Tutor Perini Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unless otherwise stated, amounts below are U.S. dollars; financial statement amounts are in millions.
Business context and reporting period
Tutor Perini provides general contracting, construction management and design-build services through Building, Civil, Specialty Contractors and Management Services segments. The prior-year comparison is affected by acquisitions completed in 2011, including GreenStar and Lunda, which were included for a full six months in 2012 but not in the comparable 2011 period.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $985.3 | $819.9 | $1,897.9 | $1,435.1 |
| Gross profit | $87.1 | $87.2 | $173.2 | $149.7 |
| Gross margin | 8.8% | 10.6% | 9.1% | 10.4% |
| Construction operations income (loss), GAAP | $(354.2) | $37.0 | $(337.2) | $55.5 |
| Net income (loss) | $(348.4) | $19.7 | $(349.6) | $26.6 |
| Diluted EPS | $(7.35) | $0.41 | $(7.38) | $0.56 |
The GAAP operating loss includes a $376.6 million non-cash goodwill and intangible-asset impairment charge ($355.9 million after tax). Excluding the impairment and specified discrete tax and investment-sale items, management reported non-GAAP construction operations income of $22.4 million and net income of $7.5 million for Q2; for the first half, $39.4 million and $11.6 million, respectively. Adjusted diluted EPS was $0.16 for Q2 and $0.24 for the first half. These are company-defined non-GAAP measures.
- Cash flow: First-half operating cash use was $31.9 million, versus $88.5 million used in 2011. Investing activities provided $0.6 million, versus $179.6 million used in 2011; financing activities provided $12.4 million, versus $217.7 million provided. Cash and cash equivalents fell $18.9 million to $185.4 million.
- Cash availability: Of reported cash, $75.2 million was corporate cash available for general purposes and $110.1 million was the company’s share of joint-venture cash restricted to joint-venture uses. Restricted cash was a further $38.7 million.
- Liquidity: Working capital was $591.6 million; current ratio was 1.45. At June 30, the company had $42.5 million outstanding on its revolver and $257.3 million available to borrow under the credit agreement. Auction-rate securities of $46.3 million were classified as long-term investments because of limited liquidity.
- Debt and equity: Debt was $690.3 million including $65.0 million of current maturities; long-term debt excluding current maturities was $625.3 million. Stockholders’ equity declined to $1,056.5 million from $1,399.8 million at December 31, 2011, primarily reflecting impairment. Long-term debt-to-equity rose to 0.59 from 0.44.
- Margins and costs: Before impairment, construction operations income was $22.4 million in Q2 and $39.4 million for the first half, equivalent to approximately 2.3% and 2.1% of revenue. Interest expense rose to $10.6 million for Q2 and $21.7 million for the first half, principally reflecting the term loan.
Material changes versus prior comparable periods
- Revenue grew 20.2% in Q2 and 32.2% in the first half, mainly from acquired businesses and increased Civil project activity. Building revenue fell as major projects reached substantial completion; Building operations were also affected by lower volume, under-absorbed overhead, work mix and unrecoverable costs on an Alabama educational project.
- Specialty Contractors and Civil revenue rose substantially, primarily from 2011 acquisitions. Specialty Contractors’ pre-impairment operating income improved; Civil operating income also increased, though management cited lower margins on some work and the effect of completed prior-year projects.
- First-half backlog declined to $5.85 billion from $6.11 billion at year-end 2011. New business awarded was $1.64 billion, compared with $1.90 billion of revenue recognized.
- Goodwill and intangible assets fell materially following impairment: goodwill was $570.6 million at June 30 versus $892.6 million at year-end. The charge followed a sustained share-price decline, construction-sector market volatility and delays in anticipated work awards and starts.
- First-half operating cash use improved from the prior year, but the company still consumed operating cash. The 2011 cash comparison included $161.7 million of acquisition spending, unlike 2012.
Outlook, management commentary, risks and unusual items
- Management cited significant awards and low bids across segments, including a $178 million Florida courthouse and a $94 million U.S. Army Corps of Engineers task order. It identified more than $1 billion of Building pending awards, more than $500 million of Civil low bids and more than $150 million of Specialty Contractors low bids as potential 2012 backlog additions; these were not yet contracted backlog.
- Management said it expected to pursue large Civil and Building opportunities, including Hudson Yards, and expected its financial position and credit arrangements to support current backlog and anticipated new work. The filing provides no formal earnings or revenue guidance.
- The interim impairment analysis was not final at filing. Management anticipated completion in Q3 2012 and warned that final assumptions could result in a material adjustment to the recorded impairment. The impairment was non-cash but reduced reported earnings and equity.
- Credit covenant event: The company obtained a waiver for June 30, 2012 because it otherwise would have failed minimum fixed-charge and maximum leverage tests amid the impairment, debt levels and lower-than-expected operating income. An August 2, 2012 amendment revised covenants, added minimum-liquidity and senior-leverage tests, increased the letter-of-credit sublimit to $150 million, and allowed up to $450 million of impairment add-backs for certain covenant calculations. Management expected compliance with the amended covenants.
- Project claims and litigation: The company recognizes estimated recoveries on certain disputed claims in revenue; reductions in expected recovery could reduce future earnings. At June 30, costs and estimated earnings exceeding billings included $149.3 million of claims and $108.7 million of unapproved change orders; approximately $65.8 million of those combined amounts was subject to litigation or dispute resolution. Major matters include CityCenter, the Long Island Expressway/Cross Island Parkway claim ($53.8 million) and NYSDOT counterclaims ($151 million), and Brightwater, where the ultimate impact was undetermined. Management said it did not expect certain other matters to have a material effect, but outcomes remain uncertain.
- Other unusual items include a $2.7 million loss on sale of auction-rate securities in the first half and a $3.6 million discrete tax expense. Management anticipated an effective tax rate of approximately 3.9% for the remainder of 2012, primarily due to the impairment. No cash dividends were declared or paid in the first half.
Most important facts for investors to verify
- Whether the Q3 completion of the impairment analysis changes the $376.6 million charge, and whether further impairment is indicated by work-award timing, margins or market assumptions.
- Actual covenant compliance after the August 2 amendment, including minimum liquidity and senior leverage, and the company’s ongoing revolver usage and borrowing availability.
- Cash conversion and collections, especially given first-half operating cash outflow and the amount of cash held for joint ventures rather than general corporate use.
- Conversion of pending awards and low bids into executed contracts and backlog, and whether backlog stabilizes or continues to decline.
- Resolution and collectability of disputed project claims and litigation, including CityCenter, NYSDOT and Brightwater, and any resulting adjustments to recorded revenue or receivables.