Tutor Perini Corporation — 2016 Form 10-K Summary
Business context and reporting period: Tutor Perini is a diversified construction contractor providing general contracting, construction management, design-build and specialty trade services. Its Civil, Building and Specialty Contractors segments serve public agencies and private owners. This annual filing covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing.
Key financial results
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Revenue | $4.973 billion | $4.920 billion | Up 1.1% |
| Gross profit | $457.2 million | $356.3 million | Gross margin approximately 9.2%, versus 7.2% |
| Income from construction operations | $201.9 million | $105.4 million | Operating margin approximately 4.1%, versus 2.1% |
| Net income | $95.8 million | $45.3 million | Net margin approximately 1.9%, versus 0.9% |
| Diluted EPS | $1.92 | $0.91 | More than doubled |
| Operating cash flow | $113.3 million | $14.1 million | Improved by $99.3 million |
| Capital expenditures | $15.7 million | $35.9 million | Lower year over year |
| Year-end backlog | $6.227 billion | $7.465 billion | Down 16.6%; about $3.4 billion expected to be recognized in 2017 |
| New awards | $3.735 billion | $4.554 billion | Below revenue burn |
Segments and operating performance
- Civil: Revenue was $1.669 billion, down 12%; construction operating income was $172.7 million and margin was 10.3%, up from 7.7%. Lower activity on completed or nearing-completion projects was partly offset by work on major tunnel and mass-transit projects.
- Building: Revenue was $2.070 billion, up 15%; operating income was $51.6 million versus a $1.2 million loss. Margin improved to 2.5% from negative 0.1%, reflecting stronger performance and the absence of prior-year cost revisions.
- Specialty Contractors: Revenue was $1.234 billion, essentially flat; operating income rose to $37.9 million from $15.7 million, and margin improved to 3.1% from 1.3%. Management described 2016 as a transition year for New York operations and anticipated further margin improvement in 2017.
Liquidity, debt and financial position
- Year-end cash and cash equivalents were $146.1 million, compared with $75.5 million. This included $96.6 million of the Company’s share of joint-venture cash, available for joint-venture-related uses; cash available for general corporate purposes was $49.5 million. Restricted cash was an additional $50.5 million.
- Working capital was $1.319 billion and the current ratio was 1.87, compared with $1.160 billion and 1.80 in 2015. Stockholders’ equity was $1.553 billion.
- Reported total debt was $759.5 million, down from $817.7 million. Debt to equity was 0.49, versus 0.58. The $200 million of 2.875% convertible notes issued in June 2016 are due in 2021; proceeds were used principally to repay credit-facility borrowings. Their reported carrying value was $152.7 million after accounting discounts.
- The $300 million revolver had $147.3 million of unused availability at year-end. The amended credit facility matures May 1, 2018, earlier than its original 2019 maturity. The Company reported compliance with its financial covenants: fixed-charge coverage of 2.08 versus a 1.25 minimum, and leverage of 2.79 versus a 3.25 maximum at year-end.
- Management said cash from operations, available credit capacity and cash were sufficient for operating requirements for at least the next 12 months. Variable-rate net borrowings were approximately $211.3 million; a 0.50 percentage-point rate increase was estimated to raise annual interest expense by approximately $1.1 million.
Material changes, outlook and key risks
- Results rebounded from 2015, when the Company recorded unfavorable project adjustments of $45.6 million for Five Star Electric, $24.3 million for a New York Building project and $23.9 million related to the Brightwater litigation matter. 2015 also included a favorable $13.7 million Civil project adjustment. In 2016, the Specialty Contractors segment recorded offsetting favorable and unfavorable project adjustments of $14.0 million and $13.8 million.
- Management characterized the growth outlook over the next several years as favorable, particularly for Civil, citing infrastructure funding measures, the federal FAST Act, prospective public projects and private-sector demand. These are expectations, not formal company earnings guidance. A joint venture led by Tutor Perini was awarded a $1.4 billion Los Angeles Purple Line project in January 2017; the Company expected to consolidate its results beginning in first-quarter 2017.
- Backlog contracted as Building and Specialty Contractors revenue burn exceeded awards. Backlog is not guaranteed revenue: projects can be cancelled or reduced, and conversion to profit depends on execution and estimates.
- Contract accounting relies on percentage-of-completion estimates. At year-end, costs and estimated earnings in excess of billings totaled $831.8 million, including $477.4 million of claims and $207.5 million of unapproved change orders. Management estimated $414.7 million would be collected beyond one year. Delays or failure to recover claims and change-order amounts could weigh on cash flow and working capital.
- Significant litigation and contingencies include project claims and counterclaims, the Alaskan Way Viaduct tunnel dispute, and a U.S. Attorney investigation involving Five Star Electric’s business practices. The filing says the Company could not predict the investigation’s outcome or estimate potential liability. Management stated that resolution of the matters discussed was not expected to materially harm the Company’s financial position, results or cash flows, based on information then available.
- Other material risks include fixed-price contract overruns, schedule delays and liquidated damages, competitive bidding, government funding changes, joint-venture partner exposure, economic concentration in New York and California, and uncertainty in collection of billed and unbilled amounts. Goodwill and indefinite-lived intangible assets totaled approximately $635.4 million; 2016 impairment testing found no impairment.
- No dividends or share repurchases were made in 2016, and the Company reported no immediate plans for either; debt agreements restrict these actions. Management reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the large claims and unapproved change orders included in unbilled balances are resolved, billed and collected on the timing assumed by management.
- Whether the reported operating improvement—especially in Building and Specialty Contractors—continues without significant unfavorable project-estimate revisions.
- Backlog conversion, new awards and the effect of the 2017 Purple Line award, including the joint venture’s execution and cash requirements.
- Compliance with credit-facility covenants, available revolver capacity, debt maturities in 2018 and the Company’s ability to refinance or repay them.
- Developments in the Five Star Electric investigation and material project litigation, including any resulting costs, penalties, recoveries or restrictions on future bidding.