Q3 2022 Tutor Perini Corp Earnings Call
Creating very significant cash.
Consequently, we are holding guidance for 2022, we anticipate providing EPS guidance for 2023, when we issue our fourth quarter results in February next year.
And today's inflationary and potentially recessionary environment, we're fortunate.
That once again is repeated many times in the past the construction industry and particularly infrastructure is largely resilient to the effects of economic downturns.
We have not seen nor do we expect to see any notable reductions strong level of demand for our services and very large complex civil projects, if anything even more demand than ever.
Our civil business in particular, the core driver of our future growth and profitability.
<unk> has historically been extremely resilient during economic terms, where governments over the last 50 years typically lead to increasing investments.
And a U S wide decaying infrastructure such that those projects support good Union and nonunion jobs and promote long term economic growth in benefits.
Add to that the fact.
That there is a $1 2 billion dollar bipartisan partisan infrastructure fund established by law, we have already seen.
<unk> seen billions of dollars of funding beginning to flow into the jobs. We're currently looking at bidding over the next 18 months.
Which much more expected to flow and the direct benefits.
Proceeding to the infrastructure industry over the next five years.
As I mentioned, we booked 80 $885 million of New awards and contract adjustments in the third quarter of 2022.
Most significant included a $126 million military facility in Puerto Rico, and a $32 million of hospitality project in California, both for Perini management services of $142 million of additional funding for two educational facilities for <unk>.
Rudolph and Sletten in California.
$56 million funding of a mass transit project for London construction in the Midwest and a $48 million mining award for frontier Camper in Virginia.
As I mentioned earlier, our backlog does not yet include the Raritan River Bridge, where we expect to add debt to the backlog by the end of the year and the same phase one south of the American Legion Bridge, which we anticipate booking into backlog sometime.
During the second quarter of next year.
<unk> these could increase our backlog to a new record high over the coming months.
In addition, Rudolph and Sletten began negotiating a new $300 million of healthcare project in northern California that should be added incrementally to backlog over the next year.
In addition, there are two other awards pending gaming projects in California.
Where we have preconstruction agreements collectively valued at 500 million, which we believe will be awarded by the second quarter next year.
Yeah.
Beyond these pending awards some of our larger near term bidding opportunities.
<unk>, the Brooklyn, and Queens jails, each valued at in excess of $3 billion for the New York City.
Markman of design and construction with Brooklyn proposal being tendered.
And on November 14th and the Queens prison.
In mid May 2023.
The $1 5 billion East San Fernando Light rail project was turned in today to Los Angeles, MTA, the $1 $5 billion, JFK roadways and ground Transportation Center.
Is due in January of 2023, or 60 days from now.
In addition, the $1 $5 billion Inglewood automatic.
People mover, which is situated 30 minutes from our main office in Southern California.
Proposal will be tendered in the third quarter of 2023.
Last but not least we have talked to the Hawaii Rapid transit district on the heart project that I remind you two years ago, we were low bidder at $2 7 million and it was rejected because it was far over budget.
They have reduced the scope by 25%, although they'll suffer the escalation there coming back out to bid by the second quarter next year.
So needless to say these are only some of the best of the major infrastructure. So we are overwhelmed and trying to select the both those best suited to us in a marketplace, where I continue to state there's very little competition.
As previously discussed we are continuing to make excellent progress and resolving disputes and collecting the associated cash and expect these efforts to conclude successfully over the next 18 months.
We look forward is substantially growing our backlog in the near term to historically high levels.
That will set new records, providing a solid foundation for our future success.
Thank you and with that I turn the call over to Gary Smalley.
Thank you Ron and Hello, everyone.
I'll start by discussing our strong operating cash results then I will review, our other financial results, including.
Including some factors that negatively impacted our earnings during the quarter and finally move on to provide some commentary on our balance sheet.
Operating cash flow was once again, the major highlight of our quarterly results.
As Ron mentioned, we generated $73 million of operating cash during the quarter compared to usage of $21 million for the same quarter last year.
The current year third quarter operating cash flow was among our best operating cash results of any third quarter since the merger in 2008.
And over the past 13 years since the merger prior to this year or.
Our third quarter operating cash flow has averaged approximately $26 million. So a $73 million result.
This year's third quarter was excellent.
More importantly, our year to date operating cash flow through the first nine months of 2022 was $251 million nearly double the best operating cash result, we've had for the first nine months of any year.
And 45% greater than the highest full year operating cash we have generated.
<unk> declined in all three segments was attributable to reduced project execution activities on various projects most of which are completed or nearing completion and partly due to the follow on impact of the COVID-19 pandemic.
As I discussed last quarter delayed bidding activities and awards of certain new projects during 2020 and much of 2021.
The decline was partially offset by increased activities on certain newer civil and building segment projects in California, and the Midwest.
We reported a loss from construction operations of $7 million for the third quarter of this year compared to income from.
From construction operations of $52 million for the same quarter in 2021.
The Civil segment reported income from construction operations of $23 million. The building segment was essentially at breakeven and the specialty contractor segment reported a loss from construction operations of $12 million for the quarter.
And finally, we reported corporate G&A of $18 million for the quarter.
The decrease in operating income compared to the third quarter last year was primarily due to reduced project execution activities at Newark, which impacted all three segments.
As well as an unfavorable adjustment of $14 $3 million.
On a completed civil segment Highway project in the northeast.
Due to an unexpected reversal on appeal of a previously favorable lower court ruling.
The decrease was also driven by an unfavorable adjustment on our building segment hospitality project in Florida that resulted from an adverse legal ruling as well as the absence of a prior year favorable adjustment on a mass transit projects in California.
Our earnings for the third quarter of 2022 were also negatively impacted by lower profits associated with the lower revenue.
With much of the lower volume due to the follow on impacts of Covid that impacted bidding and award activity in 2021 as I just mentioned.
Moving on interest expense for the third quarter of 2022 was $17 million comparable to last year's third quarter.
We had a small income tax expense of about <unk> 5 million for the third quarter of 2022 compared to $8 7 million of expense for the prior year third quarter and a corresponding effective tax rate was two 4% for the third quarter this year compared to 24.
9% for the comparable quarter of last year.
Normally a quarter with a reported pre tax loss such as what we experienced this quarter would have produced a tax benefit rather than tax expense.
The minor tax expense this quarter.
It was from a change in estimate due to a year to date catch up adjustment in our tax provision, resulting from a change in forecasted earnings for 2022.
Yes.
Due to the various factors I mentioned net loss attributable to tutor perini for the third quarter of 2022 was $32 million or a loss of <unk> 63 per share.
Compared to net income attributable to tutor perini.
A $50 million or <unk> 30 of earnings per share for the same quarter of last year.
As for our balance sheet, our net debt as of September 32022 was $638 million.
Down 19% compared to $791 million at December 31, 2021.
The decline was due to a lower level of debt and a higher level of cash on hand.
With regard to our credit agreement, we have just completed an amendment that temporarily increases our maximum allowable net leverage ratio to $2 75 to one from two to $5 to one through the first quarter of 2023.
The limit and will then step back down to 225 to one in the second quarter of next year.
Our reported net leverage ratio for the third quarter of 2022 was $2 one so.
So we were in compliance even without the amendment.
But since much of the cushion we have had with this covenant has eroded with the poor earnings for this year, we thought it was prudent to request covenant relief regardless.
We really look at this as being rather affordable insurance to provide some extra cushion in meeting this covenant over the short term.
We anticipate that we will continue to be in compliance with this covenant and our other credit agreement restrictions in the foreseeable future.
As we noted today in our earnings release debt reduction remains our primary near term focus for the use of cash.
We also indicated that on or before April 7th next year, we plan to make a significant excess cash to pay down on the outstanding balance of our term loan b, which is required by the terms of the debt agreement.
We currently estimate this pay down will be approximately $100 million.
So managing our cash for this upcoming debt repayment is currently our top priority.
However, once we get through the term loan B paydown.
Depending on conditions at that time, we may consider other capital optimization strategies, the timing of which will be dependent on how quickly and to what extent, we generate excess cash.
We have been somewhat confounded by our low share price.
As well as the significant discount at which our senior notes have been trading this year, particularly considering our record operating cash generation.
Our outlook for continued strong cash collections next year and a strong backlog that we expect to grow.
Two a record high in 2023.
Still believe as I mentioned last quarter that over the next year or so.
We will continue to resolve other claims and unapproved change orders that have been delayed by COVID-19. The amount of cash that we collect could exceed and should exceed the amount of our current market cap.
And with that I'll turn the call back over to Ron.
Thanks, Gary.
To summarize we generated very strong operating cash.
Of $73 million for the quarter and $251 million plus for the first nine months, we expect significant cash generation in the fourth quarter as well as throughout next year.
Timing of litigation Mediations and simply settlements of long overdue issues that were delayed for years, thanks to the pandemic and the shutdown of the court system is finally coming to the forefront.
This is a significant reason we are able to generate and will continue to generate the cash that we are.
Our backlog, obviously remains very healthy.
And if you look at what's pending and awards, we feel confident by next summer, we will have by far the largest backlog ever generated by the company without even adding any more of the new work bidding between now and then.
More importantly.
We continue to look forward.
To return to more consistent solid earnings per shell share results next year.
This year has been a focus almost entirely on new work and the collection of monies owed to us whether it's through litigation claims are open changes.
So as these resolved and the cash flow amounts.
We will continue to add to the backlog and we think next year will be the beginning.
Of a run a very successful earnings as we still continue to collect the enormity of cash were owed.
Thank you and with that I'll turn the call over to the operator for any questions.
Thank you and see you would like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star. He is our first question is from Brent Thielman with D. A Davidson. Please proceed.
Okay, great. Thanks, good evening.
Ron the large pending Maryland work could you just talk about what needs to be finalized in order for you to book that into backlog and when do you ultimately think that can occur.
Where we're meeting with the state of Maryland, and the joint venture of Trans urban and Mcquary literally every week virtually full time going through scope.
Right of ways, what Maryland has to do what they have to do so that when this is awarded and we're confident it will be that there'll be a clear path to success and we're spending time now trying to plug all of the open items and resolve all issues such.
When we get financial close which should be approximately April next year.
Job will immediately take off.
As you probably read the government is very supportive of the project.
<unk> has gone to the federal government for infrastructure funds to help fund the gap between their budget and our price.
And in all our meetings with the Maryland.
And the two developers of the <unk> III project everybody is optimistic that it will go ahead, but my guess is it won't get awarded until probably second quarter of 2023.
Okay. That's helpful.
The biggest contract ever awarded in the U S infrastructure, even larger than the than the Tappan Zee bridge that we bid some seven eight years ago.
Absolutely congratulations on that look forward bookings.
Bookings.
Yes, Ryan I know, we're not talking about 2023.
I'm just curious any initial thoughts.
I appreciate the commentary on recovery in earnings per share thoughts on how this sort of growing backlog convert to how quickly you sort of expect to see a recovery in revenues.
Again, theyre kind of convert on all of this new work being added.
Well if the new work gets added the way we expect it is a tremendous influx on revenue and it's at very high levels of margins. However.
The Raritan bridge, we get if we are awarded in November , which we are which we would hope or December the.
The first year is really planning layout and mobilization, so I don't see a great deal of costs expanded.
So as far as the earnings and costs associated it will be limited next year as wood.
Maryland, Maryland, Maryland, However has a very large cash component and mobilization and setup that we would be paid next year. So it adds a lot of positive aspects, but I don't believe we will see any significant revenue and cost and earnings and the Maryland job before too.
24, there will be some level in 'twenty three because there will be obvious startup costs insurance bonds and the like which are significant but the major impetus and impacts will be in 'twenty four going forward.
Having said that we expect next year to be a good year, we have a significant level of revenue yet to earn on high speed rail and even though it's been delayed for years. It appears it will be back on track by the second quarter next year to where we will be able to generate substantial gone.
Costs at the level of margin we've been earning.
All our purple line projects in Los Angeles are doing very well on the ramping up from design and the construction so.
So we are looking forward to a good year next year, but an even better on the following.
Okay very helpful.
Last one for me, Ron I mean, any sort of yield qualitatively quantitatively to the scale of some of these ongoing disputes youre attempting to resolve by year end I imagine things slow down closer to the holidays, so any progress teenager and things can speak.
Just trying to settle two right now and we will either saddle agree in the next.
Three weeks on what equates to $200 million in claims are we won't so it could have a significant impact cash wise.
And overall impact wise or we could say what I'd like to say go to Hell will see in cohort four years. So we will have to wait and see but it's that eminent.
And as one of the many reasons, we're reluctant to predict for the fourth quarter. Because this year as you can see has generated tremendous cash flow and we continue to resolve claims and collect monies, but it's hard to tell what will result in our resolve and what will continue in our litigation, but it's.
<unk> doing day to day and as soon as it takes place if it takes place we will announce.
Okay very good thank you.
Our next question is from Steven Fisher with UBS. Please proceed.
Thanks, Good afternoon, just want to clarify.
Was there new adverse legal rulings here in the quarter that kind of reverse some prior positive rulings I know that was an issue last quarter. So are these related or these new ones.
Yes. It is.
Not related to last quarter, but there was.
The two ones that we talked about one of the two was a reversal of.
A positive ruling that we had previously so different from last quarter, but similar circumstances that we had won in the lower court and then it was lost on appeal.
Okay.
Any sense for kind of what the risk that you have more of these reversals are these things that you've already.
I guess the cash hasn't been resolved yet so it's not like cash is going.
Back out, but it's just a reversal of a ruling.
Yes, that's right. These are the charges that we took are noncash.
Look it's rare to have something reversed on appeal, we thought that the facts, where we're totally on our side and quite frankly, we were shocked two to have the results both last quarter and this quarter that you mentioned.
So what's the likelihood of that happening is always possible, but we think it's low likelihood we think that to win when we win at the lower court, especially when the facts are on our side, we think and usually history has shown that the appeals fail in that case.
Okay. That's helpful and then on the specialty segment any can you just kind of give us a little more color on.
What's still on the specialty backlog that has maybe compromised margins and what's the timeframe for getting those projects completed.
The only thing of consequence remaining.
And let's say the two major specialty units that create all of these issues and losses are WD <unk> and five star in New York.
I would say the balance of our specialty group continues to meet its budget is very close to or does.
WD.
Took a write down on their subcontract at New York.
<unk> as did five star <unk>.
<unk> has no major other work ongoing that we feel could have a significant.
Impact in the near future they have a tremendous amount of cost reimbursable.
<unk> for all of the city agencies, which is pretty much established all those slow pay because of its cost reimbursable nature.
We don't see that we're exposed to any more significant write downs from WDM.
Unless it was an adverse ruling for any litigation and since there are no trials pending in at least the next six months.
I don't see <unk> as having anything significant that issue.
Five star Electric is very similar they took a major write down on Newark.
The balance of their issues are such that the ongoing work they have very little to any significant claims.
And it's finishing up over the next year do we have.
<unk> doesn't lawsuits pending with five star electric.
One of which is being currently litigated in arbitration against the U N as we speak but that wont conclude until next April or may but overall, although there is still continues to be major litigation when I timeline. It many of them came to fruition this year.
We think a lot of potential settlements will come up next year, but I don't believe we have any significant lawsuits.
It could hit us hard in the earnings category not like this year.
Okay. So then as we look out to the fourth quarter.
How should we think about the potential for returning to profitability in that in that segment.
Is that what your base cases for the fourth quarter and how.
Close to normalized third quarter D.
It won't be normal.
Because we have two major claims with very large monies associated we're in the final stages of negotiation.
Where our beloved New York Garner keeps telling us he owes us and theyre going to make us a significant offer.
But depending on that offer it may hold the balance sheet. It may be reduced it may be acceptable it may not but that's why we're very reluctant to make a fourth quarter commitment because these two significant claims they have a very large impact on both cash and on profitability.
If we resolve them.
It'll happen in the fourth quarter, if we don't we'll take we'll go straight delineation it'll be three to five years down the road.
There is significant ongoing negotiations that should result in a settlement.
Whether they do or not remains to be seen but we will know in the next few weeks.
Steve.
If those two large projects that Ron mentioned do not settle in the fourth quarter, we're looking at.
Specialty to come in with a small profit so breakeven to a small profit.
Okay. Thanks, and then maybe just lastly, Ned.
Reference to capital capital optimization strategies.
A little bit more color there is that just.
Basically referring to doing buybacks or theres some other.
<unk> plan that you have in mind.
Well without getting specific.
Projecting very significant cash flow from next year.
We would hope would be significantly more than even this year and as a result, we will be in a position to where we will be reducing that significantly and once we reduce that significantly to have the options discussed where a stock buyback because the stock is so horrific lead to.
Press.
That with the reduction of debt, we think we are free to buyback stock and secondly.
To encourage investment we're seriously considering dividends.
Because we think after next year, our earnings will be much more stabilized and significant and we think an appropriate dividend would be in order.
Oh and address any of those probably until mid year next year and of course, it will depend on the significance of our collections and the success of all of the cash flow.
Steve also it depends on what our stock prices at the time too and just the timing the pace of collections to the extent that we make the progress that we're talking about so really all options are on the table run as Ron outlined well as we sit and talk and we realize we're talking about honestly, believing we're going to.
Collect more cash next year, then the market cap of the company you begin to think buying back stock maybe something you can avoid.
Very interesting well best of luck and thanks a lot.
Thanks, Steve Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to Ron for closing comments.
Thank you once again fourth quarters next we will talk to you then.
Thank you. This concludes today's call you may disconnect your lines at this time and thank you for your participation.
Okay.
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