Tutor Perini Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless otherwise noted. Financial amounts are in U.S. dollars.
Business context
Tutor Perini provides construction and project-management services through its Civil, Building, and Specialty Contractors segments. The company reported $1.085 billion in revenue and $8.2 billion of backlog at quarter-end.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $1,085.4 million | $1,066.5 million |
| Gross profit / gross margin | $105.1 million / 9.7% | $90.8 million / 8.5% |
| Income from construction operations / margin | $40.1 million / 3.7% | $20.1 million / 1.9% |
| Interest expense | $14.1 million | $11.1 million |
| Net income | $15.4 million | $5.1 million |
| Diluted EPS | $0.31 | $0.10 |
| Operating cash flow | $15.9 million | $(2.3) million |
| Cash and cash equivalents | $90.6 million | $75.5 million at Dec. 31, 2015 |
| Total debt | $825.7 million | $817.7 million at Dec. 31, 2015 |
| Working capital / current ratio | $1.2 billion / 1.76 | $1.2 billion / 1.79 at Dec. 31, 2015 |
Capital expenditures were $4.8 million. Cash from financing was $6.4 million, including $12.3 million of net borrowings, partly offset by $5.9 million in debt issuance costs. Restricted cash was $49.2 million and is not freely available for general purposes. Management stated that cash, operating cash generation, and $116.3 million of revolver capacity should support operating needs for at least 12 months.
Material changes and segment performance
- Revenue increased 2%, while construction operating income approximately doubled, reflecting increased activity on mass-transit and building projects and lower general and administrative expenses.
- Civil revenue declined 10% to $335.9 million, but segment operating income rose 10% to $33.7 million; margin increased to 10.0% from 8.2%.
- Building revenue rose 17% to $467.7 million. The segment moved from a $2.3 million operating loss to $12.5 million of income, with margin improving to 2.7% from negative 0.6%.
- Specialty Contractors revenue fell 4% to $281.8 million and operating income fell 11% to $9.4 million. Results included net favorable project-estimate adjustments of $3.0 million, comprising a $14.0 million favorable adjustment and a $13.8 million unfavorable adjustment.
- New awards were $1.8 billion versus $1.0 billion; backlog grew to $8.2 billion from $7.8 billion a year earlier. Awards included a $663 million New York mass-transit project and a $285 million California hospitality and gaming project. Management cited approximately $1.2 billion of pending awards, primarily building projects.
Outlook, debt, risks, and unusual items
- Management described the multi-year outlook as favorable, citing backlog, expected public infrastructure spending, the FAST Act, and continued building demand. It anticipated further awards but gave no specific financial guidance; projected outcomes remain uncertain.
- On February 26, 2016, lenders waived covenant violations stemming from 2015 results, which included a $23.9 million Brightwater litigation charge and $45.6 million of Five Star Electric charges, and amended the credit agreement. The revolving facility and term loan mature May 1, 2018.
- At March 31, the company reported compliance with amended covenants: leverage ratio 3.85 versus a maximum 4.25, and fixed-charge coverage 1.58 versus a minimum 1.25. Limits tighten later in 2016. The amendment adds liquidity and cash-collection requirements, additional term-loan payments beginning Q4 2016, higher borrowing costs at elevated leverage, and expanded lender collateral; it also removes the facility’s accordion feature.
- Interest expense increased by $3.0 million, principally because of a higher average borrowing rate and write-off of deferred debt issuance costs related to the amendment, partly offset by lower average borrowings.
- Costs and estimated earnings exceeding billings totaled $858.4 million, including $395.7 million of claims and $224.3 million of unapproved change orders. Billing depends on resolution, agreement, or contract terms, making recovery timing and amounts uncertain.
- Five Star Electric is cooperating with a federal investigation covering 2005–2014, including business-enterprise usage and employee compensation, benefits, and tax practices. The company could not predict the outcome or estimate potential liability.
- For the Alaskan Way Viaduct project, the company said potential material adverse impact from insurer and Washington State legal actions was neither probable nor remote. Other significant project disputes include Long Island Expressway, Fontainebleau, NOAA, and Westgate; recorded recoveries depend on estimates and unresolved claims.
- The Q1 2016 effective tax rate was 42.4%, versus 37.5%, affected by discrete state tax items; the prior-year rate benefited from adjustments to prior tax positions.
Most important facts for investors to verify
- Whether operating cash generation and customer collections satisfy the amended credit facility’s weekly liquidity and quarterly collection requirements, and whether covenant limits tighten as scheduled.
- Cash conversion and recoverability of the $858.4 million of costs and estimated earnings in excess of billings, especially claims and unapproved change orders.
- Developments and potential financial exposure from the Five Star investigation and major project disputes, including Alaskan Way and Brightwater-related matters.
- Whether new awards and pending contracts convert to backlog and revenue, and whether project margins remain sustainable given the quarter’s estimate adjustments.