Tutor Perini just violated a bank loan covenant and required a waiver
In November, the Wall Street Journal reported that Tutor Perini had an earnings conference call for analysts that was notable for what it was missing – the earnings. Tutor ended up filing its required quarterly financial statements a week late. It needed the time to include a last minute court decision that caused it to take a small write-off. Tutor failed to mention on the (non) earnings call that they also needed the week to work out things with their bank creditors, as they were in non-compliance with their bank covenants, according to the 10q SEC filing.
The bank loan size was increased last year and covenants eased to accommodate Tutor’s need for more debt
In 2014, Tutor Perini was getting very low on cash. The company needed to borrow more from its banks and reduce the payments on its existing debt so they renegotiated their bank loans in June 2014. Because of the additional debt, there was no way to comply with the existing bank covenants. The key restriction on Tutor Perini was a ratio of its debt to the earnings available to pay the debt, called the “Consolidated Leverage Ratio”.
|Quarter ending:||Pre – 2014 limit||After 2014 restructuring|
|June 30, 2014||3.25||3.75|
|September 30, 2014||3.25||3.75|
|December 31, 2014||2.75||3.75|
|March 31, 2015||2.75||3.75|
|June 30, 2015||2.75||3.5|
|September 30, 2015||2.75||3.5|
|December 31, 2015||2.75||3.5|
|March 31, 2016||2.75||3.5|
|June 30, 2016||2.75||3.25|
While the specific financial figures in the bank loan documents make it difficult to calculate the ratios exactly, we estimate that Tutor’s debt was $886 million and the adjusted earnings figure was $240 million for the September 30, 2015 period. This is a ratio of 3.69, above the 3.5 requirement.
The banks gave Tutor Perini a waiver – but the California High Speed Rail Authority and investors should still be concerned.
First, the write-off wasn’t that big. This means it was not a one-off occurrence. Tutor is in danger of violating its covenants again. Tutor’s debt has continued to grow over the last couple of years, despite a couple of very large cash inflows from longstanding legal disputes that just got settled. They have been forced to sell off assets at losses and have a limited ability to take on new debt.
Second, this is a write-off that should have been taken two years ago. A Tutor Perini subsidiary lost a lawsuit as part of a consortium that had failed to completed a tunnel project in Washington state. They had actually handed over the cash to the plaintiff for their share in 2013, but decided they were “owed” the money and booked a future payment in accounts receivable for the same amount while the case was being appealed. This is extremely aggressive accounting. While it may not have been material as a percentage of Tutor Perini’s annual revenues, it was just enough to make sure that Ronald Tutor met the threshold for corporate earnings to receive his multi-million bonus in 2013. There are enough serious issues with the corporate governance at Tutor Perini to raise a red flag for anyone doing business with them.
Why did the state of California agree to pay Tutor Perini $32 million before they were required to?
The violation of the debt covenant should draw attention to a change in the payment terms for the CP 1 construction contract (first segment of the California high speed rail project) this summer. The “earned value” / invoiced amount of the contract jumped suddenly this summer. Project officials said that this did not represent additional work that had been done, but rather a change in how Tutor Perini was being compensated. The September 2015 operations report stated,” The increase in CP 1 earned value during the August pay period is primarily a result of revising the way the Contractor is compensated for administrative overhead incurred to date.” This was a substantial change.
In August 2015, the remaining contract value only decreased by $6 million, while the amount invoiced to date jumped from $134 million to $172 million. This suggests that the state of California, out of the goodness of their heart, allowed Tutor Perini to frontload an additional $32 million in payments. While Tutor Perini did not disclose this payment or how they accounted for the windfall cash, it would have been enough to keep them in compliance with their bank covenants for the third quarter. Why did the state make this payment? Why did they agree to this arrangement? Is there anything the state is getting, formally or informally, for helping Tutor out of a sticky situation?
This gets particularly concerning as Tutor Perini needs to disclose any changes in their financial status, including bank waivers of covenants, as part of their bid for CP 4, a 22 mile construction segment.
The Authority should provide additional information about the change in contract payments.
It should also require a full explanation from Tutor Perini about their need for additional debt, given the fact they are showing accounting profits. In particular, the agency should request detailed information about what comprises the accounts receivable category. Unlike all other large construction firms, Tutor’s ability to collect from its customers has declined substantially and consistently over the last couple of years. This either is a sign of a poorly run company or an indication that Tutor is saying people owe them money that maybe they don’t. Here is an analysis showing the increase in accounts receivables (data: Morningstar).