Tutor Perini Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in millions of dollars except per-share data and ratios. Tutor Perini provides general contracting, construction management and design-build services through Building, Civil, Specialty Contractors and Management Services segments.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,099.4 | $1,166.4 | $2,997.3 | $2,601.6 |
| Gross profit | $115.5 | $120.4 | $288.7 | $270.0 |
| Gross margin | 10.5% | 10.3% | 9.6% | 10.4% |
| Income (loss) from construction operations | $54.7 | $62.0 | $(282.5) | $117.6 |
| Net income (loss) | $42.6 | $35.5 | $(307.0) | $62.1 |
| Diluted EPS | $0.88 | $0.74 | $(6.47) | $1.30 |
The nine-month loss includes a $376.6 million noncash goodwill and intangible-asset impairment charge ($339.2 million after tax). Excluding the impairment, investment-sale loss and specified discrete tax items, management reported non-GAAP nine-month construction operating income of $94.0 million, net income of $37.4 million and diluted EPS of $0.78. These measures are not substitutes for GAAP results.
- Cash flow: Nine-month operating cash use was $27.9 million, versus $125.0 million used in 2011. Investing used $9.2 million and financing provided $13.7 million; cash and cash equivalents declined $23.5 million to $180.8 million. Operating cash use reflected collection timing in Building and interest and tax payments.
- Liquidity: Working capital was $638.7 million and the current ratio was 1.48 at September 30, compared with $556.8 million and 1.40 at year-end 2011. Cash included $110.7 million attributable to joint ventures and unavailable for general corporate purposes; corporate cash was $70.1 million. Restricted cash was $38.7 million.
- Debt: Total reported debt was approximately $700.8 million, including $63.8 million current maturities; long-term debt was $636.9 million. Debt-to-equity was 0.58, up from 0.44 at year-end, largely because impairment reduced equity. The company had $70.0 million drawn on its revolving facility and $229.8 million available under the credit agreement.
- Contract position: Backlog was $5.55 billion, down from $6.11 billion at December 31, 2011. Nine-month awards were $2.44 billion against $3.00 billion of revenue recognized.
Material changes versus prior periods
- Q3 revenue fell 5.7% year over year, while net income increased; reported Q3 earnings were affected by tax effects associated with the impairment. Excluding specified discrete items, Q3 net income was $25.8 million and diluted EPS was $0.54.
- Nine-month revenue rose 15.2%, primarily reflecting the contribution of 2011 acquisitions, particularly in Civil and Specialty Contractors. Before impairment, nine-month construction operating income was $94.0 million versus $117.6 million reported in 2011.
- Q3 segment revenue was lower in Building, Specialty Contractors and Management Services, but higher in Civil. Specialty Contractors’ Q3 construction operating income fell to $14.2 million from $33.1 million; Building income rose to $20.9 million from $8.9 million, aided in part by project recovery estimates.
- Management cited completed large projects, under-absorbed overhead in Building while pending work starts, and a less favorable mix of new work as pressures on operating results. Increased acquisition contributions and certain project recovery estimates partly offset these pressures.
Outlook, risks and unusual items
- Management cited significant pending awards, including Hudson Yards, and expected certain awards and low bids to enter backlog as contracts are executed. It said self-performance and schedule-control capabilities could support further large Civil and Building awards; no specific revenue or earnings guidance was provided.
- The company expects an effective tax rate of approximately 3.9% for the remainder of 2012, primarily due to the impairment charge.
- The impairment followed lower share value, market volatility and higher valuation discount rates, delays in anticipated awards and project ramp-ups, and lower expected margins or uncertainty in some reporting units. Building, Civil and Management Services had impairment charges; Specialty Contractors’ estimated fair value exceeded carrying value. The Q3 review found no change to the Q2 charges. Management cautioned that small changes in valuation assumptions could materially affect valuations.
- A $12.4 million increase in estimated recovery on a large hospitality and gaming project increased construction operating income by $12.4 million, net income by $7.2 million and diluted EPS by $0.15 in the three- and nine-month periods.
- Costs and estimated earnings in excess of billings totaled $411.7 million, including $107.8 million of unapproved change orders and $161.9 million of claims. About $72.2 million of those change-order and claim amounts were subject to litigation or dispute resolution; recoveries are estimates and reductions could affect future earnings.
- Notable disputes include MGM CityCenter, with approximately $192 million of contract receivables recorded and a $191.3 million mechanic’s lien at September 30; the Long Island Expressway project, where the company asserted a $53.8 million claim and NYSDOT counterclaimed $151 million; and the ongoing Brightwater trial. Outcomes and timing are uncertain. The filing states that management’s estimates of anticipated recoveries are included in revenue for several disputed projects.
- An August credit amendment revised financial covenants, added minimum-liquidity and senior-leverage covenants, and increased the letter-of-credit sublimit to $150 million. The company reported compliance at quarter-end. It also disclosed $46.3 million of illiquid auction-rate securities classified as long-term investments, while stating it did not expect them to materially impair liquidity.
Most important facts for investors to verify
- Whether backlog awards, including Hudson Yards phases and other pending projects, are executed on schedule and at expected margins.
- Whether the project recovery estimates and disputed claims supporting contract assets and revenue are ultimately collected; review litigation outcomes and any resulting earnings adjustments.
- Whether Building margins, overhead absorption and overall cash collections improve, and whether the company’s impairment assumptions remain supportable.
- Available covenant headroom and liquidity, distinguishing corporate cash from joint-venture cash and restricted cash; monitor borrowing needs and debt service.
- How much of reported Q3 and year-to-date earnings reflects project estimate changes, impairment-related tax effects and other discrete items rather than recurring operations.