Tutor Perini Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; dollar amounts below are in millions unless stated otherwise.
Business context
Tutor Perini provides civil infrastructure, building construction and specialty contracting services. Its three reportable segments are Civil, Building and Specialty Contractors. The filing says interim results may not indicate full-year results.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,120.1 | $1,247.3 | $2,148.2 | $2,364.6 |
| Gross profit | $118.6 | $102.8 | $185.7 | $205.6 |
| Income from construction operations | $54.8 | $34.0 | $53.9 | $71.1 |
| Net income attributable to Tutor Perini | $24.9 | $30.1 | $12.8 | $43.9 |
| Diluted EPS | $0.49 | $0.59 | $0.25 | $0.86 |
- Q2 gross margin was approximately 10.6%, versus 8.2% a year earlier; six-month gross margin was approximately 8.6%, versus 8.7%. Q2 construction-operations margin was 4.9%, versus 2.7%; first-half margin was 2.5%, versus 3.0%.
- Six-month operating cash flow was negative $62.4, compared with negative $34.6 in 2017. Investing cash flow was negative $44.8, including $48.3 of property and equipment purchases; financing cash flow was positive $51.5. Cash, cash equivalents and restricted cash ended at $142.0.
- At June 30, cash and cash equivalents were $138.6, including $51.4 available for general corporate purposes. Working capital was $1.5 billion and the current ratio was 1.97.
- Total debt was $822.6, up from $736.3 at year-end 2017; debt-to-equity was 0.48. The $350 million revolving facility had $258 million available. The company reported compliance with its covenants: leverage ratio 3.35 against a 3.50 maximum and fixed-charge coverage 2.62 against a 1.25 minimum.
Changes versus the prior comparable period
- Revenue declined 10% in Q2 and 9% in the first half, mainly due to reduced or completed project activity in Building and lower activity on Civil mass-transit projects, including delays on a large California project.
- Q2 construction-operations income rose from the prior-year quarter, reflecting the absence of unfavorable Specialty Contractors adjustments recorded in 2017. First-half income fell, including a $17.8 charge from an unfavorable arbitration decision on a completed New York Civil project.
- Prior-year net income benefited from a $37.0 litigation settlement related to auction-rate securities, contributing approximately $0.43 to diluted EPS. This made year-over-year net income and EPS comparisons less favorable in 2018. Interest expense fell partly because 2017 included debt-restructuring costs.
- Backlog increased 19% from December 31, 2017 to $8.7 billion. New awards were $3.6 billion for the first half, compared with $3.7 billion in 2017.
Outlook, risks and unusual items
- Management described the outlook over the next several years as favorable, particularly for Civil and Specialty Contractors, citing public infrastructure funding plans, prospective projects and continued public- and private-sector demand. No numerical earnings or revenue guidance was provided.
- Remaining performance obligations at June 30 were $4.3 billion in Civil, $2.0 billion in Building and $1.6 billion in Specialty Contractors. Backlog is a separate measure and may include awards without an executed contract or notice to proceed.
- Contract estimates depend on judgments about total costs, claims, change orders and other variable consideration. Contract assets totaled $1.576 billion, including $646.3 million of claims and $334.8 million of unapproved change orders; recovery timing and amounts remain uncertain.
- Material disputes include the Long Island Expressway matter, Fontainebleau, and the Alaskan Way Viaduct project. For the Seattle tunnel project, the company said potential loss from insurer denial and WSDOT legal actions was neither probable nor remote, but could not be reasonably estimated; anticipated recoveries were included in recorded assets.
- The company could not predict the outcome or estimate potential loss from a U.S. Attorney’s Office investigation involving its Five Star Electric subsidiary. Management said it did not expect the identified disputes, based on current information, to have a material adverse effect overall.
- The 2018 effective tax rates were 30.0% for Q2 and 31.2% for the first half, reflecting the lower federal statutory rate under the Tax Act, partly offset by other tax items. Adoption of ASC 606 modestly reduced reported 2018 net income attributable to Tutor Perini by $0.6 million for Q2 and $0.9 million for the first half; prior-year comparisons were not restated.
Important facts for investors to verify
- Whether the large claims and unapproved change-order balances convert to approved billings and cash, and how quickly retainage is collected.
- Progress, schedule and cost performance on delayed or major projects, particularly the California mass-transit work and the Seattle tunnel project.
- Whether backlog converts into profitable work; review contract mix, cancellations, new awards and project execution risks.
- Debt and covenant headroom, given higher debt, limited remaining revolver availability and a reported leverage ratio near the covenant ceiling.
- Developments in the Five Star investigation and material litigation, including any changes to estimated recoveries or potential losses.