Tutor Perini Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
Tutor Perini provides general contracting, construction management and design-build services through Building, Civil and Management Services segments. During the first half, it acquired Fisk Electric, Anderson Companies and Frontier-Kemper, expanding electrical, building and tunneling capabilities. Their results were included from their respective acquisition dates; collectively, the businesses contributed $253.9 million of first-half revenue and $6.2 million of construction operating income.
Backlog was approximately $5.0 billion at June 30, up from $4.3 billion at December 31, 2010. Acquisitions contributed approximately $775 million of second-quarter backlog additions. Management reported a further approximately $1.6 billion of backlog acquired with Lunda and GreenStar on July 1; their results are not included in the June 30 financial statements.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $819.9 | $914.4 | $1,435.1 | $1,779.5 |
| Gross profit | $87.2 | $98.9 | $149.7 | $175.0 |
| Gross margin | 10.6% | 10.8% | 10.4% | 9.8% |
| Income from construction operations | $37.0 | $55.9 | $55.5 | $90.0 |
| Net income | $19.7 | $32.7 | $26.6 | $53.7 |
| Diluted EPS | $0.41 | $0.66 | $0.56 | $1.09 |
| Interest expense | $7.3 | $3.2 | $14.4 | $4.8 |
Construction operating margin was 4.5% for Q2 versus 6.1% a year earlier, and 3.9% for the first half versus 5.1%. The effective tax rate was 36.5% in both comparable periods.
For the six months, operating cash flow was negative $87.4 million, compared with positive $12.7 million in 2010; management attributed the outflow primarily to working-capital changes and substantial completion of large Building projects. Investing cash use was $182.6 million, principally for acquisitions. Financing provided $219.6 million, mainly from borrowing and equipment-financing activity. Cash and cash equivalents ended at $421.0 million, including $78.5 million held by joint ventures for joint-venture uses; restricted cash was $32.4 million. Working capital was $699.4 million and the current ratio was 1.66.
Total debt, including current maturities, was approximately $638.4 million at June 30, compared with $395.7 million at year-end. Long-term debt excluding current maturities was $606.0 million; the company reported a long-term debt-to-equity ratio of 0.45x, up from 0.29x. The $300 million 7.625% senior notes mature in 2018. The company had $200 million drawn on its revolving facility and $156.6 million available under the facility then in place. Cash declined by $50.4 million from year-end.
Material changes versus prior comparable periods
- Q2 revenue fell 10.3%; first-half revenue fell 19.3%. Management cited completion of large projects, including Las Vegas hospitality and gaming work and New York-area civil projects, and a lag in starting new backlog work.
- Construction operating income fell 33.8% in Q2 and 38.3% in the first half. Building and Civil drove the declines; management cited lower revenue and weaker margins, including less self-performed work on certain major Building projects and the completion of favorable-margin Civil projects.
- Management Services revenue rose 45.7% in Q2 and 15.4% in the first half, chiefly from a containerized-housing task order in southern Iraq. Segment income was slightly lower year over year.
- Interest expense rose substantially following issuance of the $300 million senior notes in October 2010. Other income included a gain on a property sale.
- Acquisitions added scale but also increased debt, goodwill and intangible assets. Aggregate preliminary purchase consideration for Fisk, Anderson and Frontier-Kemper was $238.3 million, including $9.7 million of contingent consideration; purchase-price allocations remained preliminary.
Outlook, commentary, risks and unusual items
Management expects acquisition synergies and more self-performed work, together with higher-margin public works opportunities, to enhance margins. It said liquidity and credit arrangements were sufficient to support current backlog and anticipated new work. No specific full-year revenue, earnings or margin guidance is provided; management cautioned that interim results may not indicate full-year results because project progress and estimated profitability can vary.
After quarter-end, the company signed an August 3 credit agreement providing a $300 million revolving facility, a $200 million term loan and a conditional option to increase the base facility by up to $50 million. The agreement has financial covenants; the company reported compliance. Lunda and GreenStar were acquired July 1. GreenStar’s $74.9 million seller note and accrued interest were paid August 3. Their purchase-price allocations and pro forma effects were not yet available.
Major risks include converting backlog to revenue, project execution and cost estimates, delays or scope changes, financing availability, surety capacity, labor, public funding and litigation outcomes. Several project claims and recoveries are reflected in revenue based on management estimates and could change. Notable matters include the Central Artery/Tunnel dispute, the $53.8 million Long Island Expressway claim, CityCenter (approximately $222 million of contract receivables recorded at June 30 and a $313 million mechanic’s lien), and disputes involving Gaylord, Fontainebleau and Brightwater. Outcomes and timing remain uncertain. The company stated that the auction-rate securities market remained illiquid; $88.1 million was classified as long-term, including securities supported by government guarantees, private insurance or tax-exempt bonds. Management did not expect this to materially impair overall liquidity.
Disclosure controls were assessed as effective. The company reported no material change in internal control during the period, while noting that controls were being integrated at acquired businesses.
Most important facts for investors to verify
- Whether new backlog converts to revenue on schedule and whether operating margins recover as projects ramp up.
- Whether working-capital demands and negative operating cash flow persist, and how much cash is available for general corporate use versus joint-venture purposes.
- Debt, revolver availability, covenant headroom and the financing and integration effects of the July acquisitions.
- Final purchase accounting, earnouts and acquired-company performance relative to management’s synergy expectations.
- Changes in estimated recoveries, receivables or potential liabilities from the significant construction claims and disputes.
- Liquidity, valuation and eventual realization of the $88.1 million auction-rate securities investment.