TPC Tutor Perini Corporation





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2017



OR



☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from             to             



Commission File Number:  1-6314



Tutor Perini Corporation

(Exact name of registrant as specified in its charter)




MASSACHUSETTS		04-1717070
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



15901 OLDEN STREET, SYLMAR , CALIFORNIA 91342-1093

(Address of principal executive offices)

(Zip code)



(818) 362-8391

(Registrant’s telephone number, including area code)





(Former name, former address and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  No   ☐



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒  No  ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company . See the definitions of “large accelerated filer , ” “accelerated filer , ” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒



The number of shares of common stock, $1.00 par value per share, of the registrant outstanding at November 3, 2017 was 49, 781,010 .









 

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TUTOR PERINI CORPORATION AND SUBSIDIARIES



TABLE O F CONTENTS







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P ART I.  –   FINANCIAL INFORMATION



Item 1. – Financial Statements



TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



UNAUDITED











	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except per common share amounts)	2017			2016			2017			2016
REVENUE	$	1,199,505		$	1,332,978		$	3,564,140		$	3,726,477
COST OF OPERATIONS		(1,081,254)			(1,208,310)			(3,240,332)			(3,386,947)
GROSS PROFIT		118,251			124,668			323,808			339,530
General and administrative expenses		(69,179)			(63,749)			(203,674)			(189,660)
INCOME FROM CONSTRUCTION OPERATIONS		49,072			60,919			120,134			149,870
Other income, net		967			2,048			42,373			5,214
Interest expense		(15,643)			(15,041)			(53,726)			(44,655)
INCOME BEFORE INCOME TAXES		34,396			47,926			108,781			110,429
Provision for income taxes		(9,096)			(19,125)			(37,084)			(44,868)
NET INCOME		25,300			28,801			71,697			65,561
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		(1,716)			—			(4,253)			—
NET INCOME ATTRIBUTABLE TO TUTOR PERINI CORPORATION	$	23,584		$	28,801		$	67,444		$	65,561
BASIC EARNINGS PER COMMON SHARE	$	0.47		$	0.59		$	1.36		$	1.33
DILUTED EARNINGS PER COMMON SHARE	$	0.47		$	0.57		$	1.33		$	1.32
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
BASIC		49,775			49,185			49,602			49,132
DILUTED		50,587			50,100			50,768			49,649





The accompanying notes are an integral part of these Condensed Consolidated F inancial S tatements.





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TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED   STATEMENTS OF COMPREHENSIVE INCOME



UNAUDITED











	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2017			2016			2017			2016
NET INCOME	$	25,300		$	28,801		$	71,697		$	65,561

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Defined benefit pension plan adjustments		269			248			806			819
Foreign currency translation adjustments		726			(411)			1,321			261
Unrealized gain (loss) in fair value of investments		12			(79)			(12)			(224)
Unrealized loss in fair value of interest rate swap		—			—			—			(24)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX		1,007			(242)			2,115			832

COMPREHENSIVE INCOME		26,307			28,559			73,812			66,393
LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		(1,716)			—			(4,253)			—
COMPREHENSIVE INCOME ATTRIBUTABLE TO TUTOR PERINI CORPORATION	$	24,591		$	28,559		$	69,559		$	66,393





The accompanying notes are an inte gral part of these C ondensed Consolidated F inancial S tatements.

 



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TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED   BALANCE SHEETS



UNAUDITED











	As of September 30,			As of December 31,
(in thousands, except share and per share amounts)	2017			2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ($79,111 and $0 related to variable interest entities ("VIEs"))	$	221,878		$	146,103
Restricted cash		17,424			50,504
Restricted investments		48,775			—
Accounts receivable ("AR") including retainage of $574,710 and $569,391 (AR of $36,317 and $0 related to VIEs)		1,857,870			1,743,300
Costs and estimated earnings in excess of billings		902,312			831,826
Other current assets		70,781			66,023
Total current assets		3,119,040			2,837,756
PROPERTY AND EQUIPMENT, net of accumulated depreciation   of $345,546 and $313,783		447,588			477,626
GOODWILL		585,006			585,006
INTANGIBLE ASSETS, NET		90,340			92,997
OTHER ASSETS		40,811			45,235
TOTAL ASSETS	$	4,282,785		$	4,038,620

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	30,951		$	85,890
Accounts payable ("AP") including retainage of $267,110 and $258,294 (AP of $4,826 and $0 related to VIEs)		949,675			994,016
Billings in excess of costs and estimated earnings ( $91,750 and $0 related to VIEs)		403,635			331,112
Accrued expenses and other current liabilities		124,385			107,925
Total current liabilities		1,508,646			1,518,943
LONG-TERM DEBT, less current maturities , net of unamortized discounts and debt issuance costs totaling $54,699 and $56,072		855,325			673,629
DEFERRED INCOME TAXES		132,335			131,007
OTHER LONG-TERM LIABILITIES		155,553			162,018
TOTAL LIABILITIES		2,651,859			2,485,597

CONTINGENCIES AND COMMITMENTS (NOTE 7)

EQUITY
Stockholders' Equity:
Preferred stock - authorized 1,000,000 shares ( $1 par value), none issued		—			—
Common stock - authorized 75,000,000 shares ( $1 par value), issued and outstanding   49,781,010 and 49,211,353 shares		49,781			49,211
Additional paid-in capital		1,080,371			1,075,600
Retained earnings		541,069			473,625
Accumulated other comprehensive loss		(43,298)			(45,413)
Total Stockholders' Equity		1,627,923			1,553,023
Noncontrolling interests		3,003			—
TOTAL EQUITY		1,630,926			1,553,023

TOTAL LIABILITIES AND EQUITY	$	4,282,785		$	4,038,620



The accompanying notes are an integral part of these Condensed Consolidated Financial S tatements.

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TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED   STATEMENTS OF CASH FLOWS



UNAUDITED











	Nine Months Ended September 30,
(in thousands)	2017			2016
Cash Flows from Operating Activities:
Net income	$	71,697		$	65,561
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		37,806			44,638
Amortization of intangible assets		2,657			2,657
Share-based compensation expense		16,057			10,109
Excess income tax benefit from share-based compensation		—			(10)
Change in debt discounts and deferred debt issuance costs		14,725			7,124
Deferred income taxes		642			(8,636)
(Gain) loss on sale of property and equipment		(376)			300
Other long-term liabilities		(2,876)			(8,555)
Other		4,785			(353)
Changes in other components of working capital		(143,213)			(18,669)
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,904			94,166

Cash Flows from Investing Activities:
Acquisition of property and equipment excluding financed purchases		(9,712)			(10,273)
Proceeds from sale of property and equipment		1,440			1,139
Investments in securities restricted in use		(48,657)			—
Change in restricted cash		33,080			(2,872)
NET CASH USED IN INVESTING ACTIVITIES		(23,849)			(12,006)

Cash Flows from Financing Activities:
Proceeds from issuance of convertible notes		—			200,000
Proceeds from debt		1,991,457			1,003,092
Repayment of debt		(1,866,072)			(1,174,679)
Excess income tax benefit from share-based compensation		—			10
Issuance of common stock and effect of cashless exercise		(11,147)			(423)
Distributions paid to noncontrolling interests		(2,500)			—
Contributions from noncontrolling interests		1,250			—
Debt issuance and extinguishment costs		(15,268)			(14,868)
NET CASH PROVIDED BY FINANCING ACTIVITIES		97,720			13,132

Net increase in cash and cash equivalents		75,775			95,292
Cash and cash equivalents at beginning of period		146,103			75,452
Cash and cash equivalents at end of period	$	221,878		$	170,744





The accompanying notes are an inte gral part of these Condensed Consolidated Financial S tatements.

 



 

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(1)      Basis of Presentation



The Condensed Consolidated Financial Statements do not include footnotes and certain financial information normally presented annually under accounting principles generally accepted in the United States (“GAAP”). Therefore, they should be read in conjunction with the audited consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the three and nine months ended September 30, 2017 may not be indicative of the results that will be achieved for the full year ending December 31, 2017.



In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the Company’s consolidat ed financial position as of September  30, 2017 and its consolidated results of operations and cash flows for the interim periods presented. All significant intercompany transactions of consolidated subsidiaries ha ve been elimin ated. There were no material events that occurred subsequent to the date of the financial statements up to the filing of this Form 10-Q.  



(2)      Recent Accounting Pronouncements



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,  Revenue from Contracts with Customers (Topic 606) , as amended by subsequent ASUs (collectively, “ASU 2014-09”). ASU 2014-09 amends the existing accounting standards for revenue recognition and establishes principles for recognizing revenue upon the transfer of promised goods or services to customers based on the expected consideration to be received in exchange for those goods or services. The guidance will be effective for the Company as of January 1, 2018. The amendments may be applied retrospectively to each prior period presented or with the cumulative effect recognized as of the date of initial application (modified retrospective method). The Company expects to adopt this new standard using the modified retrospective method. The Company is currently reviewing contracts in order to determine the impact, if any, that the adoption of ASU 2014-09 will have on its consolidated financial statements. Based on the Company’s evaluation of ASU 2014-09, the Company currently does not expect it to have a material impact on its results of operations. The Company is identifying and implementing changes to the Company’s business processes, systems and internal controls to support the adoption of this new standard and the related disclosure requirements. The adoption of the standard is also expected to impact the presentation of the consolidated balance sheet. The impact primarily relates to reclassifications among financial statement accounts to align with the new standard. The Company will continue its evaluation of ASU 2014-09 (including how it may impact future contracts, as well as any new or emerging interpretations of the standard) through the date of adoption.



In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments , seeking to eliminate diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues including the classification of debt prepayment and extinguishment costs in the cash flow statement. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period provided any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The Company adopted this accounting standard during the three months ended September 30, 2017 and has applied the provisions retrospectively to the beginning of the fiscal years presented in the Condensed Consolidated Financial Statements. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.



In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting . This ASU clarifies the scope of modification accounting under Topic 718 with respect to changes to the terms or conditions of a share-based payments award. Under this new guidance, modification accounting would not apply if a change to an award does not affect the total current fair value, vesting conditions or the classification of the award. This guidance will be effective for the Company as of January 1, 2018, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.



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(3)      Earnings Per Common Share (EPS)



Basic EPS and diluted EPS are calculated by dividing net income attributable to Tutor Perini Corporation by the following: for basic EPS, the weighted-average number of common shares outstanding during the period; and for diluted EPS, the sum of the weighted-average number of both outstanding common shares and potentially dilutive securities, which for the Company can include restricted stock units, unexercised stock options and the Convertible Notes, as defined in Note 6. The Company calculates the effect of these potentially dilutive securities using the treasury stock method.





With regard to diluted EPS and the impact of the Convertible Notes on the diluted EPS calculation, because the Company has the intent and ability to settle the principal amount of the Convertible Notes in cash, per Accounting Standards Codification (“ASC”) 260, Earnings Per Share, the settlement of the principal amount has no impact on diluted EPS.

  

(4 )      Income Taxes



The Company’s effective incom e tax rate for the three and nine months ended September 30, 2017 was 26.4% and 34.1% , respectively, compared to 39.9% and 40.6% for the three and nine months ended September 30, 2016, respectively. The effective tax rate for both of the 2017 periods was favorably impacted by the release of tax liabilities as a result of a statute expiration and earnings attributable to noncontrolling interests for which income taxes are not the responsibility of the Company . The effective tax rate for the nine months ended September 30, 2017 was also favorably impacted by the tax benefits associated with share-based compensation. During the first quarter of 2017, t he Company recognized tax benefits associated with share-based compensation under the provisions of ASU 2016-09, Improvement to Employee Share-Based Payment Accounting , as discussed in Note 9. This tax benefit is the result of a greater tax deduction for share-based compensation expense for awards that vested or were exercised in the first quarter of 2017 relative to the share-based compensation expense recognized under GAAP for these same awards. The effective tax rate for the third quarter of 2016 was favorably impacted by return-to-provision adjustments.



(5 )      Costs and Estimated Earnings in Excess of Billings



Costs and estimated earnings in excess of billings, as reported on the Condensed Consolidated Balance Sheet s , consist ed of the following:







Claims and unapproved change orders are billable upon the resolution of any disputed or open items between the contractual parties and the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions where recovery is concluded to be both probable and reliably estimable; decreases normally result from resolutions and subsequent billings. For both claims and unapproved change orders, the Company recognizes revenue, but

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not profit. Other unbilled costs and profits are billable in accordance with the billing terms of each of the existing contractual arrangements and, as such, the timing of contract billing cycles can cause fluctuations in the balance of unbilled costs and profits. Ultimate resolution of other unbilled costs and profits typically involves the passage of time and, often, incremental progress toward contractual requirements or milestones.



(6 )      Financial Commitments



Long-Term Debt



Long-term debt consisted of the following as of the dates of the Condensed Consolidated Balance Sheets presented:







The following table reconciles the outstanding debt balance to the reported debt balances as of September 30, 2017 and December 31, 2016:







Debt Transactions



2017 Senior Notes



On April 20 , 2017, the Company issued $500 million in aggregate principal amount of 6.875% Senior Notes due 2025 (the “2017 Senior Notes”) in a private placement. Interest on the 2017 Senior Notes is pa yable in arrears semi-annually in May and Nove mber of each year, beginning in November 2017.



Prior to May 1, 2020, the Company may redeem the 2017 Senior Notes at a redemption price equal to 100% of thei r principal amount plus a “make- whole” premium described in the indenture. In addition, prior to May 1, 2020, the Company may redeem up to 40% of the original aggregate principal amount of the notes at a redemption price of 106.875% of their principal amount with the proceeds receive d by the Company from any offering of the Company’s equity . After May 1, 2020, the Company may redeem the 2017 Senior Notes at specified redemption prices described in the indenture. Upon a change of control, holders of the 2017 Senior Notes may require the Company to repurchase all or part of the 2017 Senior Notes at 101% of the principal amount thereof, plu s accrued and unpaid interest to the redemption date .  

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The 2017 Senior Notes are senior unsecured obligations of the Company and are guaranteed by substantially all of the Company’s existing and future subsidiaries that also guarantee obligations under the Company’s 2017 Credit Facility, as defined below. In addition, the indenture for the 2017 Senior Notes provides for customary covenants, including events of default and restrictions on the payment of dividends and share re purchases .



2017 Credit Facility



On April 20, 2017 , the Company entered into a credit agreement (the “2017 Credit Facility”) with SunTrust Bank as Administrative Agent, Swing Line Lender and L/C Issuer and a syndicate of other lenders. The 2017 Credit Facility provides for a $350 million revolving credit facility (the “2017 Revolver”) and a sublimit for the issuance of letters of credit and swingline loans up to the aggregate amount of $150 million and $10   million, respectively, both maturing on April 20, 2022, unless any of the Convertible Notes, as defined below, are outstanding on December 17, 2020, in which case all such borrowings will mature on December 17, 2020 (subject to certain further exceptions). In addition, the 2017 Credit Facility permits additional borrowings in an aggregate amount of $150 million, which can be in the form of increased capacity on the 2017 Revolver or the establishment of one or more term loans.



Borrowings under the 2017 Revolver bear interest, at the Company’s option, at a rate equal to a margin over (a) the London Interbank Offered Rate (“LIBOR”) plus a margin of between 1.50% and 3.00% or (b) a base rate (determined by reference to the highest of (i) the administrative agent’s prime lending rate, (ii) the federal funds effective rate plus 50 basis points, (iii) the LIBOR rate for a one-month interest period plus 100 basis points and (iv) 0% ), p lus a margin of between 0.50% and 2.00% , in each case based on the Consolidated Leverage Ratio (as defi ned in the 2017 Credit Facility ). In addition to paying interest on outstanding principal under the 2017 Credit Agreement, the Company will pay a commitment fee to the lenders under the 2017 Revolver in respect of the unutilized commitments thereunder. The Company   will pay customary letter of credit fees. If an event of default occurs and is continuing, the otherwise applicable margin and letter of credit fees will be increased by 2% per annum. The weighted-average annual interest rate on borrowings under the 2017 Revolver was approximately 3.86% during the first nine months of 2017.



The 2017 Credit Facility contains customary covenants for credit facilities of this type, including maximum consolidated leverage ratios ranging from 4.00 :1.00 to 3.25 :1.00 over the life of the facility and a minimum consolidated fixed charge coverage ratio of 1.25 :1.00. Substantially all of the Company’s subsidiaries unconditionally guarantee the obligations of the Company under the 2017 Credit Facility; additionally, the obligations are secured by a lien on all personal property of the Company and its subsidiaries guaranteeing these obligations.



As of September  30, 2017, there was  $ 197 million available under the 2017 Revolver , and the Company had not utilized the 2017 Credit Facility for letters of credit. The Company was in compliance with the financial covenants under the 2017 Credit Fa cility as of September 30, 2017.



Repurchase and Redemption of 2010 Senior Notes and Termination of 2014 Credit Facility



On April 20, 2017, the Company used proceeds from the 2017 Senior Notes and 2017 Revolver to repurchase or redeem its 2010 Senior Notes, to pay off its Term Loan and 2014 Revolver, and to pay accrued but unpaid interest and fees. In addition, the indenture governing the 2010 Senior Notes was satisfied and discharged, and the Company terminated the 2014 Credit Facility.



2010 Senior Notes



O n October 20, 2010, the Company issued $300 million of 7.625% Senior Notes due November 1, 2018 (the “2010 Senior Notes”) in a private placement offering. As discussed above, on April 20, 2017, the Company repurchased or redeemed the 2010 Senior Notes in full and the related indenture was satisfied and discharged.



2014 Credit Facility



On June 5, 2014, the Company entered into a Sixth Amended and Restated Credit Agreement, as amended (the “2014 Credit Facility”), with Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer and a syndicate of other lenders. T he 2014 Credit Facility provided for a $300 million revolving credit facility (the “2014 Revolver”), a $250 million term loan (the “Term Loan”) and a sublimit for the issuance of letters of credit up to the aggregate amount of $150 million, all maturing on May 1, 2018 .   Borrowings under both the 2014 Revolver and the Term Loan bore interest based either on Bank of America’s prime lending rate or the London Interbank Offered Rate (“LIBOR”), each plus an applicable margin ranging from 1.25% to 3.00% ,   contingent upon the latest Consolidated Leverage Ratio.

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As discussed above, on April 20, 2017, the Company repaid all borrowings under the 2014 Credit Facility and concurrently terminated the facility .



Convertible Notes



On June 15, 2016, the Company issued $200 million of 2.875% Convertible Senior Notes due June 15, 2021 (the “Convertible Notes”) in a private placement offering. The Convertible Notes   are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by the Company. The Convertible Notes bear interest at a rate of 2.875% per year, payable in cash semi-annually in June and December.



Prior to January 15, 2021, the Convertible Notes will be convertible only under the following circumstances: (1) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (2) if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion rate of 33.0579 (or $39.32 ) on each applicable trading day; or (3) upon the occurrence of specified corporate events. On or after January 15, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.



The Convertible Notes will be convertible at an initial conversion rate of 33.0579 shares of the Company’s common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $30.25 . The conversion rate will be subject to adjustment for some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company is required to increase, in certain circumstances, the conversion rate for a holder who elects to convert their Convertible Notes in connection with such a corporate event including customary conversion rate adjustments in connection with a “make-whole fundamental change” described in the indenture. Upon conversion, and at the Company’s election, the Company may satisfy its conversion obligation by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock. As of September 30, 2017, the conversion provisi ons of the Convertible Notes have not been triggered.



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Interest Expense



Interest expense as reported in the Condensed Consolidated Statements of Operations consists of the following:





(a) The combination of cash and non-cash interest expense produces effective interest rates that are higher than contractual rates. Accordingly, the effective interest rates for the 2017 Senior Notes and the Convertible Notes were   7.13% and   9.39% , respectively, for the nine months ended September 30, 2017.

 

(7)      Contingencies and Commitments



The Company and certain of its subsidiaries are involved in litigation and are contingently liable for commitments and performance guarantees arising in the ordinary course of business. The Company and certain of its customers have made claims arising from the performance under their contracts. The Company recognizes certain significant claims for recovery of incurred cost when it is probable that the claim will result in additional contract revenue and when the amount of the claim can be reliably estimated. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims , and the cost of both pending and future claims. In addition, because most contingencies are resolved over long periods of time, assets and liabilities may change in the future due to various factors. Management believes that, based on current information and discussions with the Company’s legal counsel, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.



Several matters are in the litigation and dispute resolution process. The following discussion provides a background and current status of the more significant matters.



Long Island Expressway/Cross Island Parkway Matter



The Company reconstructed the Long Island Expressway/Cross Island Parkway Interchange for the New York State Department of Transportation (the “NYSDOT”). The $130 million project was substantially completed in January 2004 and was accepted by the NYSDOT as complete in February 2006. The Company incurred significant added costs in completing its work and suffered extended schedule costs due to numerous design errors, undisclosed utility conflicts, lack of coordination with local agencies and other interferences for which the Company believes the NYSDOT is responsible.



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In March 2011, the Company filed its claim and complaint with the New York State Court of Claims and served to the New York State Attorney General’s Office, seeking damages in the amount of $53.8 million. In May 2011, the NYSDOT filed a motion to dismiss the Company’s claim on the grounds that the Company had not provided required documentation for project closeout and filing of a claim. In September 2011, the Company reached agreement on final payment with the Comptroller’s Office on behalf of the NYSDOT , which resulted in an amount of $0.5 million payable to the Company and formally closed out the project allowing the Company to re-file its claim. The Company re-filed its claim in the amount of $53.8 million with the NYSDOT in February 2012 and with the Court of Claims in March 2012. In May 2012, the NYSDOT served its answer and counterclaims in the amount of $151  million alleging fraud in the inducement and punitive damages related to disadvantaged business enterprise (“DBE”) requirements for the project. The Court subsequently ruled that NYSDOT’s counterclaims may only be asserted as a defense and offset to the Company’s claims and not as affirmative claims. In November 2014, the Appellate Division First Department affirmed the dismissal of the City’s affirmative defenses and affirmative counterclaims based on DBE fraud. The Company does not expect the counterclaims to have any material effect on its consolidated financial statements.



Management has made an estimate of the total anticipated recovery on this project, and such estimate is included in revenue recorded to date. To the extent new facts become known or the final recovery included in the claim settlement varies from the estimate, the impact of the change will be reflected in the consolidated financial statements at that time.



Fontainebleau Matter



Desert Mechanical , Inc. (“DMI”) and Fisk Electric Company (“Fisk”), wholly owned subsidiaries of the Company, were subcontractors on the Fontainebleau Project in Las Vegas (“Fontainebleau”), a hotel/casino complex with approximately 3,800 rooms. In June 2009, Fontainebleau filed for bankruptcy protection, under Chapter 11 of the U.S. Bankruptcy Code, in the Southern District of Florida.



DMI and Fisk filed liens in Nevada for approximately $44 million, representing unreimbursed costs to date and lost profits, including anticipated profits. Other unaffiliated subcontractors have also filed liens. In June 2009, DMI filed suit against Turnberry West Construction, Inc., the general contractor, in the 8th Judicial District Court, Clark County, Nevada (the “District Court”), and in May 2010, the court entered an order in favor of DMI for approximately $45 million.



In January 2010, the Bankruptcy Court approved the sale of the property to Icahn Nevada Gaming Acquisition, LLC, and this transaction closed in February 2010. As a result of a July 2010 ruling relating to certain priming liens, there was approximately $125  million set aside from this sale that is available for distribution to satisfy the creditor claims based on seniority. At that time, the total estimated sustainable lien amount was approximately $350 million. The project lender filed suit against the mechanic’s lien claimants, including DMI and Fisk, alleging that certain mechanic’s liens are invalid and that all mechanic’s liens are subordinate to the lender’s claims against the property. The Nevada Supreme Court ruled in October 2012 in an advisory opinion at the request of the Bankruptcy Court that lien priorities would be determined in favor of the mechanic lien holders under Nevada law.



In October 2013, a settlement was reached by and among the Statutory Lienholders and the other interested parties. The Bankruptcy Court appointed a mediator to facilitate the execution of that settlement agreement, but the parties were unable to settle. During the third quarter of 2017, DMI filed a motion seeking permission to file an action in Nevada; the motion was granted by the Bankruptcy C ourt.



Management has made an estimate of the total anticipated recovery on this project, and such estimate is included in revenue recorded to date. To the extent new facts become known or the final recovery included in the claim settlement varies from the estimate, the impact of the change will be reflected in the consolidated financial statements at that time.



Honeywell Street/Queens Boulevard Bridges Matter



In 1999, the Company was awarded a contract for reconstruction of the Honeywell Street/Queens Boulevard Bridges project for the City of New York (the “City”). In June 2003, after substantial completion of the project, the Company initiated an action to recover $8.8 million in claims against the City on behalf of itself and its subcontractors. In March 2010, the City filed counterclaims for $74.6  million and other relief, alleging fraud in connection with the DBE requirements for the project. In May 2010, the Company served the City with its response to the City’s counterclaims and affirmative defenses. In August 2013, the Court granted the Company’s motion to dismiss the City’s affirmative defenses and counterclaims relating to fraud.



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In January 2017, the Court granted the City’s motion for summary judgment and dismissed the Company’s claim against the City. The Company has filed a notice of appeal. The Court also granted the Company’s motion for summary judgment for release of retention plus interest from 2010 for an aggregate amount of approximately $1.2 million.



The Company does not expect ultimate resolution of this matter to have a material effect on its consolidated financial statements.



Westgate Planet Hollywood Matter



Tutor-Saliba Corporation (“TSC”), a wholly owned subsidiary of the Company, was contracted to construct a timeshare development project in Las Vegas , which was substantially completed in December 2009. The Company’s claims against the owner, Westgate Planet Hollywood Las Vegas, LLC (“WPH”), relate to unresolved owner change orders and other claims. The Company filed a lien on the project in the amount of $23.2 million and filed its complaint with the District Court, Clark County, Nevada. Several subcontractors have also recorded liens, some of which have been released by bonds and some of which have been released as a result of subsequent payment. WPH has posted a mechanic’s lien release bond for $22.3 million.



WPH filed a cross-complaint alleging non-conforming and defective work for approximately $51 million, primarily related to alleged defects, misallocated costs and liquidated damages. WPH revised the amount of their counterclaims to approximately $45 million.



Following multiple post-trial motions, final judgment was entered in this matter on March 20, 2014. TSC was awarded total judgment in the amount of $19.7 million on its breach of contract claim, which includes an award of interest up through the date of judgment, plus attorney’s fees and costs. WPH was awarded total judgment in the amount of $3.1  million on its construction defect claims, which includes interest up through the date of judgment. WPH and its Sureties have filed a notice of appeal. TSC has filed a notice of appeal on the defect award. In July 2014, the Court ordered WPH to post an additional supersedeas bond on appeal, in the amount of $1.7 million, in addition to the lien release bond of $22.3 million, which increases the security up to $24.0 million. In May 2017, the Nevada Supreme Court issued its ruling on the appeal by WPH and its Sureties. With only minor adjustments, the Nevada Supreme Court affirmed the lower district court’s judgment, and following further proceedings in the lower district court, the anticipated final recovery to the Company is estimated to exceed $20 million, including interest and recovery of certain attorneys’ fees and costs.



The Company does not expect ultimate resolution of this matter to have any material effect on its consolidated financial statements. Management has made an estimate of the total anticipated recovery on this project and such estimate is included in revenue recorded to date. To the extent new facts become known or the final recovery included in the claim settlement varies from the estimate, the impact of the change will be reflected in the consolidated financial statements at that time.



U.S. Department of Commerce, National Oceanic and Atmospheric Administration Matter



Rudolph and Sletten, Inc. (“R&S”), a wholly owned subsidiary of the Company, entered into a contract with the United States Department of Commerce, National Oceanic and Atmospheric Administration (“NOAA”) for the construction of a 287,000 square-foot facility for NOAA’s Southwest Fisheries Science Center Replacement Headquarters and Laboratory in La Jolla, California. The contract work began on May 24, 2010 and was substantially completed in September 2012. R&S incurred significant additional costs as a result of design errors and omissions, NOAA’s unwillingness to correct design flaws in a timely fashion and a refusal to negotiate the time and pricing associated with change order work. R&S filed claims against NOAA for contract adjustments related to the unresolved owner change orders, delays, design deficiencies and other claims.



In March 2017, the parties agreed to a proposed settlement, which was subsequently approved and paid by the government in the third quarter of 2017 .   The settlement did not have a material impact on the Company’s financial results for the three and nine months ended September 30, 2017.



Five Star Electric Matter



In the third quarter of 2015, Five Star Electric Corp. ("Five Star"), a wholly owned subsidiary of the Company that was acquired in 2011, entered into a tolling agreement (which has since expired) related to an ongoing investigation being conducted by the United States Attorney’s Office for the Eastern District of New York (“USAO EDNY”). Five Star has been cooperating with the USAO EDNY since late June 2014, when it was first made aware of the investigation, and has provided information requested by the g overnment related to its use of certain minority-owned, women-owned, small and disadvantaged business enterprises and certain of Five Star’s employee compensation, benefit and tax practices.



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As of September 30, 2017, the Company cannot predict the ultimate outcome of the investigation and cannot reasonably estimate the potential loss or range of loss that Five Star or the Company may incur or the impact of the results of the investigation on Five Star or the Company.



Alaskan Way Viaduct Matter



In January 2011, Seattle Tunnel Partners (“STP”), a joint venture between Dragados USA, Inc. and the Company, entered into a design-build contract with the Washington State Department of Transportation (“WSDOT”) for the construction of a large diameter bored tunnel in downtown Seattle, King County, Washington to replace the Alaskan Way Viaduct, also known as State Route 99.



The construction of the larg e diameter bored tunnel required the use of a tunnel boring machine (“TBM”). In December 2013, the TBM struck a steel pipe, installed by WSDOT as a well casing for an exploratory well. The TBM was damaged and was required to be shut down for repair. STP has asserted that the steel pipe casing was a differing site condition that WSDOT failed to properly disclose. The Disputes Review Board mandated by the contract to hear disputes issued a decision finding the steel casing was a Type I differing site condition. WSDOT has not accepted that finding.



The TBM was insured under a Builder’s Risk Insurance Policy (the “ Policy”) with Great Lakes Reinsurance (UK) PLC and a consortium of other insurers (the “Insurers”). STP submitted the claims to the Insurers and requested interim payments under the Policy. The Insurers refused to pay and denied coverage. In June 2015, STP filed a lawsuit in the King County Superior Court, State of Washington (“Washington Superior Court”) seeking declaratory relief concerning contract interpretation , as well as damages as a result of the Insurers’ breach of their obligations under the terms of the Policy. WSDOT is deemed a plaintiff since WSDOT is an insured under the Policy and had filed its own claim for damages. Hitachi Zosen (“Hitachi”) , the manufacturer of the TBM, has also joined the case as a plaintiff for costs incurred to repair the damages to the TBM. Trial is scheduled for Octob er 2018. Discovery is ongoing.



In March 2016, WSDOT filed a complaint against STP in Thurston County Superior Court for breach of contract alleging STP’s delays and failure to perform and declaratory relief concerning contract interpretation. STP filed its answer to WSDOT’s complaint and filed a counterclaim against WSDOT and Hitachi. Trial is set for June 2018. Discovery is ongoing.



As of September 30, 2017, the Company has concluded that the potential for a material adverse financial impact due to the Insurers’ denial of coverage and WSDOT’s legal actions is neither probable nor remote, and the potential loss or range of loss is not reasonably estimable. With respect to STP’s claims against the Insurers, WSDOT and Hitachi, management has included an estimate of the total anticipated recovery, concluded to be both probable and reliably estimable, in receivables or costs and estimated earnings in excess of billings recorded to date. To the extent new facts become known o r the final recoveries vary from the estimate, the impact of the change will be reflected in the financial statements at that time.

 

(8 )      Other Income, Net



On May 31, 2017, the Company entered into a settlement agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”), as successor in interest to Banc of America Securities LLC and Bank of America, N.A. (collectively “BofA”), to resolve the pending litigation between the Company and Merrill Lynch. The   litigation, which was filed by the Company in 2011, related to the purchase by the Company of certain auction-rate securities from BofA.



On June 6, 2017, the Company received the $37.0 million cash settlement payment agreed to in the settlement agreement, and the pending litigation was dismissed with prejudice. Neither party made any admission of liability or wrongdoing, and the settlement agreement includes mutual releases of all claims and liabilities related to the subject matter of the pending litigation.



The Company recognized the settlement as a gain during the second quarter of 2017 and reported it as a component of other income, net in its Condensed Consolidated Statement of Operations for the nine months ended September 30, 2017 .



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(9 )      Share-Based Compensation



On April 3, 2017, the Company adopted the Tutor Perini Corporation Incentive Compensation Plan (“Compensation Plan”), which was approved by the Company’s shareholders on May 24, 2017. The Compensation Plan provides for various types of share-based grants, including restricted and unrestricted stock units and stock options. Restricted and unrestricted stock units give the holder the right to exchange their stock units for shares of the Company’s common stock on a one-for-one basis. Stock options give the holder the right to purchase shares of the Company’s common stock at an exercise price equal to the fair value of the Company’s common stock on the date of the stock option’s award. Restricted stock units and stock options are usually subject to certain service and performance conditions and may not be sold or otherwise transferred until those restrictions have been satisfied; however, unrestricted stock units have no such restrictions. The term for stock options is limited to 10 years from the date of grant. The Compensation Plan allows for 2,335,000 shares of the Company’s common stock to be issued. As of September 30, 2017 , there were 1,839,364 shares available to be granted under this plan.



The Company’s Amended and Restated Tutor Perini Corporation Long-Term Incentive Plan (“Incentive Plan”) is still active. The Incentive Plan is described, and informational disclosures are provided, in the Notes to Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2016. As of September 30, 2017, there were 405,529 shares authorized to be issued under the Incentive Plan; however, as discussed in the Company’s Definitive Proxy Statement (Schedule 14A) filed on April 13, 2017, the Company will not issue these shares. As of September 30, 2017, the Incentive Plan had an aggregate of 4,360,018 of restricted stock units and stock options from outstanding, historical awards that either have not vested or have vested but have not been exercised.



During the first nine months of 2017 and 2016, the Company issued, in total from both the Compensation Plan and the Incentive Plan, the following share-based instruments: (1) restricted stock units of 1,055,000 and 483,387 at weighted-average per share prices of $ 30.03 and $ 19.14 , respectively; (2) stock options of 530,000 and 274,000 at weighted-average per share exercise prices of $ 24.64 and $16.20 , respectively; (3) unrestricted stock units of 99,155 and 64,603 at weighted-average per share prices of $ 26.26 and $21.67 , respectively.



Effective January 1, 2017, the Company prospectively adopted ASU  2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) , which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for the income tax effect of share-based transactions and the forfeiture of share-based instruments. Upon this adoption, the Company elected an accounting policy requiring forfeitures of share-based instruments to be accounted for upon occurrence. As a result, the Company will recognize the full grant-date fair value of share-based awards throughout the requ isite service period, with any adjustments for forfeitures recognized only if and when a forfeiture occurs. This policy notwithstanding , the Company will continue to assess the probability that performance targets will be achieved, and will adjust share - based compensation expense accordingly. During the nine months ended September 30, 2017, a total of   20,985 performance-based restricted stock units, with a weighted-average per share price of $23.91 , and 19,466 performance-based stock options, with a weighted-average per share exercise price of $26.56 , were forfeited; however, the impact of these forfeitures was not recognized during this period because it was previously recognized in the fourth quarter of 2016 in accordance w ith the provisions of ASC 718 ,   Compensation-Stock Compensation .  



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(1 0 )      Employee Pension Plans



The Company has a defined benefit pension plan and an unfunded supplemental retirement plan. Effective September 1, 2004, all benefit accruals under these plans were frozen; however, the current vested benefit was preserved. The pension disclosure presented below includes aggregated amounts for both of the Company’s plans.



The following table sets forth the net periodic be nefit cost for the three and nine months ended September 30, 201 7 and 201 6 :







The Company contributed $2.0 million and $ 1. 3 million to its defined benefit pension plan during the nine months ended September 30, 201 7 and 201 6 , respectively, and expects to contribute an additional $0.6 million later in 2017.

 

(11 )      Fair Value Measurements



The fair value hierarchy established by ASC 820, Fair Value Measurement , prioritizes the use of inputs used in valuation techniques into the following three levels:





The following fair value hierarchy table presents the Company’s assets that are measured at fair value on a recurri ng basis, as of September 30, 2017 and December 31, 2016:





(a) Includes money market funds with original maturity dates of three months or less.

(b) Investments in lieu of customer retainage are included in accounts receivable and are comprised of money market funds and municipal bonds, the majority of which are rated A3 or better. The fair values of the money market funds are measured using quoted market prices; therefore, they are classified as Level 1 assets. The fair values of municipal bonds are measured using readily available pricing sources for comparable instruments; therefore, they are classified as Level 2 assets. All of the above investments are available-for-sale securities.



The Company did not have material transfers between Levels 1 and 2 during the nine months ended September 30, 2017 or 2016.



The carrying values of receivables, payables and other amounts arising out of normal contract activities, including retainage, which may be settled beyond one year, are estimated to approximate fair value. The Company has restricted investments with an aggregate fair value of $48.7 million as of September 30, 2017, determined using Level 2 inputs. Restricted investments are held as collateral to secure insurance related contingent obligations. They are comprised of various corporate bonds and bank notes that are rated A3 or better and have maturities within the Company’s operating cycle. These restricted investments are held-to-maturity securities carried at amortized cost of $48.8 million as of September 30, 2017 .   Of the Company’s long-term debt, the fair value of the 2017 Senior Note s as of September 30, 2017 was $537.5 million . The fair value of the 2010 Senior Notes as of December 31, 2016 was $302.6  million; the 2010 Senior Notes were redeemed in the second quarter of 2017, as discussed in Note 6. T he fair value of the

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Convertible Notes was $ 231.9 million and $228.4 million as of September  30, 2017 and December 31, 2016, respectively. The fair values of the 2017 Senior Notes, 2010 Senior Notes and Convertible Notes were determined using Level 1 inputs, specifically current observable market prices. The reported value of the Company’s remaining long-term debt at September  30, 2017 and December 31, 2016 approximates fair value.

 

(1 2 )      Variable Interest Entities (“VIE”)



From time to time the Company may form joint ventures or partnerships with third parties for the execution of single contracts or projects. In accordance with ASC   810, Consolidation , the Company assesses its partnerships and joint ventures at inception to determine if any meet the qualifications of a VIE. ASC 810 also requires the Company to determine whether it is the primary beneficiary of the VIE. The Company concludes that it is the primary beneficiary and consolidates the VIE if the Company has both (a) the power to direct the economically significant activities of the VIE and (b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The Company considers the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights and board representation of the respective parties in determining if the Company is the primary beneficiary. The Company also considers all parties that have direct or implicit variable interests when determining whether it is the primary beneficiary. In accordance with ASC 810, management’s assessment of whether the Company is the primary beneficiary of a VIE is performed continuously.



As of September 30, 2017, the Company had consolidated VIE-related assets of $115.4 million and liabilities of $96.9 million , all of which are classified as current and are included in the Company’s Condensed Consolidated Balance Sheet.



One large joint venture that the Company is consolidating was established to construct the Purple Line Segment 2 Extension project, a $1.4 billion mass-transit project in Los Angeles, California. The Company has a 75% interest in the joint venture with the remaining 25% held by O&G Industries, Inc. The joint venture was initially financed with contributions from the partners and, per the terms of the joint venture agreement, the partners may be required to provide additional capital contributions in the future.



(13 )      Other Comprehensive Income (Loss)



ASC 220, Comprehensive Income , establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. The Company reports the change in p ension benefit plan assets/liabilities, cumulative foreign currency translation, change in fair value of investments and change in fair value of an interest rate swap as components of accumulated other comprehensive loss (“AOCI”).



The tax effects of the components of other comprehensive income (loss) for the three months ended September 30, 2017 and 2016 are as follows:







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The tax effects of the components of other comprehensive income (los s) for the nine months ended September 30, 2017 and 2016 are as follows:







The changes in AOCI balances by component (after tax) during the three and nine months ended September 30, 2017 are as follows:











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The changes in AOCI balance by component (after tax) for the three and nine months ended September 30, 2016 are as follows:















The significant items reclassified out of AOCI and the corresponding location and impact on the Condensed Consolidated Statement of Operations are as follows:







(a) Defined benefit pension plan adjustments were reclassified to cost of operations and general and administrative expenses.



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(1 4 )      Business Segments



The Company offers general contracting, pre-construction planning and comprehensive project management services, including planning and scheduling of manpower, equipment, materials and subcontractors required for the timely completion of a project in accordance with the terms and specifications contained in a construction contract. The Company also offers self-performed construction services: site work; concrete forming and placement; steel erection; electrical; mechanical; plumbing; and heating, ventilation and air conditioning (HVAC). As described below, our business is conducted through three segments: Civil, Building and Specialty Contractors. These segments are determined based on how the Company’s Chairman and Chief Executive Officer (chief operating decision maker) aggregates business units when evaluating performance and allocating resources.



The Civil segment specializes in public works construction and the replacement and reconstruction of infrastructure. The civil contracting services include construction and rehabilitation of highways, bridges, tunnels, mass-transit systems, and water management and wastewater treatment facilities.



The Building segment has significant experience providing services for private and public works customers in a number of specialized building markets, including: high-rise residential, hospitality and gaming, transportation, health care, commercial and government offices, sports and entertainment, education, correctional facilities, biotech, pharmaceutical, industrial and high-tech.



The Specialty Contractors segment specializes in electrical, mechanical, plumbing, HVAC, fire protection systems and pneumatically placed concrete for a full range of civil and building construction projects in the industrial, commercial, hospitality and gaming, and mass-transit end markets. This segment provides the Company with unique strengths and capabilities that allow the Company to position itself as a full-service contractor with greater control over scheduled work, project delivery and risk management.



The following table s set forth certain reportable segment information relating to the Company’s operations for the three and nine months ended September 30, 2017 and 2016:





(a) Consists primarily of corporate general and administrative expenses.



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(a) Consists primarily of corporate general and administrative expenses.

(b) Depreciation and amortization is included in income from construction operations.



During the nine months ended September 30, 2016, the Company recorded net favorable adjustments totaling $ 3.0 million in income from construction operations ( $0. 04 per diluted share) for various Five Star Electric projects in New York in the Specialty Contractors segment. The net impact included material adjustments related to two electrical subcontract projects: a favorable adjustment of $14.0 million for a completed project ( $0.17 per diluted share) and an unfavorable adjustment of $13.8 million for a project that was nearly complete ( $0.17 per diluted share). These were the only changes in estimates considered material to the Company’s results of operations during the periods presented herein.



A reconciliation of segment results to the consolidated income before income taxes is as follows:







Total assets by segment are as follows:









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(15 )       Related Party Transactions



Raymond R. Oneglia, Vice Chairman of O&G Industries, Inc. (“O&G”), is a director of the Company. The Company occasionally forms construction project join t ventures with O&G. Currently, the Company has two joint ventures with O&G for infrastructure projects in the northeastern United States that are both complete. In a ddition, the Company has a 75% interest in a newly formed joint venture with O&G (as the 25% interest holder) for a project in Los Angeles, California. O&G may provide equipment and services to these joint ventures on customary trade terms ; related payments made by the joint ventures to O&G during the three and nine months ended September 30, 2017 and 2016 were immaterial.