Q2 2023 Tutor Perini Corporation Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the tutor Perini Corporation second quarter 2023 earnings Conference call.
My name is Doug 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 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'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 will be filing.
Tomorrow 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. Thank you and I will now turn the call over to Ronald tutor.
Thanks, Jorge Good day, and thank you all for joining us.
Our second quarter results were highlighted by strong revenue and backlog growth as well as solid operating cash flow.
Our consolidated revenue was up 19% year over year due to contributions from certain civil segment mass transit projects in California. It had a significant work remains.
Our revenue growth this quarter fall of more than two years of 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-19 impact.
As we have discussed in the past COVID-19 temporarily halted major bids and awards of law of large civil projects.
We're in the range of two plus years and prevented the award of four large projects valued at almost $11 billion, which we had been to lower preferred bidder.
Most of these projects the reward that were not awarded us if not all of them are now expected to be rebid in 2024 and in the first half of 2025. So we will have another opportunity to capture the same car.
Tracks.
We will 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 2024.
Our second quarter operating cash flow was a solid 56 million, bringing our operating cash flow for the first six months of 2000 $23 million to $78 million. The second highest results for the six months of any year since the merger of tutors the Labor Perini Corporation.
2008.
We remain confident that our cash generation in the second half of this year will be even stronger as we expect to resolve various long standing long standing disputes.
Be it either by negotiation or litigation and collect significant amounts of cash and that our operating cash flow for 'twenty three will exceed the record 207 million, we generated last year.
As we mentioned last quarter, depending on the timing and magnitude of dispute resolutions. This year, our cash generation could be much stronger.
We plan to use this anticipated cash reduce our debt and position ourselves favorably for refinancing early next year.
Our second quarter backlog increased to 10.9 billion up 27% compared to 8.5 billion for the same quarter last year.
Strong backlog growth was driven by the large award of the $3 billion Brooklyn jail design build project, which includes more than 600 million of electrical and mechanical work that is expected to be performed by our specialty contractors segment.
We also booked nearly 1 billion up other new awards and contract adjustments, including Black constructions, new $222 million.
In International Airport project in the Northern Mariana Islands, and 102 million of additional funding at of Rudolph and Sletten health care projects in California.
Mhm.
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 $17 million.
And ended the second quarter of a loss of 72 cents per diluted share after adjusting for noncontrolling interests.
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 billion Queens facility on the decision of which would be made in January with all proposal then.
The owner has indicated that as the timeline for award.
In October we will be busy bidding on numerous projects, including.
The one plus billion dollar Frederick total Frederick Douglass tunnel in Maryland, as well as the $500 million Fulton line Communications train control project in New York.
The 500 million dollar Amtrak, Connecticut River Big Bridge replace units. We also expect the decision in the fourth quarter on frontier Kemper's proposal, where the $500 million great Lakes dumped.
Other larger near term opportunities include the $1 $5 billion Inglewood people mover.
Jack in Southern California.
And the $500 million Amtrak East River tunnel rehab in New York, both bidding later this year.
To follow will be the $2 billion, Honolulu rail transit project, which.
It is now expected to bid in the first quarter of 2024, which I'd remind you all we were low bidder two 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 economy continues to be strong and resilient.
Despite the effects of inflation and higher interest rates, particularly in the area of public works with diminishing concerns about the threat of a recession.
Some of this strength can be attributed to funding toward investments in infrastructure.
By the bipartisan infrastructure the law.
Demand for our services remains extremely strong.
And it's expected to increase as substantial funding flows through 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 did not provide new guidance for 2023.
Various risks exist, both with respect to the skewed.
<unk> resolution negotiation.
And the result of major litigation decisions, which are in play to conclude in the fourth quarter.
There is also a wide range of potential outcomes related to our effective income tax rate.
It gives us cause to pause.
There are several additional positive events that could transpire later, this year, which could offset to some degree any negatives that might occur needless to say, we don't feel it appropriate to make.
State for the balance of the year, Thank you and with that I will turn the call over to Gary.
Actual results.
Thank you Ron and good afternoon, everyone.
I will start by discussing our results for the second quarter, 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 million of operating cash in the second quarter of 2023.
$78 million in the first six months of 2023, which is the second best result for the first six months of any year since the 2008 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.
Revenue for the second quarter of 2023 was just over $1 billion 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 second quarter was 500.
And $54 million up a strong 37% compared to the second quarter of last year due to the mass transit projects I just mentioned.
Building segment revenue was $331 million up 24% and specialty contractor segment revenue was 136 million 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.
The northeast.
Oklahoma and.
In Florida, partially offset by reduced project execution activities and certain other projects in Arkansas in California that are nearing completion.
The decrease for the specialty contractor segment was principally due to reduced project execution activities on the electrical component of a transportation project in the northeast that is nearing completion as well as unfavorable noncash adjustments due to changes in estimates on that same project associated with the change and expect to recovery uncertain unapproved change requests.
And an 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.
Yes.
Overall, we reported $2 million of income from construction operations for the second quarter of 2023 compared to a loss from construction operations.
$91 million for the same quarter of last year.
Our second quarter results for this year were dominated by a very strong profit.
For by very strong profit contributions from our civil segment, which delivered $105 million of income from construction operations and a strong segment operating margin of 19%.
This quarter strong civil segment performance was due to solid contributions from the previously mentioned mass transit projects in California, including favorable adjustments of $58 million on one of those projects based on improved performance.
The building segment. However, despite posting good revenue growth for the second quarter posted a loss of $14 million 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 million in the aggregate.
The specialty contractor segment posted a loss from construction operations was 70.
In the second quarter that was largely attributable to unfavorable noncash adjustments of $36 million due as I just mentioned.
Two changes in estimates on the electrical and mechanical scope with 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 noncash charge of $25 million on the educational facilities project in New York that resulted from an adverse court ruling for no damages for delay clause.
Okay.
Corporate G&A expense for the second quarter of 2023 was $19 million compared to $14 million for the same quarter of last year.
Other income for the second quarter of 2023 was $3 million compared to $1 million in the second quarter of 2022 interest expense was $22 million compared to $16 million 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 had a slight income tax expense of $194000 for the quarter with an associated effective tax rate of a negative one 2% compared to an income tax benefit of $44 million in the second quarter of last year and an effective tax rate of 41, 3%, which resulted from a pre tax loss.
A $106 million in the prior year period.
Our effective tax rate for each quarter it depends on the pre tax results or forecasted for the full year.
When we forecast a pre tax loss tax.
Tax benefits that would normally reduced effective tax rate when we report profits instead increased the rate.
Also the impact of tax benefits is.
Is magnified when the benefits are disproportionately large compared to the pre tax 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 or for the period that we're reporting to align with the expected annual tax provision.
As we continue through this year you.
You may see higher or lower rate than normal increased volatility in the rates from quarter to quarter.
Net loss attributable to tutor perini for the second quarter of 2023 was $38 million or a loss of 72 cents per share compared to a net loss attributable to tutor perini of 63 million or a loss of $1 23 per share in the second quarter of 2022.
The smaller loss was due to the various factors I mentioned earlier that drove our income from construction operations in the current second quarter again, primarily in the civil group.
As for our balance sheet, our net debt as of June 32023 was $663 million down 36 million or 5% compared to a net debt as of December 31 2022.
As of June 30th 2023 were in compliance with our covenants under our credit agreement and we expect to continue to be in compliance in the future.
Our first lien net leverage ratio for the second quarter of 2023 was two point to three to one well within the limit for the quarter of three to one.
As a reminder, the leverage ratio will step down to two five to one for the third quarter of this year and 2.25 to one for each quarter thereafter.
Debt reduction remains our primary near term focus for the use of cash.
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, we'll 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 springing 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&A expense for 2023 is now expected to be between $245 million to $255 million depreciation and amortization is still anticipated to be approximately $47 million in 2023 with the depreciation.
Of 45 million and amortization of $2 million.
Interest expense is now expected to be approximately $84 million of which about $4 million will be noncash. 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 noncontrolling interests to be.
Between 45 and $50 million.
And we continue to forecast 52 million weighted average diluted shares outstanding for 2023.
Lastly, capital expenditures are now expected to be approximately $45 million to $50 million most of which.
It is project related.
Thank you with that I'll turn the call back over to Ron.
Thanks.
To recap.
We had strong revenue growth in the second quarter.
Driven by contributions from certain civil mass transit projects in California.
As I previously stated our backlog grew to 10.9 billion in the second quarter up 27%.
We once again generated solid cash of 56 million from operations and $78 million to date and I repeat continue anticipate much stronger in the balance of the year.
Andrew you resolved the disputed manners at hand, and the litigation 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 in very limited at best competition.
We anticipate delivering significantly improved.
Earnings.
Let me change that I've read we anticipate delivering improved earnings over the second half of this year without question and.
And significantly improved financial results next year and beyond.
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 second quarter.
Unfortunately, it was largely offset by continuous losses in.
In our specialty contractors segment.
And to a lesser extent our building group.
With that I'll turn the call over to the operator for questions. Thank you.
Okay.
Thank you, ladies and gentlemen at this time well be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad a.
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Our first question comes from the line of Alex Rygiel with B Riley Securities. Please proceed with your question.
Okay.
Thank you good evening gentlemen, a couple of quick questions here, where any of the recent awards funded by the IRA or other kind of recent federal funding initiatives in it.
Do you see this money started to work its way into the market yet.
Well this is Ron.
No the Brooklyn prisons is funded in New York.
As a part of the federal judges dictating that rikers be replaced and that's all state and city funds and frankly, we hear about the infrastructure Bill we're convinced their funding they.
They've been more funding director owners financing, drawing and getting things out, but we don't think a significant commitment of funds that you have to hit the market.
But we're in contact with three or four of our major billion dollar plus civil jobs that appear to be getting funding and will hit the market place for us to prove.
Both of them in first and second quarter next year. So it is having an effect, it's just been very slow happening.
That's helpful.
Obviously this has been a tough year as it relates to kind of reported earnings with.
A lot of the dispute settlements.
You mentioned that you're hopeful this concludes.
Any way to kind of brackets near mine sort of.
Are you, hoping that it concludes in 2024 could it slip into 2025.
No I don't think there'll be any litigation or claims that go into 'twenty five and if there are.
There'll be small to a point they won't affect anything.
<unk> three and 'twenty four.
Good or bad is collecting money.
Sadly these long standing claims and disputes it stood still for three years during COVID-19.
Every one of which has court dates mediations and we're trying cases and litigating them through verdicts.
And that's just what it.
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 this to win and collect most of our money.
Yeah, Ron if I could ask this.
Hi, Alex.
Just just wanted to remind everyone that.
Our history isn't too to always take write downs when we litigate in an 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 are are being.
Luna gated arbitrated, we look forward to not just having negative results about positive results and in fact, we've had that in the land.
Alright, Gary and if I said something to the contrary that isn't what I meant to infer because now we have still want 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. Other words were trying a number of cases.
And our history has been successful.
Yeah right now it was nothing you said I just want to make sure that it was understood based on the question but.
Yeah.
And we've even had some positive outcomes in the last year or so, but they've just been masked by larger negative result, so anyway.
Thank you.
Yeah.
Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.
Thanks, Good afternoon.
No it's not.
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 books that are that are to be adjudicated I think Ron you just said 90% of C. A R E.
You know before this is all over but how much in the in the second half of this year do you think it'll be adjudicating.
They run probably <unk> hundred.
Yeah, probably been out talking to him.
In aggregate right.
Well, that's what I was gonna do I can say just quickly in my mind, adding up what should resolve I'd say in the neighborhood of 200 million more.
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're still what will your planning what the uncertainties are for the rest of the year, but curious what kind of changed your mind.
You know versus three months ago.
We have a law suit that tries for.
For well over $100 million in the three panel arbitration.
And although I believe we will win.
It it does 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.
Compares to it going forward into the following year.
Yeah, and if I could okay, if I could add this Steve also.
In my remarks.
He's talking about.
The tax rate and that's a big part of it. It's just so hard for us to know what that tax rate's going to be or what the impact will be because you know with us.
Our tax rate based on what it is on a on a forecast for the year as we whittle down the the loss that we have for the first half of the year than the impact on the on the tax rate is magnified because that loss shrinks.
If you followed its Matt.
But hum.
So it just makes it more volatile 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 theres. So much volatility with the tax rate that besides what what Ron mentioned it.
It just makes it almost impossible for us to really feel comfortable with the estimate.
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 are in the early part of next year.
Yeah right, Okay I'll take this one.
Yeah, Yeah, so yeah, so Steve we've talked to.
To various groups and the short answer is the more the better.
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 as a positive.
Also what the pricing for our bonds, what they're trading at right now Theyre at 86 has significantly improved from what they were a quarter ago. If we continue to see improvement. There then that certainly is a bright side getting down R. R.
Our leverage was was a big part we made some progress in that so.
We believe based on the device that we're getting it continued to do what we're doing maybe a little better on the earnings side of course for the rest of the year. We think we're going to be well positioned and then certainly with the with the outstanding litigation that that Ron mentioned litigation arbitration and also some of the other cash that we expect to come in.
In.
For for settlement activity that should give us another bump that should be helpful.
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.
Your surety capacity at this point you know what what's the status of that has that been affected at all by sort of leverage and cash collection.
Yeah, some of the legal settlements or what's your surety bond capacity and where does that stand at the moment well, we have a very significant capacity because unlike the public markets. The surety is look at our basic equity net worth which exceeds 1.200 billion.
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 into disputes and the write downs and I might add predominantly in New York, which is.
Very good to be very kind of very challenging place to work the.
Charities are 100% support at least as we speak they continue to be supportive as we pursue this major 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 maturity.
And a capacity standpoint.
So everything's fine, but it doesn't mean, we have we have simply got to get out from under the Cie and back to the norm whatever it takes.
Okay, and then just lastly on the specialty business.
Obviously lots of moving parts in there.
I Wonder if you could just give us a sense of what the underlying performance of that business is.
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.
It might flow through to give us a sense that this is a business that still makes sense to.
To pursue well let me, let me clarify that specialty business. So you know throw in the good with the bad.
We have.
Operation called Fisk Electric which operates in fifth, Texas and physical to California, two separate entities in that specialty group that year after year make money and never lose.
We have a mechanical company in South, Florida called neighbor Nagel Bush mechanical that never loses.
We have a 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 goes there.
New York is an incredibly difficult place to work.
With a legal system that essentially protects public agencies.
And it's very difficult and challenging for contractors.
However, our performance in those of most of our peers in New York and greater decision that a dismal state.
Nobody left that can bid big work and as result, they don't.
So we've reached a point.
Sure as one of only may be two 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.
Had been reduced to a fraction of their size and at least for the time being in the near future or only bidding in support of our civil group and not do 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 four years ago 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 that leaning out all of the negative work getting all these issues are resolved and then if they go back up it will only be on the basis of their performance.
So far at best has been challenging.
Thank you very much Ron.
Yeah.
There are no further questions in the queue I'd like to hand, the call back to Mr. Tutor for closing remarks.
Thank you everybody.
They're bearing with US we'll turn this miserable corner and I look forward to the next call. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.