Tutor Perini (TPC) Q1 2020 Earnings Call Transcript

Tutor Perini (TPC -0.22%)
Q1 2020 Earnings Call
May 06, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to Tutor Perini Corporation first-quarter 2020 earnings conference call. My name is Devon, and I will be your coordinator for today. [Operator instructions] I would now like to turn the conference over to your host for today, Mr. Jorge Casado, vice president of investor relations.

Please go ahead.

Jorge Casado -- Vice President of Investor Relations

Hello everyone, and thank you for your participation. With us today 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 most recent Form 10-K which was filed on February 26, 2020, 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. With that said, I will turn the call over to Ronald Tutor.

Ronald Tutor -- Chairman and Chief Executive Officer

Thanks Jorge and good afternoon to everyone, and thanks for joining us. Our first-quarter results were nothing short of outstanding and well ahead of our own expectations. We delivered double-digit revenue growth across all our segments, with particularly strong growth generated by the civil and specialty contractors groups driven as usual by the large infrastructure projects that continue to accelerate as anticipated. These include Newark Airport Terminal One, Minneapolis Southwest Light Rail, the Purple Line sections 2 and 3 contracts as well as section three tunnels, California High-Speed Rail and the significant work on the East Side Access in New York City, namely the projects being CQ33 and CS179.

Our operating income in the quarter more than doubled our expectations compared to last year's first quarter due again to the broad-based revenue growth across all our segments as well as improved performance in our New York City, in particular, specialty contractors business units. Gary will provide the details of our financial results in a moment. But to highlight, we delivered the strongest first-quarter revenue growth in the past eight years and the highest first-quarter EPS in the past 10 years. As everyone understands, and I believe, the first quarter has been traditionally always our weakest quarter in revenue, earnings and cash flow because of the severe impacts of the winter on our East Coast and Midwest operations which is what makes this quarter so gratifying.

So suffice it to say, we are enjoying an excellent start to the year and confident that the rest of the year will continue to show progress and improved performance compared to last year. And interesting, it's in spite of the impacts of COVID-19 to date. Now, I'll go on to say we're fortunate the COVID-19 pandemic did not have much of an impact on our ability to generate these results. While we have experienced some temporary project issues, particularly in New York City and secondarily on Newark terminal in New Jersey, the vast majority of our projects have been deemed essential services which has allowed us to continue our project activities while trying to maintain the social distancing and hygiene requirements of our agencies.

Since our higher-margin projects have continued to operate and had very little impact of the COVID-19 to date, we currently do not anticipate that the pandemic will materially affect our results for 2020. So we must caution that there is a certain uncertainty about whether it could reoccur and in fact, accelerate, even though we don't believe that will be the case. Our backlog stood at $10.6 billion at the end of the first quarter. Certainly, a very healthy level that we believe will continue to fuel solid revenue growth and higher profits.

Compared to last year's first quarter which featured a record $3.2 billion of new awards and contract adjustments and ended up in the largest backlog in our history, this year's first quarter included a modest $587 million of new awards and adjustments. This highlights how our backlog can and sometimes does fluctuate when comparing different periods due to the timing of large awards. I might add that certain of the jobs that we anticipated bidding in the first and second quarter, thanks to the COVID crisis, have been pushed back from 60 to 90 days. So the one area it has had impact is the bidding of work, and the second area has been the ability to meet and resolve issues.

We continue to be encouraged and extremely busy, managing the bidding opportunities that we're constantly presenting. Some of the significant new awards booked this quarter were two military projects by our PMSI unit at Camp Lejeune in North Carolina andone at Cape Canaveral in Florida, totaling $133 million. In addition, Frontier-Kemper, our tunnel subsidiary, booked a $64 million Blue Creek mining project in Alabama. As a reminder of the limited competition we are seeing for many of our large civil project pursuits, we're onlyone of three teams shortlisted to compete for the $1.2 billion metro North Penn Station access project in New York.

We expect to bid that project later this year or early next year. Today, we are submitting our qualifications for the $600 million link Union Station Phase 1 project in Los Angeles, with award of that project anticipated in the fourth quarter. In addition, we will be offering a proposal on the $7 billion Sepulveda Transit Corridor project for the Los Angeles MTA in the month of July -- excuse me, make that June. It's June, not July.

The project will be executed under a design support, general contractor framework wherein design support and preliminary design should ultimately need to a negotiated general contract at the end of the design and approval process. Our bid for the $400 million LAMTA Metro Connector project is expected to be on TheStreet in the summer with an award expected in the fourth quarter. Our notable upcoming bids include the $1.5 billion Honolulu Rail Transit P3 project which will now bid in July and should be awarded by the fourth quarter of this year. The $2 billion Bay Area Rapid Transit tunnel project in San Jose which bids in the second quarter of next year with award expected in the third quarter.

And on the East Coast, we also expect to bid the $1.5 billion Newark AirTrain with selection and award expected in the first quarter of 2021 and the $1.5 billion JFK Airport landside roadway development with selection and award anticipated by the end of 2020. Even more sizable civil bids that are further out in a horizon include the $4 billion West Santa Ana Transit Corridor and a $1.5 billion East San Fernando Corridor, both for Los Angeles MTA and the $3.5 billion port terminal in Manhattan and New York for the Port Authority of New York. In addition, the $2.5 billion Dumbarton Bridge Rail Corridor in Northern California as well as the $2 billion LaGuardia AirTrain and a $1.4 billion portal bridge replacement in New Jersey. I could go on and on, but that gives you an indication of the sheer size and specific projects within our geographical influence.

Our building group's larger prospective opportunities include the $500 million Burbank Airport Terminal replacement, the $350 million Harbor UCLA Outpatient Support facility, a $350 million hospitality and gaming project in New Orleans, the $300 million Hudson County Courthouse in New Jersey and various and a sundry other large building work. Our specialty contractors group continues to experience strong demand driven by the volume of large civil work and building project opportunities, the majority of which would be as an exclusive subcontractor to Tutor Perini Corp. We reiterate what I have said before, the newer work at the specialty group has booked over the past two to three years of elevated margins is beginning to offset the weaker margins associated with the older legacy projects that we are in stages of completion. In terms of our effort to reduce our unbilled receivables and improve cash generation, we are definitely making strides.

The only issue has been a number of settlement meetings that were set for March and April have now been postponed to June and July with the inability to meet. We have had three litigations where they were supposed to start in the litigation. The courthouse literally was closed until further notice. So my guess is that will set those back three months.

And we've had a number of mediations that we believe will result in settlements that were tentatively set up for February and March and have now been set for June and July. So there's a very significant number of large confrontational unbilled receivables wherein, given the ability to meet and mediate, we think, will resolve itself prior to the end of this year. Finally, we anticipate continued strong revenue growth across all our segments in 2020 with increasing and improved margin performance across all our operating segments. The only group that has not been affected positively by the lack of competition has been the building group which is still a victim of the low fees associated with CM work in a building industry that has plenty of competition and lots of large contractors.

While our first quarter results were well ahead of expectations and we're not significantly impacted by COVID-19, we're clearly mindful of the uncertainties around that situation and its potential to have some impact on our business going forward. Therefore, based on our results to date and our current forecast and market assessment, we are maintaining our 2020 EPS guidance in the range of $1.80 to $2.10. We will reassess our progress and performance as well as the impacts of COVID-19 and any other relevant factors later this year, but we should certainly have an excellent handle on what, if any, impacts come forward by the reporting of the second quarter. With that, I will turn the call over to Gary to present the details of our financial results.

Gary Smalley -- Executive Vice President and Chief Financial Officer

Thanks Ron. Good afternoon, everyone. I will start by discussing our results for the quarter, followed by some commentary on our balance sheet, cash flow and then the 2020 guidance assumptions. Revenue for the first quarter was $1.3 billion, up approximately $300 million or 30% compared to revenue of about $1 billion for the same quarter of last year.

This outstanding revenue performance was broad-based, with all three segments producing double-digit year-over-year improvement, marking the best first quarter revenue growth for the company in the last eight years, as Ron noted. Civil segment revenue for the quarter was $487 million, up a strong 46% compared to the first quarter of last year due to increased activities on various large projects including the Newark Airport, the Purple Line projects in L.A., California High-Speed Rail, Minneapolis Southwest Light Rail and CQ33 which is one of the projects that Ron mentioned earlier as part of East Side Access in New York. Revenue for the building segment was $482 million, up 11% compared to the first quarter of 2019, predominantly due to the ramp-up of the Choctaw Casino & Resort project in Oklahoma. specialty contractors segment revenue was $282 million, up a robust 47% year over year primarily due to increased activities on the Newark Airport project and also certain electrical and mechanical projects in New York.

Income from construction operations for the first quarter was $47 million, more than double the $23 million reported for the same quarter of last year. The significant increase was mostly due to contributions associated with the significant volume growth we experienced across all segments this quarter that I just mentioned as well as significantly improved performance compared to the prior-year period on various Five Star Electric and WDF Mechanical projects in New York. Civil segment income from construction operations was $46 million compared to $42 million for the same quarter of last year. The segment's income grew 10% year over year, less than the rate of revenue growth primarily because of the absence of a prior-year immaterial favorable adjustment on a project in California, but also due to the impact of approximately $5 million of incremental noncash amortization expense in the first quarter of the current year related to the increased equity interest in the joint venture that we acquired in the fourth quarter of 2019.

The civil segment's operating margin was 9.5% for the first quarter of 2020 compared to 12.5% for the same quarter of last year. The higher margin for the first quarter of last year was largely attributable to the favorable adjustment that I just mentioned. Over the years, we have typically seen the civil segment's annual operating margin in the 10% to 12% range. For this year, we expect to be at the upper end of that range, particularly when adding back the incremental noncash amortization expense related to the increased equity interest in the JV that I just mentioned.

Building segment income from construction operations was $4 million, up 12% compared to $3 million for last year's first quarter, consistent with the revenue growth. The building segment's operating margin was 0.7%, level with the 0.7% also reported for the same quarter of 2019. Both first quarters were negatively impacted by immaterial adjustments on a couple of projects that were winding down and are now complete. building segment operating margin for the full year of 2020 is expected to be in the 2% to 3% range.

Specialty contractors income from construction operations was $8 million compared to a loss from construction operations of $7 million for the same quarter of last year. The notable turnaround was principally due to the improved performance I mentioned earlier at Five Star Electric and WDF in Newark. The Specialty segment's operating margin was 2.9%, a solid improvement compared to the negative 3.9% margin reported for the same quarter of last year, but still below our profitability expectations for the group of 5% to 7%. We believe the lower end of this range is achievable as 2020 progresses given our ongoing focus on driving improvements in the group.

Interest expense for the first quarter of 2020 was $16 million, level with the same quarter of last year. Tax expense for the first quarter of 2020 was $5 million with an effective tax rate of 16.4% compared to tax expense of $2 million and effective tax rate of 31.7% for the first quarter of 2019. The lower tax rate this year was driven by the recently enacted CARES Act which provides for the beneficial treatment of our 2019 net operating loss or NOL. The CARES Act allows us to carry back the 2019 NOL for up to five years, whereas prior to the CARES Act, we could only carry forward the NOL.

And the amount we could carry forward for anyone year was limited to 80% of taxable income for that year. As a result, the CARES Act will allow us to accelerate the refund associated with the NOL into the current year that we, otherwise, would have received in future years. Net income attributable to Tutor Perini for the first quarter of 2020 was $17.4 million or $0.34 per diluted share compared to a slight net loss attributable to Tutor Perini of $400,000 or $0.01 loss per diluted share for the first quarter of last year. The substantial increase in net income and EPS in this year's first quarter was due to the factors I mentioned that drove the increases in revenue and income from construction operations as well as the lower tax rate.

The $0.34 per share was well ahead of our budget, as Ron noted, and the best first quarter EPS performance for the company in 10 years. Next, let's discuss our operating cash. As Ron noted, and as a reminder, due to adverse winter weather conditions in the Northeast and Midwest, our first quarter operating results each year are seasonally weak. As a result, our first quarter cash generation is usually considerably lower than any of the other quarters of the year.

We kicked off the year with a use of operating cash of $34 million in the first quarter which, though not as strong as we expect for the next three quarters, was actually ahead of budget and exceeded our expectations. Our first quarter operating cash generation was $91 million better than the first quarter of last year and nearly $40 million better than the first quarter of 2018. To be clear, we expect strong operating cash generation over the remainder of the year, with the goal of generating operating cash that well exceeds net income for 2020 driven by our project execution activities and from collection and settlement activities. Operating cash generation for the remainder of 2020 will also be positively impacted by the CARES Act.

I previously mentioned the acceleration of the refund of the 2019 net operating loss which, under the CARES Act, we will now be able to carry back up to five years and receive in 2020. We estimate that the 2020 operating cash benefit of being able to carry back this loss will be approximately $15 million. We will also benefit from the deferral of the employer portion of FICA payments for the last three quarters of 2020 which are expected to total approximately $30 million with half of this amount payable at the end of 2021 and the other half payable at the end of 2022. Our total debt as of March 31, 2020, was $902 million compared to $834 million at the end of 2019, with the increase largely attributable to the timing of certain cash collections.

In other words, we had a far more than normal amount of deposits in transit. So we are unable to pay down the revolver prior to quarter close, although those -- although the cash generated from those deposits to transit were of course part of our results for the quarter. As many of you are well aware, our credit facility includes a spring forward maturity provision whereby it will mature on December 17, 2020, if our convertible notes are still outstanding at that time. We still intend to seek to repurchase the convertible notes prior to triggering the spring-forward maturity provision using cash generated during the year and available liquidity.

The positive cash that we expect to generate from operations beginning in the second quarter should be enhanced by cash collections from the resolution of disputes as well as the collection of some sizable retention balances. Our cash generation and available liquidity is also expected to get a boost from certain provisions of the CARES Act, as I just outlined. Also keep in mind that subject to certain limitations, we are permitted to utilize available credit capacity from our revolver to repurchase the convertible notes. So the bottom line is we are confident that we will have adequate liquidity to repurchase the converts this year, and we will avoid triggering the spring-forward provision that, otherwise, would cause the credit facility to mature in December of 2020.

We continue to be well within the limits of and in compliance with our debt covenants at the end of the first quarter, and we anticipate that we will continue to be comfortably within our covenant limits going forward. Earlier, Ron mentioned that we are maintaining our EPS guidance for 2020 at $1.80 to $2.10 after our much better-than-expected first quarter. We believe that our guidance appropriately considers the inherent uncertainties that are common in our business, such as unanticipated delays in project awards and project execution and unfavorable adjustments to our estimates to complete projects that can occur from time to time. Our decision to affirm guidance also assumes that the vast majority of our projects will continue to operate during the balance of the COVID-19 pandemic.

Now, let me revisit some of the assumptions associated with our guidance. G&A expense for 2020 is still expected to be approximately $270 million to $280 million. Interest expense is still estimated to be approximately $71 million for the year, in line with our expectation that we will collect cash and reduce debt, but it also includes additional noncash interest associated with addressing our convertible notes this year. About $20 million of the $71 million will be noncash interest expense including an amount for expected debt extinguishment costs.

Depreciation and amortization for 2020 is still expected to be approximately $109 million, of which $28 million represents intangible asset amortization associated with our increased joint venture interest on the civil segment project that I noted earlier. Our effective tax rate for 2020 is now expected to be 24% to 26% with a 2% reduction in our range due to the NOL carryback features of the CARES Act that I discussed earlier. Net income attributable to noncontrolling interest for 2020 is anticipated to be approximately $41 million. Our weighted average shares outstanding for the year should be approximately $51.5 million.

Finally, capital expenditures in 2020 are now expected to be approximately $40 million, of which $30 million will still be for owner-funded, project-specific equipment. With that, Ron, I'll turn the call back over to you.

Ronald Tutor -- Chairman and Chief Executive Officer

Thanks Gary. To summarize, we have executed well thus far in 2020, delivering excellent first quarter results, highlighted by the revenue growth we discussed and the highest earnings per share that we've produced in the last 10 years. As stated previously and at the risk of being redundant, our large backlog includes various high-margin multiyear projects which provide us with not only the visibility but a solid foundation to maintain our profitability over a significant period of years given that long-term backlog. In addition, we expect to generate very significant operating cash this year and next as we execute our large civil projects while resolving, we believe, significant levels of cash associated with large claims and changes.

With the limited competition available today in our industry or those large infrastructure projects and our focus on that same work, I will continue to repeat, we believe we are extremely well positioned to weather any impacts of COVID-19 as well as continue to drive collection of monies and increased revenues and profits. With that, I will turn the call over to the operator for any questions, and thank you.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Alex Rygiel with B. Riley. Please proceed with your question.

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

Good evening gentlemen. Great quarter.

Ronald Tutor -- Chairman and Chief Executive Officer

Thank you.

Gary Smalley -- Executive Vice President and Chief Financial Officer

Thanks Alex.

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

Ron, in the past, you've talked a little bit about the backlog mix, and backlog mix shifting sort of away from the East Coast toward the West Coast where you've got some better relationships, some more predictable project margins, less litigation. How does that mix look today compared to, say, three months ago?

Ronald Tutor -- Chairman and Chief Executive Officer

Well, as we pointed out, we didn't achieve any very large awards three months ago. But when you realize the largest projects in the company, other than the Newark Terminal which has been going very well in Newark -- in New Jersey, all our work in New York City, the largest contract, is in the range of $700 million. And its CMO07, it's virtually 90% done. CS179 which was $600 million, is 85%, 90% done.

All our largest work and problems in New York are nearing their conclusion, and there's no question that market has been challenging to everybody that lives in it. However, when you get to California and you look at what constitutes our major work, we have the San Francisco MTA contract which is approximately $900 million which is 95% and will conclude by the end of the year. And hopefully, we will resolve every issue during the next few months. But more importantly, we have high-speed rail which is sitting now at $2 billion.

We've got two more years to go and probably $800 million worth of revenue to earn, a very successful job with no claims, as we speak. We have the Purple Line 2 and 3 stations as well as the third project, the Purple Line tunnels. Those total about $3-plus billion, and we have started the work two years ago. We are well into it.

We don't have any claims. Pay has been extremely good, and everything is operating quite well. To say that we have far less issues in our work in California, then New York would be absolutely accurate. So I appreciate the fact you picked up on it and the majority of our backlog in civil rests in California as we go forward in those jobs that I mentioned.

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

Hey Ron, broadly speaking, you've been through plenty of cycles in your career. Clearly, the public sector customers right now are spending greatly on COVID remediation. How do you think this could impact their spending on infrastructure in, say, two or three years? And what are your thoughts on the federal government moving forward on some sort of infrastructure bill?

Ronald Tutor -- Chairman and Chief Executive Officer

Well, I think what's going to happen, and of course, I'm constantly talking to our owners, with this COVID-19 destruction of our economy, even if it's over three to six months, it's had a devastating effect on the economy, taxes collected, sales tax revenue. So I'm hearing from our owners that some of this new work, unless the federal government puts a bill together and funds these shortfalls, what they would have anticipated awarding over the next six to 12 months may get pushed back a year or two until they can determine how to cover those shortfalls. There seems to be a confidence that once these acts of the federal government have concluded in taking care of unemployment, small businesses and trying to keep the economy alive, there is an infrastructure bill that has to take place that will plug the funds into bringing those major infrastructure projects back online. I believe there will be a certain amount of these very large projects deferred, but it doesn't appear than any of the current ones are slipping.

But ones that were set for the summer of 2021 and into '22, there's talk about sliding. So until, and if the federal government puts the money back, then it will sustain. If not, I think we're going to see some major projects push back.

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

Very helpful. Thank you. I'll get back in the queue.

Operator

Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

Brent Thielman -- D.A. Davidson -- Analyst

Hey thank you. Great quarter as well.

Ronald Tutor -- Chairman and Chief Executive Officer

Thank you.

Brent Thielman -- D.A. Davidson -- Analyst

Ron, just because we're poking up a bit about public budgets these days, just given the loss and some of the revenue -- or shortfalls and revenues, I just want to confirm all the work in your civil backlog, I mean, at this point, is funded, is there any reason for risk any of that work because of pressures on state budget?

Ronald Tutor -- Chairman and Chief Executive Officer

I don't think so. The way it works, they really can't award the contract until they set aside the funds. And I'm in contact with -- our work is so large, I really deal on a day-to-day with the heads of the agencies. And there's no concerns about funding of the existing work.

They have plans of course for all this additional work. And that they're concerned about because of their loss of tax base and just the economic losses during this pandemic, but they're all looking to the federal government as the next course of action. If that doesn't happen, I think instead of this enormous ramp-up that we've been talking about, there'll still be significant civil work, but it will start getting pushed backone year, two years, three years.

Brent Thielman -- D.A. Davidson -- Analyst

Yup. And for the work you've got, has this sort of whole state-at-home movement -- I guess, has it or could it have the potential to move up time lines in terms of the work you anticipate starting up? I'm just wondering if it might help expedite some of that.

Ronald Tutor -- Chairman and Chief Executive Officer

Well, I think the federal government has really no option, but to plug money in to fund all these shortfalls because the one thing they've -- in every economic downturn, the government has always put money in the infrastructure because it's the one thing you can spend on where you get value. It puts people to work and it rebuilds an infrastructure desperate for rebuilding. So there's kind of an underlying confidence among our public agencies and a belief that there will be a bill and act to plug those shortfalls. But in the meanwhile, they're very -- they're just kind of stepping back and what we thought would be bidding end of this year, first quarter next year, then push back six months to a year on a wait and see what happens because, remember, their position is they have to -- when we get awarded a $2 billion job, that money has to be set aside and within their grasp.

They can't bid this work and award it based on what might come in the future. So to that extent, it's very positive for us.

Brent Thielman -- D.A. Davidson -- Analyst

Yup. OK. And I guess the whole courthouse closures, work from home, I imagine it slowed the processes with claims and pushed out some time lines. I guess, two-part question is, any meaningful April collections to report? And I guess in context of addressing the converts this year, can you help us understand in terms of what you're waiting for? What portion of claims you're hoping will drop through versus just generating cash out of the business? I'm just trying to get a feel for that.

Ronald Tutor -- Chairman and Chief Executive Officer

Well without giving you a list of each and every claim, we monitor all our claims nationally on an each basis. So we know. For example, we have one large claim with the federal government where they've made us an offer that was substantial, we had an original mediation date because they evidenced that they wanted to settle. And now because of COVID-19, it got pushed back to now we have a date of mediation in the middle of June.

We had two very large claims in New York that we had a final settlement conference that we thought we would settle in both. That was set for March. God bless COVID-19, they didn't push back to July. We've got an arbitration, we just ended in March that we expect an answer from the sole arbitrator in June.

He's written back and don't ask me how COVID-19 affects him working from home, but now he's going to be in August. So we remain confident with what we can control, and there's no doubt in my mind that we will generate the money from within the payoff of the converts.

Brent Thielman -- D.A. Davidson -- Analyst

OK. Thank you. I'll get back in queue.

Operator

There are no further questions left in the queue. I would like to turn the floor back over to Mr. Ron Tutor for any closing remarks.

Ronald Tutor -- Chairman and Chief Executive Officer

Well, thank you everyone. That was an uneventful Q&A. However, as you know, we had a great first quarter. We hope to continue and thank you for your time.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Jorge Casado -- Vice President of Investor Relations

Ronald Tutor -- Chairman and Chief Executive Officer

Gary Smalley -- Executive Vice President and Chief Financial Officer

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

Brent Thielman -- D.A. Davidson -- Analyst

More TPC analysis

All earnings call transcripts