Tutor Perini Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited consolidated financial statements; dollar amounts below are in millions unless noted.
Business context and reporting period
Tutor Perini provides general contracting, construction management, and design-build services through Civil, Building, and Specialty Contractors operations. During Q1 2014, it eliminated the Management Services reporting segment and reorganized reporting units; prior-period segment figures were restated. Management cautions that interim results may not indicate full-year performance, in part because project progress and estimated project profitability can change.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,084.5 | $1,053.1 | $2,039.7 | $2,046.0 |
| Gross profit / margin | $129.5 / 11.9% | $106.0 / 10.1% | $234.9 / 11.5% | $206.3 / 10.1% |
| Income from construction operations / margin | $65.4 / 6.0% | $39.5 / 3.7% | $106.9 / 5.2% | $75.6 / 3.7% |
| Net income | $28.5 | $15.5 | $44.5 | $30.3 |
| Diluted EPS | $0.58 | $0.32 | $0.91 | $0.62 |
- Cash flow: First-half operating cash outflow was $61.4, versus $38.6 outflow in 2013, primarily reflecting working-capital timing, including collections in Specialty Contractors. Investing cash flow was $19.6 provided, including $44.5 proceeds from selling auction-rate securities, partly offset by $26.7 of property and equipment purchases. Financing provided $61.7. Cash ended at $139.9, up from $119.9 at year-end.
- Liquidity: Working capital was $1,003.9, with a 1.74 current ratio, compared with $787.4 and 1.61 at December 31, 2013. Of cash at June 30, $118.3 was joint-venture cash restricted to JV-related purposes and $42.6 was restricted cash; only $21.6 was available for general corporate purposes.
- Debt: Total debt was $829.3, up from $733.9 at year-end; debt-to-equity was 0.64 versus 0.59. The company had $80.5 drawn on its revolving facility and $219.1 available. The new facility includes a $250 term loan and $300 revolving line, both maturing June 2019; the term loan has a 44.5% balloon payment at maturity. The company reported covenant compliance.
- Other balance-sheet items: Accounts receivable, including retainage, was $1,454.0; costs and estimated earnings in excess of billings were $661.0, including $252.4 of claims and $125.0 of unapproved change orders. These balances depend on contract billing and recovery outcomes.
Material changes versus the prior comparable period
- Q2 revenue increased 3.0%; first-half revenue was down 0.3%. Civil revenue rose 25.9% for the first half, while Building revenue fell 22.1%; Specialty Contractors revenue increased 4.8%.
- First-half construction income rose 41.5%, and net income rose 46.9%. Management attributed the earnings improvement mainly to higher Civil volume and favorable legal-ruling-related recovery estimate changes. Building operating income improved modestly; Specialty Contractors income declined, partly due to unfavorable mechanical-project performance and the absence of a favorable prior-year settlement.
- Revenue growth and margin improvement were concentrated in Civil. The filing says favorable and unfavorable changes to recoveries on two projects were $24.2 and $9.4, respectively, yielding a net $14.8 increase in construction income and $8.8 increase in net income, or $0.18 diluted EPS, for both the quarter and first half.
- Other expense increased by $3.8 in Q2 and $6.2 for the first half, primarily due to a $1.8 loss on the sale of auction-rate securities and credit-facility refinancing expenses. The securities were sold for $44.5 on April 30.
Outlook, management commentary, risks, contingencies, and unusual items
- Backlog and outlook: Backlog was approximately $7.8 billion at June 30, up from $7.0 billion at year-end, supported by $2.85 billion of awards and adjustments, including two MTA mass-transit awards totaling $844 million. Management expects to pursue conversion of pending awards, including up to $2.3 billion in future Hudson Yards phases and about $1.9 billion in other contracts. These pending projects are not yet backlog. No quantified earnings or revenue guidance is provided.
- Project-estimate sensitivity: Construction accounting uses cumulative catch-up revisions as project assumptions change. The favorable $14.8 net estimate adjustment materially contributed to reported earnings; final recoveries may differ from recorded estimates.
- Legal and claims exposure: The company has numerous contract disputes and litigation matters. A June 2014 court ruling reinstated certain Central Artery/Tunnel dispute-board awards; Tutor Perini increased anticipated recovery to $85.6, including interest, which is included in recorded revenue. Other significant matters include CityCenter, Long Island Expressway/Cross Island Parkway, Fontainebleau, and Brightwater. Outcomes and recoveries remain uncertain; management says an adverse variance could affect future results. In Brightwater, the company had paid the verdict and related fees, appealed, and recorded a $5.0 contingent liability; amounts paid beyond that liability were recorded in receivables.
- Unusual charge: A May 2014 appellate ruling affirmed denial of insurance coverage in the 100th Street Bus Depot matter; management recorded an earnings charge in Q2. The charge amount is not clear in the filing text provided.
- Principal risks: Winning awards and converting backlog, project execution and cost estimates, litigation and claims recoveries, access to financing and surety bonds, labor disruptions, and public infrastructure funding. Management reported no material changes to previously disclosed risk factors and no material change in market-risk exposure.
Most important facts for investors to verify
- How much of earnings growth is sustainable after excluding the $0.18 per-share benefit from project recovery estimate changes and other unusual items.
- Whether operating cash conversion improves, given the $61.4 first-half operating cash outflow and the large receivable, retainage, claims, and unbilled balances.
- The timing and collectability of disputed project recoveries, particularly the Central Artery/Tunnel, CityCenter, and other material claims.
- Execution, margins, and timing of the $7.8 billion backlog and whether pending awards are formally contracted and added to backlog.
- Debt repayment and covenant headroom under the refinanced credit facility, including the term loan’s scheduled amortization and maturity balloon.