Tutor Perini Corporation — FY 2018 Form 10-K
Business context and period. Tutor Perini is a diversified construction contractor operating in Civil, Building and Specialty Contractors. This filing reports the fiscal year ended December 31, 2018; quarterly figures below are unaudited.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $4.455 billion | $4.757 billion |
| Gross profit / margin | $454.5 million / 10.2% | $454.4 million / 9.6% |
| Income from construction operations | $191.9 million | $179.5 million |
| Net income attributable to Tutor Perini | $83.4 million | $148.4 million |
| Diluted EPS | $1.66 | $2.92 |
| Cash provided by operating activities | $21.4 million | $163.6 million |
| Capital expenditures | $77.1 million | $30.3 million |
| Total debt | $761.5 million | $736.3 million |
| Working capital / current ratio | $1.578 billion / 1.99 | $1.493 billion / 1.94 |
Revenue declined 6.4%; construction income rose 6.9%, while attributable net income fell 43.8%. The effective tax rate was 26.3%, versus a 2017 benefit-driven rate of (0.4%). Cash and cash equivalents were $116.1 million, but only $51.7 million was identified as available for general corporate purposes; much of the remainder was held for joint-venture uses. The $350 million revolving facility had $309 million available. The company reported compliance with its debt covenants.
Margins and earnings reflect uneven segment results: Civil operating margin was 10.6% (12.0% in 2017), Building 2.4% (1.8%), and Specialty Contractors 4.3% (1.6%). Interest expense was $63.5 million. Debt included $500 million of 6.875% senior notes due 2025 and $200 million principal of 2.875% convertible notes due 2021.
In Q4 2018, revenue was $1.183 billion versus $1.193 billion in Q4 2017; income from construction operations was $90.7 million versus $59.3 million, and diluted EPS was $0.98 versus $1.60.
Material changes and backlog
- Backlog increased 28% to $9.297 billion, from $7.283 billion, following $6.468 billion of new awards. Approximately $4 billion, or 45%, was expected to convert to revenue in 2019.
- Backlog by segment: Civil $5.142 billion, Building $2.333 billion, and Specialty Contractors $1.822 billion. State and local agencies represented 72% of backlog; fixed-price contracts were 80%, up from 67%.
- Revenue fell in Building, principally as a large California technology project completed, and in Specialty Contractors, reflecting lower activity on New York electrical and California transit work. Civil revenue was slightly lower.
- Operating income improved despite lower revenue, aided by lower G&A costs and better Specialty Contractors and Building performance. A $17.8 million charge related to an adverse arbitration decision on a completed Civil project in New York partly offset the improvement.
- Operating cash flow dropped sharply, mainly due to increased working-capital investment, including a $108.6 million greater increase in costs and estimated earnings in excess of billings than in 2017. 2017 cash flow also included a $37 million legal settlement receipt.
Outlook, risks, contingencies, and unusual items
Management described the growth outlook over the next several years as favorable, particularly for Civil and Specialty Contractors, citing public infrastructure funding plans, voter-approved transportation measures and a strong prospective project pipeline. It cautioned that growth could be moderated by project delays, completion timing and ramp-up. The filing gives no quantified earnings or revenue guidance.
- Contract revenue and profit depend on estimates of costs, claims, change orders, project schedules and recoveries. At year-end, contract assets included $698.3 million of claims and $354.0 million of unapproved change orders; management estimated $529.3 million of costs and estimated earnings in excess of billings would be collected beyond one year.
- Material legal matters include the Five Star Electric investigation, for which the company could not estimate a potential loss; the Alaskan Way Viaduct project disputes and litigation, with potential loss not reasonably estimable; and other project claims and counterclaims. Management stated that the overall resolution of disclosed contingencies was not expected to materially harm financial position, results or cash flows, but outcomes remain uncertain.
- Other notable nonrecurring comparison items: 2017 included a $37.0 million legal-settlement gain and a $53.3 million one-time tax benefit from U.S. tax reform. The 2018 arbitration charge was primarily non-cash.
- Goodwill and indefinite-lived intangible assets totaled approximately $635.4 million. No impairment was recorded; Specialty Contractors’ estimated fair value exceeded carrying value, but not by a significant amount.
- Key risks include fixed-price cost overruns, delayed or disputed customer payments, backlog cancellation or reduced scope, labor and subcontractor availability, government funding changes, litigation, joint-venture exposure, and debt covenant or liquidity pressure. The company also noted potential dilution from convertible notes, though it intended to repay principal in cash.
The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective. The company adopted ASC 606 in 2018, with an immaterial reduction to opening retained earnings; it expected lease accounting adoption in 2019 to increase assets and liabilities by approximately $40–$50 million, with immaterial income-statement and cash-flow effects.
Most important facts for investors to verify
- Whether low operating cash flow and elevated unbilled contract assets convert into cash, particularly claims and unapproved change orders.
- Project-level cost estimates, margins and collections within the $9.3 billion backlog, especially the 80% fixed-price portion and expected 2019 revenue conversion.
- Developments and potential financial exposure in the Five Star Electric investigation and Alaskan Way Viaduct disputes, as well as the status of major project claims.
- Liquidity and debt-service capacity, including availability under the revolving facility, covenant headroom, and the 2021 convertible-note maturity/conversion terms.
- Whether Specialty Contractors’ goodwill valuation retains adequate headroom and whether segment margins are sustainable as projects ramp up or close out.