Tutor Perini Corp (TPC) 2022 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation Second Quarter 2022 Earnings Conference Call. My name is Rob, and I will be your coordinator for today. (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.

Hello, everyone. And thank you for joining us. With me today 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-K, which we filed on February 24, 2022, and in the Form 10-Q that we filed earlier 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.

Thanks, Jorge. Good morning, and thank you for joining us. As you have probably seen from our earnings release this morning, we delivered mixed results for the second quarter of 2022. The positive highlight is we continue to generate very strong operating cash of $58 million for the quarter, which when combined with the record cash we generated in the first quarter, totaling just under $179 million for the first 6 months of 2022, an amount that is already greater than any full year of operating cash we produced since the merger of Perini and Tutor-Saliba in 2008.

And like last quarter, our operating cash was largely driven by the resolution of certain disputes and collections of certain successfully negotiated and approved change orders. I will add that we are still anticipating significant cash generation through the remainder of this year as well as of course in 2023. New awards and backlogs were another highlight of our second quarter results. We booked $1.1 billion of new awards and contract adjustments during the second quarter, which helped us to achieve solid year-over-year backlog growth of 14%.

Our backlog now stands at $8.5 billion compared to $7.5 billion in June of 2021. And nearly 60% of our current backlog is comprised of higher margin civil work which bodes well for our earnings potential over the next several years. We would detail some of our major new second quarter awards as well as our opportunities in a moment. Unfortunately, our second quarter earnings were negatively impacted by several factors, including certain unfavorable project adjustments, certain settlements of claims and change orders, an unexpected partial reversal of a previously awarded legal damages in a judgment form and the reduced profits due to lower revenue volume in the quarter. Gary will provide you some of the details regarding these impacts a bit later.

Consequently, we reported a loss of $1.23 per diluted share for the second quarter of 2022. Despite our obvious disappointment in these earnings for the quarter and the year-to-date, we continue to make major progress in resolving unapproved change orders and claims, which had and will continue to have a positive impact on cash flow. Over the next 30 to 60 days, we will be attempting to settle significant disputes on certain major projects. The uncertainty related to the outcome of the settlement discussions makes it very difficult to reliably predict at this time what our expected earnings will be for the remainder of the year. Settlements can positively or negatively impact earnings while generating significant cash.

Consequently, we have decided to withdraw our guidance for 2022 and expect to issue new guidance once we have better visibility into this potential timing and magnitude of settlements, which we expect to have by this time in the third quarter earnings announcement. I'm encouraged that we continue to experience strong demand for our services, even in spite of the current inflationary environment and concerns over a potential recession. Our Civil business in particular, is and has historically been very resilient during economic downturns as governments tend to invest even more in civil infrastructure during such period as a means of bolstering jobs and promoting long-term benefits. This is certainly even more true today given the passage of last year's infrastructure bill for which funding to project owners is beginning to flow.

As I mentioned, we booked $1.1 billion of new awards and contract adjustments in the second quarter. The most significant awards included $293 million of additional funding of changes on the mass transit project in California High-Speed Rail, $95 million for an educational facility in California, and $85 million housing project in Alaska and several projects in Guam, including $107 million military housing, an $84 million Wharf improvement and 2 other military facilities at $73 million and $49 million, respectively.

In addition to waiting imminent owners' decisions and announcing some 2 very large prospective opportunities, namely the $3 billion Newark AirTrain replacement project, for which I expect to have an announcement within 30 days and 2 projects that comprise the [$5 billion] (corrected by the company after the call) Maryland Express Lanes project for Accelerate Maryland Partners, which we expect an announcement in 2 weeks. We are preparing to bid and hopefully capture our share of various other large new projects later this year and in 2023, including the $3 billion shipyard and dry dock project in Hawaii for the U.S. Navy, which bids in October of 2022; the -- excuse me, the $2 billion Brooklyn Jail project for the New York City Department of Design and Construction, which should propose an award in the first quarter of 2023; the $1.5 billion JFK roadways and ground transportation center for the Port of New York, which we have asked for an extension and expect to bid in the first quarter of 2023; the $1.5 billion East San Fernando Light Rail project for Los Angeles MTA, again, first quarter of '23; and the $1.5 billion Inglewood Automated People mover, which we have put back into the third quarter of '23.

Last week, it was announced we are the apparent low bidder for the $519 million Raritan River Bridge Replacement Project in New Jersey. There were only 2 other bidders for the project, which is a further example of the limited competition that we are often seeing for major projects we are pursuing. We anticipate a contract award for the Raritan River Bridge in the fourth quarter of this year. In addition last week, Rudolph and Sletten was notified by one of its major customers that has been selected as the preferred general contractor to be awarded a large new hospital campus project in California.

The initial contract award will be rather modest as it will represent only early-stage preliminary work. After this initial work and subsequent preconstruction is completed, we anticipate booking approximately $800 million in the backlog by approximately the fourth quarter of 2023. We were also informed this week that we are the low bidder with written notification to follow shortly on a very significant Civil project on the East Coast. We will be providing further information regarding this project in the next 30 days.

Finally, we still have other new awards pending, including 2 gaming projects in California collectively valued at over $5 million that we now believe will be awarded in the fourth quarter, $500 million, excuse me. It is unfortunate that our strong second quarter and record year-to-date cash flow, and our backlog growth were overshadowed by the various negative impacts to earnings.

However, we are collecting cash, and we are encouraged by the progress in resolving these continuing disputes, which I've stated in the past, the majority of which should be concluded by the end of 2023. And we anticipate substantial further backlog growth over the next 2 quarters.

Thank you. And with that, I'll turn the call over to Gary.

Thank you, Ron. Good morning, everyone. This quarter, I'll begin by discussing our strong operating cash results, then I will review our other financial results, including the factors that negatively impacted our earnings and finally, some commentary on our balance sheet.

Operating cash flow continues to be the highlight of 2022 for us. We generated $58 million of operating cash during the quarter compared to usage of $85 million for the same quarter of last year. The current year second quarter operating cash flow was our third best operating cash result of any second quarter since the merger in 2008. Considering that for the 13 years since the merger before this quarter, our second quarter operating cash flow on average has been just slightly positive. Therefore, the $58 million of operating cash for this quarter is excellent.

Even more impressive, our operating cash flow for the first 6 months of 2022 was nearly $179 million. By far, the best operating cash result for the first 6 months of any year since 2008. It should be noted that we have generated more operating cash in these first 6 months of 2022 than we have during any full year. Like last quarter, our strong operating cash generation was largely driven by improved collection activity, including the continued resolution of certain claims and unapproved change orders that previously required the use of cash. We expect continued strong operating cash generation for the remainder of 2022 as well as next year based on projected cash collections, both from project execution activities and the resolution of various other outstanding claims and change orders.

Next, let's shift gears and discuss our revenue and the items that impacted our earnings. Revenue for the second quarter of 2022 was $861 million, down from $1.2 billion for the same quarter of last year. Civil segment revenue was $404 million compared to $555 million for the comparable prior year quarter. Building segment revenue was $267 million compared to $383 million for the second quarter of last year. Specialty contractor's revenue was $190 million compared to $281 million.

The lower revenue in all 3 segments reflected reduced project execution activities on various projects, most of which are completed or nearing completion, partially offset by increased activities on certain newer Civil and Building segment projects. The revenue decline was also partly attributable to the follow-on impact of the COVID-19 pandemic, which, as we have discussed in the past, delayed bidding activities and awards of certain new projects during 2020 and much of 2021.

In other words, we believe that our current revenue run rate would be notably larger if not for the COVID-19 impact. As our backlog would likely be significantly higher than where it currently stands and we would be converting that larger backlog into more revenue. We believe that as newer projects accelerate and contribute more meaningfully to earnings, we should see fourth quarter revenue more comparable to the same quarter of last year and ultimately start to see revenue growth by early 2023. We reported a loss from construction operations of $91 million for the second quarter of 2022 compared to income from construction operations of $69 million for the same quarter of last year.

The Civil segment had a loss from construction operations of $10 million. The Building segment reported a very small loss from construction operations and the Specialty Contractors segment reported a loss of $67 million. As Ron mentioned, our second quarter earnings this year were significantly reduced by several factors that negatively impacted our results. Let's review them now.

The largest negative impact for the second quarter of 2022 was $33.5 million associated with an unfavorable adjustment for the unforeseen cost of a project closeout -- of project closeout issues, remediation work, extended project supervision and associated labor inefficiencies on electrical component of a transportation project in the Northeast and the Specialty Contractor segment, which is nearing completion. Despite the charge that we took on this project in the quarter, the project remains profitable just at a lower profit margin than before. This unfavorable project adjustment loan accounted for a $0.47 reduction in earnings per diluted share for the second quarter of 2022.

We also received a legal ruling during the second quarter of 2022 that resulted in an unexpected partial reversal of legal damages that had been previously awarded to us related to a completed electrical project in New York in the Specialty Contractors segment. Consequently, we recorded an unfavorable adjustment of $17.8 million or $0.25 in EPS for the second quarter. It is important to note that last year's second quarter EPS included a $0.28 favorable benefit related to the same dispute due to an award in our favor by the trial court at that time. So for this matter, we believe that the course got it right the first time when we received a favorable decision. As such, we intend to appeal the latest ruling and are optimistic that we will ultimately prevail.

In addition, we reached a settlement with an owner in the second quarter on some long-disputed matters pertaining to a completed Civil segment project in Maryland, which resulted in an unfavorable impact of $16.2 million and accounted for a further $0.23 reduction in earnings per share for the quarter, with cash associated with the settlement expected in the third quarter. Also negatively impacting earnings for the second quarter of 2022 was a temporary negative impact of the successful negotiation of additional change orders on the Civil segment mass transit project in California.

As I explained last quarter for the same project, the additional work approved in the quarter was of lower risk and therefore carried a lower margin percentage than the project's overall project profit margin. As a result, even though the total profit in dollars that we will ultimately be recognizing for this project increased with the approval of the change orders, the cumulative margin percentage for the project declined slightly. The combination of the slight decline in the project's overall profit margin percentage and a small decrease in projects percentage of completion as a result of this change order settlement resulted in an $11 million decrease in the profit recognized for the project in the second quarter. For the first 6 months of 2022, the impact was $29 million.

So in summary, we successfully negotiated significant change orders in both the first and second quarters that increased the overall profit of the project, but the accounting treatment for the changeovers resulted in negative cumulative corrections to earnings in both quarters. It is important to note that the reductions in earnings for the last 2 quarters are only temporary since they will reverse themselves and be recognized in profit over the remaining life of the project. But for the current year, the negative impact to earnings per share for the successful negotiations of these change orders was $0.18 for the second quarter and $0.45 in total for the first 2 quarters.

Finally, our earnings for the second quarter of 2022 were negatively impacted by lower profits associated with the lower revenue with much with a lower volume due to the follow-on impacts of COVID that I mentioned earlier.

Moving on. Interest expense for the second quarter of 2022 was $16 million, down 10% compared to $18 million for the second quarter of 2021. The decrease was principally due to the absence of amortization of discount and debt issuance cost on the convertible notes that we repaid last year as well as a lower average balance on our revolver this quarter compared to the second quarter of last year, partially offset by higher borrowing costs this year. The income tax benefit for the second quarter of 2022 was $44 million compared to income tax expense of $11 million for the prior year second quarter and the corresponding effective tax rate was 41.3% for the second quarter of this year compared to 20.4% for the comparable quarter of last year.

In periods reporting pretax losses, the tax benefit increases the effective income tax rate because it increases the tax benefit generated from the pretax loss. The tax benefits that caused the higher tax rate for the second quarter were primarily the earnings attributable to non-controlling interest, for which income taxes are not the responsibility of the company and state income tax benefits net of federal tax benefits.

The effective income tax rate for the quarter reflects the impact of a relatively low projected pretax loss for the year, which magnifies the impact of tax benefits on the effective income tax rate. The various negative adjustments that I've mentioned were the catalyst for our earnings underperformance in the quarter. Net loss attributable to Tutor Perini for the second quarter of 2022 was $63 million or a loss of $1.23 per share compared to net income attributable to Tutor Perini of $31 million or $0.61 of earnings per share for the same quarter of last year.

To reiterate what Ron said earlier, while we are disappointed with our earnings performance this year, we are encouraged by the progress we have made in resolving certain unapproved change orders and claims, the settlements of which have had and will continue to have a positive impact on cash flow. As for our balance sheet, our net debt as of June 30, 2022 was $659 million, down 17% compared to $791 million as of December 31, 2021. We remain within our debt covenant compliance limits and anticipate that will continue to be the case in the foreseeable future.

As Ron mentioned earlier, over the next month or so, we will be attempting to settle significant disputes on certain major projects due to the uncertainty related to the outcome of the settlement discussions and the potential financial impacts they could have positively or negatively, we are withdrawing our guidance for 2022 at this time. We expect to issue new guidance once we have greater visibility into the timing and magnitude of any potential settlements, which we expect to have by the time of our third quarter earnings announcement.

Regardless of the outcome of any potential settlements, however, we now expect a net loss for this year. The upside to these potential settlements is that there is an excellent opportunity to continue to generate significant operating cash in the short term.

Thank you and with that, I will turn the call back over to Ron.

Thank you, Gary. To recap, we generated solid operating cash of $58 million in the quarter. Record operating cash of nearly $179 million through the first 6 months of the year and are expecting our full year operating cash to be far above our previous annual record of $173 million. In so many words, we have a significant level as everyone knows, of costs in excess. We have analyzed dates for all of their results, whether it be trial dates, mediations, ongoing negotiations and it is still my belief that the majority of those will either be adjudicated or resolved by the end of 2023 with only a handful going into 2024.

Despite a hiccup from time to time with the legal system, not always being totally predictable, we continue to have significant settlements and resolves and the collections of cash, which I expect to continue through the end of 2023 with particular emphasis on the second half of 2022. In addition, our backlog is up 14% year-over-year, driven by a steady stream of sizable new awards. And I'm in belief with preliminary statements made that we could significantly add to that backlog by the end of the year, given the 2 major proposals in and the third one going in, in October. We look forward to an obvious return to more consistently solid earnings per share next year and beyond as we focus on collecting cash in the short term.

Thank you. And with that, I'll turn the call over to the operator for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) And our first question is from the line of Steven Fisher with UBS.

So I know the second half are going to be impacted by these claims settlements, and that's uncertain. But just curious about how you see the operational performance in the second half and how much of uncertainty there is a factor in withdrawing the guidance as well? Like are you thinking that you could confidently be back to more normalized margin ranges for at least Building and Civil for the second half of the year?

Well, if you look at the analysis of the significance of our second quarter losses, there are individual events that should not be repeated. The most significant reason that we held our guidance is we have 2 very large claims in final stages of negotiations. And yet we're uncertain as to how that might end or if we'll even settle for that matter. So that should conclude itself in the next 60 to 90 days.

And as far as operations, the one project that received a significant write-down in the Specialty groups should resolve that issue, and I see more of a leveling in operations. Civil lost an appeal on a big lawsuit, we lost the most unbelievable we had a judgment for $41 million and the Appellate Court decided the court couldn't award certain aspects and then remanded it back to the same judge that gave us the award and told them to come back with a final judgment. So everything that could go wrong in the second quarter went wrong, but none of it repeats itself. However, I continue to emphasize, the second half of this year and next year, we are going to clean up our costs in excess. And the enormity of those costs in excess will be collected. And the only question mark is what, if any, write-downs we take around those collections. Sometimes we do better. Sometimes, we do worse, but we're determined to collect the money we're due. And you're seeing just a taste of it in the first 6 months.

Okay. So it sounds like you're not just -- go ahead, Gary.

Yes, Steve, I just wanted to just indicate one thing as Ron went through those things and went from segment to segment. I just want to make sure that you understand that, that partial reversal that we're talking about, that was in Specialty.

Yes, okay. So it sounds like you're not discouraging us from thinking about more normalized margins in the second half of the year or at least Civil and Building. I know Specialty has had some ongoing challenges, but it sounds like we should have some degree of confidence in normalized in the second half of this year, other than, I guess, low volume impact. Is that right?

Well, that's the other thing. We've had the Civil group back east who has consistently delivered over the years' excellent results and profits. Because of COVID, there's been virtually in the last 18 months, 2 years, nothing bidding. And as a result, their backlog has dwindled and their operations dwindled from potentially $700 million to $800 million a year of revenue where I don't anticipate $250 million this year. So their profit delivery has basically dwindled to nothing. And it's no reflection on the operation. It's the fact that East Coast has had no work, New York virtually stopped as did New Jersey and Pennsylvania.

However, given that, we have 2 enormous projects we are waiting word on, and we are very confident that we're going to get a sizable portion, if not all of it. So we'll learn that in the next 30 to 60 days, which, of course, would bode well for the next years to come for New York. So, just a lot of things in the queue.

Okay. And then just a follow-up in terms of the inflationary environment. Clearly, a lot of uncertainty there, but it does seem like costs continue to move higher. And I'm curious, as you're kind of pursuing some of these very large programs that are going to be over multiple years. How are you planning for inflation in those bids today to be able to capture that uncertainty and ensure that you're going to have profitability on these projects?

Steve, the multibillion-dollar projects involve so much contract negotiation before we tender a bid. And invariably, both of the large projects that are quoted and awaiting notice of award or at least results. We negotiated escalation clauses because we refused to take the risk of steel escalation, fuel escalation, asphalt that derives from fuel, and both times the owners agreed to escalation clauses where they would be responsible.

With our position being very simply, escalation is out of control, you have to take the risk or our contingencies will be so enormous, we will not take that risk. And if you don't deliver that risk or assume it, we won't bid the job. And when there's only 2 bidders that doesn't put them in a very negotiating position. So, we've been able to transfer that risk to the owners on all these billion dollar plus jobs, and we continue to insist that has to be.

Our next question comes from the line of Alex Rygiel with B. Riley.

Gary, can you help us understand the inflationary pressures on margins over the next couple of quarters?

Based on Ron's comment right there on these mega projects that are being bid, we're putting in escalation clauses. We try to do that on the, we'll say, the medium smaller project as well, those that where we're unsuccessful to do that, then we try to make sure that we have as much contingency in there to cover those type things. So we think that the margins should be not significantly impacted by inflation, Alex.

And then, Ron, can you provide a target for cash collection in the second half of the year?

It will be very significant. I'd rather not be specific because there are so many factors involved, but it will not be trivial.

Would you characterize -- would you characterize the first half of the year to have been a significant cash flow collection period?

Well, if it was the big -- the 6 months was the biggest cash flow we've had in the last 14 years for an entire year, I call it significant.

Alex, I'd reiterate what Ron is saying, I agree totally. It's so unpredictable with the timing of some of these settlements that are ongoing and when certain arbitration litigation activities will take place in order to know exactly what quarter certain cash collection will fall. But if you broaden the horizon and Ron talked about cleaning up these significant unbilled as we progress through this year and through next year.

If you look at where our market cap is now, and you say over the next year or maybe even if you go next year, 1.5 years. And we're going to collect cash that exceeds the market cap, at least that's what we firmly believe. That's our expectation. So, I -- that's another way to look at it to give you some type of scale over a longer term. But again, we don't want to provide an estimate for a shorter term because of the volatility or the uncertainty with respect to how long it actually takes to close in on some of these items.

The next question is from the line of Brent Thielman with D.A. Davidson.

My questions have been asked. Thanks, guys. Best of luck.

At this time, there's no additional questions. I would like to turn the floor back to management for further remarks.

Thank you, everyone. Hopefully, we've answered whatever questions you had, and we'll talk to you the next quarter.

This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.