Tutor Perini Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results. Amounts are in U.S. dollars; financial statement figures below are in millions unless noted.
Business context and reporting period
Tutor Perini provides general contracting, construction management and design-build services through Building, Civil, Specialty Contractors and Management Services. The company emphasized large, complex public works and reported backlog of $6.6 billion at June 30, up from $5.6 billion at year-end 2012.
Financial results and liquidity
- Q2 revenue: $1,053.1 million, up 6.9% year over year. Gross profit was $106.0 million, with a 10.1% gross margin versus 8.8% a year earlier. Construction operating income was $39.5 million, a 3.8% margin.
- Q2 earnings: Net income was $15.5 million, or $0.32 per basic and diluted share, compared with a $348.4 million loss in Q2 2012. The prior-year quarter included a $376.6 million goodwill and intangible-asset impairment charge.
- First-half revenue and earnings: Revenue was $2,046.0 million, up 7.8%; gross profit was $206.3 million, with a 10.1% margin versus 9.1%. Construction operating income was $75.6 million, and net income was $30.3 million, or $0.64 basic and $0.62 diluted per share.
- Cash flow: First-half operating cash flow was negative $38.6 million, versus negative $31.9 million in 2012. Investing used $34.1 million, mainly for $28.1 million of equipment purchases and an $8.3 million increase in restricted cash. Financing provided $47.3 million. Cash and cash equivalents ended the period at $142.7 million, down from $168.1 million at year-end.
- Liquidity: Working capital was $791.8 million; the current ratio was 1.58. Of cash and equivalents, $33.7 million was available for general corporate use and $108.9 million represented the company’s share of joint-venture cash restricted to JV-related uses. Restricted cash was a further $47.0 million.
- Debt: Total debt was $783.8 million, up $46.7 million from year-end, primarily due to a $50 million increase in revolving borrowings. The company reported $170 million outstanding on its revolver, a $135 million term loan balance, and $129.9 million available under the revolving facility. Debt-to-equity was 0.66, compared with 0.64 at year-end. The company was in compliance with its amended financial covenants at June 30.
Material changes versus the prior comparable period
- Revenue growth was led by Building, whose first-half revenue rose 21.5%, and Specialty Contractors, up 7.8%. Civil revenue declined 3.3%, and Management Services revenue declined 18.3%.
- First-half operating income improved across Building, Civil and Management Services, while Specialty Contractors operating income declined 10.9% and its margin fell from 7.3% to 6.0%.
- The dramatic year-over-year net income improvement is not directly comparable: 2012 included the $376.6 million impairment charge. Excluding specified discrete items, the company reported 2012 net income of $7.5 million for Q2 and $11.6 million for the first half; these are non-GAAP figures.
- Accounts receivable, including retainage, increased to $1,389.5 million from $1,224.6 million at year-end; costs and estimated earnings in excess of billings increased to $504.9 million from $465.0 million.
Outlook, management commentary, risks and unusual items
- Management expressed confidence in the company’s position to pursue large civil and building awards. Backlog reached $6.6 billion, with significant pending opportunities, including future Hudson Yards phases and the company’s share of a proposed California High-Speed Rail joint venture project. These pending awards are not reported as contracted backlog.
- No quantified full-year earnings or revenue guidance is provided in the filing. Management cautioned that interim results may not indicate full-year performance because project progress and estimated profitability can vary.
- Management Services faced weaker activity related to reduced federal awards and work in Afghanistan. The company cited a deteriorating Afghanistan security environment and sequestration-related funding constraints; its Management Services reporting unit had only 4.5% fair-value headroom over carrying value at year-end 2012, and management said it would continue monitoring impairment risk.
- Project accounting depends on estimates of costs to complete, change orders and claims. At June 30, costs and estimated earnings in excess of billings included $118.8 million of unapproved change orders and $185.7 million of claims; approximately $62.9 million of those amounts were subject to litigation or dispute resolution. A reduction in estimated recoveries could reduce future earnings.
- Brightwater litigation: The joint venture paid a $155.8 million jury verdict and $14.7 million in fees and costs in May 2013 and appealed. Tutor Perini had recorded a $5.0 million contingent liability; payments exceeding that amount were recorded in accounts receivable. The ultimate impact remains uncertain.
- Other project matters: A $39.8 million MGM-related settlement and a settlement with Factory Mutual on the Gaylord matter were reached in June and paid in August 2013; the company included their effects in June 30 results as changes in estimates. The MGM dispute involved approximately $193 million of recorded contract receivables as of June 2013.
- The company held $46.3 million of auction-rate securities classified as long-term investments. Management reported no appropriate change to carrying value but expected it could take more than 12 months to refinance or sell them. It said this illiquidity was not expected to materially affect overall liquidity.
- Other stated risks include converting backlog into revenue, project execution and cost estimates, claims and litigation outcomes, government infrastructure funding, access to borrowing and surety bonds, and labor disruptions. Management reported no material change in risk factors or market-risk exposure and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether backlog additions, particularly pending awards, are executed and convert into revenue at expected margins.
- Collections and recoverability of receivables, retainage, claims and unapproved change orders, including the Brightwater and MGM matters.
- Operating cash flow and working-capital trends, given first-half operating cash use and increased receivables.
- Debt levels, revolver availability and continued compliance with tightening credit-agreement covenants.
- Whether Afghanistan-related performance weakness or other changes in forecasts trigger impairment of goodwill or intangible assets.
- Liquidity and valuation developments for the auction-rate securities.