Tutor Perini Corp (TPC) 2004 Q2 法說會逐字稿

Good afternoon, my name is Meredith and I will be your conference facilitator. At this time, I would like to welcome everyone to the Perini Corporation Second Quarter Fiscal Year 2004 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to Mr. Crocker Coulson, please go ahead, sir.

Well, thank you Meredith. Good afternoon everyone. Thanks again for joining us on Perini's Second Quarter 2004 Conference Call. With us today are Perini's President, Robert Band, the company's Chief Financial Officer, Mike Ciskey and Dick Rizzo who is Chairman of Perini Building Company, which is the largest business unit of the company.

Our agenda for today is as follows. Bob Band is going to discuss the highlights of the second quarter operating results, new contract wins and some other accomplishments. After that, Mike Ciskey will review the company's Q2 financial results in detail. Then Bob is going to come back and make some closing remarks and at that point we will open the call up to your questions.

But before we start I'd like to remind our listeners that our comments today will contain forward looking statements. And management may make additional forward looking statements in response to your questions. These types of written and oral disclosures are made pursuant to the safe harbor provision contained in the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that such forward looking statements do involve risks and uncertainties that could cause actual results to differ materially from anticipated results. The company cautions that any such forward looking statements are based upon assumptions that the company believes are reasonable that are subject to wide range of risks and actual results may differ materially.

These types of statements and underlying factors related to the statements are listed in filed information with the SEC including Perini's annual report on Form 10-K for the fiscal year ended December 31, 2003 as well as in today's news release. Our statements on this call are made of today, August 5, 2004 and the company undertakes no obligation to update any of these forward looking statements contained in the call.

Whether as a result of new information, future events, changes in expectation or otherwise. With those formalities out of the way, it's my pleasure to turn the call over to Bob Band.

Well, thank you Crocker. Good afternoon and thanks to all of you for your interest in our results. Two thousand four is shaping up to be a terrific year for Perini with very strong revenue and earnings performance by our building and management services segments and include improving profit contributions across the board. In fact, we have increased our guidance for revenue and pro forma earnings per share to $1.5 to $1.7 billion for the full year for revenue and a range of $0.95 to $1.05 for pro forma EPS fully diluted.

We are also forecasted on a GAAP diluted earnings basis for full year 2004, earnings per share in the $1.25 to $1.35 range, which is anticipated to include the strongest pre tax income performance in the company's 110 year history. Now Mike Ciskey will cover the financial details in a little bit.

The demand for our services in several of our core focus areas including the hospitality and gaming markets and our military base construction and reconstruction work supporting U.S. government activities overseas is as strong as it has ever been and I'm pleased to report that we continue our track record of on time, on budget and safe performance during the quarter across our client base.

There are a few other organizations in the world that can manage large scale complex projects that have become for any signature. And we see ample opportunities to support our future growth. We reported strong revenues and earnings for the second quarter with results exceeding both our internal financial forecasts and analyst consensus estimates.

Again, Mike will review the details in a few moments. I'd like to talk to you about the progress we've made in the first half of 2004. For the first six months of 2004, revenue was up 70% as compared to the same period in 2003 to $976 million.

Income from construction operations increased by 202% to $28.4 million and net income for the first half of the year was $22.8 million or $0.91 per diluted share. And pro forma net income, assuming full tax provision crippled to $15.4 million or $0.60 per diluted share versus $5.4 million or $0.21 per diluted share in the first half of 2003.

Anyway you want to measure it, this has been a very successful first half of 2004. While we expect the pace of this growth to moderate somewhat in the second half, the underlying market dynamics and our competitive position both remain very strong.

During the second quarter, we had $333 million in new work awards and during the month of July, we had an additional $310 million of new contract awards and low bids, those were not reflected in our second quarter back log. Our growth in the quarter was driven by outstanding performance by both our building and management services segments.

All three of our segments were profitable during the second quarter, reflecting both the higher value of our contract mix and increased focus on our civil segment. We see our multi segment strategy as a major asset for Perini, since it enables us to balance any temporary downturns in any of our core markets, producing more consistent and diverse revenue and profit opportunities over time.

The building segment was the largest contributor to our second quarter results. At $370 million or 75% of total revenues and to our operating profits as well. The momentum in this business continues to build given our leadership position in the hospitality and gaming segment and the growth of that sector.

Upgrades and expansions of existing facilities and traditional gaming centers and the explosive growth of Native American gaming in California and New York and other regions continue to create a target rich environment. We're also seeing solid revenue and profit performance out of the Southeast region where our James A. Cummings acquisition continues to meet financial objectives we establish and is on track to be accretive for 2004.

The building segment had another strong quarter of new work acquisition, with over $290 million added to the backlog during the quarter. Perini won new work with customers including the San Manuel Native American Tribe, MGM, Caesar's Palace and Stations Casino during the second quarter.

The majority of this work consisted of facility upgrades and scope expansions with existing customers. As our gaming clients look to expand and remodel their existing facilities, we're often seen as a key partner working from the design and pre construction phase all the way through to completion.

In addition to the work that was brought into back log, we have another $300 to $400 million worth of hospitality and gaming work that we expect to bring to contract in the next 90 days. This includes several new facilities and major renovation projects. Looking a little further out, we have an excess of $2 billion worth of projects in their market that is currently in the pre construction phase including several new major Native American gaming facilities in various parts of the country.

We have found that the pace of this planning and funding activity leading to this work is continuing to accelerate. With over 29 states that have approved Native American gaming and over 60 projects under development in California alone. We foresee that this market will continue to generate attractive opportunities for Perini for many years to come.

Our management services segment enjoyed another strong quarter with $90 million in revenues or 18% of our total revenue for the quarter. This represents 150% increase over Q2 of 2003, although it is a slight decline from the first quarter of 2004.

The primary driver of growth was our work on power generation and power transmission in southern Iraq as well as general reconstruction work in Iraq and Afghanistan. Our management services team continues to do an outstanding job of these power generation and distribution assignments in a very challenging work environment.

Perini is proud of the contribution our people are making to restore a basic infrastructure to the people of Iraq. As a result of this work, electrical power has been restored to millions of people. And despite all the well publicized impediments, we continue to deliver our projects on schedule and on budget.

As of June 30th, we have substantially completed our work under the first $500 IDIQ, that's indefinite delivery, indefinite quantity contract, which we received from the Army Core of Engineers in April of 2003. Under this contract, we turned over 400 kilometers of power transmission lines and towers, we completed nine low voltage sub stations, we put two reconditions and two new power stations on the grid.

In July, we announced two new task orders valued at $104 million for the design and construction of brigade facilities for the Afghanistan National Army at Masi-Sharif (ph) in Northern Afghanistan and Gardez (ph) in Eastern Afghanistan. These contracts were awarded under the second, $1.5 billion five year IDIQ contract that we received from the Core of Engineers in January of 2004.

We are actively proposing on other tasks under this vehicle for the core, U.S. Army Core of Engineers, which covers CENTCOM's entire 25 country area responsibility and believe that they are highly satisfied with our performance thus far.

Perini was the first U.S. Army Core of Engineer contract to arrive in Afghanistan in January of 2003 and we have essentially completed two similar brigade facilities at Polycharky (ph) near Kabul and Afterrahliman (ph) Afghanistan which were valued at a combined amount of approximately $60 million. You will recall that in March of 2004, we received a third $500 million five year IDIQ contract, this time from the coalition provisional authority, which also covers electrical transmission and distribution work in Southern Iraq.

Following the transfer of Iraqi sovereignty, this contract has been moved to the new project and contracting office of the Department of State, it's now known as PCO, which is the administering contracts in the region formally led by the CPA. They have continued to staff up their contract administration and oversight capabilities and we expect to be receiving additional task orders under this vehicle by early Fall 2004.

Just to be clear, as of the end of June 30, 2004, we have $119 million of back log revenue in Iraq, and $7 million in Afghanistan. And in July, we were awarded two task orders in Afghanistan totaling $104 million. Taken together, these two IDIQ contracts have a potential value of $2 billion, with only a $100 million which has been awarded through June 30th.

While the pace of reconstruction work being proposed on has been slower than many expected, we anticipate that we will realize substantial value from IDIQ contracts over their five year terms. We also believe that Perini's years of experience in strengthening embassies around the globe with the U.S. State Department positions us well.

As government agencies and major corporations think every more seriously about the need to secure their physical plant against potential terrorist attacks. Our several segment contributed $36.3 million to our second quarter revenues, or 7.3% of the total, which is 20% lower than the $45.5 million booked a year ago. While this is an improvement from Q1 of 2004, civil is clearly underperforming its historical levels due to our lower backlog of high value civil infrastructure projects in the Northeast region.

We are now starting to see an improved flow of new work opportunities in this marketplace, but we don't expect a dramatic improvement in results before 2005. That said, we expect this business unit to be an important contributor to our long-term growth and profitability.

In summary, this was another outstanding quarter of performance for Perini and it is certainly shaping 2004 to be a terrific year. With improving visibility into the second half of the year, we feel confident that we're on track to achieve our financial goals for full year 2004.

The fundamentals in our major market remain strong and the company continues to strengthen our financial, the company continues to strengthen the financial position and our reputation for quality and on time performance. With that, I'll turn the call over the Mike Ciskey to discuss our financial results in more detail.

Thanks Bob, and thanks to everyone who is joining us on the conference call this afternoon. We're very pleased with the results that we announced this afternoon in our press release which show strong momentum in our building and management services segment.

Improving operating leverage and a stronger balance sheet. As Bob stated earlier with two very solid quarters behind us this year, we are confident that we are on track to achieve financial goals, our financial goals for the full year. At this time, I will go over the second quarter financial results.

Second quarter revenues grew by 73% to $496 million, a $210 million increase from $286 million in the second quarter of 2003. Revenues from our building segment were $370 million, up by 80% from $206 million a year ago. Management services revenue grew by 157% to $90 million, up from $35 million a year ago. While revenues from our civil segment declined by 20% to $36 million from the $46 million reported in the second quarter of 2003.

Approximately 80% of the second quarter revenues were earned through cost plus or guaranteed maximum price contracts, with the remaining 20% of second quarter revenues coming from fixed price contracts. Gross profit grew by 65% to $23.7 million, up from $14.4 million in the second quarter of 2003. Our gross margin was 4.8% for the quarter as compared to 5% a year ago.

General and administrative expenses were $9.1 million of 1.8% of revenues in the quarter as compared to $9.9 million or 3.4% of revenue in the second quarter of 2003. The decline in G&A expense reflects the impact of cost savings initiatives implemented at one of our building segment business units last year and the shifting of personnel from G&A into projects as the number of active contracts has increased.

Income from construction operations was $14.7 million in the quarter, an increase of 227% from the $4.5 million reported in the second quarter of 2003. Operating margin was 3% in the quarter, up by 1.4% from 1.6% a year ago as we benefited from improved operating leverage on increased volumes.

Looking at income from operations by segment; building segment income from operations increased by 207% to $9.2 million from $3 million in the second quarter of 2003. As indicated earlier, this strong profit contribution reflects better operating leverage as the number of active contracts has increased and the impact of G&A cost reductions at one of our business units.

Management services income from operations grew by 78% to $6.6 million in the quarter from $3.7 million in 2003. The increased income from operations in this segment reflects the increased volume as a result of our work in Iraq and Afghanistan.

And despite a decline in volume, civil income from operations increased to $1 million, from $200,000 a year ago. This increase in civil income from operations was helped by a $600,000 gain on sale of equipment during the quarter. As we have said earlier, we continue to approach new work opportunities in this segment cautiously, emphasizing projects that meet our margin and cash flow objectives, while continuing to focus on returning the segment to its historical level of performance.

Other expense in the second quarter of 2004 was $1.4 million as compared to $100,000 a year ago. The increase is due primarily to expenses associated with our recently completed secondary stock offering. We recognized the provision for state income taxes of $966,000, or an effective rate of 7.3% as compared to $525,000 recognized in the second quarter of 2003.

Beginning in the third quarter of this year, we expect to begin recognizing federal income taxes for book purposes resulting in an effective tax rate close to the statutory rate of 38% combined state and federal. I should point out that while we do not expect to begin paying federal taxes on a cash basis until sometime in 2005.

GAAP net income was $12.2 million in the second quarter up by 236% from the $3.6 million reported a year ago. Diluted earnings per share are $0.48 for the quarter as compared to $0.41 for the same period of 2003. As you may recall, earnings per share in the second quarter of 2003. As you may recall, earnings per share in the second quarter of 2003 benefited by $0.29 from the reversal of accrued dividends on our 2125 preferred stock as a result of the tender offer which closed during that quarter.

On a pro forma basis which adjusts our actual results in both periods to resurrect a full tax provision and to remove the effect of the second quarter 2003 earnings per share on the dividend reversal on the 2125 preferred stock, net income would have $8.1 million in the second quarter of 2004, up 217% as compared to pro forma net income of $2.6 million a year ago.

Pro forma diluted earnings per share would have been $0.31 for the second quarter of 2004 versus $0.10 for the second quarter of 2003. We believe such pro forma results may be useful to investors in comparing our performance over these periods that they are not meant to substitute for GAAP earnings.

A reconciliation of reporting earnings in accordance with GAAP to pro forma earnings is contained in the press release published this afternoon. Turning to the balance sheet; at quarter end our working capital stood at $152 million, up from $125 million at December 31, 2003. This represents a current ratio of 1.35 to 1, up from 1.31 to 1 at year end.

As of June 30, 2004, we had $89 million in cash and cash equivalents, an increase of $21.5 million compared to December 31, 2003. Long-term debt stood at $9 million, up slightly from $8.5 million at year end. Our long-term debt to equity ratio was .06 to 1 at quarter end, compared to .07 to 1 as of December 31, 2003.

During the first six months, we generated $20 million in cash from operations and as of June 30th, we had $47.2 million available to borrow under our $50 million credit facility. Our back log was at $1.29 billion at quarter end, as compared to $1.67 billion reported at the end of 2003 and $1.23 billion a year ago.

Of this amount, $775 million, or 60% relates to our building segment, $261 million, or 20% of total back log is attributable to our management services segment and $253 million, or 20% relates to our civil segment. As we announced in today's press release during the month of July, we received approximately $310 million in new or pending contract awards and low bids, which is not reflected in back log.

This includes $104 million in management services segment related to reconstruction in Afghanistan. It's a new $30 million low bid in our civil segment and over $170 million in new and pending awards in our building segment. In closing, although Bob mentioned our 2004 guidance in its opening statement, I would like to restate our 2004 revised guidance.

We have increased our forecasts to 2004 revenues to the range of $1.5 billion to $1.7 billion. We have also increased our pro forma fully tax affected earnings per share guidance to a range of $0.95 to $1.05 per diluted share for 2004 and expect our GAAP diluted earnings per share to be in the range of $1.25 to $1.35. With that, I'll turn the call back over to Bob for his closing comments.

Thank you, Mike. As we're fortunate in our increased guidance, we expect 2004 to be another strong year of performance for Perini both at the top and bottom line. Despite record volumes in our building segment, we feel confident that we have sufficient opportunities to support replenishing our backlog and supporting future growth.

We continue to expect to win a substantial amount of additional business in the second half of the year. Our pipeline of opportunities continues to be robust and if anything the picture has improved. While the security situation in Iraq continues to be a challenge, it has not impacted our ability to generate revenues and deliver critical reconstruction projects for our clients on schedule.

While we expect lower volumes of work in the region during the second half of this year, we are optimistic that our work will reaccelerate in 2005 and we see ample opportunities for future growth providing mission critical construction services for reconstruction, military and homeland security related projects at home and around the globe.

That concludes our prepared remarks and Mike Ciskey, Dick Rizzo and I would be happy to entertain any questions you might have. Operator?

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question is from Ben Warmen (ph) with Bishop, Rosen and Company.

Yes, first I'd like to congratulate the company for the terrific improvement in the fortunes. I remember a few years ago you had practically a negative net worth and I calculate, it seems like your book value, stockholders' equity is around close to $6.00 a share, is that correct?

It's getting there, Ben.

Good, the other question I have is you still have some outstanding preferred stock and I think it might be a good time to clean that up and pick up the unpaid dividends that you've accrued.

Well, Ben, thanks for the question. Really, it's very timely, we are, as you might note in the S-1 that was recently filed, we did mention that we were pursuing a court sanctioned mediation on the preferred stock issue. And while we have met, naturally the mediation is not concluded so there's not much I can say about it. But we are encouraged by the discussion, so I would leave it at that and say it's a major agenda writer for the company.

Thank you.

Your next question is from Richard Rossi with Morgan Joseph.

Good afternoon everybody.

Hi Richard.

Hi Rich.

A couple of things, could you sort of bring us up to date of your knowledge of what's going on in California regarding the potential agreement between the tribes and the state as far as the casino slots are concerned.

Dick, do you want to address that?

Sure, I will. Currently there are six tribes that have signed with the governor, two of which are our clients. The other one, they are projecting within the next 60 days that the majority of the rest of the tribes of any consequence, particularly the ones that we're currently doing work for should go under agreement.

Some are pending the referendum vote that's in November before they'll sign with the governor and I'm sure depending on how that vote goes, after that point, the remainder of the tribes should probably join forces and agree with the governor. So my projection is that probably by the end of the year you'll probably have most of the tribes under agreement.

Is it fair to assume that if the agreement holds that there will be a substantial amount of new business out there? And will there be more adding to capacity that's already there or new facilities?

I think that the answer is two fold. The current projects we are working on which is probably in total growth value close to $600 million, all of which have various future phases which we have already budgeted, much of which is pending resolution with the governor and once that happens, the majority of that work should move forward.

I would wager to say the value of that work is probably, one project alone is $700 million, the others are in cumulative, probably another equal amount. So considerable volume is at our doorstep, subject to the confirmation by the governor.

There's a whole other movement of what I call secondary tribes that are now, once they have come to agreement, will now start to see a lot of new activity from those tribes that either currently don't have a gaming facility, or have a very small and are waiting to get resolution with the governor to extend.

So I think between, and we looked at several of those, we budgeted several of those and I think that again, those probably will come our way once the referendum is voted on in November. And either way, that referendum goes, I don't think it's going to adversely effect potential growth.

Thanks Dick.

One other issue, if I could. The Iraq work, looking beyond the next couple of quarters, do you see '05 being as good a year as '04 in terms of the amount of Iraqi work that you might be doing?

Well, it's really hard to make that type of prediction. Currently, the new work that we're seeing in Iraq is coming in at a much slower pace. This is being issued by the former CPA now, now the PCO under the State Department.

However, they do have a lot of projects that they need to get moving. They've committed to us certain goals that they have in terms of letting work. So I would say the potential is there for substantial work to come in between now and the end of the year and that will determine how robust '05 starts up.

All right, thank you.

Yeah, thanks.

your next question is from John Rogers with the DA Davidson (ph).

Hey John.

Hi, how are you?

Great.

Um, a couple of things. First of all, in terms of the awards that you've received subsequent to the quarter, the revenue that's associated with these and which I think is supporting your higher outlook, is that predominately fourth quarter business?

I'm just trying to get a sense of the seasonality, because I would have expected the fourth quarter to maybe trail off with construction. Now it looks like it may be better than the third quarter, or is that too hard to call?

Well, we don't normally project quarter to quarter, because of the lumpiness in the business. I will say that the base construction in Afghanistan has been rapidly mobilized. So one of the two projects has been mobilized with camp construction beginning now. It's really difficult to project on a quarter to quarter basis in this business. However, I'm encouraged by the work coming in in July, it still gives us a shot at getting mobilized and up and running in the third and fourth quarter.

OK, OK. And the other question I had was just in terms of some of your legal disputes, any update on any of those?

All of the major legal items that are individually disclosed in the queue pretty much status quo at this point. We're still awaiting either decisions or appellate action, that type of stuff. So there's no major update on those cases at all. I think you'll see in the queue when it's filed for the period ended June 30, the descriptions are pretty much as they were in the first quarter.

OK, and then just last question, in terms of the $300 to $400 million of gaming projects that you refer to, are those, does that work that you feel will be pulled into booking, what did you say, in the next 90 days?

Well, that's certainly our consensus here. We'd like to covert that to contract in the next 90 days. But based on the lumpiness of the industry, you never know when a project is actually going to convert. If somebody gets sticky on terms, it might take a little longer. But we're very encouraged by that amount of projects which are getting very close to contracting.

OK, and just to be clear, that's in addition to the $170 million worth of bookings that you added in July?

Right, that's right.

OK, great. All right, great quarter, thanks.

Your next question is from Richard Fryerie (ph) with Delphi (ph) Management.

Good afternoon.

Hi Richard.

On this back log, I know, Bob, I had asked you about this in the past, but are the margins in the back log up, down, the same as the margins we're seeing right now in the business?

We don't really discuss detailed margins, but they are generally the same. We don't see any change in the margin. And our margin guidelines if anything are even stronger than they have been. So the back log is generating, will generate essentially the same margins that we're looking at now.

All right, and with your increased work in Iraq and Afghanistan, have you guys had to take out any new insurance coverage on the property or catastrophe side or also just covering your workers? Anything meaningful there?

There's no, first of all, all of the work in Iraq is cost plus work, which would include any insurance premiums.

Right.

With that said, I really won't discuss any specific insurance as related to that work.

All right, thank you very much.

Appreciate it, Richard.

Your next question is from Steve Penault (ph) with Imperium (ph) Capital.

Actually, my question has been answered, but congratulations on the quarter.

Thanks Steve.

I'm showing no further questions.

You're showing no further questions at the moment?

No sir, would you like for me to do a reminder?

Sure, please.

OK, again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question is from John Rogers with DA Davidson.

Thanks, Mike, you mentioned on the tax credit, do you expect to begin paying tax credits next year. Can you remind us what the amounts are that are left? How longer do you expect to begin paying taxes next year?

Well, going into 2004, for tax purposes, we had $63 million available net operating loss carried forward for tax purposes. So obviously we're going to use some of that, a fair portion of that for this year and then the remainder would fall into next year.

OK, great, thank you.

I'm showing no further questions.

OK, at that point then I'll thank everybody for joining us in the call and hope to hear from you individually if you have any further questions. Thank you.

Thank you, this concludes today's Perini Corporation Second Quarter Call, you may disconnect.