Tutor Perini Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited results; dollar amounts below are in millions unless noted. Tutor Perini provides general contracting, construction management and design-build services across Building, Civil, Specialty Contractors and Management Services.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,166.4 | $731.8 | $2,601.6 | $2,511.3 |
| Gross profit | $120.4 | $90.7 | $270.0 | $265.7 |
| Income from construction operations | $62.0 | $50.0 | $117.6 | $140.0 |
| Net income | $35.5 | $30.9 | $62.1 | $84.6 |
| Diluted EPS | $0.74 | $0.65 | $1.30 | $1.73 |
| Gross margin | 10.3% | 12.4% | 10.4% | 10.6% |
| Construction operations margin | 5.3% | 6.8% | 4.5% | 5.6% |
Q3 revenue rose 59.4% and net income rose 14.7%; for the nine-month period, revenue increased 3.6% while construction operating income fell 16.0% and net income fell 26.6%. Management attributed the Q3 improvement mainly to acquisitions, partly offset by completed projects and higher interest expense. Nine-month declines reflected lower volume and margins as large Building and Civil projects were substantially completed, partly offset by acquired businesses.
Cash flow, liquidity and debt
- Operating cash flow was negative $123.9, versus negative $35.9 in the prior-year period, primarily reflecting working-capital timing, particularly Specialty Contractors collections, as well as tax and interest payments.
- Investing cash outflow was $373.9, including $337.9 net cash used for acquisitions and $39.7 for property and equipment. Financing cash inflow was $299.7. Cash declined by $198.1 to $273.3.
- At September 30, cash included $193.3 of corporate cash available for general purposes and $80.0 held by joint ventures for joint-venture uses; restricted cash was $35.8. Working capital was $682.0 and the current ratio was 1.48, down from 1.61 at year-end 2010.
- Total debt was approximately $832.8, including $73.8 current maturities and $759.0 long-term debt, versus approximately $395.7 at December 31, 2010. Long-term debt-to-equity rose to 0.55x from 0.29x. The company reported $132.0 drawn on its revolving facility, $3.0 in letters of credit and $165.0 available to borrow.
- The August credit agreement provides a $300 revolving facility and a $200 term loan, with a conditional option to increase the base facility by up to $50. The company stated it was in compliance with covenants. Its $300 senior notes bear 7.625% interest and mature in 2018.
Material developments and outlook
- The company completed a major acquisition program: Fisk, Anderson, Frontier-Kemper, Becho, GreenStar and Lunda. Management said the acquired businesses had combined 2010 revenue of approximately $1.7 billion and backlog of approximately $2.6 billion at their respective acquisition dates. GreenStar and Lunda were acquired in July; their reported results materially contributed to Q3.
- Backlog was approximately $6.45 billion at September 30, up from $4.28 billion at year-end 2010. New business awarded during the nine months was $4.77 billion, including acquired work. Backlog is not a guarantee of future revenue or profit.
- A new Specialty Contractors segment was formed to support vertical integration and more self-performed work. Management described the acquisition strategy as complete and said it expected greater self-performed work and higher-margin public works opportunities. The filing provides no specific earnings or revenue guidance.
- Reported Q3 other income included a $4.0 bargain-purchase gain from Frontier-Kemper. Acquisition-related amortization and financing costs also affected results; nine-month interest expense increased to $26.0 from $6.4.
- Acquisition purchase-price allocations were preliminary. Goodwill was $881.5 at quarter-end, up from $621.9 at year-end, and intangible assets were $203.1 versus $132.6.
- Costs and estimated earnings in excess of billings totaled $374.3, including $139.3 of unapproved change orders and $104.0 of claims. Approximately $87.2 of the combined change orders and claims balance was subject to pending litigation or dispute resolution; reductions in expected recovery could reduce future earnings.
- Major disclosed disputes include CityCenter, where approximately $222 of contract receivables were recorded and a $313 mechanic’s lien remained; the Central Artery/Tunnel matter, including disputed awards; and other claims involving Brightwater, Queensridge and insurance coverage. Management stated it did not expect certain matters, including CityCenter, to have a material adverse effect, but outcomes remain uncertain.
- Approximately $88.1 of auction-rate securities remained invested at quarter-end; $21.1 was redeemed at par after quarter-end, while $67.1 remained classified as long-term. Management said this did not materially impair overall liquidity given cash and credit availability.
Most important facts for investors to verify
- Whether operating cash flow improves as acquired-company receivables and working-capital balances convert to cash.
- Recoverability and timing of the $374.3 costs and estimated earnings in excess of billings, particularly disputed claims and unapproved change orders.
- Progress, settlement exposure and cash impact of CityCenter and other material litigation and claims.
- Debt levels, interest costs, covenant headroom and available borrowing capacity following the acquisition-driven increase in leverage.
- Whether acquired businesses deliver sustainable margins and integration benefits, and whether preliminary purchase-price allocations or goodwill change materially.
- Backlog conversion, project profitability and the effect of completed large projects on legacy Building and Civil operations.