Tutor Perini Corporation — FY 2015 Form 10-K
Business context and reporting period. Tutor Perini is a diversified construction contractor operating through Civil, Building and Specialty Contractors segments. This filing covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. Revenue is recognized primarily using percentage-of-completion accounting, which depends on estimates of total project costs and recoveries.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $4.920 billion | $4.492 billion |
| Gross profit / gross margin | $356.3 million / 7.2% | $505.4 million / 11.2% |
| Income from construction operations | $105.4 million | $241.7 million |
| Net income | $45.3 million | $107.9 million |
| Diluted EPS | $0.91 | $2.20 |
| Operating cash flow | $14.1 million | $(56.7) million |
| Capital expenditures | $35.9 million | $75.8 million |
| Year-end backlog | $7.465 billion | $7.832 billion |
Revenue increased about 9.5%, but construction operating income fell about 56% and net income fell about 58%. Gross margin was approximately 7.2%; construction operating margin was approximately 2.1%, compared with 5.4% in 2014. The 2015 effective tax rate was 38.7%, versus 42.4%.
Year-end cash and cash equivalents were $75.5 million, down from $135.6 million; only $18.4 million was Company cash available for general purposes, while $57.0 million represented the Company’s share of joint-venture cash restricted to joint-venture uses. Restricted cash was an additional $45.9 million. Working capital was $1.162 billion and the current ratio was 1.79. Total debt was $823.4 million, down from $865.4 million; debt-to-equity was 0.58. The $300 million revolver had $158.0 million drawn and $141.8 million available at year-end.
Material changes and unusual items
- Civil revenue grew 12% to $1.890 billion, while operating income declined to $145.2 million from $220.6 million; margin fell to 7.7% from 13.1%.
- Building revenue rose 20% to $1.803 billion, but the segment reported a $1.2 million operating loss, versus $24.7 million income. A $24.3 million unfavorable cost-to-complete adjustment on a New York office project was a principal factor.
- Specialty Contractors revenue declined 6% to $1.228 billion and operating income fell to $15.7 million from $51.0 million. Unfavorable adjustments totaling $45.6 million affected Five Star Electric projects; most were complete or nearing completion.
- A $23.9 million non-cash, pre-tax charge followed an adverse appellate decision in the Brightwater matter, reducing diluted EPS by $0.28. Management’s adjusted measure, excluding this charge only, was diluted EPS of $1.19; it does not exclude the other project charges. Favorable runway-project adjustments added $13.7 million to operating income, or $0.16 per diluted share.
- Backlog declined about 5% year over year as Civil and Specialty Contractors work-off exceeded new awards, partly offset by Building awards. Approximately $4.4 billion, or 59%, was expected to convert to revenue in 2016. New awards were $4.554 billion, down from $5.370 billion.
Cash, debt and covenant developments
Operating cash flow turned positive from 2014, but remained modest relative to net income. Working capital absorbed cash, including increases in costs and estimated earnings in excess of billings; the company cited claims and unapproved change orders as a significant use of working capital. That asset balance reached $905.2 million, including $407.2 million of claims and $270.0 million of unapproved change orders; management estimated $353.2 million would be collected beyond one year.
At December 31, 2015, the Company was out of compliance with the original credit facility’s leverage and fixed-charge coverage covenants: actual ratios were 4.81:1 versus a maximum 3.50:1, and 1.11:1 versus a minimum 1.25:1, respectively. On February 26, 2016, lenders waived the violations and amended the facility. The revolver and term loan maturity moved to May 1, 2018; leverage limits, pricing, collateral and liquidity requirements were tightened or revised, and cash-collection milestones and additional term-loan payments were imposed. The filing states the Company was in compliance with the amended covenants as of the filing date. Debt agreements restricted dividends and share repurchases; none were made in 2015.
Outlook, commentary and risks
Management described the outlook as favorable, citing the $7.5 billion backlog, prospective awards, expected public infrastructure spending and the 2015 FAST Act. It expected Building to achieve strong revenue growth and return to profitability in 2016. This is qualitative outlook rather than consolidated numerical earnings guidance. Management also expected Civil backlog to grow after a $663 million New York mass-transit award in January 2016. The Company identified approximately $3.6 billion of pending awards at year-end, including projects that were subsequently awarded in January 2016.
- Major risks include project cost-estimation errors, fixed-price and guaranteed-maximum-price overruns, schedule penalties, delayed recovery of claims and change orders, and potential backlog cancellations or scope reductions.
- Five Star Electric was cooperating with a U.S. Attorney’s Office investigation covering 2005–2014, including its use of certain disadvantaged-business enterprises and employee compensation, benefit and tax practices. The Company could not predict the outcome or estimate potential liability.
- Brightwater litigation, the Alaskan Way Viaduct tunnel and insurance disputes, and other contract claims remain matters to monitor. For the Alaskan Way matter, management said a material adverse impact from the respective legal actions was neither probable nor remote.
- Other risks include high indebtedness and covenant compliance, government funding and competition, labor and subcontractor availability, weather, geographic concentration in California and New York, international and government-contract exposure, and impairment of goodwill. Goodwill was $585.0 million; no impairment was recorded in 2015.
Most important facts for investors to verify
- Whether the amended credit-facility covenants, minimum liquidity terms and cash-collection milestones were met after filing, and whether revolver availability remained adequate.
- Cash conversion and collections on the $905.2 million of costs and estimated earnings in excess of billings, especially the $677.2 million attributed to claims and unapproved change orders.
- Whether the Five Star Electric project charges were substantially final and whether the federal investigation resulted in additional costs, penalties or restrictions.
- Execution and profitability of the Building segment backlog, including the office-project cost adjustment and management’s stated 2016 return-to-profitability expectation.
- Resolution and recoverability assumptions for significant claims and legal matters, including Brightwater, Alaskan Way, NOAA and other project disputes.