Tutor Perini Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results; amounts below are U.S. dollars unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,123.1m | $1,199.5m | $3,271.4m | $3,564.1m |
| Gross profit | $111.1m | $118.3m | $296.8m | $323.8m |
| Income from construction operations | $47.3m | $49.1m | $101.2m | $120.1m |
| Net income attributable to Tutor Perini | $21.3m | $23.6m | $34.0m | $67.4m |
| Diluted EPS | $0.42 | $0.47 | $0.68 | $1.33 |
- Gross margin was approximately 9.9% in Q3 and 9.1% for the first nine months, broadly similar to the respective 2017 periods. Construction-operations margin was 4.2% for Q3 and 3.1% year to date, versus 4.1% and 3.4% in 2017.
- Operating cash flow was negative $34.8m for the nine months, versus positive $1.9m in 2017. Investing activities used $58.5m, including $64.4m for property and equipment. Financing activities provided $17.3m.
- Cash and cash equivalents were $118.3m at September 30, including only $53.9m available for general corporate purposes; much of the balance was joint-venture cash restricted to related uses. Restricted cash and investments totaled $56.6m.
- Total debt was $801.3m, up from $736.3m at year-end 2017. Working capital was approximately $1.55bn; the current ratio was 1.94. The company reported $272m available under its $350m revolver and was in compliance with its debt covenants.
Business context and changes versus prior period
Tutor Perini operates Civil, Building, and Specialty Contractors segments, primarily on long-term construction contracts. Revenue fell 6% in Q3 and 8% year to date. Management attributed the decline mainly to completion of a large California technology project in Q2 2018, with new-project activity not yet offsetting revenue from completed or winding-down work.
- Q3 segment revenue: Civil $431.5m, Building $455.5m, and Specialty Contractors $236.2m. Civil revenue increased 9% year over year; Building declined 8% and Specialty Contractors declined 24%.
- Year-to-date construction income declined primarily because of reduced contributions from the completed technology project, a Washington tunnel nearing completion, delays on a California mass-transit project, and a $17.8m first-quarter charge following an unfavorable arbitration decision on a completed New York Civil project. The charge reduced nine-month diluted EPS by $0.25.
- Year-to-date net income and EPS also compared with a 2017 period that included a $37.0m litigation cash settlement gain, equivalent to $0.43 of diluted EPS. The 2018 effective tax rate was lower—26.2% year to date versus 34.1%—mainly reflecting the federal tax-rate reduction.
- Backlog was $8.5bn, up 17% from December 31, 2017, with approximate mix of 55% Civil, 25% Building, and 20% Specialty Contractors. Nine-month awards were $4.5bn. Remaining performance obligations were reported at $8.0bn across the three segments.
Outlook, risks, and unusual items
- Management described the multi-year outlook as favorable, particularly for Civil and Specialty Contractors, citing public infrastructure funding plans and demand. It cautioned that growth could be moderated by project delays and ramp-up timing. No numerical earnings or revenue guidance was provided.
- Contract estimates, claims, change orders, and project costs involve significant judgment. At September 30, contract assets included $672.9m of claims and $349.3m of unapproved change orders within costs and estimated earnings over billings; recoverability and timing depend on negotiation, agreement, or dispute resolution.
- Material disputes include the Alaskan Way Viaduct tunnel project, where insurance rulings limited potential recovery and the company intended to appeal; management said potential loss or range of loss was not reasonably estimable. The Five Star Electric government investigation also had an outcome and potential loss that the company could not estimate.
- Other disclosed matters include the Long Island Expressway/Cross Island Parkway claim and Fontainebleau project claims. Management stated that the ultimate resolution of the discussed matters was not expected to have a material adverse effect based on then-current information, while noting estimates could change.
- The company identified risks including project cost or schedule overruns, disputed claims, delayed collection of working capital, cancellations or reduced scope, competition, government spending, joint-venture performance, covenant compliance, and potential goodwill impairment. It reported no material change to its stated risk factors.
- ASC 606 was adopted in 2018. Its effect on nine-month reported net income attributable to Tutor Perini was a $0.7m reduction versus the amount without adoption; adoption did not affect operating cash flow. The company expected the 2019 lease standard to materially increase reported assets and liabilities, with no material income-statement or cash-flow impact expected.
Important facts for investors to verify
- Whether working-capital investment, contract asset growth, and negative year-to-date operating cash flow convert to cash in subsequent periods.
- Collection prospects and resolution timelines for claims, unapproved change orders, retainage, and other significant contract balances.
- Project execution and profitability on major awards, including the Newark Airport Terminal One and Purple Line projects, and the effect of delayed or completed projects on revenue.
- Updates on the Alaskan Way Viaduct dispute and Five Star Electric investigation, including any change in estimated recoveries, exposures, or contingencies.
- Debt levels, revolver availability, covenant headroom, and the restricted or joint-venture nature of a substantial portion of reported cash.