Tutor Perini Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Financial amounts below are in millions of dollars unless stated otherwise. Tutor Perini provides general contracting, construction management and design-build services through Building, Civil, Specialty Contractors and Management Services segments.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,030.4 | $1,099.4 | $3,076.4 | $2,997.3 |
| Gross profit | $120.9 | $115.5 | $327.2 | $288.7 |
| Gross margin | 11.7% | 10.5% | 10.6% | 9.6% |
| Income (loss) from construction operations | $58.1 | $54.7 | $133.6 | $(282.5) |
| Net income (loss) | $23.8 | $42.6 | $54.0 | $(307.0) |
| Diluted EPS | $0.49 | $0.88 | $1.11 | $(6.47) |
- Q3 revenue declined 6.3%, while construction operating income rose 6.3%; net income fell 44.2%. Q3 performance included a $9.7 million increase in estimated recovery on a Building project, adding $6.2 million to net income and $0.13 to diluted EPS.
- Nine-month revenue increased 2.6%. The 2012 comparison includes a $376.6 million goodwill and intangible impairment charge ($339.2 million after tax); excluding this and other specified discrete items, 2012 nine-month net income was $37.4 million and diluted EPS was $0.78, versus $54.0 million and $1.11 in 2013.
- Q3 operating margin was 5.6%, compared with 5.0%. Nine-month operating margin was 4.3%; 2012 was negative 9.4% including the impairment and 3.1% before it.
- Q3 other expense was $9.5 million, compared with $0.5 million of other income a year earlier, primarily reflecting increases in acquisition-related liabilities. Interest expense was $11.6 million for the quarter and $34.0 million year to date. Effective tax rates were 35.8% and 37.2%, respectively.
Cash, liquidity and debt
- Cash and cash equivalents were $127.9 million at September 30, down from $168.1 million at year-end. Only $35.0 million was corporate cash available for general purposes; $92.9 million represented the company’s share of joint-venture cash restricted to JV-related uses. Restricted cash was $47.5 million.
- Working capital was $820.8 million, up from $747.6 million; the current ratio was 1.61. Management reported a 0.65 debt-to-equity ratio.
- Total debt was $777.5 million, up $40.4 million from year-end. The revolving facility had $177.8 million drawn and $122.0 million available; the term loan balance was $125.0 million. The company reported compliance with its amended credit covenants at September 30 and said it expected to remain compliant.
- Nine-month operating cash flow was negative $11.1 million, improved from negative $27.9 million. Investing cash flow was negative $46.0 million, including $39.8 million of property and equipment purchases; financing cash flow was positive $16.9 million. Cash declined $40.2 million over the period.
Operations, changes and outlook
- Backlog rose to approximately $6.9 billion from $5.6 billion at December 31, 2012. Civil backlog increased to $3.1 billion; Building backlog was $1.8 billion. New awards included Tutor Perini’s $511 million share of the California High-Speed Rail project and two Wisconsin highway contracts totaling $191 million.
- Management cited a significant pipeline of pending awards, including up to $3 billion in future Hudson Yards phases. These are prospective opportunities, not booked backlog; no formal earnings or revenue guidance is provided in the supplied filing text.
- Civil results strengthened: Q3 revenue increased 8.4% and operating margin rose to 12.6% from 7.6%, driven by project activity and volume. Building Q3 revenue fell 15.4%, with operating margin down to 4.1% from 5.3%, mainly due to reduced activity on California healthcare and office projects and completion of Southern U.S. projects. Specialty Contractors and Management Services also had lower Q3 revenue and operating income.
- Management Services faced weaker activity, including reduced work in Iraq and on surety projects. The company noted sporadic timing of U.S. government funding and task orders, sequestration and government shutdown-related uncertainty. At the prior year-end valuation, this reporting unit’s fair value exceeded carrying value by only 4.5%; management planned to assess the funding outlook in its fourth-quarter 2013 impairment test.
- Management said the company’s financial position and credit arrangements were sufficient for current backlog and anticipated new work. It also cautioned that construction results are sensitive to project timing, cost-to-complete estimates, change orders and claims; reported results to date are not necessarily indicative of full-year results.
Contingencies and unusual items
- Costs and estimated earnings in excess of billings totaled $538.4 million, including $144.8 million of unapproved change orders and $197.3 million of claims. About $54.1 million of the latter two categories was subject to litigation or dispute resolution; recoverability estimates may change and affect future earnings.
- The Brightwater joint venture, in which Tutor Perini’s subsidiary holds a 20% minority interest, paid a $155.8 million jury verdict and $14.7 million in fees and costs in 2013 and appealed. The ultimate impact remains uncertain. The company had recorded a $5.0 million contingent liability at year-end 2012; amounts paid above that liability were recorded in accounts receivable.
- Other significant disputes include the MGM CityCenter matter (approximately $159 million in recorded contract receivables and a $166.8 million mechanic’s lien as of September 2013; trial scheduled for April 2014), the Long Island Expressway claim and counterclaim, and the Fontainebleau recovery. Management’s estimated recoveries on several claims are included in recorded revenue and are subject to revision.
- Q3 settlements included receipt of payment on the Gaylord insurance dispute and $39.8 million related to CityCenter receivables and subcontractor disputes. The company also recorded $9.2 million of Q3 fair-value adjustments to contingent consideration, contributing to other expense.
- The company held $46.3 million of illiquid auction-rate securities, classified as long-term investments; management considered their recorded fair value appropriate and said their limited short-term liquidity was not expected to materially impair overall liquidity.
Important facts for investors to verify
- Whether the $538.4 million contract asset balance—including disputed claims and change orders—converts to cash at estimated amounts and timing.
- Developments and potential financial effects of Brightwater and other material claims, especially MGM CityCenter and the New York and Fontainebleau disputes.
- Whether backlog converts into profitable revenue, and whether pending awards, including Hudson Yards phases, are executed and funded.
- Availability of corporate liquidity after distinguishing JV-purpose cash and restricted cash, and continued compliance with tightening credit covenants.
- The fourth-quarter goodwill impairment assessment for Management Services in light of federal funding uncertainty, and whether the Building project recovery estimate continues to support reported earnings.