How did Tutor-Perini make the grade?
- Financial strength is imperative for design-build contractor
- Authority’s rules listed types of disqualifying negative Material Changes to financial condition
- Tutor Perini had three Material Changes
- Tutor Perini’s finances are increasingly weak
- The Authority reported today (June 3, 2013) that none of the proposers had Material Changes in their financial status
- Because Tutor Perini failed the pass/fail analysis, it should not have been eligible to win.
*Update* People have asked. Are Tutor Perini’s cash losses just an industry trend? No.
Tutor Perini has won the recent competition for the first high speed rail construction contract with a barely passing technical score and a perfect score for its low price.
Here are the results:
|
Tutor Perini JV |
Dragados/ Samsung JV |
Acciona JV |
Fluor Skanska |
Kiewitt Granite |
|
|
Proposal Price |
$985,142,530 |
$1,085,111,111 |
$1,365,770,098 |
$1,263,309,632 |
$1,537,049,000 |
|
Price Score (out of 100) |
100 |
90.79 |
72.13 |
77.98 |
64.09 |
|
Technical Score (out of 100) |
68.5 |
87.1 |
92.37 |
69 |
71.37 |
|
Total score* |
90.55 |
89.68 |
78.20 |
75.28 |
66.27 |
|
Price/ Technical pt** |
$14,381,643 |
$12,458,222 |
$14,785,862 |
$18,308,835 |
$21,536,346 |
*Total score is comprised of Price score weighted 70% and Technical Score weighted 30%
**Price per Technical point is the dollar value of each technical point which is calculated by Price divided by technical points
Financial capacity matters
A construction’s firm financial capacity is always an important factor in awarding contracts. For prime contractors, cash is king and the typical large construction firm has a very strong balance sheet.
The project will take almost 5 years to complete, 30% of the work will be given to DBEs who must be paid promptly and it is design-build, making it more difficult for a guarantor to step in and finish the work in a timely manner if the original contractor can’t.
It could be a decade after this part of the work is finished but before trackwork and high speed rail elements are completed and the winning firm will be inspecting its own work. Both the state of California and the firm undertaking this work will be taking on a lot of risk. Any cashflow problems suffered by the contractor will only increase those risks.
The rules were clear: financial strength is a must.
Financial strength was so important that, as described in a Authority staff memo, it was part of the first step in evaluating proposals. While the pass/fail checklist was administrative, there was an additional absolute prohibition against weakened financial capacity.
The rules were laid out in an RFP document called “Instructions to Bidders”.
Precisely, a bidder must not have incurred a (negative) Material Change in their financials since the original Request for Qualification process in 2011.
The bidding documents gave seven examples (the rules themselves) of what would constitute a material change. Tutor Perini Corp (TPC) had three of them.
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Write-off of more than 5% of equity value – Tutor Perini (TPC) took a before-tax charge of $377 million for goodwill in 2012, related to acquisitions made in 2010 and 2011 that have failed to perform as expected. This was about 25% of shareholder equity.
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Waiver of bank covenants required – From Tutor Perini’s August 6, 2012 earnings press release, ”On August 2, 2012, the Company amended its existing credit agreement to modify the financial covenants under agreement to allow for more favorable ratios for the Company. In conjunction with the amendment, the Company obtained a waiver of compliance with the covenants of the credit agreement for the period ended June 30, 2012 as the Company would otherwise have been out of compliance with certain ratios due to the impairment charge, current debt levels, and lower than expected income from operations.”
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Downgraded to junkbond status – In September 2012, Tutor Perini (TPC) was downgraded by Moody’s. Senior unsecured debt is now rated B1 because of a significant deterioration in its liquidity position. The company had only approximately $75 million of corporate cash, approximately $110 million of joint venture cash along with $257 million of borrowing availability as of June 30, 2012. Since that time, liquidity has further decreased to to $35 million of corporate cash, $98 million of joint venture cash and $96 million of borrowing availability. This may prompt another earnings downgrade.
Tutor Perini’s balance sheet has gone from pristine to highly indebted over the past 5 years, as a result of series of acquisitions and negative free cash flow. While Tutor Perini has recorded accounting profits (and paid large bonuses based on them), the company is incurring losses on a cashflow basis. The discrepancy appears to be a combination of an increase in disputed claims and other unexplained factors.
Liquidity (cash available for general corporate purposes and bank credit line availability) is going down… and debt has been going up.
The Authority laid out a process that would highlight red flags. Bidders had to actually make formal certifications about a lack of Material Changes. So what happened here? The Authority needs to make good on its promises of a transparent process and disclose more information about the Financial Change review, starting with Tutor Perini’s financial documentation.