Tutor Perini Corporation (NYSE:TPC) Q4 2023 Earnings Call Transcript
Tutor Perini Corporation (NYSE:TPC) Q4 2023 Earnings Call Transcript February 28, 2024
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Operator: Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation Fourth Quarter 2023 Earnings Conference Call. My name is Camilla, and I will 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. [Operator Instructions]. I will now turn the conference call over to your host for today, Mr. Jorge Casado, Vice President of Investor Relations. Please proceed.
Jorge Casado: Hello, everyone, and thank you for joining us. With us today are Ronald Tutor, Chairman and CEO; Gary Smalley, President; and Ryan Soroka, Senior 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-K, which we are filing today. 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.
Ronald Tutor: Thank you, Jorge. Good day and thank you all for joining us. Please pardon my raspy voice, I've had a head cold for a couple of days, but I'll survive. Before I discuss our results for the year, I'd like to mention for those of you that may not have heard or recall, that last November, we announced that our Board of Directors approved the appointment of Gary Smalley, our former CFO, as President of Tutor Perini, and that Gary is expected to succeed me as CEO effective January 1 of next year. Turning now to our results, we had another year of mixed results in 2023, highlighted by record operating cash flow that was nearly 50% better than last year, as well as backlog that grew 28% year-over-year to a $10.2 billion figure.
We generated $308 million of operating cash in 2023, compared to $207 million in 2022, with both years setting records as the highest results of any year since the 2008 merger between Tutor-Saliba and Perini Corporation. Our earnings in 2023 were challenged due to certain adverse legal judgments or decisions throughout the year, primarily in the Northeast, and write-downs that resulted from the expedited settlement or resolution of various disputed matters. Our consolidated revenue was up slightly in 2023, compared to 2022, still dramatically reduced from our typical years prior to the pandemic. We sustain modest revenue growth in the Civil and Building segments mostly offset by lower revenue in the Specialty Contractors segment. Ryan will discuss the financials in more detail a bit later.
We made excellent progress on claims and dispute settlements in 2023, which helped us to deliver our record cash flow and reduce our unbilled receivables or costs in excess by 17% or $234 million. We expect to continue resolving most of our remaining legacy disputes in 2024, with only a handful going into 2025, and thereby, collecting substantial amounts of associated cash throughout this year and a certain amount in next year before all of our legacy issues will be resolved and brought current. Last week, we began to utilize some of our excess cash generated since the latter part of 2023 to deleverage our balance sheet by paying down our Term Loan B by approximately $91 million, bringing its balance to $276 million compared to its original $425 million.
This pay down was not required until the first week in April, but we decided to pay it down early to capture interest savings over the next few months. Following this pay down, we still have significant cash on hand, which is anticipated to be used for further debt reduction as part of the current refinancing underway. We expect to successfully conclude this refinancing sometime between the middle and end of April. As I mentioned, our year-end backlog stood at $10.2 billion, up 28% with strong growth largely driven by the award of the $2.95 billion Brooklyn Jail project in New York. Other significant new awards and contract adjustments in 2023 included $788 million of additional funding for certain mass transit projects in California, $287 million of additional funding for two large healthcare projects in California, $222 million military facilities project at Tinian International Airport in the Northern Mariana Islands, and $127 million of additional funding for a Light Rail project in Minnesota.
We expect our backlog to grow substantially in 2024 and again in 2025, as we pursue and capture our share of a tremendous volume of available project opportunities, many of which are supported by strong funding that is put in place at the state and local levels, as well as the $1.2 trillion Bipartisan Infrastructure Law that was passed in 2021 for which funding is now flowing. We are tracking more than $75 billion of opportunities over the next three years to four years and $32 billion of which are expected this year and next. Some of the most significant near-term prospects include the $6 billion dry dock at Puget Sound Naval Shipyard in the State of Washington, the $2.6 billion DTX Transbay Transit Center project in Downtown San Francisco, the $2 billion Honolulu Rail Transit project, which we had previously been the low bidder in 2020, the $2 billion Sites Reservoir project in Northern California, the $1.8 billion South Jersey Light Rail in New Jersey and again the $1.5 billion Newark AirTrain, for which we had also been low bidder some two years ago.
And the $1 billion Inglewood Transit Connector project in Southern California, which bids this summer. Regarding our prospective jail projects in New York City, the owner has just made a formal announcement that the Queens facility was awarded to one of our competitors. So we were also shortlisted with one other team on the Manhattan Jail, which would be the most costly endeavor of all the facilities, which will bid an award in the third or fourth quarter. I could go on and on and I'm only talking about the megaprojects. However, others worth of note are an $800 million Kensico Tunnel, the $800 million Amtrak East River Tunnel rehab, which we've already bid and should hear the results any day. The $500 million Palisades Tunnel in New York and the $750 million Manhattan Tunnel in New York that and a number of projects in that size too many to mention.
We are anticipating significant double-digit revenue growth in 2024, with 80% of which sourced by our existing backlog. We are expecting a return to positive earnings in 2024 and significantly higher earnings in 2025, and again in 2026. Based on our assessment of the current market and business outlook, we are establishing our initial EPS guidance for 2024 in the range of $0.85 to $1.10. As in prior years, our earnings are expected to be weighted more heavily in the second half of the year due to the anticipated timing of large activities as well as the typical business seasonality that is affected by the weather. Thank you. And with that, I'll turn the call over to Ryan to review the financial results.
Ryan Soroka: Thank you, Ron, and good afternoon, everybody. I will start by discussing our results for the year, including our record operating cash, after which I will review the fourth quarter. Then I'll provide some commentary on our balance sheet, our 2024 guidance assumptions, and our refinancing effort. As Ron mentioned, operating cash is one of the major highlights in 2023. For the second year in a row, we achieved a record operating cash flow and more impressive is the $308 million that we generated in 2023, was an increase of nearly 50% compared to the prior year record of $207 million in 2022. Our strong operating cash was driven by overall solid collection activities, including collections related to various settlements and dispute resolutions that we concluded in the latter part of 2022 and into 2023.
Some of these were expedited settlements as we continued with the focus we had begun in the latter part of 2022 on accelerating dispute resolutions and cash collections. In fact, we had a modest net favorable impact to earnings and cash generation in 2023 because of various settlements concluded during the year, compared to a significant unfavorable earnings impact related to settlements in 2022. We expect continued solved cash collections in 2024, much of which will be associated with anticipated resolutions of various remaining disputes, and our cash generation should continue to be strong over the next several years as well. Our continued strong cash generation has already enabled us to begin utilizing some of the excess cash generated over the past several months to deleverage our balance sheet, something that we had indicated we had planned to do in last quarter's conference call.
As Ron said, last week, we further paid down the balance of our Term Loan B by approximately $91 million, a payment that was not due until the first week of April, but a payment that we decided to make early to save on interest expense. After making this payment, we still have significant cash available, which is expected to be used for further debt reduction in conjunction with the refinancing of our senior notes. Revenue for 2023 was $3.9 billion, up slightly compared to $3.8 billion in 2022, primarily due to a lower amount of net unfavorable impacts related to settlements, litigation results, and other project charges in 2023 as compared to 2022. Civil segment revenue was $1.9 billion, up 9% compared to last year, primarily due to the absence of certain prior year unfavorable adjustments, as well as increased project execution activities on a mass transit project in California and various other projects in Guam and the Northern Mariana Islands.
Building segment revenue was $1.3 billion, up 5%, with growth driven by increased activities on various projects in California. The growth in the Civil and Building segment was mostly offset by a 15% decline in the Specialty Contractors segment, with specialties revenue coming in at $694 million for 2023, mainly due to decreased activities on the electrical and mechanical components of a completed transportation project in the Northeast. We reported a reduced loss from construction operations of $115 million in 2023, compared to a $205 million loss in 2022. Our results in both years were negatively impacted by net unfavorable adjustments on various projects, primarily due to changes in estimates resulting from recent negotiations, settlements, and legal judgments on certain disputed claims and unapproved change orders.
Civil segment income from construction operations for 2023 was $199 million, up substantially compared to $21 million in 2022. The strong improvement was driven by certain current year net favorable adjustments as well as higher volume on the projects I mentioned earlier and also the absence of significant prior year unfavorable adjustments. The Building segment posted a loss from construction operations of $91 million in 2023 compared to income from construction operations of $7 million in 2022. The loss in 2023 was largely attributable to an adverse legal ruling in the first quarter of 2023 on the completed mixed use project in New York that resulted in a non-cash pretax charge of $83.6 million, of which $72.2 million impacted the Building segment and $11.4 million impacted the Specialty Contractors segment, as well as an unfavorable adjustment of $14.6 million in the 2023 fourth quarter on a government building project in Florida due to increased costs associated with an external subcontractor.
The Specialty Contractors segment posted a loss from construction operations of $145 million in 2023 compared to a loss of $168 million in 2022. The reduced loss from construction operations was primarily due to the reduced negative impact of various unfavorable adjustments in 2023 as compared to 2022. We were significantly challenged once again in 2023 by charges in the Specialty Contractors segment related to various settlements and negotiations, partly due to our focus on expediting dispute settlements and cash collections in New York, a focus that began in the latter part of 2022. You can, of course, find further information about the various charges that negatively affected our results in 2023 and 2022 in our 10-K, which was filed today.
Note that the majority of the remaining larger disputes are expected to be resolved in 2024. Corporate G&A expense was $75 million in 2023 compared to $62 million in 2022, with the increase primarily due to higher compensation-related expenses charged to corporate in 2023 that were previously charged to the segments, as well as higher outside professional fees. Other income was $17 million compared to $7 million last year, primarily due to a gain on sale of property in 2023. And interest expense for 2023 was $85 million compared to $70 million for 2022, with the increase driven by higher borrowing rates in 2023, on our revolver and Term Loan B. We reported an income tax benefit of $55 million in 2023 due to our significant pretax loss for the year and an effective tax rate of 30.1% compared to our larger tax benefit of $75 million, with an effective tax rate of 28.1% in 2022.
As we return to profitability in 2024, and in future years, the net operating losses generated in 2022 and 2023 will help reduce our cash outlays for future income taxes. Net loss attributable to Tutor Perini for 2023 was $171 million or loss of $3.30 per share, compared to a net loss of $210 million or loss of $4.09 per share in 2022. It was certainly another disappointing year for us in 2023 from an earnings perspective, but as Ron mentioned, we anticipate double-digit revenue growth and a return to positive earnings in 2024, with substantially stronger earnings expected in 2025 and 2026. Now, let's turn to the fourth quarter results. Revenue for the fourth quarter was $1 billion, up 13% compared to $907 million for the fourth quarter of 2022.
Civil segment revenue was $459 million, up 5% compared to $440 million last year. Building segment revenue was $376 million, up 15% from $327 million last year, and Specialty Contractors segment revenue was $186 million, up 33% compared to $140 million last year. The revenue improvement across our business was largely attributable to fewer charges in the fourth quarter of 2023 compared to the same quarter of 2022 for judgments and settlements. Increased activities on certain Civil segment projects in British Columbia and California, along with various Building segment projects in California and New York, also contributed to the revenue growth for the fourth quarter of 2023. Civil segment income from construction operations for the fourth quarter of 2023 was $28 million, up substantially compared to $9 million for the same quarter last year.
The strong improvement was primarily driven by the absence of prior year unfavorable charges on certain projects in the Northeast and California. The Building segment posted a loss from construction operations $7 million for the fourth quarter of 2023, compared to a loss of $2 million for the fourth quarter last year. The larger loss in the fourth quarter of 2023 was primarily due to a current year unfavorable adjustment on a government facility project in Florida, partially offset by improved performance on other projects. The Specialty Contractors segment posted a loss from construction operations of $24 million in the fourth quarter of 2023, compared to a loss of $86 million in the fourth quarter of last year, as 2023 had fewer unfavorable adjustments than in the prior year.
And corporate G&A expense in the fourth quarter 2023 was $19 million compared to $17 million for the same quarter last year. And other income for the fourth quarter was $5 million compared to $2 million last year. Interest expense for the fourth quarter of 2023 was $21 million compared to $20 million last year. Income tax benefit was $3 million in the fourth quarter of 2023 compared to an income tax benefit of $28 million for the same quarter last year. Net loss attributable to Tutor Perini's for the fourth quarter of 2023 was $48 million, or a loss of $0.91 per share, compared to a net loss of $93 million, or a loss of $1.80 per share in last year's fourth quarter. Now, I will address the balance sheet. Our net debt as of December 31, 2023, was $519 million, down $180 million or 26% compared to our net debt of $699 million at December 31, 2022, with a significant reduction due to our record cash flow in 2023.
As of December 31, 2023, we were in compliance with the covenants under our credit agreement and expect to continue to be in compliance in the future. Next, I'll provide some assumptions regarding our guidance. G&A expense for 2024 is expected to be between $265 million and $275 million. Depreciation and amortization expense is anticipated to be approximately $54 million in 2024, with depreciation at $52 million and amortization at $2 million. Interest expense for 2024 is expected to be approximately $83 million, of which about $10 million will be non-cash. Our effective income tax rate for 2024 is expected to be approximately 22% to 24%. We anticipate non-controlling interest to be between $55 million and $65 million. And we expect approximately $53 million weighted average diluted shares outstanding for 2024 and capital expenditures are anticipated to be approximately $25 million to $30 million with about $5 million to $10 million of that being project specific and owner funded.
Finally, as Ron mentioned, we are working to refinance our senior notes. We believe that our strong cash flow in 2023, continuing solid liquidity to-date in 2024, recent and further anticipated debt reductions and current credit market liquidity will allow us to complete a refinancing transaction by the end of April. Thank you. And with that, I'll turn the call back over to Ron.
Ronald Tutor: Thanks Ryan. To recap, we delivered another year of significant operating cash flow, strong backlog growth, and made the necessary progress in settling and resolving the various disputed matters in 2023. But our earnings were negatively impacted by certain charges associated with these resolutions, as well as some negative court verdicts that were unanticipated. We believe that our operating cash flow will again continue to be strong in 2024, in particular, and also in 2025, as we resolve, frankly, the balance of the remaining legacy disputed matters, most of which will be accomplished by the end of this year, and collect a substantial associated cash there too. We expect double-digit revenue growth in 2024 as we continue to be in a strong bidding environment.
And that, of course, is reflected on our EPS guidance. We believe there will be even significantly higher earnings in 2025 and 2026, as these new contract awards begin to generate the significant revenue associated with design build. Our backlog is anticipated to grow this year significantly and next, as we are tracking and expect to capture certainly our share or more of the $32 billion of major near-term opportunities with at best limited competition. Finally, we have begun to utilize some of our excess cash that we have been accumulating to continually reduce our debt. Having paid down the term loan and having the cash available to reduce our bonds, we expect to successfully conclude our refinancing by the end of April. Gary is here with us to participate in any questions.
Thank you. And I'll turn the call back to the operator.
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