TUTOR PERINI CORP quarterly report, Q3 FY2014

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Tutor Perini Corporation — Q3 2014 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2014; unaudited. Tutor Perini provides general contracting, construction management and design-build services through Civil, Building and Specialty Contractors segments. Amounts below are in millions except per-share data.

Financial performance

  • Third quarter: Revenue was $1,250.7, up 21.4% year over year; gross profit was $140.8, and income from construction operations was $70.4. Net income was $35.7, up 50.4%; diluted EPS was $0.73 versus $0.49.
  • Nine months: Revenue was $3,290.4, up 7.0%; gross profit was $375.7, and income from construction operations was $177.3. Net income was $80.2, up 48.4%; diluted EPS was $1.64 versus $1.11.
  • Margins: Gross margin was 11.3% in Q3 versus 11.7% a year earlier; nine-month gross margin was 11.4% versus 10.6%. Construction operating margin was 5.6% in both Q3 periods and 5.4% for nine months versus 4.3%.
  • Cash flow: Operating activities used $143.4 in the first nine months, versus $11.1 used in 2013, primarily reflecting the timing of collections and a $300.8 working-capital cash outflow. Investing activities provided $7.5, including $44.5 from selling auction-rate securities, partly offset by $37.8 of property and equipment purchases. Financing activities provided $153.2. Cash and cash equivalents ended at $137.2, up from $119.9.
  • Liquidity and debt: Working capital was $1,160.2, with a current ratio of 1.83. Total debt was $945.5 versus $733.9 at year-end 2013; debt-to-equity was 0.71 versus 0.59. The company had $93.2 available under its revolving facility. Of cash and equivalents, $121.8 was held for joint-venture purposes and $15.5 was corporate cash available for general purposes; restricted cash was an additional $47.0.
  • Backlog: $8.1 billion at September 30, up from $7.0 billion at year-end. Management cited two large new mass-transit awards as key contributors. It also identified up to $2.3 billion of potential future Hudson Yards phases and approximately $1.8 billion of other pending awards; these are not reported as booked backlog.

Changes versus the prior period

  • Q3 revenue increased across all three segments. For the first nine months, Civil revenue rose 24.1% and Specialty Contractors revenue rose 11.0%, while Building revenue declined 10.2%.
  • For nine months, Civil construction operating income increased to $156.0 from $104.5; Building increased to $28.7 from $20.9; Specialty Contractors decreased to $31.3 from $44.6, partly due to prior-year Hurricane Sandy work and a favorable settlement in 2013.
  • Nine-month earnings included $30.6 of favorable net estimate changes on Civil and Building project recoveries, adding $18.3 to net income and $0.37 to diluted EPS. The comparable 2013 periods also benefited from project recovery estimate increases.
  • The effective tax rate rose to 39.9% for nine months from 37.2%, primarily due to increased operations in higher-tax jurisdictions. The company reorganized reporting units in Q1 and eliminated the Management Services reportable segment.

Outlook, risks and unusual items

  • No specific earnings or revenue guidance is provided. Management said backlog growth and its capabilities in large civil and building projects support its long-term growth strategy, and stated that available financing was sufficient for current backlog and anticipated new work.
  • The new June 2014 credit agreement provides a $300 revolving facility and a $250 term loan, both maturing in 2019. The company reported covenant compliance at September 30. The term loan has scheduled amortization and a 44.5% balloon payment at maturity.
  • Project accounting depends on significant estimates of completion costs, change orders and claims. At quarter-end, costs and estimated earnings exceeding billings included $320.8 of claims and $138.0 of unapproved change orders; approximately $38.4 of those balances were subject to litigation or dispute resolution. Reductions in estimated recoveries could reduce future earnings.
  • After quarter-end, the Central Artery/Tunnel joint venture agreed with Massachusetts on total recovery, including interest, following a court decision reinstating awards. Management booked the settlement impact in Q3 and had cited an anticipated recovery of $88.7. The MGM CityCenter trial began October 28, 2014; the company reported $160.7 of contract receivables and a $173.7 mechanic’s lien. Recoveries and counterclaims in several other disputes remain uncertain.
  • The sale of auction-rate securities generated $44.5 in proceeds and a $1.8 realized loss. The filing also describes a $5.0 recorded contingent liability relating to the Brightwater litigation and a Q2 earnings charge from an adverse insurance-coverage ruling in the 100th Street Bus Depot matter; the charge amount is not clearly stated in the filing text provided.
  • Key risks include converting backlog into revenue, project execution and cost estimates, customer funding and project delays, claims and litigation outcomes, access to borrowing and surety bonds, and labor availability. Management reported no material change in risk factors and no material change in market-risk exposure.

Investor verification priorities

  1. Assess the quality and collectability of the $720.2 in costs and estimated earnings exceeding billings, especially claims, unapproved change orders and amounts in dispute.
  2. Track operating cash flow and collections: operating cash use increased substantially despite higher reported earnings, and most cash and equivalents was restricted to joint-venture purposes.
  3. Review debt service, the $93.2 of remaining revolver availability, covenant headroom and the term loan’s balloon maturity.
  4. Validate project-recovery assumptions behind the $30.6 of favorable estimate changes and the earnings contribution from the Central Artery/Tunnel settlement.
  5. Monitor the CityCenter and other material claims, including timing, settlement outcomes and any effect on recorded receivables or earnings.
  6. Distinguish firm backlog from pending awards and verify conversion, margin and cash-generation performance across the segments.