Tutor Perini Corporation (NYSE:TPC) Q2 2023 Earnings Call Transcript
Tutor Perini Corporation (NYSE:TPC) Q2 2023 Earnings Call Transcript August 4, 2023
Operator: Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation Second Quarter 2023 Earnings Conference Call. My name is Doug 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 over to your host for today Mr. Jorge Casado, Vice President of Investor Relations. Please proceed.
Jorge Casado: 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 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 will be filing tomorrow 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 Tutor.
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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 that had significant work remaining. Our revenue growth this quarter followed 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 impacts. As we have discussed in the past, COVID temporarily halted major bids and awards of large civil projects were in the range of two-plus years and prevented the award of four large projects valued at almost $11 billion, which we had been the lower preferred bidder.
Most of these projects that are awarded -- 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 contracts. 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 2023 to $78 million, the second highest results for the six months of any year since the merger of Tutor-Saliba and Perini Corporation in 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 disputes be it either by negotiation or litigation and collect significant amounts of cash and that our operating cash flow for 2023 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 to reduce our debt and position ourselves favorably for a 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. The 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. And we also booked nearly $1 billion of other new awards and contract adjustments including Black Construction's new $222 million Tinian International Airport project in the Northern Mariana Islands and $102 million of additional funding at a Rudolph and Sletten health care project in California.
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 with a loss of $0.72 per diluted share after adjusting for noncontrolling interest. 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 and a decision of which will be made in January with all proposals in.
The owner has indicated that as a time line for award. In October, we will be busy bidding on numerous projects, including the $1 billion plus Frederick Douglass tunnel in Maryland, as well as the $500 million Fulton line communications train control projects in New York and the $500 million Amtrak Connecticut River Bridge Replacements. We also expect the decision in the fourth quarter on Frontier-Kemper's proposal for the $500 million Great Lakestone. Other larger near-term opportunities include the $1.5 billion Inglewood people mover project 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 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 US 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 threats of a recession. Some of this strength can be attributed to funding toward investments in infrastructure by the bipartisan infrastructure law. Demand for our services remains extremely strong and is expected to increase as substantial funding flows to 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 to not provide new guidance for 2023. Various risks exist both with respect to dispute 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 that give us cause to pause. There are several additional positive events that could transpire later this year, which could offset to some degree any negative that might occur.
Needless to say, we don't feel it appropriate to make a statement for the balance of the year. Thank you. And with that, I will turn the call over to Gary to review the financial results.
Gary Smalley: 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 and $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 $554 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 Contractors 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 Northeast Oklahoma and Florida, partially offset by reduced project execution activities on certain other projects in Arkansas and California that are nearing completion.
The decrease for the Specialty Contractors 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 non-cash adjustments, due to changes in estimates on that same project associated with the change in expected recovery on certain 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. Overall, we reported $2 million of income from construction operations for the second quarter of 2023 compared to a loss from construction operations of $91 million for the same quarter of last year.
Our second quarter results for this year were dominated by a very strong profit – by very strong profit contributions from the Civil segment, which delivered $105 million of income from construction operations and a strong segment operating margin of 19%. This quarter's 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 Contractors segment posted a loss from construction operations of $70 million in the second quarter. That was largely attributable to unfavorable non-cash adjustments of $36 million due as I just mentioned to changes in estimates on the electrical and mechanical scope of 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 non-cash 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. 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 $194,000 for the quarter with an associated effective tax rate of a negative 1.2% 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 pretax loss of $106 million in the prior year period. Our effective tax rate for each quarter depends on the pretax results that are forecasted for the full year. When we forecast a pretax loss, tax benefits that would normally reduce the effective tax rate when we report profits instead increase the rate.
Also the impact of tax benefits is magnified when the benefits are disproportionately large compared to the pretax 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. So as we continue through this year, you may see higher or lower rates than normal increase 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 $0.72 per share compared to a net loss attributable to Tutor Perini of $62 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 30, 2023, was $663 million down $36 million or 5% compared to our net debt as of December 31, 2022. As of June 30, 2023 we're in compliance with the 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 2.23:1 well within the limit for the quarter of 3:1. As a reminder the leverage ratio will step down to 2.5:1 for the third quarter of this year and 2.25:1 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 will 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 a 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 non-controlling interest to be between $45 million 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 is project-related. Thank you. With that, I'll turn the call back over to Ron.
Ronald Tutor: Thanks, Gary. 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 to anticipate much stronger at the balance of the year as we resolve the disputed matters at hand and the litigation in 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 read -- we anticipate delivering improved earnings over the second half of this year without question and significantly improved financial results next year and beyond as 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 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.
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