Tutor Perini Corporation Q1 2023 Earnings Call
Good day, ladies and gentlemen, and welcome to the 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 managements 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad I will now turn the conference over to your host for today, Mr. Jorge Casado.
Vice President of Investor Relations. Please proceed.
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.
Before we discuss our results I'll 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 15th 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.
You and I will now turn the call over to Ronald tutor.
Good afternoon, and thank you all for joining us as we disclosed in our 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 noncash pre tax charge of $83 6 million that impacted the building in.
Specialty contractors segment in the first quarter of 2023.
A number of years ago, we were in arbitration pursuing recovery of our claim from the project developer and we're clearly winning in that process.
Once it became clear they would be annoying us a significant amount of money.
<unk> per stop paying their lawyer and immediately file for bankruptcy.
Based on case law and the advice a pre eminent bankruptcy counts. So 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.
However, we are still.
Pursuing recovery of significant amounts of money, 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 Port of New York, and New Jersey, who is the owner of the project.
Who is now succeeded the developer and taken it back.
Separately during the first quarter, we successfully negotiated more than $220 million of change orders.
For our 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 million 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 the project.
It is a situation where we have an earn profit to date that is significantly higher than this specific earnings of the executed change or <unk>.
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 of percentage of completion, when you have while disparity amongst profits in certain changes as well as the contract, but we're dealing with it and although it impact 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 in our financial results for the quarter in a moment.
Both factors negatively impacted our revenue.
<unk> earnings for the first quarter of 2023.
Our first quarter 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-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 thanks to the upswing in Covid costs.
Everything that we were low on with significantly over the owners non updated budgets, they're rejected theyre coming back out in 2024 and various stages, but nevertheless between the ending of Newark, and the enormity of those bids would should have been.
In awards and generating revenue not going forward as a resulted in this dramatic reduction of revenue.
As a result of these negative impacts as discussed we reported a loss of 95 per diluted share for the first quarter of 2023.
Positive news for the first quarter, including 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 continue to anticipate our cash generation will be stronger in 2023, then a record operating cash in 2022, and depending on the timing and magnitude of disputes resolution this year, our cash generation could be much stronger.
For the first quarter, we maintain our backlog of $7 9 billion level with our year end 2022 backlog.
On our last earnings call I mentioned that we had more than $3 billion of pending New awards and I am pleased to report that in the second quarter of 2023 have already booked to contract more than $3 2 billion of new projects in the backlog, including the recently announced $2 95.
Brooklyn, JL 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 10 year in the International Airport project in the Northern Mariana Islands.
That was recently awarded a black construction, our Guam subsidiary and a $41 million 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.
East Coast.
Some of the more significant awards and contract adjustments that we worked in the first quarter of 'twenty. Three included the $224 million of additional changes for a mass transit project in California, a $91 million educational facility in California.
$75 million facility renovation for the military in Colorado.
$62 million bridge repair in Minnesota, and a $56 million of additional funding for our healthcare project in California.
Yes.
We continue to believe the demand for our services will remain strong and increased meaningfully and 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 the 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, which has been historically the part of our business that has been most resilient and successful during economic downturns.
<unk>, our primary focus and will continue to be the driver of our future growth and profitability.
We are still awaiting a decision expected in.
In the coming months on frontier Kemper'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 propose in July with an expected award in September and a notice to proceed in December of this year.
Yeah.
The $2 billion, Honolulu rail transit job, which should bid in the fourth quarter 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 5 billion Englewood automated people mover in southern California, which should bid in the fourth quarter.
With significant New awards mentioned earlier that are already in 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 first quarter financial results make the achievement of our initial EPS guidance for 2023 challenging.
Accordingly, withdrawing our EPS guidance. However, we believe there are certain positive events that will occur later, this year, which 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 an updated guidance. When we report our results for the second quarter of 2023 looking.
Looking ahead, we continue to anticipate positive and normalized EPS performance in 2024 and beyond.
Thank you and with that I turn the call over to Gary Smalley to review the financial data.
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 the rest of 2023 due.
Due to projected 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.
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. When we were the lower preferred bidder, primarily because of COVID-19 induced customer budgetary constraints significantly reduced.
Revenue for both the first quarter of 2023 in the first quarter of 2022 since it prevented us from replacement revenue on 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.
With respect.
To the $83 $6 million noncash.
Noncash 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 Soufan 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 a lower margin and lower risk change orders that negatively impacted income from construction operations by $28 million on the civil segment project.
Keep in mind that as Ron indicated that 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 first quarter of last year, and then also in the latter quarters.
We resolve this large amount of change orders and then as we did this time with the customer which is a very good thing with a short term impact due to the accounting rules related to cumulative catch up adjustments on profit recognition caused the unfavorable impact in the quarter.
I would point out that if not for these two significant negative impacts to earnings.
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 the same project due to the successful negotiation of change orders that we've been talking about.
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 $72 $2 million that I just mentioned.
And the specialty contractor segment reported a $12 million loss from the from construction operations.
For the current quarter compared to a $4 million loss in the first quarter of last year.
<unk> largely due to the negative DWP project impact to the segment at 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 $16 million 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 million in the first quarter of 2023 due to a.
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 and that it provided 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 <unk> 95 per share comp.
Compared to a net loss attributable to tutor perini of $22 million or a loss of <unk> 42 per share in the first quarter of 2022.
As for 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, we'll 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 enticing and financially rewarding yield to maturity.
Longer term, we may consider other capital optimization strategies.
So we are 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 determined the optimal window to refinance our debt. We currently believe that such refinancing as 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 215 $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 noncash.
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% and $40 million.
And we continue to forecast <unk>.
<unk> <unk> $52 million of weighted average diluted shares outstanding for 2023.
Lastly, capital expenditures are now expected to be approximately $30 million to $40 million.
It's about $15 million will be owner funded and project specific.
Thank you and with that I'll turn the call back over to Ron.
Thanks, Gary to summarize.
We generated solid operating cash as previously stated.
$21 million in the first quarter of 2023.
And entered the quarter with a backlog steady at seven 9 billion, we've already booked $3 2 billion of New awards into the backlog in the second quarter.
Creasing 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 continuing various disputed matters and collect the associated cash our end markets remained 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 improved financial results in 2024 and beyond.
As new projects that we have recently booked in 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.
Thank you.
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One moment, please while we poll for questions.
Thank you. Our first question comes from Steven Fisher with UBS. Please proceed with your question.
Good afternoon, congratulations on the Brooklyn jail project.
They're an upfront cash payment that youre going to get from that project and if so how much could that be.
Well, Unfortunately, Steven and 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 two phases.
Phase one will be the design phase as we conclude the design with the owners' input and approval and then hopefully a groundbreaking of construction by something in the order of June of next year.
Okay, not even June is now make it.
We are in May now, let's say by March or April of next year, we will break ground that's more accurate.
And are there any other sort of uncertainties around this project that could kind of keep.
Keep the base case from happening.
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 one.
That's typically routine and pre approve 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.
<unk> roughly 30 days.
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 and the civil T Civil and specialty side of the business over the next two to three quarters like how should we think about the revenue trend in near and medium term margin.
<unk>.
Our margins are holding up well, particularly in the civil and and we think for the balance of the year. The building in it just a matter of getting these large jobs going so we can replace all of the lost revenue by this period of time, where although we werent initially affair.
<unk> by Covid, we worked through it.
What most people don't realize and it took us time to understand.
None of that $11 billion in low bids being awarded which should have long been in the construction and generating revenue.
It didn't take place so all of a sudden a revenue is down by 30% 35%.
And that will not increase until we add more large work as in the New York prison and alike and that builds the revenue back to where it's always been in the $5 million to $6 million 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 first quarter revenue shortfall again these adjustments that we talked about earlier.
Earlier, they had the most significant impact otherwise, we're not that far off of what the revenue was for last year, we expect as as these new projects come on board and start to generate revenue that that delta that adjusted Delta will say well, even shrink and by the end of the year, we expect to exceed revenue from what we had last year.
Okay, and then maybe a.
A big picture question here.
Bear with me on this result.
At the company have been a little less than ideal for a little while now.
Last couple of quarters, maybe even.
Little more variable with guidance withdrawal of this quarter, 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 some bigger changes.
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 and the way we operate there are certain areas, we're talking about change, but that won't be there is that something that will take place over the next eight 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.
Okay. Thank you very much.
Thank you.
There are no further questions at this time.
Like to turn the floor back over to Ronald tutor for closing comments.
Thank you everyone for your patience and involvement and we'll see you next quarter.
Okay.
Yeah.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
[music].
Yeah.