Tutor Perini Corp
NYSE:TPC
Earnings Call Analysis
Summary
Q3-2023
The quarter's results were a mixed bag with a stable revenue of $1.06 billion but faced a net loss attributable to Tutor Perini of $37 million, or $0.71 per share. Yet, the backdrop is brighter with operating cash flow already reaching $181 million, close to last year's $207 million record. The quarter's backlog stood at $10.6 billion, bolstered by a $2.95 billion project award. Challenges in the Specialty Contractors segment were offset by solid performance in Civil Construction. Dispute resolutions are expected to boost future cash flows, and strategic refinancing plans aim to alleviate debt maturity concerns. With promising bids in the pipeline, such as the $3 billion Queens jail facility, and expectations of robust demand, the company is set for revenue growth in Q4 and 2024, although no solid guidance for EPS in 2023 has been provided.
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Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation Third Quarter 2023 Earnings Conference Call. My name is John, and I will be your coordinator for today. [Operator Instructions]. As a reminder, this conference call is being recorded for replay purposes. [Operator Instructions].
And I will now turn the conference over to your host for today, Mr. Jorge Casado, Vice President of Investor Relations. Thank you. Please proceed.
Hello, everyone, and thank you for joining us today. With us 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-Q, which we are filing today 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.
Thank you, Jorge, and thank you all for joining us. We delivered mixed results for the third quarter of 2023 with very strong cash generation and year-over-year backlog growth, but with challenged earnings due to a number of write-downs that resulted from the resolution of various disputed matters. We generated $103 million of operating cash in the quarter, bringing our year-to-date operating cash flow to $181 million, which is just $26 million short of the full year record of $207 million that we achieved last year. Both our third quarter and year-to-date operating cash flows were the second highest result for each respective period of many years since the 2008 merger between Tutor-Saliba and Perini Corporation.
Our consolidated revenue was level compared to the same quarter last year, with increased contributions from the Building and Civil segments, offset by lower revenue in the Specialty Contractors segment due to certain projects in the Northeast that have been completed or are very nearly complete. We expect revenue growth in the fourth quarter, compared to the fourth quarter of last year, with better revenue growth next year and even stronger growth in 2025 as we should be entering the construction phase of multiple large projects starting in 2024.
We have made continuing and significant progress on various claims and dispute settlements and expect to continue resolving the balance of long-standing disputes and collecting significant amounts of related cash over the next 12 months. We expect there to be a very limited number of outstanding disputes at the end of 2024, all of it, which should be resolved in the first 2 quarters of 2025.
Considering our near record cash flow through the third quarter as well as very strong collections thus far in the fourth quarter related to the resolution of disputed items, we are confident that our cash flow for 2023 will significantly exceed the record $207 million we generated last year. We are also optimistic that 2024 will even be a stronger year than 2023 and the resolve and generation of cash. We plan to use the excess cash generated between now and next spring to delever our balance sheet as part of a planned refinancing early next year.
For the past several months, we have been closely monitoring the markets and discussing various strategic refinancing alternatives with our advisers and have developed a plan that we will soon embark upon, and that we expect will result in a timely refinancing of our debt in light of this bringing maturities. But we believe that the market concerns regarding those maturities and our ability to refinance have been a significant headwind to the valuations of both our equity and debt. So we look forward to concluding that refinancing to eliminate that valuation impediment.
Our third quarter backlog was $10.6 billion, steady compared to the second quarter of '23 and up 28% compared to the $8.4 billion for the same quarter last year. The strong year-over-year backlog growth was largely driven by our second quarter award of the $2.95 billion Brooklyn jail progressive design-build project. The most significant other new awards and contract adjustments in the third quarter of 2023 include $115 million of additional funding for health care project in California; $95 million and $81 million of additional funding for 2 different mass-transit projects in California; the $47 million New Everglades National Park Visitor Center project in Florida; and a $42 million mining project in Virginia; as well as the Central District Wastewater Treatment Plant electrical in Florida valued at more than $40 million.
From an earnings perspective, good contributions in the third quarter from our Civil segment were offset by continuing challenges predominantly in our Specialty Contractors segment in New York. Gary will discuss these in a moment. Overall, we reported a consolidated pretax loss of $26 million and ended the third quarter with a loss of $0.71 per diluted share after adjusting for noncontrolling interest.
Our bidding pipeline continues to be very active and filled with various large project opportunities. We have been and will continue to be highly selective as to which owners and projects we pursue and execute as well as under what contractual terms. Our most significant opportunities include the pending Queens jail facility, a progressive design build projects similar to Brooklyn, estimated to be in excess of $3 billion for which we have already submitted our initial proposal and are awaiting an owner selection decision, most probably in January.
Last week, we bid the $500 million RFK bridge retrofit and rehabilitation project in New York. And between now and the end of this year, we will bid 4 other projects, namely the $1 billion Frederick Douglass tunneling project in Maryland, the $800 million Amtrak East River Tunnel Rehab Project in New York, a $200 million Long Slip Canal Rail Enhancement Project in New Jersey and the $225 million MD4 at Suitland Park Interchange in Maryland. We expect decisions on these by the end of the year or in early '24. We are also anticipated a decision by either the end of this year or the first quarter next year on Frontier-Kemper's bid for the $500 million Great Lakes Tunnel Project.
In addition, we are currently preparing to bid with ONG Industries, our Connecticut partner, the $500 million Amtrak Connecticut River Bridge replacement in January next year. Other large near-term opportunities include the $1.5 billion Inglewood Automated People Mover Project in Southern California, the $2 billion Honolulu Rail Transit project, which is still expected to bid in the spring of 2024. And as a reminder, we had originally been the low bidder back in 2020. And 2 sections of the Hudson River Tunnel Project, the $750 million Manhattan Tunnel in New York and the $500 million Palisades Tunnel in New Jersey. Finally, in the spring of 2024, we plan to propose on the $2.6 billion DTX Transbay Transit Center Project in San Francisco. Then in December, the $1.5 billion newer Air Train Design Build Project, which we were originally low bidder last year and was rejected as being over budget. And later next year, the $1.6 billion Amtrak Sawtooth bridges replacement project in New Jersey.
As competition, as I've said time and again, has diminished, we are confident that we win our share of these projects and continue to grow our backlog substantially over the next 12 to 18 months. As you can tell from this bidding pipeline, there continues to be very strong demand for our services, and we expect that demand to increase as incremental funding from the bipartisan infrastructure law continues to flow to our public owners over the next several years. We expect improved performance in the fourth quarter of 2023 and next year. We are still not providing new guidance for 2023, but plan to provide our initial EPS for 2024 when we issue fourth quarter and full 2023 results.
With that, I'll turn the call over to Gary Smalley to review the financial results.
Thank you, Ron, and good afternoon, everyone. I will begin with the discussion of results for the third quarter, including cash flow, followed by some commentary on our balance sheet and then some modeling assumptions. As Ron indicated, we generated a very strong $103 million of operating cash in the third quarter of 2023 and $181 million over the first 9 months of 2023, both of which were the second best result for each respective period of any year since the 2008 merger and only trailing last year's operating cash performance for the equivalent periods.
Our strong operating cash flow has been driven by overall solid collection activities, including collections related to various settlements and dispute resolutions that we concluded earlier in the year. Because of the favorable outlook for continued strong cash generation over the next several quarters, as Ron mentioned, much of it associated with expected further settlements and dispute resolutions, we are confident that we will conclude this year with significantly stronger operating cash flow, compared to the record $207 million that we reported last year, and we intend to use excess cash generated over the next several months to deleverage our balance sheet as part of a successful refinancing.
In fact, our continued strong operating cash flow in the first part of the fourth quarter has allowed us to begin accumulating cash that we are earmarking for refinancing. We have, to date, set aside more than $70 million for this purpose, again, just from fourth quarter collections. And to be clear, this is incremental to any required annual excess cash flow prepayment related to our Term Loan B. We are focused on our debt maturities and have been taking a holistic approach that considers a broad range of alternatives, leveraging both our management and Board of Directors experience in evaluating our refinancing options. Soon, we will begin the actual refinancing process.
Revenue for the third quarter of 2023 was $1.06 billion level compared to the same period in 2022. Civil segment revenue was $520 million, up modestly compared to the third quarter of last year. Building segment revenue was $365 million, up 15%, primarily due to increased project execution activities on various projects in California with substantial scope of work remaining. And Specialty Contractors revenue segment revenue was $175 million, down 31% year-over-year due in part to decreased activities on the electrical and mechanical components of a transportation project in the Northeast that is nearing completion.
Overall, we reported a loss from construction operations of $13 million for the third quarter of 2023 compared to a $7 million loss from construction operations for the same quarter of last year. Our results for both periods were negatively impacted by net unfavorable adjustments on various projects, primarily due to changes in estimates resulting from negotiations, settlements and legal judgments on certain disputed claims and unapproved change orders. The more recent negotiations and settlements have resulted and will continue to result in additional operating cash in the fourth quarter and future periods.
Civil segment income from construction operations was $47 million, more than double, compared to $23 million reported in the third quarter of 2022. The increase was primarily due to the absence of a couple of prior year unfavorable adjustments as well as an improved project mix in the current year period, including contributions from higher volume on a mass-transit project in California. In addition, during the third quarter of 2023, we reached a settlement that impacted multiple components of a different mass-transit projects in California, which included the resolution of certain ongoing disputes and increased the expected profit from work to be performed in the future.
This settlement resulted in an unfavorable noncash adjustment of $23 million to one component of the project that is nearing completion, partially offset by a favorable adjustment of $9 million on another component of the project that has substantial scope of work remaining. As a result of the settlement, the net unfavorable impact to the period from these 2 adjustments is expected to be more than offset by the increased profit generation from future work on the project. This settlement should have a favorable impact on cash generation in future quarters as well.
The Building segment reported essentially breakeven income from construction operations for the third quarter of both 2023 and 2022.
The Specialty Contractors segment posted a loss from construction operations of $38 million for the third quarter of 2023, compared to a loss of $12 million in the same quarter of last year. The change was principally due to the impact of $17 million of unfavorable noncash adjustments related to changes in estimates on the electrical mechanical scope of the transportation project in the Northeast due to changes in the expected recovery on certain unapproved change orders resulting from ongoing negotiations. As well as a $9 million unfavorable adjustment that resulted from ongoing negotiations and an anticipated settlement on a completed mass-transit project in California. We are certainly disappointed with continued charges we have had in the Specialty Contractors segment, but are anticipating improved performance in the fourth quarter as well as in 2024 from both the Specialty Contractors and Building segments.
Corporate G&A expense for the third quarter of 2023 was $21 million, compared to $17 million for the same quarter of last year. Other income for the third quarter of 2023 was $3 million, compared to approximately $400,000 in the third quarter of 2022. Interest expense was $20 million, compared to $17 million for the same quarter of last year, with the increase driven by higher borrowing rates this year on our revolver and the Term Loan B.
Net loss attributable to Tutor Perini for the fourth quarter -- excuse me, for the third quarter of 2023 was $37 million or a loss of $0.71 per share compared to a net loss attributable to Tutor Perini of $32 million or a loss of $0.63 per share in the third quarter of last year. The underperformance in both periods is due to the reasons I mentioned earlier.
As for our balance sheet, our net debt as of September 30, 2023, was $615 million, down $84 million or 12% compared to our net debt of $699 million at December 31, 2022. As of September 30, 2023, we are in compliance with the covenants under our credit agreement, and we expect to continue to be in compliance in the future. Debt reduction remains our top near-term focus for the use of cash. As mentioned earlier, we expect continued significant cash collections. Much of it will be associated with anticipated resolutions of various disputes and expect to use excess cash generated over the next several months to deleverage as part of the successful refinancing.
Lastly, I will provide some updated assumptions for modeling purposes. G&A expense for 2023 is now expected to be between $250 million and $255 million. Depreciation and amortization expense is now anticipated to be approximately $46 million in 2023, with depreciation at $44 million and amortization at $2 million. Interest expense is still 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 35% to 40%. We now expect noncontrolling interest to be between $40 million and $45 million. We continue to forecast 52 million weighted average diluted shares outstanding for 2023. And lastly, our capital expenditures are now expected to be approximately $56 million for 2023.
Thank you, Gary. To summarize the quarter, we had very strong operating cash flow and year-over-year backlog growth in the third quarter, but earnings were negatively impacted by certain charges due to the resolution of disputed matters that goes back as long as 8 and 9 years ago. We anticipate that our full year operating cash flow for 2023 will significantly exceed last year's record result as we continue to resolve and settle disputed matters and collect the substantial cash associated with those disputes.
We believe strongly that our operating cash performance in 2024 will be significantly in excess of the record in 2023, as virtually all but a handful of issues, claims and disputes will be resolved in 2024. Our backlog should grow significantly next year as we are awaiting pending decisions on major project bids already submitted, and our bidding pipeline remains very strong with solid end market demand for numerous major projects. We anticipate improved performance in the fourth quarter and significantly improved EPS next year and beyond.
The reality is between the pandemic and all the disputes, all the delays with associations that accumulated the level of cost in excess are being resolved by the end of next year. And some 50-odd disputes in 2021 will be down to 5 or less in 2025.
Thank you. And with that, I will turn the call over to the operator for any questions.
[Operator Instructions] And the first question comes from the line of Steven Fisher with UBS.
I just want to sort out the underlying operations from the charges related to settlement. In which segments were the charges on projects that are ongoing and what were those, Gary?
Yes, Steve, there's a mix of projects that are ongoing, but we did have some in Civil that were ongoing, but they are -- the one project there that had the $23 million that I mentioned, is winding up. And really -- so it's ongoing, but we'll say barely. And then most of the charges that we're talking about, though, are for projects that are really complete.
That charge was the tunnel project in Los Angeles that is completed.
Okay. And then as we think about sort of the cadence and the clarity that you have for 2024, obviously, you mentioned an expectation of giving guidance for 2024 on the next call, is there still a lot of work in terms of settlements that could be cleaned up in the first half of the year? Actually, it sounds like a lot of this is going to be going on through even the first half of '25. So I'm curious about what's going to be different compared to the last couple of quarters that will kind of make it a clear enough environment to be able to offer guidance, given that there's still going to be a number of things moving in and out?
Well, let me try to explain it to the limits that I can. 2022 was a strong cash flow year. 2023, as I pointed out, will be significantly in excess of that. And I also point it out, '24 larger than '23. In essence, by the end of '23 -- excuse me, by the end of '24, we won't have 5 outstanding claims to resolve that will all be in the first 2 quarters. The largest one is an insurance claim on SR 99 against the carriers that as insurance companies all do if any of you are listening, you collect premiums, install payments until the last moment you can. So virtually, the balance of our CIE say, a small portion will be concluded next year, and that's why we believe the cash flow will be so significant. And we have not been increasing or adding claims to the mix. For every 10 we settle, we might add 1. So I'm very pleased that, that phase is behind us, and we're cleaned up and the cash will follow as it already is.
We're also looking at the significant amount of work to add to already a large backlog. So we're feeling very positive, but the last thing that remains to put the past behind us, is to settle up or litigate to conclusion, the balance of our claims, because we are not hesitant to litigate and let a judge decide. And we've had a number of those and they've been positive, and we've got a couple of more where we'll get judicial decisions within the next 3 to 6 months. So the main thing is that, that CIE will be very limited by the end of 2024. And as such, you will see cash generation in accordance with it. So it's very positive from my perspective, given I negotiate every one of them.
Steve, from an EPS guidance standpoint as that part of your question, look, there's going to be some volatility, and we think there's going to be some upward volatility, too. There's some cases that we're waiting on judgment, so that will be tried that we think we're well poised to exceed what our book position is. So yes, there could be some volatility that's not going to keep us from coming out with guidance, and we hope with the puts and takes to what happens with settlements and judgments and arbitration results. We hope that we'll hit the guidance pretty close, but there's going to be volatility.
Until we get all of the claims behind us, there will be a certain volatility attached, which by the end of '24 for all intents and purposes, they'll be behind us.
Okay. And then just a couple of last ones. In terms of -- obviously, the Q3 cash flow, operating cash flow was pretty solid. So I just -- I'm curious for Q4, is that your sense that the operating cash flow will be more or less than that of Q3? And then can you give us a sense of the margins that you have in backlog?
I'm told we can't tell you that. I did tell you it will be significant and then we'll exceed the record of last year. But as much as I wanted to tell you what I thought it'd be, I was told that I couldn't.
Steve, we're -- we don't even have results of operating cash for October yet. We'll get those in the next few days and to predict, we've had great collections, as Ron and I both mentioned, but we just can't provide it yet.
Okay. And then could you just give us a sense of the margins that you have in backlog, if you can by segment, that would be helpful. Just trying to get a sense of normalization here.
We can't tell you margins by backlog. That's a competitive item. And I think we've never said in the past, margin.
I think he's looking at segment, not specific projects.
Segment -- even segment operation. That's so variable because we have very -- what are you looking for, Steve, what each segment should make after G&A pretax?
Yes, Ron, just trying to get a sense of -- because of the margins have been influenced a lot by these settlements coming in and out over the last several quarters. Presumably, the work that you're putting in backlog today should lend itself to some more normalization of results. So just kind of curious, historically, you've had low double-digit margin potential in Civil. Is that kind of what we should expect from that business? . You've got a pretty equal sized backlog in the Building segment, and that could be very different profitability. We're talking about a 1% versus maybe there's more fixed work in there, because of the prison project, maybe it's more towards a mid-single -- and when does the Specialty business kind of get back on track with sort of the low to mid-single-digit margins that you've kind of targeted for a while? That's the natural question.
I would tell you that if I gave you a range of Civil, it'd be conservative at 10% to 12% after all Civil G&A subject to corporate. I think the Building business, as it ramps up, in particular, with the prison job award, we'll continue to be in the 2% to 3%, with the prison having a very positive upward impact on that 2% to 3%. As the revenue progresses, that could easily be significantly higher. It won't be lower.
And the Specialty group should be operating at 5% to 6%. But as you're aware, our 2 New York specialty companies have been nothing, but struggling for the last 4 to 5 years, even with all the management replacements and restructuring. Now we have reduced our Specialty group's operations in New York to only working for Tutor Perini, and I'd say their Specialty revenues of 25% of what they were 3 and 4 years ago.
So other than the resolve of fast disputes, I don't see any negative operating results starting in 2024 going forward. So I think the Specialty group, controlled as it is in New York, will limit our exposure and generate a fairly stabilized margin in the 4% to 5% category working only for Tutor Perini. So the issues of litigations with their general contractors or owners will hopefully disappear.
So I think that's the safe way to put it. I think Civil still has significant upside to what I quoted. And the Building business should be significantly upgraded by virtue of the lump sum bids in New York. I might add Black Construction continues to grow and do extraordinarily well as does Lunda in the Midwest. So everything is going extremely well going forward. The concern still remains our New York City specialty contractors and what we do to reduce their impact and reduce our risks associated with our operations.
And the next question comes from Abe Landa from BofA.
I think I saw on 8-K earlier, just kind of going off of your recent comment. I believe, an executive that worked at the New York City specialty received a bonus. Can you maybe just -- I think due to a strong performance, can you just give us an update on how those settlements and kind of related discussions are going? And what we should kind of expect...?
I don't even know what you just said. Could you repeat that so I can understand it?
Yes. I think you put out an 8-K maybe a few months back for bonuses paid to an executive that was in charge of managing your New York Specialty Contractor business. And I kind of just wanted an update on how the dispute settlement was progressing, and kind of when you kind of think the cadence of that settlement?
When you mean that settlement, are you singling some? First of all, the settlements...
Yes. I think maybe the confusion is the incentive that you're referring to was not paid for progress in -- it was really based on his other portfolio assignments prior to him taking over for Specialty.
Yes. You're talking about Ghassan Ariqat's bonus, that had really nothing to do with the Specialty group. He just assumed that role. And it was for past performance that was extraordinary. So not to confuse one with the other. He is now in charge of both Building and Specialty and will be tied accordingly. And by the way, if you were asking, when do you think we'll be out of these Specialty group claims in New York? I'll say unequivocally by the end of 2024.
Thank you for clarifying that. And yes, I was ultimately trying to get to when the settlement, et cetera, was kind of can be resolved...
Let's put it this way. All our owners can't stall us anymore. They either got court dates or we got judgments, they run out of appeal. They're going to have to pay. And one by one, they are.
That's good to hear. I believe also during your last call, you may have mentioned that there was, I think, in November 3 panel arbitration as well that was you're kind of expecting some more color on. Is there an update on that?
Yes. We concluded our arbitration against the California DOT on the Shasta Bridge project. That was concluded in November of this year. We expect the decision subject to input in April or May next year. They originally said March, our lawyer just got clarity and it won't be until April or May, but that will conclude that litigation, which is in the range of $100 million plus.
Okay. So we should get like a final judgment, let's say, in April '24 around that?
April or May, yes. '24 without a question.
Great. And then it's also good to kind of talking about your capital structure, a strong free cash flow generation, how you're kind of setting some money aside. Do you have a target time frame of when you're going to come to the market to kind of do a refinancing? And do you have a target net debt number as well?
Yes. No, we're not going to talk any more specifics than what we said. Look, we said that we're soon ready to launch. We're looking at different alternatives, and we'll be doing different things, we'll say, simultaneously. So based on when we would close, we would say, sometime early part of the year.
And as far as a net debt or a debt target, look, it depends on the pace of cash. We should be able to get our debt down significantly based on what we foresee as cash collections and the -- and we'll see how that works. But it will be significant reduction of debt is what we're looking at.
Absolutely. We will significantly reduce the debt load that we're carrying right now and you will see in time. But if you look at the cash flow we generated for 2023, still going strong and what's coming in '24, the first base, we're going to funnel that cash flow is to significantly reduce debt in this crazy market plus.
That's great to hear. And maybe just building off that, is there maybe a leverage that you kind of feel more comfortable offering and kind of a go-forward basis, kind of once you generate all this free cash flow and refinance?
I absolutely do, but I'm not supposed to tell you, I guess it's one of the many things. I believe we will achieve the amount of debt structured in a way that I'm comfortable even with these awful interest rates. And I think we'll reach that point between April and June of next year. And again, I'll reiterate what Gary said, significantly reduced total amount of debt, which is appropriate, and if you look at the CIE and the cash flow and you begin to generate and add this year to next year, what better place to put it in reducing high interest debt.
There are no further questions at this time. And I would like to turn the floor back over to Ron for any closing comments.
No, I have nothing more to add. Thank you, everyone, for joining us, and stay patient. We're getting there.
And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.