Tutor Perini Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 27, 2018. Tutor Perini is a diversified construction contractor operating through Civil, Building and Specialty Contractors segments. The filing also reports fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $4.757 billion | $4.973 billion |
| Gross profit / gross margin | $454.4 million / 9.5% | $457.2 million / 9.2% |
| Income from construction operations | $179.5 million | $201.9 million |
| Net income attributable to Tutor Perini | $148.4 million | $95.8 million |
| Diluted EPS | $2.92 | $1.92 |
| Cash provided by operating activities | $163.6 million | $113.3 million |
| Reported total debt | $736.3 million | $759.5 million |
Revenue declined about 4% year over year, while income from construction operations fell about 11%. Net income and EPS rose substantially, but included a $53.3 million tax benefit from U.S. tax reform and a $37.0 million gain from a legal settlement. Excluding the tax benefit, management reported a 2017 effective tax rate of 34.3%. Interest expense increased to $69.4 million from $59.8 million.
Operating cash flow reached a post-2008-merger record, which management attributed to improved billing and collections and working-capital management. Cash and cash equivalents were $192.9 million, including $98.2 million held by joint ventures and restricted to joint-venture-related uses; cash available for general corporate purposes was $94.7 million. Working capital was $1.493 billion and the current ratio was 1.94.
At year-end, backlog was $7.283 billion, up 17% from $6.227 billion. Civil backlog rose to $4.118 billion; Building backlog declined to $1.701 billion and Specialty Contractors backlog to $1.464 billion. Management estimated that approximately $3.6 billion, or 49%, of backlog would be recognized as 2018 revenue. New awards were $5.814 billion, compared with $3.735 billion in 2016.
Segment results and material changes
- Civil: Revenue decreased 4% to $1.602 billion, while construction operating income increased 11% to $192.2 million; margin improved to 12.0% from 10.3%. Higher-margin project activity and $3.0 billion of new awards supported results and backlog growth.
- Building: Revenue fell to $1.941 billion and operating income declined 34% to $34.2 million; margin was 1.8% versus 2.5%. The decline reflected completed or winding-down projects and favorable close-out activity in 2016. Backlog decreased as revenue outpaced awards.
- Specialty Contractors: Revenue was nearly flat at $1.214 billion, but operating income fell 50% to $18.9 million; margin was 1.6% versus 3.1%. Unfavorable adjustments on certain mechanical projects were a principal factor.
Fourth-quarter 2017 revenue was $1.193 billion versus $1.247 billion in fourth-quarter 2016. Net income attributable to Tutor Perini was $80.9 million versus $30.3 million, and diluted EPS was $1.60 versus $0.60. Full-year results included substantial one-time tax and settlement gains, so quarterly and annual comparisons should be assessed in that context.
Debt, outlook, risks and unusual items
- In April 2017, the Company issued $500 million of 6.875% senior notes due 2025 and entered a $350 million revolving credit facility, using proceeds to retire its 2010 senior notes and repay the former credit facility. The revolver was undrawn at year-end, and the Company reported compliance with its covenants.
- The Company also had $200 million principal amount of 2.875% convertible notes due 2021. Management intended to settle principal in cash; conversion could dilute shareholders if circumstances or settlement intentions change. Some debt agreements restrict dividends and share repurchases; none were paid or made in 2017.
- Management described the growth outlook as favorable, particularly for Civil, citing infrastructure funding measures, public spending plans, and prospective projects. It expected Building backlog to grow in 2018. These are expectations, not quantified earnings guidance; the filing provides no clear numerical EPS or revenue forecast.
- Key execution risks include estimating costs and claims on percentage-of-completion contracts, fixed-price cost overruns, schedule penalties, project cancellations, competition, public funding, labor availability and working-capital demands. Fixed-price contracts represented 51% of revenue and 67% of backlog.
- Costs and estimated earnings in excess of billings were $932.8 million, including $549.8 million of claims and $296.6 million of unapproved change orders. Management estimated $443.7 million of this balance would be collected beyond one year. Recovery timing and amounts are subject to dispute and estimation risk.
- Five Star Electric was cooperating with a U.S. Attorney investigation; as of year-end, the Company could not predict the outcome or reasonably estimate potential loss. The Alaskan Way Viaduct project involved ongoing litigation, and the Company said potential loss or range of loss was not reasonably estimable. Management did not expect the overall resolution of disclosed contingencies to materially harm the Company, based on information then available.
- The $37.0 million Merrill Lynch settlement resolved litigation concerning auction-rate securities, with no admission of liability by either party. The $53.3 million tax benefit primarily reflected remeasurement of deferred tax balances following the reduction in the federal corporate tax rate to 21% effective in 2018.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much of reported earnings growth persists after excluding the tax benefit and legal settlement, and whether segment margins recover.
- Backlog conversion, new awards and funding availability, especially for large Civil projects and the Building pipeline.
- Collection timing and ultimate recoveries for claims, unapproved change orders and other unbilled balances.
- Developments in the Five Star Electric investigation and Alaskan Way litigation, including any effect on costs, cash flow or project execution.
- Accessible liquidity after distinguishing general-purpose cash from joint-venture cash, and the Company’s ability to meet debt obligations and covenants.