Tutor Perini Corporation (NYSE:TPC) Q3 2022 Earnings Conference Call November 2, 2022 5:00 PM ET
Company Participants
Jorge Casado – Vice President of Investor Relations
Ronald Tutor – Chairman and CEO
Gary Smalley – Executive Vice President and CFO
Conference Call Participants
Brent Thielman – D.A. Davidson
Steven Fisher – UBS
Operator
Good day, ladies and gentlemen. And welcome to the Tutor Perini Corporation Third Quarter
2022 Earnings Conference Call. My name is Sherry, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following management 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].
At this time, I will 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 today’s 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 filed on February 24, 2022 and in the Form 10-Q that we are filing today. The company assumes no obligation to update forward-looking statements, whether as a result of 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
Thanks, Jorge. Good morning, and thank you for joining us. Our third quarter 2022 results were once again mixed. On a positive side we continue to generate strong operating cash of $73 million for the quarter, which combined with the record cash we generated during the first six months of the year totals $251 million of positive cash for the first nine months of 2022. By far the best nine month operating cash result we have delivered since the merger of Perini Corporation and Tutor-Saliba in 2008.
Our operating cash was partly driven by the resolution of certain disputes, as well as solid overall collection activities and resolves on major open changes that continue to lag. Also on the positive side, our backlog remain healthy at $8.4 billion compared to the backlog we had at the end of the third quarter of last year, and does not yet include either the Raritan Bridge or the Maryland Highway, which should add more than $4.5 billion when they are finally awarded.
We booked $885 million of new awards and contract adjustments during the third quarter of this year. Later, I will discuss some of the more significant new awards and several of our major perspective opportunities. Our third quarter earnings unfortunately were negatively impacted by continued reduced volume and lower profit margins of course from the Newark Terminal project, which is completing this month in November, which as a result shuts off a flow of profit from those projects to the various divisions.
Consequently, we reported a loss of $0.63 per diluted share for the third quarter. Although disappointed with the various negative impacts to earnings for the quarter and year-to-date, we continue to make significant progress in resolving the various unapproved change orders and claims which have had and will continue to have a positive impact on cash flow this year and next.
Since our last earnings call, we have continued our efforts to settle certain significant disputes on major projects. But while we believe we are making excellent progress, we have not yet concluded these negotiations. As a result, there remains uncertainty with respect to the outcome of these potential settlement discussions, making it still too difficult to reliably predict our expected earnings in both the fourth quarter and of course, finally 2022 as settlements can positively or negatively impact earnings, although generating very significant cash.
Consequently, we’re holding guidance for 2022. We anticipate providing EPS guidance for 2023 when we issue our fourth quarter results in February next year.
In today’s inflationary and potentially recessionary environment, we are fortunate that once again is repeated many times in the past the construction industry, and particularly infrastructure is largely resilient to the effects of economic downturns. We have not seen, nor do we expect to see any notable reduction in the strong level of demand for our services in very large complex civil projects, if anything even more demand than ever. Our civil business, in particular the core driver of our future growth and profitability is and has historically been extremely resilient during economic terms, or governments over the last 50 years have typically leaned to increasing investments in a U.S. wide decaying infrastructure, such that those projects support good union and nonunion jobs and promote long-term economic growth and benefits.
Add to that the fact that that there is a $1.2 billion bipartisan infrastructure fund established by law we have already seen billions of dollars of funding beginning to flow into the jobs we’re currently looking at bidding over the next 18 months, which much more expected to flow and the direct benefits proceeding to the infrastructure industry over the next five years.
As I mentioned, we booked $885 million of new awards and contract adjustments in the third quarter of 2022. The most significant included $126 million military facility in Puerto Rico, and a $32 million hospitality project in California, both for Perini Management Services, $142 million of additional funding for two educational facilities for Rudolph and Sletten in California, a $56 million funding of a mass transit project for Lunda Construction in the Midwest, and a $48 million mining award for Frontier-Kemper in Virginia.
As I mentioned earlier, our backlog does not yet include the Raritan River Bridge, where we expect to add that to the backlog by the end of the year, and the same Phase 1 South of the American Legion Bridge, which we anticipate booking into backlog sometime during the second quarter of next year. Collectively, these could increase our backlog to a new record high over the coming months.
In addition, Rudolph and Sletten began negotiating a new $300 million healthcare project in Northern California that should be added incrementally to backlog over the next year. In addition, there are two other awards pending gaming projects in California, where we have preconstruction agreements collectively valued at $500 million, which we believe will be awarded by the second quarter next year.
Beyond these pending awards, some of our larger near-term bidding opportunities include the Brooklyn and Queens jails, each valued at in excess of $3 billion for the New York City Department of Design and Construction, with Brooklyn proposal being tendered on November 14, and the Queens prison in mid May 2023. The $1.5 billion East San Fernando Light Rail project was turned in today to Los Angeles MTA, the $1.5 billion JFK Roadways and Ground Transportation Center is due in January of 2023 or 60 days from now.
In addition, the $1.5 billion Inglewood automatic people mover, which is situated 30 minutes from our main office in Southern California where proposal will be tendered in the third quarter of 2023. Last but not least, we have talked to the Hawaii Rapid Transit District on the HART project that I remind you two years ago we were low bidder at $2.7 million and it was rejected, because it was far overbudget. They have reduced the scope by 25% and although they’ll suffer the escalation, they’re coming back out to bid by the second quarter next year.
So needless to say these are only some of the best of the major infrastructure. So we are overwhelmed and trying to select the both those best suited to us in a marketplace where I continue to state that has very little competition.
As previously discussed, we’re continuing to make excellent progress and resolving disputes and collecting the associated cash and expect these efforts to conclude successfully over the next 18 months. We look forward to substantially growing our backlog in the near-term to historically high levels that will set new records providing the solid foundation for our future success.
Thank you. And with that, I turn the call over to Gary Smalley.
Gary Smalley
Thank you, Ron, and hello, everyone. I’ll start by discussing our strong operating cash results then I will review our other financial results, including some factors that negatively impacted our earnings during the quarter, and finally move on to provide some commentary on our balance sheet.
Operating cash flow was once again the major highlight of our quarterly results. As Ron mentioned, we generated $73 million of operating cash during the quarter compared to usage of $21 million for the same quarter last year. The current year third quarter operating cash flow was among our best operating cash results of any third quarter since the merger in 2008. And over the past 13 years, since the merger prior to this year, our third quarter operating cash flow has averaged approximately $26 million, so a $73 million result, so this year’s third quarter was excellent.
More importantly, our year-to-date operating cash flow through the first nine months of 2022 was $251 million, nearly double the best operating cash result we have had for the first nine months of any year, and 45% greater than the highest full year operating cash we have generated.
Our strong cash generation has been driven by solid collection activities including the resolution of certain claims and unapproved change orders. We continue to anticipate operating cash generation for the fourth quarter of 2022 as well as strong cash flow next year as a result of projected cash collections both from projects execution activities, and the resolution of various other outstanding disputes.
Now let’s discuss our revenue and the factors that impacted our earnings. Revenue for the third quarter of 2022 was $1.1 billion, down 9% compared to $1.2 billion for the same quarter of last year. Civil segment revenue was $501 million, compared to $546 million for the comparable quarter in 2021. Building segment revenue was $318 million, compared to $361 million for the third quarter of last year. Specialty Contractors revenue was $252 million compared to $271 million.
Like last quarter, the revenue decline in all three segments was attributable to reduced project execution activities on various projects, most of which are completed or nearing completion, and partly due to the follow on impact of the COVID-19 pandemic, which as I discussed last quarter, delayed bidding activities and awards of certain new projects during 2020 And much of 2021.
The decline was partially offset by increased activities on certain newer civil and building segment projects in California and the Midwest.
We reported a loss from construction operations of $7 million for the third quarter of this year compared to income from construction operations of $52 million for the same quarter in 2021. The Civil segment reported income from construction operations of $23 million. The Building segment was essentially at breakeven and the Specialty Contractors segment reported a loss from construction operations of $12 million for the quarter. And finally, we reported corporate G&A of $18 million for the quarter.
The decrease in operating income compared to the third quarter last year was primarily due to reduced project execution activities at Newark, which impacted all three segments, as well as an unfavorable adjustment of $14.3 million on a completed Civil segment highway project in the Northeast, due to an unexpected reversal on appeal of a previously favorable lower court ruling.
The decrease was also driven by an unfavorable adjustment on a Building segment hospitality project in Florida, that resulted from an adverse legal ruling, as well as the absence of a prior favorable adjustment on a mass transit project in California. Our earnings for the third quarter of 2022 were also negatively impacted by lower profits associated with the lower revenue with much of the lower volume due to the following impacts of COVID that impacted bidding and award activity in 2021 as I just mentioned.
Moving on interest expense for the third quarter of 2022 was $17 million comparable to last year’s third quarter. We had a small income tax expense of about $0.5 million for the third quarter of 2022, compared to $8.7 million of expense for the prior year third quarter, and the corresponding effective tax rate was 2.4% for the third quarter this year, compared to 24.9% for the comparable quarter of last year.
Normally, a quarter with a reported pre-tax loss such as what we experienced this quarter would have produced a tax benefit rather than tax expense. The minor tax expense this quarter was from a change in estimate due to a year-to-date catch up adjustment in our tax provision, resulting from a change in forecasted earnings for ’22. Due to the various factors I mentioned, net loss attributable to Tutor Perini for the third quarter of 2022 was $32 million, or a loss of $0.63 per share, compared to net income attributable to Tutor Perini, a $15 million or $0.30 of earnings per share for the same quarter of last year.
As for our balance sheet, our net debt as of September 30, 2022 was $638 million, down 19% compared to $791 million at December 31, 2021. The decline was due to a lower level of debt and a higher level of cash on hand. With regard to our credit agreement, we have just completed an amendment that temporarily increases our maximum allowable net leverage ratio to 2.75 to 1 from 2.25 to 1 through the first quarter of 2023. The limit will then step back down to 2.25 to 1 in the second quarter of next year. Our reported net leverage ratio for the third quarter of 2022 was 2.1. So we were in compliance even without the amendment. But since much of the cushion we have had with this covenant has eroded with the poor earnings for this year, we thought it was prudent to request covenant relief regardless. We really look at this as being rather affordable insurance to provide some extra cushion in meeting this covenant over the short-term. We anticipate that we will continue to be in compliance with this covenant and our other credit agreement restrictions in the foreseeable future.
As we noted today, in our earnings release, debt reduction remains a primary near-term focus for the use of cash. We also indicated that on or before April 7 next year, we plan to make a significant excess cash pay down on the outstanding balance for Term Loan B, which is required by the terms of the debt agreement. We currently estimate this pay down will be approximately $100 million. So managing our cash for this upcoming debt repayment is currently our top priority.
However, once we get through the Term Loan B paid down. Depending on conditions at that time, we may consider other capital optimization strategies, the timing which will be dependent on how quickly and to what extent we generate excess cash. We have been somewhat confounded by our low share price, as well as the significant discount at which our senior notes have been trading this year, particularly considering our record operating cash generation, our outlook for continued strong cash collections next year, and a strong backlog that we expect to grow to a record high in 2023.
We still believe as I mentioned last quarter that over the next year or so, we will continue to resolve other claims and unapproved changes that have been delayed by COVID. The amount of cash that we collect could exceed and should exceed the amount of our current market cap.
Thank you. And with that, I’ll turn the call back over to Ron.
Ronald Tutor
Thanks, Gary. To summarize, we generated very strong operating cash of $73 million for the quarter, and $251 million-plus for the first nine months. We expect significant cash generation in the fourth quarter as well as throughout next year. As the timing of litigation, mediations, and simply, settlements have long overdue issues that were delayed for years thanks to the pandemic and the shutdown of the court system is finally coming to the forefront and is a significant reason we are able to generate and will continue to generate the cash that we are.
Our backlog obviously remains very healthy. And if you look at what’s pending in awards, we feel confident by next summer we’ll have by far the largest backlog ever generated by the company without even adding any more of the new work bidding between now and then.
More importantly, we continue to look forward to return to more consistent and solid earnings per share results next year. This year has been a focus almost entirely on new work and the collection of monies owed to us whether through litigation claims or open changes. So as these results and the cash flow mounts, we will continue to add to the backlog and we think next year will be the beginning of a run a very successful earnings. As we still continue to collect the enormity of cash we’re own.
Thank you. And with that I turn the call over to the operator for any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Brent Thielman with D.A. Davidson.
Brent Thielman
Ron, the large pending Maryland work, can you just talk about what needs to be finalized in order for you to book that into backlog and when you ultimately think that can occur?
Ronald Tutor
We’re meeting with the State of Maryland and the joint venture of Transurban and Macquarie, literally every week, virtually full time going through scope, right aways what Maryland has to do, what they have to do. So that when this is awarded, then we’re confident it will be, that there’ll be a clear path to success. And we’re spending time now trying to plug all of the open items and resolve all issues such that when we get financial close, which should be approximately April next year, the job will immediately take off. As you’ve probably read, the governor is very supportive of the project. The state has gone to the federal government for infrastructure funds to help fund the gap between their budget and our price. And in all our meetings with the Maryland DOT and the two developers of the P3 project, everybody is optimistic that it will go ahead, but my guess is, it won’t get awarded till probably second quarter of 2023. Needless to say, the biggest contract ever awarded in the U.S. infrastructure, even larger than the Tappan Zee Bridge that we bid some seven, eight years ago.
Brent Thielman
I guess, Ron, I know, we’re not talking about 2023 yet, but I’m just curious, any initial thoughts — I mean, appreciate the commentary on, recovery in earnings per share, but thoughts on how that’s sort of growing backlog converts or how quickly you sort of expect to see a recovery in revenue? Is it beginning to kind of converge on all this new work being added?
Ronald Tutor
Well, if the new work gets added the way we expect it, it’s a tremendous influx on revenue, and it’s a very high levels of margins. However, the Raritan Bridge we get, if we’re awarded in November, which we would hope or December, the first year is really planning, layout and mobilization. So I don’t see a great deal of costs expended. So as far as the earnings and costs associated, it will be limited next year, as would Maryland.
Maryland, however, has a very large cash component, immobilization and setup that we wouldn’t be paid next year. So it has a lot of positive aspects. But I don’t believe we’ll see any significant revenue and costs and earnings in the Maryland job before 2024. There will be some level in ’23, because there will be obvious startup costs and insurance bonds in the light, which are significant. But the major impetus and impacts will be in ’24 going forward.
Having said that, we expect next year to be a good year, we have a significant level of revenue yet to earn on high speed rail. And even though it’s been delayed for years, it appears it will be back on track by the second quarter next year to where we’ll be able to generate substantial costs at the level of margin we’ve been earning. All our Purple Line projects in Los Angeles are doing very well on the ramping up from design into construction. So we are looking forward to a good year next year but an even better one the following.
Brent Thielman
Just last one for me, Ron, I mean any sort of feel qualitatively, quantitatively for the scale of some of these ongoing disputes you’re attempting to resolve by year-end? I imagine things slow down closer to the holidays. So any progress to date or maybe you can speak to the fourth quarter?
Ronald Tutor
We’re in the midst of trying to settle two right now and we will either settle agree in the next three weeks on what equates to $200 million in claims or we won’t. So it could have a significant impact cash wise, and overall impact wise or we could say what I’d like to say go to hell we’ll see in court in four years. So we’ll have to wait and see but it’s that imminent and is one of the many reasons we’re reluctant to predict for the fourth quarter, because this year, as you can see has generated tremendous cash flow. And we continue to resolve claims and collect monies. But it’s hard to tell what will result in a resolve and what will continue in and litigation, but it’s week to week, day to day and as soon as it takes place, if it takes place will announce.
Operator
Our next question is from Steven Fisher with UBS.
Steven Fisher
Just want to clarify, was there new adverse legal rulings here in the quarter that can reverse some prior positive ruling that was an issue last quarter. So are these related or are these new ones?
Gary Smalley
Yes, it’s not related to last quarter but there was of the two ones that we talked about. One of the two was a reversal of a positive ruling that we had previously. So different from last quarter, but similar circumstances that we had one in the lower court, and then it was lost on appeal.
Steven Fisher
Okay. And any sense for kind of what the risks that you have more of these reversals? And are these for things that you’ve already used to cash hadn’t been resolved yet? So solid cash is going back out, but it’s just a reversal of a ruling?
Gary Smalley
Yes, that’s right. These are the charges that we took our noncash. Look, it’s rare to have something reversed on appeal. We thought that the facts were totally on our side. And quite frankly, we were shocked to have the results both last quarter and this quarter that you mentioned.
So, what’s the likelihood of that happening, it’s always possible. But we think it’s low likelihood. We think that the when we win at the lower court, especially when the facts are on our side, we think and usually history has shown that the appeals fail in that case.
Steven Fisher
And then, on the Specialty segment, any — can you just kind of give us a little more color on, what’s still on the specialty backlog that has maybe compromised margins? And what’s the timeframe for getting those projects completed?
Ronald Tutor
The only thing of consequence remaining in let’s say the two major specialty units that create all of these issues and losses are WDF and Five Star in New York. I would say the balance of our specialty group continues to meet its budgets very close to or does, but WDF took a write down on their subcontract at Newark as did Five Star. WDF has no major other work ongoing that we feel could have a significant impact in the near future. They have a tremendous amount of cost reimbursable funding for all the city agencies, which is pretty much established. All those slow pay because of its cost reimbursable nature. We don’t see that we’re exposed to any more significant write downs from WDF, unless it was an adverse ruling for any litigation and since there are no trials pending in at least the next six months. I don’t see WDF is having anything significant at issue.
Five Star Electric is very similar. They took a major write down on Newark. The balance of their issues are such that the ongoing work they have very little to any significant claims and it’s finishing up over the next year or two. We have probably a dozen lawsuits pending, with Five Star Electric, one of which is being currently litigated in arbitration against the UN as we speak. But that won’t conclude until next April or May.
But overall, although there still continues to be major litigation, when I timeline it, many of them came to fruition this year. We think a lot of potential settlements will come up next year. But I don’t believe we have any significant lawsuits that could hit us hard in the earnings category, not like this year.
Steven Fisher
So then, as we look out to the fourth quarter, how should we think about the potential for returning to profitability in that segment? Is that will your base cases for the fourth quarter and how close to normalize might that quarter be?
Ronald Tutor
It won’t be normal. Because we have two major claims with very large monies associated, we’re in the final stages of negotiation. Where our beloved New York owner keeps telling us he owes us and they’re going to make as a significant offer. But depending on that offer, it may hold the balance sheet, it may be reduced, it may be acceptable, it may not. That’s why we’re very reluctant to make a fourth quarter commitment, because these two significant claims have a very large impact on both cash and on profitability.
So if we resolve them, it’ll happen in the fourth quarter, if we don’t, we’ll take — we’ll go straight to litigation, it’ll be three to five years down the road. So it’s — there’s significant ongoing negotiations that should result in a settlement. Whether they do or not remains to be seen, but we’ll know in the next few weeks.
Gary Smalley
And, Steve, if those two large projects that Ron mentioned do not settle in the fourth quarter, we’re looking at specialty to come in with a small profit. So breakeven to a small profit.
Steven Fisher
And then maybe just lastly. You made reference to capital optimization strategies. Can you just give a little bit more color there that just basically referring to doing buybacks? Or is there some other broader plan that you have in mind?
Ronald Tutor
Well, without getting specific, we’re projecting very significant cash flow from next year that we would hope would be significantly more than even this year, and as a result, we will be in a position to where we will be reducing debt significantly. And once we reduce that significantly, two of the options discussed were a stock buyback because the stock is so horrifically depressed, that with a reduction of debt, we think we’re free to buy back stock. And secondly, to encourage investment, we’re seriously considering dividends. Because we think after next year, our earnings will be much more stabilized and significant. And we think an appropriate dividend would be in order. But we won’t address any of those probably until mid-year next year; and of course, it will depend on the significance of our collections, and the success of all of the cash flow.
Gary Smalley
And Steve also it depends on what our stock price is at the time too. And just the timing, the pace of collections, the extent that we make the progress that we’re talking about. So really all options are on the table, as Ron outlined.
Ronald Tutor
Well, as we sit and talk, and we realize we’re talking about honestly believing, we’re going to collect more cash next year than the market cap of the company, you begin to think buying back stock may be something you can’t avoid.
Operator
We have reached the end of our question-and-answer session. I would like to turn the conference back over to Ron for closing comments.
Ronald Tutor
Thank you once again. Fourth quarter is next. We’ll talk to you then.
Operator
Thank you. This concludes today’s call. You may disconnect your lines at this time and thank you for your participation.
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