Tutor Perini Corporation

Good day, ladies and gentlemen, and welcome to Tudor Perini Corporation's first quarter 2023 earnings conference call. My name is Alicia and I'll be your coordinator for today. All participants are currently in a listen only mode. Following management's prepared remarks, we will be opening the call for a question and answer session. As a reminder, this conference call is being recorded for replay purposes. 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 Tudor, Chairman and CEO, and Gary Smalley, Executive Vice President and CFO. Before we discuss our results, I will remind everyone that during this call, we will be making forward-looking statements, which are based on management's current assessment of existing trends and information. There is an inherent risk that our actual results could differ materially. You can find our disclosures about risk factors that could potentially contribute to such differences in our Form 10-Q, which we are filing today, and in our most recent Form 10-K, which we filed on March 15, 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 Tudor.

Good afternoon, and thank you all for joining us. As we disclosed in a Form 8K that we filed on April 21st, there was an unfavorable legal ruling recently handed down regarding our claims dispute on the completed George Washington Bridge bus station project in New York City, which required us to take a non-cash pre-tax charge of $83.6 million that impacted the building and specialty contractor segments in the first quarter of 2023. A number of years ago, we were in arbitration pursuing recovery of our claim from the project's developer and were clearly winning in that process. Once it became clear they would be owing us a significant amount of money, the developer stopped paying their lawyer and immediately filed for bankruptcy. Based on case law and the advice of preeminent bankruptcy counsel, we believe that we would be reimbursed for amounts that we were owed outside of the bankruptcy proceeding. Unfortunately, the appellate courts ruled otherwise, so we took the charge. 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 has now succeeded the developer in taking it back. Separately during the first quarter, we successfully negotiated more than $220 million of change orders for a civil segment mass transit project in California. However, these were lower margin and of course lower risk change orders that resulted in 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 this same phenomenon occurred on the same project in 2022 and that as we indicated then the negative financial impact will reverse itself over the remaining life of the project. It is a situation where we have an earned profit to date that is significantly higher than the specific earnings of the executed change order. And even though the profit goes up by the strict percentage of completion, we have to take this paper right down until we're further along and it comes back. It is an oddity of percentage of completion when you have wild disparity amongst profits in certain changes as well as the contract, but we're dealing with it and although it impacts us in any given quarter, they should reverse themselves and in fact go back the other way. Gary will go over the details of these impacts and our financial results for the quarter in a moment. Both factors negatively impacted our revenue and earnings for the 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 was significantly over the owner's non-updated budgets. They're rejected. They're coming back out in 2024 in various stages. But nevertheless, between the ending of Newark and the enormity of those bids which should have been in awards and generating revenue not going forward has resulted in this dramatic reduction of revenue. As a result of these negative impacts as discussed, we reported a loss of 95 cents 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 than our 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, we've already booked a contract more than $3.2 billion of new projects in the backlog. including the recently announced $2.95 billion Brooklyn Jail Design Build Project with the New York City Department of Design and Construction, for which we executed a contract last week, as well as the $222 million Tinian International Airport Project in the Northern Mariana Islands that was recently awarded to Black Construction, our Guam subsidiary, and a $41 million electrical subcontract to Fiskelectric for a healthcare project in South Florida. Our bidding pipeline remains significant and active with numerous additional opportunities, including Guam and the United States, in particular the East Coast. Some of the more significant awards and contract adjustments that we worked in the first quarter of 23 included the $224 million of additional changes for a mass transit project in California, a $91 million educational facility in California, a $75 million facility renovation for the military in Colorado, a $62 million bridge repair in Minnesota, and a $56 million of additional funding for a healthcare project in California. We continue to believe the demand for our services will remain strong and increase meaningfully as substantial funding from the infrastructure law increasingly flows to our customers this year and next. Hopefully this will enable our customers to move forward with the many more large civil projects that have been the pipeline and have not yet been released. As I have said before, successfully growing our civil business, which is historically the part of our business that has been most resilient and successful during economic downturns, remains our primary focus and will continue to be the driver of our future growth and profitability. We are still awaiting a decision expected in the coming months on Frontier Camper'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. 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 Inglewood automated people mover in Southern California, which should bid in the fourth quarter. With significant new awards mentioned earlier that have already been booked, we expect to report a significantly larger backlog at the end of the second quarter of 2023 and what could potentially be a new record backlog by the end of this year as we capture other large projects. Our first quarter financial results make the achievement of our initial EPS guidance for 2023 challenging. Accordingly, we're throwing 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 ahead, we continue to anticipate positive and normalized EPS performance in 2024 and beyond. Thank you. With that, I turn the call over to Gary Smalley to review the financial data.

Thank 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 to projected cash collections, both from project execution activities and the resolution of various other outstanding disputes with large 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 and the first quarter of 2022, since it prevented us from replacing 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%, and specialty contractor segment revenue was $197 million, down 15% year over year. With respect to the $83.6 million non-cash pre-tax charge related to the adverse legal ruling on the George Washington Bridge bus station project, or GWB project, as Ron mentioned, we are still pursuing recovery of significant amounts that we believe we are entitled to collect through 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 actions. 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 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, the negative impact is temporary, and that is expected to reverse itself over the remaining course of the project. This is the same project with similar circumstances to what we experienced in 2022, first in the first quarter of last year and then also in the latter quarters. We resolved a large amount of change orders then as we did this time with the customer, which is a very good thing, but the short-term impact due to the accounting rules related to cumulative catch-up adjustments on profit recognition caused the unfavorable impact in the quarter. I will point out that if not for these two significant negative impacts to earnings, we would have been on budget for the quarter. We would have reported positive pre-tax income, which in turn would have resulted in a vastly different and much lower effective tax rate for the quarter. Overall, we reported an $82 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 GWV project negative impact to the segment of the $72.2 million that I just mentioned. And the specialty contractor segment reported a $12 million loss from construction operations for the current quarter compared to a $4 million loss in the first quarter of last year. again largely due to the negative GWB project impact to the segment, 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 our significant 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 in that it provided additional tax benefits to help offset the impact of our pre-tax loss for the quarter. Net loss attributable to Tudor Peroni for the first quarter of 2023 was $49 million or a loss of 95 cents per share compared to a net loss attributable to Tutor Perny of $22 million or a loss of 42 cents per share in the first quarter of 2022. As for our balance sheet, our net debt as of March 31st, 2023 was $698 million level with our net debt as of December 31st, 2022. As of March 31st, 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 will 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. Also, we are mindful of our debt maturities and the springing maturity provision of our term loan B in 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 to determine the optimal window to refinance our debt. We currently believe that such refinancing is most likely to occur in the latter part of this year or the 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 $250 and $260 million. Depreciation 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 non-cash. Our effective income tax rate for 2023 is now expected to be approximately 50% compared to the 22% to 24% range we had 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 approximately $52 million of weighted average diluted shares outstanding for 2023. Lastly, capital expenditures are now expected to be approximately $30 to $40 million, of which 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. We generated solid operating cash, as previously stated, of $21 million in the first quarter of 2023 and entered the quarter with a backlog steady at $7.9 billion. We've already booked $3.2 billion of new awards into the backlog in the second quarter, increasing 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 remain 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 improve financial results in 2024 and beyond. as new projects that we've recently booked and 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. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment please while we poll for questions. Thank you. Our first question comes from Stephen Fisher with UBS.

Please proceed with your question.

Good afternoon. Congratulations on the Brooklyn Jail project. Is there an upfront cash payment that you're going to get from that project? And if so, how much could that be?

Well, unfortunately, Stephen, in our ability to release with the prison's 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. That's the phase one will be the design phase as we conclude the design with the owner's input and approval, and then hopefully a groundbreaking of construction by something in the order of June of next year. Well, not even June. We're in May now. Let's say by March or April of next year, we'll break ground. That's more accurate.

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

The only thing that's remaining is it goes to the New York City Comptroller's Office for certification. so that we can actually start phase one. That's typically routine and pre-approved, but until that's done, we have a contract, we're allowed to announce, but it isn't for certain until they certify, which will be in 30 days, or roughly 30 days.

Okay, that's helpful. And I know you're not giving formal EPS guidance right now, but can you just maybe set some expectations for operational performance in the civil and specialty side of the business over the next two to three quarters? Like how should we think about a revenue trend and near and medium term margins?

Our margins are holding up well, particularly in the civil end. and we think for the balance of the year the building in it's just a matter of getting these large jobs going so we can replace all the lost revenue by this period of time where although we weren't initially affected by covid we worked through it what most people don't realize and it took us a time to understand is with none of that 11 billion in low bids being awarded, which should have long been in the construction and generating revenue didn't take place. So all of a sudden our revenue is down by 30, 35%. And that will not increase until we add more large work as in the New York prison and the like, and that builds the revenue back to where it's always been in the five to $6 billion range. And that's what we're hoping to accomplish by the end of the year.

Yeah. 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, they had the most significant impact. Otherwise, we're not that far off of what the revenue was for last year. We expect as these new projects come on board and start to generate revenue that that adjusted delta, we'll say, will even shrink. And by the end of the year, we expect to exceed revenue from what we had last year.

OK. And maybe a big picture question here. You'll have to bear with me on this. Results at the company have been a little less than ideal for a little while now. And I guess the last couple of quarters, maybe even a little more variable with guidance withdrawal this quarter so to what extent is there any more sense of urgency to make some bigger changes within the company in in any way that you can discuss either operationally strategically within any of the segments or or anything else uh 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 in the way we operate. There are certain areas we're talking about change, but that's 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.

I would like to turn the floor back over to Ronald Tudor for closing comments.

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

This concludes today's teleconference.

You may disconnect your lines at this time. Thank you for your participation.