Tutor Perini Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Tutor Perini provides civil, building, and specialty contracting services. Unless noted, figures are in millions of dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,199.5 | $1,333.0 | $3,564.1 | $3,726.5 |
| Gross profit | $118.3 | $124.7 | $323.8 | $339.5 |
| Income from construction operations | $49.1 | $60.9 | $120.1 | $149.9 |
| Net income attributable to Tutor Perini | $23.6 | $28.8 | $67.4 | $65.6 |
| Diluted EPS | $0.47 | $0.57 | $1.33 | $1.32 |
| Operating cash flow | Not separately provided for the quarter in the statements | $1.9 | $94.2 |
Gross margin was approximately 9.9% in Q3 (9.4% prior year) and 9.1% for the first nine months (9.1% prior year). Income from construction operations as a share of revenue was approximately 4.1% and 3.4%, respectively, versus 4.6% and 4.0% in the comparable 2016 periods.
- Liquidity: Cash and cash equivalents were $221.9 at September 30, including cash associated with joint ventures; $84.2 was available for general corporate purposes. Working capital was $1.6 billion, the current ratio was 2.07, and restricted cash and investments totaled $66.2.
- Debt: Total debt was $886.3, compared with $759.5 at December 31, 2016. The company reported $855.3 of long-term debt, net of current maturities and discounts. It had $197 million available under its $350 million revolving facility and reported compliance with its covenants.
- Balance-sheet items: Costs and estimated earnings in excess of billings were $902.3, including $505.1 of claims and $295.2 of unapproved change orders. Accounts receivable included $574.7 of retainage.
Changes versus the prior period
- Q3 revenue fell about 10%; nine-month revenue declined about 4%. Management attributed the decreases mainly to reduced activity on completed or near-completion projects, partly offset by increased mass-transit and hospitality work.
- Nine-month construction operating income declined about 20%, primarily reflecting unfavorable second-quarter adjustments on certain New York mechanical projects and higher G&A expenses. Q3 operating income also fell, mainly with lower activity on projects in the Midwest and Washington.
- Nine-month net income attributable to Tutor Perini increased modestly despite weaker construction results, supported by a $37.0 legal settlement gain and a lower effective tax rate. The settlement contributed approximately $0.44 per diluted share.
- Operating cash flow fell to $1.9 from $94.2, principally due to investment in project working capital and payment timing. Cash from operations was $36.5 in Q3.
- The April refinancing replaced the prior senior notes and credit facility with $500 million of 6.875% senior notes due 2025 and a new revolving credit facility. Debt increased, and nine-month interest expense rose to $53.7 from $44.7, partly due to noncash debt-refinancing costs.
Outlook, risks, and unusual items
- Backlog rose to $7.5 billion from $6.2 billion at year-end 2016, with approximately 58% in Civil, 21% in Building, and 21% in Specialty Contractors. Nine-month new awards were $4.8 billion, compared with $3.0 billion in 2016.
- Management described the multi-year growth outlook as favorable, particularly for Civil, citing infrastructure funding measures and public-sector spending plans. It noted that Q3 revenue was below expectations because award timing and project execution delays are expected to shift some revenue contributions to 2018. The filing gives no specific earnings or revenue guidance.
- Key risks include project cost and schedule estimation, claims and change-order recovery, competition, government spending, working-capital demands, joint-venture obligations, debt covenant compliance, and legal outcomes. The filing says there were no material changes to previously disclosed risk factors.
- Management said it did not expect the ultimate resolution of disclosed legal matters, taken together, to materially adversely affect financial position, results, or cash flows. However, the potential loss from the Five Star Electric investigation could not be reasonably estimated. For the Alaskan Way Viaduct disputes, the potential adverse loss was neither probable nor remote and could not be reasonably estimated; estimated recoveries are recorded in the financial statements.
- The $37.0 Merrill Lynch settlement was received and recognized in Q2 2017. The NOAA settlement was paid in Q3 and did not materially affect reported results. Adoption of revenue-recognition guidance was planned for January 1, 2018; the company did not expect a material impact on results but anticipated balance-sheet presentation reclassifications.
Most important facts for investors to verify
- Whether the large claims and unapproved change-order balances convert to cash on the timing and amounts assumed in reported revenue.
- Whether project working capital and operating cash flow improve as projects progress and billing/payment cycles normalize.
- Execution, profitability, and timing of the $7.5 billion backlog, including whether delayed revenue shifts into 2018 as management expects.
- Debt levels, available revolver capacity, covenant headroom, and refinancing costs under the new capital structure.
- Developments in the Five Star investigation and Alaskan Way and other major disputes, including any changes to estimated recoveries or potential losses.