Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2002, for Perini Corporation (Tutor Perini Corp), a construction company incorporated in Massachusetts. The company operates primarily in two segments: Building and Civil construction. The results of operations are heavily influenced by the timing of progress and profitability changes on a limited number of significant active contracts.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2002 | Nine Months Ended Sep 30, 2002 | Nine Months Ended Sep 30, 2001 |
|---|---|---|---|
| Revenues | $232.8 million | $822.5 million | $1,190.9 million |
| Gross Profit | $12.4 million | $37.7 million | $42.0 million |
| Income from Operations | $4.2 million | $16.6 million | $22.5 million |
| Net Income | $3.6 million | $14.5 million | $20.0 million |
| Net Income Available to Common | $3.1 million | $13.0 million | $18.4 million |
| Diluted EPS | $0.14 | $0.52 | $0.79 |
| Cash and Equivalents | $7.5 million (Sep 30, 2002) | Decreased $20.5 million during the nine-month period | |
| Working Capital | $130.3 million (Sep 30, 2002) | Increased $36.9 million from Dec 31, 2001 | |
| Long-term Debt | $33.7 million (Sep 30, 2002) | Increased $26.2 million from Dec 31, 2001 | |
| Current Ratio | 1.73:1 | Improved from 1.30:1 at Dec 31, 2001 |
Material Changes vs. Prior Period
- Revenue Decline: Revenues for the nine months ended September 30, 2002, decreased by 30.9% ($368.4 million) compared to the same period in 2001. This was driven primarily by a 37.5% drop in Building construction revenues ($351.5 million decrease) due to the completion of large hotel/casino projects and a lower backlog at the end of 2001. Civil construction revenues declined slightly by 6.7%.
- Operating Income: Income from operations decreased by 23.7% ($6.3 million) for the nine-month period. While Building operating income fell due to lower revenue, the segment's gross margin improved from 3.9% in 2001 to 5.3% in 2002 due to favorable project close-outs. Civil operating income improved, turning a loss in 2001 into a profit in 2002, largely due to a smaller loss on the Central Artery/Tunnel "Big Dig" project.
- Debt and Liquidity: The company refinanced its credit facility in January 2002 with a new $45 million agreement. Long-term debt increased significantly, while cash reserves decreased. However, working capital and the current ratio improved, indicating better short-term liquidity management despite higher leverage.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance
- Backlog: Construction backlog stood at $1.12 billion at September 30, 2002, a decrease from $1.21 billion at year-end 2001. Delays in hospitality and gaming projects in Las Vegas due to economic conditions following September 11, 2001, contributed to this.
- New Awards: The company was selected to manage a joint venture for a $325 million hotel-casino complex in Detroit, expected to be added to backlog in early 2003. Management anticipates an encouraging new work award period in 2003.
- Expansion: The company is pursuing internal expansion and acquisitions, evidenced by the opening of a new office near Orlando, Florida.
Risks and Contingencies
- Legal Proceedings:
- Los Angeles MTA Matter: A jury awarded the MTA approximately $29.6 million in damages against a joint venture (TSP) in which Perini holds a 40% interest. The judge amended the award to include $33.4 million in costs/fees, totaling $63.0 million plus interest. TSP has appealed; no provision for loss has been recorded.
- San Francisco State University: Settled for $16.7 million in economic damages plus repairs. Management believes this will not have a material effect due to contributions from subcontractors and insurance carriers.
- Central Artery/Tunnel ("Big Dig"): Perini is pursuing claims totaling over $100 million in direct costs plus time delays. A Disputes Review Board (DRB) has awarded $17.4 million for time delays (upheld by court) and $17.1 million for inefficiencies. Additional claims of $41.3 million (binding) and $50.0 million (non-binding) are pending.
- San Francisco Airport Suit: The City of San Francisco filed a suit alleging fraud and violations related to airport expansion contracts, seeking $30 million in damages plus treble damages. Perini sold its interest in the relevant joint venture in 1997, and the managing partner (Tutor-Saliba) has agreed to indemnify Perini.
- Preferred Stock Dividends: Dividends on $21.25 Preferred Stock have been suspended since 1995. The aggregate amount in arrears is approximately $14.9 million. The Board does not plan to resume payments in the foreseeable future to preserve working capital.
- Pension Liability: Declining stock market values and interest rates have adversely impacted non-union pension plan assets and obligations. The company may be required to record an additional minimum pension liability in 2002, though the exact amount is currently unpredictable.
Investor Verification Checklist
- Legal Exposure: Verify the status and potential financial impact of the $63.0 million Los Angeles MTA judgment and the pending $91.3 million in claims on the "Big Dig" project.
- Backlog Quality: Assess the stability of the $1.12 billion backlog, specifically regarding the delayed Las Vegas hospitality projects and the timing of the Detroit casino award.
- Liquidity vs. Debt: Monitor the company's ability to service its increased long-term debt ($33.7 million) while maintaining the working capital required for large-scale construction projects.
- Preferred Stock: Confirm the continued suspension of preferred dividends and the implications for common shareholders regarding the $14.9 million in accrued arrears.
- Pension Funding: Track the final 2002 valuation of pension assets to determine if a significant non-cash charge to equity or a cash contribution will be required.