Tutor Perini Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. Unaudited consolidated financial statements. Dollar amounts are in millions unless otherwise noted.
Business context and financial performance
Tutor Perini provides civil, building, and specialty contracting services. Third-quarter revenue was essentially flat year over year; earnings improved substantially, reflecting stronger segment performance and the effect of prior-year project and litigation charges.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,333.0 | $1,340.7 | $3,726.5 | $3,719.6 |
| Gross profit | $124.7 | $100.2 | $339.5 | $289.6 |
| Gross margin | 9.4% | 7.5% | 9.1% | 7.8% |
| Income from construction operations | $60.9 | $39.0 | $149.9 | $89.9 |
| Net income | $28.8 | $19.7 | $65.6 | $36.6 |
| Diluted EPS | $0.57 | $0.40 | $1.32 | $0.74 |
| Interest expense | $15.0 | $11.2 | $44.7 | $33.9 |
Operating margin (income from construction operations divided by revenue) was 4.6% for Q3 and 4.0% for the first nine months, versus 2.9% and 2.4% in the comparable 2015 periods. The effective tax rate was 39.9% for Q3 and 40.6% year to date.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $94.2, up from $20.7 in 2015. The company attributed the improvement to higher profitability and lower net working-capital investment, including improved collections; $89.6 was generated in Q3.
- Investing cash outflow was $12.0, mainly for property and equipment. Financing cash inflow was $13.1, including convertible-note proceeds and net borrowings, partly offset by debt repayments and $14.9 of debt issuance costs. Cash and equivalents ended the period at $170.7, up from $75.5 at year-end 2015; restricted cash was $48.7.
- Total debt was $793.1, including $108.9 current maturities; year-end 2015 total debt was $817.7. Working capital was $1.2 billion, current ratio 1.78, and debt-to-equity ratio 0.52.
- Revolver availability was $139.3 at September 30. The company reported compliance with credit-facility covenants; its actual leverage ratio was 3.55 against a permitted maximum of 4.25, and fixed-charge coverage was 1.79 against a minimum of 1.25.
- The 2014 credit facility matures May 1, 2018, earlier than its original June 2019 maturity. Amendments added liquidity and cash-collection requirements, increased collateral, raised borrowing costs at specified leverage levels, and require additional quarterly term-loan payments beginning in Q4 2016.
Material changes and segment results
- Revenue was nearly unchanged year over year, while nine-month construction operating income rose 67%. The comparison benefited from 2015 charges, including a $23.9 litigation-related charge in Civil and $21.4 of Building project cost-estimate charges for the nine-month period.
- Civil: Nine-month revenue fell 13% to $1,260.4, but operating income increased to $129.0 from $120.1. Backlog was $2.8 billion, approximately unchanged from September 2015.
- Building: Nine-month revenue rose 16% to $1,533.8; operating income was $39.0 versus a prior-year operating loss of $8.1. Backlog was $2.2 billion versus $2.7 billion a year earlier.
- Specialty Contractors: Nine-month revenue declined modestly to $932.3 and operating income fell to $25.9 from $29.0. Q3 operating income improved to $11.1 from $4.7, partly because Q3 2015 included $13.9 of unfavorable project adjustments.
- New awards were $3.0 billion for the first nine months, compared with $3.4 billion in 2015. Backlog was $6.7 billion at September 30, 2016, down from $7.5 billion a year earlier; revenue burn exceeded awards in Building and Specialty Contractors.
Outlook, commentary and risks
Management described the outlook as favorable, citing backlog, anticipated public infrastructure spending, the FAST Act, and prospective civil projects. It expected significant award activity, but gave no quantified earnings or revenue guidance. Management also noted strong competition in Civil and possible softer demand for luxury condominiums in Florida and New York and commercial office space in New York. The filing cautions that interim results may not indicate full-year results.
- Claims and unapproved change orders are significant estimates: costs and estimated earnings in excess of billings totaled $820.2, including $435.9 of claims and $183.8 of unapproved change orders. Recovery depends on agreement or resolution with counterparties.
- Five Star Electric is cooperating with a U.S. Attorney investigation covering 2005–2014, including business-enterprise and employee compensation, benefits, and tax practices. The company said it could not predict the outcome or estimate potential liability.
- For the Alaskan Way Viaduct project, disputes with WSDOT and insurers over tunnel-boring-machine damage remain unresolved; trials were scheduled for 2017 and 2018. Management assessed potential material adverse impact from the legal actions as neither probable nor remote.
- Other disclosed disputes include the Long Island Expressway/Cross Island Parkway claim, Fontainebleau, Westgate Planet Hollywood, and NOAA. Project recoveries are included in revenue estimates and could change as claims resolve.
- The company issued $200 million of 2.875% convertible senior notes due 2021. The filing reports a $150.5 million net carrying amount after discounts and issuance costs; related non-cash interest contributed to higher reported interest expense.
- Management identified risks including inaccurate project estimates, delayed collections, contract disputes, schedule or cost overruns, failure to meet debt obligations, competition, reduced public spending, and joint-venture partner performance. It reported effective disclosure controls and no material change in internal controls over financial reporting.
Important facts for investors to verify
- Collection, timing, and ultimate recovery of claims and unapproved change orders included in the $820.2 million contract asset balance.
- Cash availability and compliance with amended credit-facility covenants, including cash-collection milestones and additional principal-payment requirements.
- Outcome and potential financial consequences of the Five Star investigation and the Alaskan Way, NOAA, and other significant project disputes.
- Whether new awards replenish backlog, particularly in Building and Specialty Contractors, and whether management’s favorable infrastructure outlook translates into contracts.
- Project-level cost estimates and margins underlying the improvement in reported operating income, given the impact of prior-period adjustments on comparisons.