Tutor Perini Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and results
Tutor Perini provides civil, building, and specialty contracting services. Third-quarter revenue growth was principally driven by increased activity on mass-transit projects in California and Minnesota. Nine-month revenue was essentially flat year over year.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,189.3 | $1,123.1 | $3,273.1 | $3,271.4 |
| Gross profit | $115.1 | $111.1 | $304.5 | $296.8 |
| Gross margin | 9.7% | 9.9% | 9.3% | 9.1% |
| Income (loss) from construction operations | $47.9 | $47.3 | $(270.9) | $101.2 |
| Net income (loss) attributable to Tutor Perini | $19.3 | $21.3 | $(301.6) | $34.0 |
| Diluted EPS | $0.38 | $0.42 | $(6.01) | $0.68 |
Cash flow, liquidity, and debt
- Operating cash flow: $111.4 million provided in the first nine months of 2019, versus $34.8 million used in the comparable 2018 period. The company generated $222.9 million in Q3, primarily due to higher billings in excess of costs and collections and settlement activity. Management attributed the year-to-date improvement partly to working-capital timing.
- Investing and financing: Cash used in investing was $66.1 million, mainly for property and equipment. Financing provided $48.3 million, including $66.1 million of net borrowings, partly offset by $21.5 million of distributions to noncontrolling interests.
- Cash availability: Cash and cash equivalents were $207.1 million, but only $49.2 million was immediately available for general corporate purposes; much of the balance was held by joint ventures for venture-related uses. Restricted cash and investments totaled $74.0 million.
- Debt and facility: Total debt was $836.2 million, up from $761.5 million at year-end 2018. The $350 million revolver had $233 million available. The company reported compliance with its covenants; trailing leverage was 2.64x against a 3.50x maximum, and fixed-charge coverage was 3.45x against a 1.25x minimum. The credit agreement was amended in May 2019 to keep the maximum leverage ratio at 3.50x.
- Working capital: $1.7 billion; current ratio 1.88 versus 1.99 at December 31, 2018. Debt-to-equity was 0.56 versus 0.43.
Material changes and operating indicators
- A second-quarter interim goodwill test resulted in a $379.9 million non-cash impairment charge, allocated to Civil ($210.2 million), Building ($13.5 million), and Specialty Contractors ($156.2 million). The charge drove the nine-month GAAP loss; management reported adjusted nine-month construction operating income of $109.0 million, adjusted net income attributable to Tutor Perini of $27.9 million, and adjusted diluted EPS of $0.55. These are non-GAAP measures.
- Excluding the impairment, adjusted construction operating income improved from the prior-year nine-month period, partly because of Newark Airport Terminal One contributions and the absence of a prior-year $17.8 million project charge. This was partly offset by $26.7 million of net unfavorable adjustments on certain New York electrical and mechanical projects.
- Q3 awards were $0.7 billion; nine-month awards were $4.9 billion, compared with $0.9 billion and $4.5 billion, respectively, in 2018. Backlog was $10.9 billion, up 17% from year-end 2018 and 28% from September 2018. Segment mix was approximately 55% Civil, 24% Building, and 21% Specialty Contractors.
- Remaining performance obligations at September 30 were $5.3 billion for Civil, $1.6 billion for Building, and $2.2 billion for Specialty Contractors. These amounts may differ from reported backlog because backlog can include awards pending formal contract execution or notice to proceed.
- Contract assets included $756.8 million of claims and $334.1 million of unapproved change orders within costs and estimated earnings exceeding billings. Total contract assets were $1.76 billion; contract liabilities were $1.05 billion.
Outlook, risks, and unusual items
- Management described the multi-year growth outlook as favorable, particularly for Civil and Specialty Contractors, citing public infrastructure funding, project pipelines, and limited competition on some large opportunities. It cautioned that project delays, starts, ramp-ups, and completions could affect growth. The filing provides no formal numerical earnings or revenue guidance.
- Management said certain delayed projects were expected to advance more meaningfully in Q4 2019 and 2020. This expectation is forward-looking and subject to execution and timing risk.
- The company noted potential additional Civil goodwill impairment if future conditions are less favorable than assumptions used in the interim valuation. Goodwill testing depends on estimates of new awards, margins, working capital, cash flows, and discount rates.
- Material project and legal exposures include the Alaskan Way Viaduct dispute, where the company reported that loss exposure was not reasonably estimable and recognized estimated recoveries; the George Washington Bridge Bus Station dispute, affected by the developer’s October 2019 Chapter 11 filing; the Five Star Electric government investigation, whose outcome and potential loss could not be estimated; and the Long Island Expressway claim and NYSDOT appeal. The company stated that ordinary-course matters were not expected to materially affect its consolidated financial position based on information then available.
- Other stated risks include contract estimate revisions, disputed claims and change orders, working-capital recovery, project delays and cost overruns, joint-venture performance, customer cancellations, government spending, debt covenant compliance, and interest-rate benchmark transition. Management said it believed available cash, operating cash flow, and unused credit capacity would meet working-capital needs for the next 12 months.
Most important facts for investors to verify
- Whether operating cash flow remains positive and how much cash is freely available to the parent versus held in joint ventures.
- Collections and settlement progress on the substantial claims, unapproved change orders, retainage, and other contract assets.
- Actual project execution, margins, and cost-estimate revisions, especially on New York electrical and mechanical work and delayed projects.
- Backlog conversion, award timing, cancellations, and the difference between backlog and remaining performance obligations.
- Goodwill valuation assumptions and whether Civil reporting-unit conditions create a risk of further impairment.
- Developments and potential financial effects of the cited litigation, arbitration, investigation, and bankruptcy-related matters.
- Debt levels, revolver availability, covenant headroom, and the company’s ability to fund project working capital.