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 Set to some degree any negative that might occur. Needless to say, we don't feel it appropriate to make Thank you. And with that, I will turn the call over to Gary to review the financial results.

Speaker 4

Thank you, Ron, and good afternoon, everyone. I will start by discussing our results for the Q2, including cash flow, followed by some comments on our balance sheet as well as some modeling assumptions. As Ron mentioned, We generated a solid $56,000,000 of operating cash in the Q2 of 2023 $78,000,000 in the 1st 6 months of 2023, which is the 2nd best result for the 1st 6 months of any year since the 2,008 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.

Speaker 4

Revenue for the Q2 of 2023 was just over $1,000,000,000 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 2nd quarter was 5 And $54,000,000 up a strong 37% compared to the Q2 of last year due to the mass transit projects I just mentioned. Building segment revenue was $331,000,000 up 24% and Specialty Contractors segment revenue was 136,000,000 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, The 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 Contractor segment was principally due to reduced project 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 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.

Speaker 4

Overall, we reported $2,000,000 of income from construction operations for the Q2 2023 compared to a loss from construction operations of $91,000,000 for the same quarter of last year. Our Q2 results for this year were dominated by a very strong profit contributions from the Civil segment, which Delivered $105,000,000 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 $58,000,000 on one of those projects based on improved performance. The Building segment, however, Despite posting good revenue growth for the 2nd quarter, posted a loss of $14,000,000 for the quarter, primarily due to unfavorable adjustments on certain projects in the Northeast, California and Florida that were immaterial individually, but totaled about $16,000,000 in the aggregate. The Specialty Contractors segment posted a loss From construction operations of $70,000,000 in the 2nd quarter that was largely attributable to unfavorable non cash adjustments of $36,000,000 due As I just mentioned, 2 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 $25,000,000 on the Educational Facilities project in New York that resulted from an adverse court ruling for a no damages for delay clause.

Speaker 4

Corporate G and A expense for the Q2 of 2023 was $19,000,000 compared to $14,000,000 for the same quarter of last year. Other income for the Q2 of 2023 was $3,000,000 compared to $1,000,000 in the Q2 of 2022. Interest expense was $22,000,000 compared to $16,000,000 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 have a slight income tax expense of $194,000 for the quarter With an associated effective tax rate of a negative 1.2 percent compared to an income tax benefit of $44,000,000 in the Q2 of last year And effective tax rate of 41.3 percent, which resulted from our pre tax loss of $106,000,000 in the prior year period. Our effective tax rate for each quarter depends on the pre tax results that are forecasted for the full year.

Speaker 4

When we forecast a pre tax 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 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 increased volatility in the rates from quarter to quarter. Net loss attributable Tutor Perini for the Q2 of 2023 was $38,000,000 or a loss of $0.72 per share Compared to a net loss attributable to Tutor Perini of $62,000,000 or a loss of $1.23 per share in the Q2 of 2022.

Speaker 4

The smaller loss was due to the various factors mentioned earlier that drove our income from construction operations in the current Q2, again, primarily in the Civil Group. As for our balance sheet, our net debt as of June 30, 2023 was $663,000,000 down 36,000,000 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 Our first lien net leverage ratio for the Q2 of 2023 was 2.23:one, well within the limit for the quarter of 3 to 1. As a reminder, the leverage ratio will step down to 2.5 to 1 for the Q3 of this year and 2.25 to 1 for each quarter thereafter. Debt reduction remains our primary near term focus for the use of cash.

Speaker 4

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 spring and 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 and A expense for 2023 is now expected to be between $245,000,000 to $255,000,000 Depreciation and amortization is still anticipated to be approximately 40 $7,000,000 in 2023 with the depreciation of $45,000,000 and amortization of 2,000,000 Interest expense is now expected to be approximately $84,000,000 of which about $4,000,000 will be non cash.

Speaker 4

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 $45,000,000 $50,000,000 and we continue to forecast 52,000,000 Weighted average diluted shares outstanding for 2023. Lastly, capital expenditures are now expected to be approximately 45 to $50,000,000 most of which is project related. Thank you. With that, I'll turn the call back over to Ron.

Speaker 2

Thanks, Jerry. To recap, we had strong revenue growth in the second quarter, driven by contributions from Civil mass transit projects in California. As I previously stated, our backlog grew The $10,900,000,000 in the 2nd quarter, up 27%, we once again generated solid cash $56,000,000 from operations $78,000,000 to date and I repeat continue or anticipate Much stronger in 2 at the balance of the year. As a result, the disputed matters at hand and the litigation and process That will conclude this year. Our bidding pipeline, as we've said over and over, continues to grow With a significant amount of major work and very limited at best competition, We anticipate delivering significantly improved earnings.

Speaker 2

Let me change that, I read. We anticipate delivering improved earnings over the second half of this year without question And significantly improve financial results next year and beyond as we conclude and resolve All these long duration disputes and litigations and they're brought to an end and we Collect the capital we've been owed for so long. We expect strong sustained profit Contributions from the various large ongoing civil projects that continue to contribute to our earnings and will continue over the next several years. I would also add that our Civil segment delivered very strong profit in the Q2. Unfortunately, it was largely offset by continuous losses in our Specialty Contractors segment and to a lesser extent our Building Group.

Speaker 2

With that, I'll turn the call over to the operator for questions. Thank you.

Operator

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer Our first question comes from the line of Alex Rygiel with B. Riley Securities. Please proceed with your question.

Speaker 3

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

Speaker 2

Well, this is Ron, no, the Brooklyn prisons is funded in New York as a part of the federal Judge is dictating that Rikers be replaced and that's all state and city funds. And frankly, We hear about the infrastructure bill. We're convinced they're funding. They've been more funding direct 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 3 or 4 of our major $1,000,000,000 plus civil jobs that appear to be getting funding and will hit the mark The place for us to propose on in 1st and second quarter next year.

Speaker 2

So it's having an effect. It's just been very slow happening.

Speaker 3

That's helpful. And then Ron, obviously, this has

Speaker 4

been a Tough year as

Speaker 3

it relates to kind of reported earnings with a lot of the dispute settlements. You've mentioned that you're hopeful this Any way to kind of bracket your mind sort of Are you hoping that it concludes in 2024 or could it split them in 2025?

Speaker 2

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 It won't affect anything. 2324, good or bad, is collecting money, Settling these long standing claims and disputes that stood still for 3 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 It's going to take place through the end of next year, where I expect that 90% of all of our CIE will be adjudicated one way or the other, and I expect us to 1 way or the other and I expect us to win and collect most of our money.

Speaker 4

Yes. Ron, if I could add this. Hi, Alex. Just wanted 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, arbitrated.

Speaker 4

We look forward to not just having negative results, but positive results. And in fact, we've had that in the last quarter.

Speaker 2

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 book 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.

Speaker 4

Yes, Ron, there was nothing you said. I just want to make sure that it was understood based on the question. But, yes, we and 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.

Speaker 3

Thank you.

Operator

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

Speaker 5

Thanks. Good afternoon. Hi, Steve. Hi. Can you just give us a sense of how much is being adjudicated In the second half of the year, and I guess, maybe putting it in terms of what's the amount of the claims you have on the That are to be adjudicated.

Speaker 5

I think Ron you just said 90% of CIE before this is all over, but how much in the second half of this year do you I think you'll be adjudicating. Ron, probably

Speaker 4

better talk in aggregate, right?

Speaker 2

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 $200,000,000 more.

Speaker 5

Okay. That's helpful. And I think last quarter, You had expected to reinstate the guidance this quarter. And I guess I'm just curious kind of I know you still What were your plan what the uncertainties are for the rest of the year, but curious just what kind of changed your mind versus 3 months ago?

Speaker 2

We have a lawsuit that tries for well over $100,000,000 in a 3 panel arbitration. And although I believe we will win, the swing could be such to try to predict that lawsuit Even as optimistic as I am, we've discussed and decided it would be inappropriate. The results will be in, in November, And there's nothing else that compares to it going forward into the following year.

Speaker 5

Okay. If

Speaker 4

I could add this, Steve also, in my remarks, I was talking about the tax rate and that's a big part of it's just so hard For us to know what that tax rate is going to be or what the impact will be because with our tax rate based on what it is On a forecast for the year, as we whittle down the loss that we have for the first half of the year, then the impact On the tax rate is magnified because that loss shrinks. If you follow, it's mapped. But So it just makes it more volatile and more difficult. So we could we'd have a better chance of predicting, Let's say consolidated pretax income, but to give an EPS range, there's so much volatility with the tax rate that besides what Ron mentioned, It just makes it almost impossible for us to really feel comfortable with an estimate.

Speaker 5

Okay. Thanks, Gary. And then Have you had discussions with lending groups to get a sense of how much cash you need to collect in order to Put yourself in a position to be able to kind of reasonably refinance the debt over in the early part of next year?

Speaker 2

Yes. Ron,

Speaker 4

okay, I'll take this one. Yes. Yes. So Steve, we've talked To various groups. And the short answer is the more the better.

Speaker 4

But there's not really a minimum that we've heard. It's really a function of certainly we need to have improved performance. Cash flow generation is a positive. Also, what the pricing for our bonds, what they're trading at right now, they're at 86. That's significantly improved from what they were A quarter ago, if we continue to see improvement there, then that certainly is a bright sign.

Speaker 4

Getting down Our leverage was a big part. We made some progress in that. We believe based on the advice that we're getting, if we continue to do what we're doing, maybe a little better on the earnings Of course, for the rest of the year, we think we're going to be well positioned. And then certainly with the outstanding litigation that Ron mentioned litigation arbitration and also some of the other cash that we expect to come in for settlement activity. That should give us another bump that should be helpful.

Speaker 5

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 So leverage and cash collections and some of the legal settlements, Well, what's your surety bond capacity and where does that stand at the moment?

Speaker 2

Well, we have a very significant capacity because unlike the public markets, The sureties look at our basic equity net worth, which exceeds $1,200,000,000 our Cash flows which are positive and continuing to get better and our performance in the major civil work which is what we're pursuing. So it's disappointing as these collections have been in the disputes and the write downs and I might add predominantly in New York, Which is a very to be very kind, a very challenging place to work, The sureties are 100% in support. At least as we speak, they continue to be supportive as we pursue This may your work because irregardless of the write downs and the lack of earnings, we have a very substantial net worth, Which is what we all look to from a surety and a capacity standpoint. So everything is fine, but it doesn't mean We have simply got to get out from under these CIEs and back to the norm, whatever it takes.

Speaker 5

Okay. And then just lastly, on the specialty business, obviously lots of moving parts in there. Wondering 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 be might flow through To give us a sense that this is a business that still makes sense to pursue.

Speaker 2

Well, let me clarify the specialty business, So you don't throw in the good with the bad. We have an operation called Fisk Electric, which operates in Fisk of Texas and Fiskars, California, 2 separate entities in that specialty group that year after year make money and never lose. We have a mechanical company in South Florida called Nagelbusch Mechanical that never loses. We have Our problem in the Specialty Group isn't the entire group. It's the mechanical and electrical operation in New York City, Which has generated half of our CIE and most of the big losses you see with respect to the reference to the specialty group New York is an incredibly difficult place to work with A legal system that essentially protects public agencies and is very difficult and challenging for contractors.

Speaker 2

However, our performance and those of most of our peers in New York have created the decision that abysmal state. There's nobody left that can bid big work, and as a result, they don't. So we've reached a point To where as one of only maybe 2 players in town that can do a major job, we're increasing our prices And demanding contract changes, which we have forced through. Our specialty group in New York, where all of these problems have emanated, Have been reduced to a fraction of their size, and at least for the time being in the near future, are only bidding in support of our civil group And not allowed to do any business with any other contractors, developers or agencies direct. So let's just say that revenue is probably 25% of what it was 4 years ago.

Speaker 2

And in the interim, they will continue to function only to support us under our control. So to put it bluntly, they've been reduced dramatically And we're in hopes of cleaning out all of the negative work, getting all these issues resolved. And then if they grow back up, it will only be on the basis of their performance, which so far at best has been challenging.

Speaker 5

Thank you very much, Ron.

Operator

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

Speaker 2

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

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Andlauer Healthcare Group Q2 2023
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