Tutor Perini Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results; dollar amounts below are in millions unless otherwise noted.
Business context and operating results
Tutor Perini provides construction and project-management services through its Civil, Building, and Specialty Contractors segments. Revenue was broadly flat year over year, while construction income and net income improved substantially.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $1,308.1 | $1,312.4 | $2,393.5 | $2,378.9 |
| Gross profit / margin | $109.8 / 8.4% | $98.6 / 7.5% | $214.9 / 9.0% | $189.4 / 8.0% |
| Income from construction operations | $48.8 | $30.9 | $89.0 | $51.0 |
| Net income | $21.4 | $11.8 | $36.8 | $16.9 |
| Diluted EPS | $0.43 | $0.24 | $0.74 | $0.34 |
| Interest expense | $15.5 | $11.3 | $29.6 | $22.7 |
Construction income rose 58% for Q2 and 75% for the first half. Management attributed improvement principally to stronger Civil and Building performance, higher Building volume, and lower general and administrative expense. Prior-year results included Building project cost-estimate charges of $14.7 million in Q2 and $17.7 million in the first half. Effective tax rates were 40.3% and 41.2% in 2016, respectively; Q2 benefited from adjustments relating to uncertain tax benefits.
Segments, awards, and backlog
- Civil: Q2 revenue was $465.7 million, down 13%; construction income was $45.1 million, down 3%. Margin improved to 9.7% from 8.7%, with favorable performance on large tunnel projects partly offsetting lower activity.
- Building: Q2 revenue was $523.5 million, up 16%; construction income was $13.2 million versus a $12.6 million loss. Margin was 2.5%, compared with negative 2.8%, reflecting increased activity and the prior-year project charge.
- Specialty Contractors: Q2 revenue was $318.9 million, down modestly; construction income fell to $5.4 million from $13.7 million. Management cited projects nearing completion and modest project charges. First-quarter results included offsetting favorable and unfavorable adjustments of $14.0 million and $13.8 million on electrical work.
First-half new awards totaled $2.2 billion, versus $2.3 billion a year earlier; Q2 awards were $0.4 billion, versus $1.3 billion. Backlog was $7.3 billion at June 30, 2016, down from $7.7 billion a year earlier, as revenue recognized exceeded awards over that period. Backlog mix was approximately 41% Civil, 34% Building, and 25% Specialty Contractors.
Cash flow, liquidity, and debt
- First-half operating cash flow was positive $4.6 million, compared with negative $31.8 million in 2015. Management cited improved profitability and lower net working-capital investment; working capital changes still used $69.7 million of cash.
- Investing cash outflow was $11.2 million, including $8.7 million for property and equipment. Financing cash inflow was $24.8 million. Cash and cash equivalents increased to $93.6 million from $75.5 million at year-end.
- Cash included $74.6 million held by joint ventures and available only for JV-related purposes; cash available for general corporate purposes was $19.0 million. Restricted cash was $49.5 million.
- Working capital was approximately $1.2 billion; the current ratio was 1.76. Total debt was $800.5 million and debt-to-equity was 0.54, versus 0.58 at year-end. The filing reports $145.8 million of unused revolver capacity.
- On June 15, the company issued $200 million of 2.875% convertible senior notes due 2021. Proceeds funded a $125 million term-loan prepayment, a $69 million revolver paydown, and fees. Reported debt carrying value reflects a substantial convertible-note discount; noncash amortization increased interest expense.
- Credit-facility amendments waived prior-year leverage and fixed-charge covenant breaches, raised borrowing costs and fees under specified leverage levels, added liquidity and cash-collection requirements, pledged additional collateral, and advanced facility maturity from June 2019 to May 2018. At June 30, the company was compliant: leverage ratio 3.59 versus a maximum 4.25; fixed-charge coverage 1.84 versus a minimum 1.25.
Outlook, risks, and unusual items
Management described the multiyear outlook as favorable, citing backlog, public infrastructure spending plans, the FAST Act, and prospective civil projects. It anticipated significant new awards but gave no numerical earnings or revenue guidance. Management noted continued competition for Civil work and potential weakness in luxury condominium and New York office markets affecting Building opportunities.
Important uncertainties include contract-estimate changes, disputed claims, customer collections, project schedules and costs, government infrastructure spending, new awards, debt-covenant compliance, and litigation outcomes. Costs and estimated earnings in excess of billings were $811.4 million, including $427.6 million of claims and $220.4 million of unapproved change orders, which are billable subject to resolution or contractual terms.
- Five Star Electric: A federal investigation covers 2005–2014, including business-enterprise usage and employee compensation, benefits, and tax practices. The company said it could not predict the outcome or estimate potential liability.
- Alaskan Way Viaduct: The tunnel boring machine was damaged after striking a steel pipe. Insurance coverage and disputes with Washington State remained in litigation; management assessed the potential for material adverse financial impact as neither probable nor remote.
- Other significant project disputes include Long Island Expressway/Cross Island Parkway, Fontainebleau, NOAA, and Westgate Planet Hollywood. Recorded revenue includes management estimates of recoveries on certain claims; actual outcomes could differ.
- The company stated it believed cash from operations, cash, and unused credit capacity would support operating needs for at least the next 12 months. This assessment depends on cash generation and continued facility availability.
Important facts for investors to verify
- Whether receivables, retainage, claims, and unapproved change orders convert to cash as expected, and how collection timing affects liquidity and covenant compliance.
- Subsequent cash flow and working-capital trends, especially given modest first-half operating cash generation and the large unbilled balance.
- Progress on awards and backlog conversion, including whether new awards keep pace with revenue burn.
- Any developments in the Five Star investigation, Alaskan Way insurance and WSDOT disputes, and other claims or litigation that could alter recorded recoveries.
- Debt-facility compliance, borrowing costs, required cash-collection milestones and principal payments, and refinancing needs before the May 2018 facility maturity.