Tutor Perini Corporation — Q2 2017 Form 10-Q
Business context and period. Tutor Perini is a construction contractor operating through Civil, Building and Specialty Contractors segments. This unaudited filing covers the quarter and six months ended June 30, 2017, compared with the same 2016 periods; balance-sheet comparisons are to December 31, 2016. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $1,247.3m | $1,308.1m | $2,364.6m | $2,393.5m |
| Gross profit / margin | $102.8m / 8.2% | $109.8m / 8.4% | $205.6m / 8.7% | $214.9m / 9.0% |
| Income from construction operations / margin | $34.0m / 2.7% | $48.8m / 3.7% | $71.1m / 3.0% | $89.0m / 3.7% |
| Net income attributable to Tutor Perini | $30.1m | $21.4m | $43.9m | $36.8m |
| Diluted EPS | $0.59 | $0.43 | $0.86 | $0.74 |
| Interest expense | $22.5m | $15.5m | $38.1m | $29.6m |
Higher reported net income and EPS reflected a $37.0m cash settlement gain recognized in Q2, partly offset by weaker construction operating results. The settlement was recorded in other income; it is not recurring construction income. Interest expense rose largely because of non-cash debt-extinguishment costs associated with the April refinancing.
Cash flow, liquidity and debt
- H1 operating cash flow was negative $34.6m, versus positive $4.6m in H1 2016. Management attributed the outflow chiefly to working-capital investment, timing of vendor and subcontractor payments, and incentive compensation payments, despite the settlement receipt and improved collections.
- H1 investing cash outflow was $17.7m, including $9.3m invested in restricted securities and $8.2m in property and equipment. Financing provided $79.1m, principally reflecting net borrowings.
- Cash and cash equivalents were $172.9m at June 30, versus $146.1m at year-end. Management reported $77.2m available for general corporate purposes; much of the balance was joint-venture cash for JV-related uses. Restricted cash and restricted investments totaled $61.3m.
- Working capital was $1.5bn; current ratio was 2.07. Total debt was $862.7m, versus $759.5m at year-end; debt-to-equity was 0.54 versus 0.49. Cash balances include amounts not necessarily available for general corporate use.
- April refinancing: issued $500m of 6.875% senior notes due 2025 and entered a $350m revolving facility due 2022, subject to an earlier maturity provision if Convertible Notes remain outstanding on December 17, 2020. Proceeds refinanced the 2010 notes and 2014 credit facility. At June 30, $225m remained available on the revolver. The company reported compliance with covenants; trailing fixed-charge coverage was 2.18 against a 1.25 minimum, and leverage was 2.79 against a 4.00 maximum.
Changes, segments and backlog
- Revenue declined 5% in Q2 and 1% in H1 year over year. Construction operating income fell 30% in Q2 and 20% in H1.
- Civil: Q2 revenue was $472.6m and construction operating income $58.1m, up from $465.7m and $45.1m. H1 operating income increased to $90.0m from $78.7m; stronger mass-transit work and margins were partly offset by lower activity on other projects.
- Building: Q2 revenue was $492.8m and operating income $5.7m, down from $523.5m and $13.2m. H1 operating income declined to $11.0m from $25.7m, reflecting project closeouts, lower activity and prior-year favorable closeouts.
- Specialty Contractors: Q2 revenue was $281.9m and the segment recorded a $14.0m operating loss, versus $318.9m revenue and $5.4m income. H1 income fell to $0.8m from $14.8m. Management cited unfavorable adjustments on certain New York mechanical projects nearing completion; none was individually material.
- Backlog rose to $7.56bn at June 30 from $6.23bn at year-end and $7.3bn a year earlier. H1 awards were $3.70bn, led by $2.35bn in Civil. Backlog mix was approximately 56% Civil, 24% Building and 20% Specialty Contractors.
Outlook, risks and unusual items
Management described the multi-year growth outlook as favorable, particularly for Civil, citing a strong backlog, prospective transportation and infrastructure spending, voter-approved funding measures, California’s transportation bill and federal programs. It expected further Civil awards and noted Building awards could follow later in 2017. These are qualitative expectations, not quantified earnings or revenue guidance; the filing provides no specific full-year financial forecast. Management also cautioned that results for the interim period may not indicate full-year results.
- Project-estimate risk is material: contract costs, claims, change orders, scheduling and recoveries can affect margins, working capital and cash flow. The filing reports $850.6m of costs and estimated earnings in excess of billings, including $486.1m of claims and $263.1m of unapproved change orders; collection depends on resolution and contractual processes.
- Significant matters include the Alaskan Way Viaduct tunnel dispute and related insurance litigation, with trials scheduled for 2018; the Five Star Electric federal investigation, for which potential loss could not be reasonably estimated; and other contract claims and counterclaims. Management said the ultimate resolution of disclosed matters was not expected to materially adversely affect the company, while acknowledging estimates and outcomes can change.
- The Westgate Planet Hollywood appeal was largely affirmed in May 2017; anticipated recovery was estimated to exceed $20m, subject to further proceedings and an offset hearing. A NOAA settlement was approved in July, with payment pending; it had no material impact on H1 results.
- The $37.0m Merrill Lynch settlement was received in June and litigation dismissed with prejudice. The company also identified competition, project execution, government spending, joint-venture performance, debt covenant compliance and potential Convertible Notes dilution among risks.
- The company planned to adopt the new revenue-recognition standard (ASC 606) on January 1, 2018 using the modified retrospective method. Contract reviews and implementation work were ongoing; the impact was not yet determined.
Important facts for investors to verify
- How much of the Q2 earnings increase came from the one-time $37.0m settlement, and what are normalized operating earnings and margins?
- Whether the Specialty Contractors project adjustments, Building margins and Civil execution improve in subsequent periods.
- Conversion of claims, unapproved change orders, retainage and other unbilled balances into cash, and the related timing or dispute risk.
- Backlog conversion, award cancellations or scope changes, project-level profitability and the pace of infrastructure funding.
- Debt costs, refinancing terms, covenant headroom, restricted/JV cash availability and the effect of any Convertible Notes conversion.
- Developments in the Five Star investigation, Seattle tunnel disputes and other material claims, including whether recorded recovery estimates remain supportable.