Tutor Perini Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement figures are unaudited. Tutor Perini is a construction and contracting company operating through Civil, Building and Specialty Contractors segments.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1,125.3 million | $1,120.1 million | $2,083.8 million | $2,148.2 million |
| Gross profit | $100.9 million | $118.6 million | $189.4 million | $185.7 million |
| Gross margin | 9.0% | 10.6% | 9.1% | 8.6% |
| Income (loss) from construction operations | $(341.7) million | $54.8 million | $(318.8) million | $53.9 million |
| Net income (loss) attributable to Tutor Perini | $(320.5) million | $24.9 million | $(320.9) million | $12.8 million |
| Diluted EPS | $(6.38) | $0.49 | $(6.40) | $0.25 |
| Operating cash flow | Positive in Q2; amount not separately stated | Not stated | $(111.5) million | $(62.4) million |
A non-cash goodwill impairment charge of $379.9 million drove the reported operating and net losses. Excluding the charge and associated tax benefit, management reported adjusted construction operating income of $38.2 million for Q2 and $61.1 million for the first half, versus $54.8 million and $53.9 million, respectively, in 2018. Adjusted diluted EPS was $0.18 and $0.17, respectively, versus $0.49 and $0.25. These are non-GAAP measures.
Balance sheet and liquidity: At June 30, cash and cash equivalents were $149.9 million, including only $64.7 million immediately available for general corporate purposes; much of the remainder was held by joint ventures for JV-related use. Restricted cash and investments totaled approximately $70.0 million. Working capital was $1.8 billion and the current ratio was 2.03. Total debt was $956.2 million, up from $761.5 million at year-end 2018; debt-to-equity was 0.64 versus 0.43. The company had $115 million available under its $350 million revolver and reported compliance with its credit covenants.
Operating cash use reflected project working-capital investment, particularly the timing of receivable collections. Investing activities used $41.2 million in the first half, mainly for property and equipment. Financing activities provided $187.5 million, primarily from increased net borrowings.
Material changes and operating trends
- Revenue was nearly flat year over year in Q2 and fell about 3% in the first half. First-half Civil revenue rose 21%, while Building fell 8% and Specialty Contractors fell 24%.
- Before impairment, adjusted construction operating income increased year over year for the first half, but declined in Q2. Specialty Contractors recorded adjusted losses of $3.6 million for Q2 and $11.1 million for the first half, including unfavorable project estimate adjustments; management cited approximately $20 million of such adjustments on New York electrical and mechanical projects in the first half.
- New awards were $0.9 billion in Q2 and $4.2 billion in the first half. Backlog reached $11.4 billion at June 30, up 22% from year-end 2018 and 31% from June 2018. Segment backlog was $6.2 billion Civil, $2.9 billion Building and $2.3 billion Specialty Contractors.
- Contract-estimate revisions reduced revenue by $14.6 million in Q2 and $27.7 million in the first half, related to performance obligations satisfied in prior periods. Claims and unapproved change orders included in contract assets were $752.7 million and $334.8 million, respectively.
Outlook, risks and unusual items
Management described its multi-year growth outlook as favorable, particularly for Civil and Specialty Contractors, while warning that project delays, start-up timing and ramp-up could moderate growth. It cited infrastructure spending plans, public funding measures and a large project pipeline. The filing provides no formal numerical earnings or revenue guidance. Management expected substantial cash generation during the remainder of 2019 to help fund working-capital needs.
The impairment followed a second-quarter decline in the company’s share price, significant negative operating cash flow in the first quarter and a credit-rating downgrade. The company impaired all goodwill in Building and Specialty Contractors and $210.2 million in Civil; $205.1 million of Civil goodwill remained. Civil’s carrying value approximated fair value, leaving potential for further impairment if conditions or estimates worsen. Management noted that relatively small changes in valuation assumptions could materially affect the impairment analysis.
Significant matters include the Alaskan Way Viaduct litigation: potential recovery claims include $532 million against insurers and a $667 million counterclaim against WSDOT and Hitachi; a related WSDOT claim seeks $57.2 million. Management said potential loss from insurer coverage denial and WSDOT actions was neither probable nor remote and could not be reasonably estimated; it had recorded an estimate of anticipated recoveries. The Five Star Electric government investigation remained unresolved, and the company could not estimate a potential loss or range. In the Long Island Expressway matter, the company seeks $50.7 million; NYSDOT’s $151 million counterclaims had been dismissed as affirmative claims and defenses, subject to appeal. Management said ordinary-course legal matters were not expected to materially affect consolidated financial position based on information then available.
Other notable items: the May 2019 credit amendment fixed the maximum leverage covenant at 3.50:1 for the remainder of the facility term. As of June 30, the reported leverage ratio was 3.07:1 against a 3.50:1 maximum, and fixed-charge coverage was 3.18:1 against a 1.25:1 minimum. Operating lease adoption added $43.3 million of assets and liabilities, with no reported effect on earnings or cash flows.
Most important facts for investors to verify
- Whether receivable collections and operating cash flow improve, given first-half operating cash use and working-capital needs.
- Recoverability and timing of the large claims and unapproved change-order balances, and the related litigation outcomes and recorded recovery estimates.
- Whether Civil results sustain the valuation assumptions underlying its remaining goodwill, and whether any further impairment indicators arise.
- Progress and profitability of Specialty Contractors projects, including the New York electrical and mechanical work and delayed projects management expected to advance in the second half of 2019 and 2020.
- Available liquidity, borrowing needs and covenant headroom, including the distinction between corporate-available cash and cash restricted to joint-venture use.
- Conversion of the $11.4 billion backlog into executed work, revenue and cash; backlog includes some awards for which a formal contract or notice to proceed may not yet have been issued.