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Tutor Perini (NYSE:TPC)

Q1 2014 Earnings Call

May 07, 2014 10:30 am ET

Executives

Jorge Casado - Director of Investor Relations

Ronald N. Tutor - Chairman and Chief Executive Officer

Michael J. Kershaw - Chief Financial Officer and Executive Vice President

Analysts

Will Gabrielski - Stephens Inc., Research Division

Steven Fisher - UBS Investment Bank, Research Division

Michael Andrew Romanelli

Min Cho - FBR Capital Markets & Co., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation First Quarter 2014 Earnings Conference Call. My name is Manny, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. [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 proceed.

Jorge Casado

Good morning, and thank you, all, for your interest and participation today. Joining us on the call are Ronald Tutor, Chairman and CEO; and Michael Kershaw, Executive Vice President and CFO.

Before we discuss our results for the first quarter, I would like to remind everyone that during today's call, we will be making forward-looking statements which reflect our current analysis of existing trends and information. There is an inherent risk that actual results and experience could differ materially. You can find a discussion of our risk factors, which could potentially contribute to such differences, in our most recent Form 10-K, which was filed on February 24, 2014.

With that, I will turn the call over to our Chairman and CEO, Ronald Tutor.

Ronald N. Tutor

Ladies and gentlemen. Thank you, Jorge. Good morning, and thank you for joining us. I'm pleased to report that we delivered strong first quarter results in line with our expectations. During the quarter, we booked several large new projects, which drove our backlog up significantly. Most of our recent new awards have been for projects in our Civil and Specialty Contractors segments, the segments which continue to drive our business. Needless to say, because of our substantially higher Civil and Specialty backlog today, we're very optimistic about our prospects for growth and continuing increased profitability over the coming years.

As mentioned in our press release, we completed a reorganization of our business during the first quarter, which resulted in the elimination of the Management Services segment. We decided to make this change, frankly, due to the less material size of the segment recently compared to in earlier years. The 2 subsidiaries that previously comprised the Management Services segment, Black Construction Company and Perini Management Services, are now being operated and reported under our Civil and Building segments, respectively. No significant personnel or management changes were made as a part of this reorganization. It simply made sense to realign and integrate the reporting of these 2 units under our larger segments.

Michael Kershaw will review our financial details a bit later, but I would like to highlight for you our first quarter results. Our revenue declined 4% compared to the first quarter of 2013 due to higher activity last year on various projects in our Building segment, as well as Hurricane Sandy response projects in New York and, of course, some of the worst weather in the Northeast encountered in the past 20 years. Over the 3 months, in New York alone, we probably lost 5 to 6 weeks in our ability to work. Despite the big decrease in revenue, our operating income increased 15% year-over-year, driven by strong volume growth and favorable project execution on our Civil segment. Our diluted earnings per share increased 6% year-over-year.

And finally, our backlog grew 38% year-over-year due to the large projects booked in the first quarter. The largest being the 2 MTA East Side Access projects mentioned during our last call with a combined value of $844 million. Our backlog remains at the highest level since 2008. And today, more than 75% of our backlog is specific to our Civil and Specialty projects.

Now I would like to provide an update on some of our larger key projects underway. On Seattle SR99 project, our joint venture Seattle Tunnel Partners has developed and is executing a plan being led by Hitachi Zosen, the tunnel boring machine manufacturer to make the needed repairs to the TBM, which was damaged when it unexpectedly encountered a steel well casing that had been left in place by the Washington DOT. The repairs and testing needed to restart the tunneling operations are now expected to take until November or December of this year. Our focus remains on making these repairs and getting the TBM tunneling again as soon as possible.

Concurrently, many elements of the civil work at the 2 tunnel portals, and, with it, the tunnel itself are finishing on schedule. Several other scheduled mitigation efforts are being reviewed to determine their viability. The costs related to the breakdown and delays will be borne by others, in our opinion. It's unfortunate this damage occurred. However, several additional safeguards will be added during this repair by Hitachi, and we have confidence the TBM will more successfully operate in its completion of the tunnel.

Our work at Hudson Yards continues to make good progress. We are diligently working to complete the Amtrak tunnel in the fourth quarter, which it appears certain, and have started work on the platform over the eastern rail yard that will serve as the foundation for the future buildings at Hudson Yards and are now up to the sixth floor with concrete framework on the South Tower, Tower C. The South Tower is scheduled to complete in late 2015, and we anticipate receiving the contracts and notice to proceed for Tower D, E, the retail work as scheduled, hopefully, over the next 12 months.

Our work on the California High-Speed Rail project continues progressing as planned. We're performing design and pre-construction tasks and other work for the actual construction expected to begin this summer. The state continues going through the process of acquiring needed land parcels, and our work remains on schedule.

Next, I'll share with you some information about our recent new orders, backlog and pending awards. In the first quarter, we had $1.7 billion of new awards and adjustments to existing contracts for a book-to-bill of 1.7. We ended the quarter with a backlog of $7.7 billion, up $2.2 billion compared to the first quarter of last year. Our backlog mix is now 51% Civil, 23% Building and 26% Specialty.

Our pending awards declined to $4.3 billion from $6.3 billion last quarter due to several large contracts awarded in the first quarter, as well as the loss of the construction management contract for the North Tower, Tower A at Hudson Yards. Despite these reductions, our volume of pending awards remains significant, and we expect the various large Civil and Building projects will be booked into backlog over the coming quarters.

Our Civil Group had first quarter new awards and adjustments totaling $714 million. Largest order we booked into backlog included the $550 million MTA CS179 and the $294 million MTA CM006. Both MTA contracts are for work on the East Side Access, connecting the Long Island Railroad to the Grand Central Terminal. Another large order was the $92 million I-564 Intermodal Connector project in Virginia. The Civil Group's backlog was $3.9 billion, up 122% compared to last year. Civil Group is also expecting to soon book in the backlog the previously announced John Hart dam excavation and tunneling project in British Columbia, valued at approximately $70 million. As a reminder, and for those who may be less familiar with our business, our Civil Group typically generates the highest margins across the company, so their large backlogs bodes very favorably for the company's future results.

Black Construction, our Guam construction arm, continues to actively bid numerous projects, with anticipated bids totaling over $700 million over the balance of this year in Guam and the Western Pacific. The Black Construction joint venture was recently awarded a 5-year IDIQ contract by the U.S. Navy, valued up to $95 million for design-build, design-bid-build construction projects at the U.S. Navy support facility in Diego Garcia. This new contract vehicle is expect to result in task order starting later this year. In addition, Black broke ground in mid-April on a $27-million port facility expansion and improvement in Guam, which should be completed in 2015.

Our Building Group had new awards and adjustments in the first quarter totaling $276 million, which included the award of $113 million high-technology building for a confidential customer in Northern California and a $35-million task order from the National Park Service. The Building Group's backlog was $1.7 billion, essentially flat compared to last quarter. The Building Group has many large pending awards, including over $2 billion in approaching phases of the Hudson Yards development, which, as I mentioned earlier, expected to be booked in the backlog over the next 12 months. In addition to Hudson Yards, there continues to be a large number of condominium developments in both the northeast and the southeast, particularly with respect to Miami, where we have 3 projects under contract negotiations, hopefully, to close in May.

The Specialty Contractors Group had first quarter new awards and adjustments totaling approximately $663 million. Their backlog was $2 million, up 36% compared to last year and up 22% compared to last quarter. The substantial increase in Specialty's backlog was primarily booking their subcontract portion of the $550 million MTA CS179 contract, as well as the $74 million project for carbon addition facilities at wastewater treatment plant in New York.

New funding sources for major civil infrastructure projects continue to develop. For example, the Obama administration recently proposed a $302 billion 4-year transportation bill to provide funding for highway projects nationwide and to keep the U.S. Highway Trust Fund solvent. The proposed plan would allow states to collect tolls on interstate highways to fund needed transportation repair and use monies from corporate tax fund to fund the bill. In addition, the proposal would increase the Highway Fund $87 billion above current levels to provide funding for aging and deficient bridges and transit systems. We are hopeful that with a looming expiration of the current Map 21 Transportation Program later this year, we may see the advancement and passage by our elected officials of a replacement multiyear funding program.

For our Civil Group, we continue to see an extremely strong $10 billion pipeline of prospective civil work to be bid and awarded over the next months. Largest of these projects is the bundled packages 2 and 3 of the California High-Speed Rail, which we estimate -- or should I say, the state estimates to be approximately $1.5 billion. The project will be bid in September of 2014. Other Civil prospects include approximately $5 billion in various highway, airport and mass transit projects and over $2 billion in various bridge projects.

The Building markets continue a gradual recovery. Areas where we have particular strengths, such as New York City, Florida and California, continue to lead the recovery due to strong demand for high-end commercial real estate and multifamily housing. One recent news report, just to give you an idea how strong Miami-Dade County is, is that more than 100 high-rise crane permit requests are pending. Strong demand for new and renovated buildings is being fueled by developers and investors that continue to identify good investment opportunities in certain regions in the U.S..

Our team from LaGuardia Central Terminal Building replacement project will submit its proposal to the Port Authority by May 20. This project represents our single-largest near-term prospect. The project was bid and will be executed under a public-private partnership model, combining the design-build, own, operate and finance elements. We're confident that our team, which includes Goldman Sachs as our equity partner and financial lead, Aéroports de Paris and TAV Airports as the terminal operator and added investors and KPF and Arup as our consulting engineers and architects, will provide a competitive proposal.

As the building markets continue to improve and the civil markets remain very active, our Specialty Contracting units are seeing a growing number in volume of prospective projects. We see a $5 billion pipeline of opportunities for Specialty over the next 12 months. These include the usual projects for various government agencies, school districts and developers.

Based on our current backlog and outlook, we are maintaining our guidance for fiscal 2014 for revenue in the range of $4.5 billion to $5 billion and diluted earnings per share of $2.20 to $2.40. As our -- as a reminder, our EPS guidance implies 28% growth at the midpoint, and it assumes a tax rate of 40%, 49 million average diluted shares outstanding and $43 million or $0.53 of depreciation expense and $17 million or $0.20 of amortization expense. As mentioned last quarter, we expect our results in 2014 to be more heavily weighted toward the back end of the year due to seasonality and the ramp-up of many of our projects awarded over the last 12 months.

I will now turn the call over to Michael Kershaw to go over the financial results. Michael?

Michael J. Kershaw

Okay, thanks, Ron. Our revenue for the quarter at $955 million was down about 4% from last year's $993 million. This is due primarily to decreased activity in Building, partially offset by the ramp-up of our Civil operations. Our gross profit at $105 million for this quarter is up 5% from last year's $100 million, and our gross profit margin was 11%, up 90 basis points from last year's 10.1%. Our SG&A in both years was flat at $64 million, leading to our income from construction operations being up 15% at $41 million this year versus $36 million last year. Our operating margin at 4.3% is up 70 basis points from last year's 3.6%, I'd point out this is our highest Q1 operating margin in the last 5 years, in fact, since the merger, resulting in our net income at $16 million this year versus $15 million last year. EPS is up 6% at $0.33 versus $0.31.

Our first quarter results were in line with our internal expectations, with strong operating performance in Civil, offsetting the lower revenue in Building and a lower profitability in Specialty Contractors. Just as a reminder, I'd point out that our backlog volume is understated by about $525 million due to the construction management, not at risk work, associated with Hudson Yards.

Moving on to each of the segments. In our Civil segment, our revenue at $365 million for the first quarter is up 44% from last year's $254 million. This was driven primarily by the ramp-up of our Civil projects at Hudson Yards, the Amtrak tunnel and the Hudson Yards platform, and a rail transportation project in California, as well as increased activity on some projects in the Midwest and in Wisconsin.

Our income from construction operations this quarter was $44 million, which is up 91% from last year's $23 million. This is due primarily to the increased mix of certain higher-margin work in parts of our Civil business and favorable performance on a large tunnel project in California, as well as the revenue volume changes that I mentioned previously. Our operating margins for the first quarter was up 300 basis points at 12.2% this year versus 9.2% last year.

Moving on to our Building segment. Our revenue in the first quarter of this year at $298 million is down 32% from last year's $437 million. This is driven primarily by decreased activity on hospitality and gaming projects in California, Arizona, Nevada and Louisiana, as well as decreased activity on 2 health care projects in California and the impact of the inclement weather in the Northeast that Ron mentioned earlier. This was partially offset by increased activity on the Hudson Yards project.

Our income from construction operations in the first quarter of 2014 at $2 million is down 66% from last year's $5 million, and that's primarily driven by the revenue volume changes that I mentioned. Our operating margin at 0.6% is a little lower than last year's 1.2%.

In the Specialty Contractors segment, our revenue this quarter was $292 million, down a little bit, only 3% down from last year's $302 million. And this is due primarily to last year, the performance on the Hurricane Sandy projects in New York, as well as some impact in the Northeast on our inclement weather, but that was partially offset by increased activity on some smaller electrical projects in the Southern U.S..

Our income from construction operations at $8 million is down from last year's $19 million. And the decrease was due to the revenue volume changes that we mentioned, some unfavorable performance on some mechanical projects in New York, but that was partially offset by favorable performance on some smaller electrical projects in New York and improving performance in certain smaller Specialty units. Our operating margin this quarter was 2.7%, down from last year's 6.4% due to the reasons mentioned below, and this is our margin expectations for this segment.

With respect to other expenses. Depreciation and amortization in the first quarter was $15 million, up 6% from last year's $14 million, and we expect that to be approximately $60 million for the year, consistent with our D&A expense that was in 2013. Our interest expense at -- for the quarter was $11 million, essentially flat with last year's $11 million. And our income tax expense was a little higher this year, the $11 million versus $9 million. Our effective rate of 41.6% versus 38.1% was due to a higher-than-expected unfavorable discrete tax adjustments in the quarter. But as Ron mentioned, we're still forecasting 40% for 2014.

With respect our balance sheet. Our working capital at March 31 was $874 million, up $86 million from the year-end's December 31, 2013, $787 million. Embedded in that is $133 million of cash, which is up from $120 million at December. Our current ratio at March 31, 2014, of 1.66 is up slightly from our December 31, 2013, ratio of 1.61. We did use $41 million in cash from operating activities in Q4 -- Q1 of this year, substantially lower than last year's $84 million. If you recall, last year, the impact of Hurricane Sandy increased our usage last year.

Our free cash usage this year was $49 million compared with $97 million of last year. I'd remind you that our Q1 seasonality will always have a negative cash impact on us for Q1 versus other periods in the year. But actually, 50% -- over 50% of the usage this quarter is related to a timing issue on one project, and that was caught up in early in Q2. Our total debt at the end of the quarter was $821 million compared with $734 million at the end of Q4. Our debt equity ratio at 0.65 compares with the fourth quarter of 0.5 now -- 0.59.

With that, I'll hand the call back over to Ron for closing comments before taking questions.

Ronald N. Tutor

Thank you, Mike. We're pleased about the $2.2 billion growth in our backlog since this time last year. Furthermore, with over 75% of our backlog comprised of higher-margin Civil and Specialty projects, we anticipate a favorable multiyear period of growth and increased profitability.

Over the next several years, barring any significant disruption in the U.S. economy, we expect to see a continuation of improvements in the building markets and, more directly, further improvements in the civil and specialty markets nationwide, as various regions of the country accelerate their spending on long-needed infrastructure improvement programs.

This concludes our prepared remarks. We will now ask the operator to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Will Gabrielski of Stephens.

Will Gabrielski - Stephens Inc., Research Division

The margins are pretty impressive, considering you said 5 to 6 weeks of work was lost here in the quarter due to weather. And I'm just wondering, where do you see the Building margin trending for the rest of the year?

Ronald N. Tutor

I think the Building margins will continue to be flat. The Building business right now is pretty much in a static mode. I don't see any real improvements in the Building business profitability in terms of the individual job margins, at least for the balance of this year, until, frankly, more work is in the marketplace and more capacity is delivered.

Will Gabrielski - Stephens Inc., Research Division

Okay. Can you talk about, I guess now that you're ramping up on Hudson Yards, what the -- have you seen any type of response from other commercial builders in New York that look at the vertically integrated model and say, "This is an interesting way to go about executing your commercial development," or has there been anything like that yet where you're getting some referenced benefits?

Ronald N. Tutor

No, no. I think our peers are so committed to the theory of no investment in either equipment or specialty subsidiaries that they -- they believe in a model that says, "Essentially, we provide management, but we self-perform none of the work." And that's what we do. It diminishes risk, but of course, it diminishes profitability. So that's what they do, and I haven't seen anything to lead me to believe that any of them are following in our footsteps, which is fine by me.

Will Gabrielski - Stephens Inc., Research Division

And I guess, yes, my -- I was actually trying to understand if any other commercial developers were actually taking notice of how you're executing Hudson Yards and saying, "It's an interesting model, and it can possibly be a benefit to us." Are you seeing any bigger developments in New York have an interest in what you're doing at Hudson Yards?

Ronald N. Tutor

Well, there is, and we've had a lot of interest from other developers. But the deal I made with Steve Ross was pretty much a commitment, given the size of what he awarded to us and the undertaking in and of itself. We would not work for any other major developers while we were doing the first phase of Hudson Yards.

Operator

The next question comes from Steven Fisher of UBS.

Steven Fisher - UBS Investment Bank, Research Division

I wondered if you could just clarify were the Management Services segments both profitable in the quarter. I'm just wondering how much a drag or a contribution there was from these on the 2 different segment margins that they got put into.

Ronald N. Tutor

Black Construction was extremely profitable in the quarter. Manage -- Perini Management Services was virtually negligible, and it was one of the reasons that it made no sense. And with the revenue down in Management Services, to keep it as a separate segment no longer made any sense.

Steven Fisher - UBS Investment Bank, Research Division

Okay. And then has there been any change to your revenue recognition or profit accruals or claims related to the Seattle tunnel project, or would you expect any in the next couple of quarters?

Ronald N. Tutor

Right now, Hitachi is on the job literally rebuilding the machine at their own expense, and we are working through the responsibility for all our costs as we speak. I don't think anything will be resolved probably until the end of the year. But as I've said previously, we have no doubts that the responsibility lies in any 1 of 3 places and, not the least of which, could be insurance. But I mean, it's too early to tell.

Steven Fisher - UBS Investment Bank, Research Division

Okay. And then just lastly here. Maybe can you just give us a sense of your expectations on the bookings outlook over the next couple of quarters? And I know you mentioned the pending awards, but just kind of curious the timing around those. Are those more longer-dated, pending awards [indiscernible] more front end?

Ronald N. Tutor

Well, we're 1 of 3 proposers on LaGuardia which is an enormous Building and Civil program. We're in the process of working on the next phase of high-speed rail which, of course, we were awarded phase one at $1.5 billion. That proposal goes in, in September of this year. We're absolutely overwhelmed. We're bidding, today, as we speak, a very large concrete paving job at JFK, where we built the first one 2 years ago. I'd have to say we're overwhelmed with the number of opportunities in our civil sector. We're just literally working 5 and 6 days a week long hours just to keep up with all of the opportunity.

Operator

[Operator Instructions] Our next question is from Michael Romanelli of Sidoti & Company.

Michael Andrew Romanelli

The one question I had just in terms of -- can you talk about the opportunities you're seeing on the East Coast, specifically the New York area, and just the general levels of bidding, the competition in bidding in that area?

Ronald N. Tutor

New York City continues to be very strong. I -- the last I looked at our bid schedule, we had a dozen projects bidding between now and year end that were over $200 million. We've got a very large bridge job in Washington, D.C. at approximately $600 million. We just -- we have more work to bid almost than our capacity to bid, and we're trying to be very selective where the margins might be higher and the competition less. Right now, the biggest part of our Civil work is in -- on the eastern seaboard, predominantly the Northeast. However, our Midwest operations at Lunda continues to exceed our expectations with the work they're bidding and end up being awarded. California is slow other than the megaprojects, of which we have the 2 biggest, and are about to bid the second phase of High-Speed Rail, which is $1.5 billion. It's a -- the enormity of these jobs and what we're looking at, it's just remarkable.

Michael Andrew Romanelli

Okay. And just in terms of debt, can you talk about, for 2014 and 2015, where you'd like that to be?

Ronald N. Tutor

Well, we believe -- or I better say I believe that with the pending resolutions of dollars owed to us, we will appreciably pay down our debt, probably in the third quarter this year. We have many claims and issues that we think are coming to resolution, which will generate a very substantial amount of -- or should I say, return of our money to pay down the debt that we've incurred.

Operator

Our next question comes from Min Cho of FBR Capital Markets.

Min Cho - FBR Capital Markets & Co., Research Division

I just actually had a question about your Specialty segment. Obviously, the margins came in below your expectations there due to some unfavorable projects. How should we look at the margins there, given the opportunities that you're seeing in that business and given the strong pipeline in the backlog over the next several quarters?

Ronald N. Tutor

We -- our New York mechanical contractor who took a very, very substantial hit that essentially ate up most of the problems we had in the Specialty group. Where we anticipated a very profitable first quarter, they lost over $4 million on a review of certain jobs, where, in their wisdom, they wrote them down appreciably on a onetime-only basis. And we believe that, that first quarter write-down in mechanical, they will immediately return to their projections and profitability. Whether they can earn back the first quarter loss or not remains to be seen. Our electrical operations continue to be consistently profitable, and the balance of Specialty, decent.

Min Cho - FBR Capital Markets & Co., Research Division

Okay. And then just -- you definitely talked about some -- it sounds like there's a lot of funding sources on the transportation side and with MAP-21 expiring at the end of this year, what do you think happens to some of your backlog, or if anything happens to your kind of pipeline of opportunities, if we get a short-term continuing resolution or we don't get a longer-term transportation bill for another couple of quarters or maybe even years?

Ronald N. Tutor

Everything we're looking at we verify. The balance of this year is already funded. I think any issues with funding will really be more specific to work in 2015 and '16. Normally, when they're on our radar to bid this year, it means major expenditures have been made for design, typically, property procurement. So that the last thing they do is go out to bid. I don't believe our short term will be impacted. It is possible that 2015 new awards and 2016 new awards could be impacted. However, one of the nice of these billion-dollar projects that we've been fortunate enough to be awarded is they extend out over 3 or 4 years, in most cases, 4 years. So it gives us a really strong assurance of our income stream over that period of time. And then what we try to do, of course, is add to it with any new awards.

Operator

We have no further questions in the queue at this time. I would like to turn the floor back over to Mr. Tutor for any closing remarks.

Ronald N. Tutor

Thank you, everyone, for joining us. We'll catch you on the next one.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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