ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in Item 15. Exhibits and Financial Statement Schedules in this Annual Report. This discussion contains forward-looking statements, which involve risks and uncertainties. For cautions about relying on such forward-looking statements, please refer to the section entitled Forward-Looking Statements at the beginning of this Annual Report immediately prior to Item 1. Our actual results
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could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including, but not limited to, those discussed in Item 1A. Risk Factors and elsewhere in this Annual Report.
Comparison of 2020 to 2019 Results
For a discussion comparing our 2020 results to our 2019 results, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission on February 24, 2021.
Our 2019 results of operations were negatively impacted by a $379.9 million pre-tax, non-cash goodwill impairment charge and a $166.8 million pre-tax charge related to the adverse SR 99 jury verdict. The goodwill impairment charge reduced income from construction operations for the Civil, Building and Specialty Contractors segments by $210.2 million, $13.5 million and $156.2 million, respectively, for the year ended December 31, 2019. The SR 99-related charge principally reduced revenue and income from construction operations in the Civil segment. For additional information on the goodwill impairment charge, refer to the Second Quarter of 2019 Goodwill Impairment discussion in Note 6 of the Notes to Consolidated Financial Statements. For additional information on the SR 99-related charge, refer to the Alaskan Way Viaduct Matter discussion in Note 8 of the Notes to Consolidated Financial Statements.
Executive Overview
COVID-19 Update
Since its onset in early 2020, the COVID-19 pandemic has caused occasional temporary shortages in available manpower, reductions in field labor productivity, other inefficiencies, delays to project schedules and deferrals of project execution. As a result, we continue to incur incremental costs, much of which we are seeking to recover from our customers as allowed by contractual terms. The relief sought from customers, together with certain incremental project opportunities that resulted from the pandemic, has helped to mitigate the pandemic's negative impact on our financial results. In addition, we have experienced delays in certain legal proceedings, as various courts and arbitrators process a large backlog of cases that were impacted by the pandemic. The COVID-19 pandemic has also hindered the Company’s ability to resolve unapproved work, resulting in the need for the Company to temporarily fund certain project costs that would normally be more promptly negotiated, billed to and collected from customers, which has largely contributed to an increase in costs and estimated earnings in excess of billings (“CIE”). These delays in resolving and recovering on such claims adversely affected our liquidity and financial results in 2021. However, we anticipate a significant improvement in the pace and magnitude of dispute resolutions and corresponding cash recoveries in 2022, assuming there is no worsening of the pandemic.
Throughout 2020 and much of 2021, the pandemic also adversely affected the volume and timing of our new awards, which has negatively impacted our backlog and operating results, and the negative impact on operating results in 2022 is expected to continue due to previously limited bidding and proposal opportunities. In addition, many of our state and local government customers’ revenue sources have been negatively impacted by the pandemic due to curtailed ridership on mass-transit systems (buses, subways, trains, etc.), travel on commercial airlines, and driving by the general public, which resulted in reduced fare and toll collections, lower fuel tax receipts and reduced airport and other facility usage fees. The significant revenue reductions experienced by some of our customers have adversely impacted their ability to pay the Company timely for amounts due. The revenue reductions have also led to, and could continue to result in, customers delaying bid solicitations and contract awards for some of their planned infrastructure projects. The potential for continued or new pandemic-related delays in project bids and awards could result in lower-than-expected revenue and earnings until such time as the substantial funding relating to the recently enacted federal infrastructure legislation is distributed to our customers.
Due to the continued fluidity of the COVID-19 pandemic, uncertainties as to its scope and duration, and ongoing changes in the way that governments, businesses and individuals respond to the pandemic, the Company is unable at this time to accurately predict the pandemic’s future impact on the Company’s business, results of operations, financial condition or liquidity.
Operating Results
Consolidated revenue for 2021 was $4.6 billion compared to $5.3 billion for 2020. The decrease was primarily due to reduced project execution activities in the Building segment, as various projects have completed or are nearing completion, while newer projects that have been recently awarded are yet to contribute meaningfully to revenue. Revenue for both 2020 and 2021 was negatively impacted by the COVID-19 pandemic, which resulted in delays in new awards. The pandemic also caused delays in the execution of certain projects, which negatively impacted revenue for both years.
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Income from construction operations for 2021 was $226.8 million compared to $262.3 million for 2020. The decrease was primarily due to the revenue decline discussed above, as well as various unfavorable impacts due to changes in estimates totaling $63.1 million on a transportation project in the Northeast that affected all three segments and a separate $16.2 million impact due to a change in estimate on a Specialty Contractors segment mass-transit project. These changes in estimates reflected the temporary negative impact to earnings from growth in unapproved change orders, which resulted in a reduction in the projects’ percentage of completion (and, correspondingly, a reduction in the percentage of estimated profit recognized for the year ended December 31, 2021 for these projects), and, to a lesser degree, project charges. The temporary reduction to earnings is expected to reverse itself as the projects progress toward completion and the negotiation and settlement of the unapproved change orders could result in additional profit for the incremental work. The decrease was partially offset by favorable impacts due to changes in estimates totaling $45.3 million on certain Civil segment mass-transit projects and a $20.1 million favorable adjustment related to a legal judgment on a completed project in the Specialty Contractors segment. Further details are provided below in the Results of Segment Operations section.
The effective income tax rate for 2021 was 16.0% compared to 12.6% for 2020. The lower effective tax rate in 2020 primarily reflects one-time tax benefits related to provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). See Corporate, Tax and Other Matters below for a discussion of the changes in the effective tax rate.
Diluted earnings per share for 2021 was $1.79 compared to diluted earnings per share of $2.12 for 2020. The decrease in 2021 was principally due to the factors discussed above that drove the decrease in income from construction operations, as well as the higher effective tax rate in 2021 compared to 2020.
Consolidated new awards in 2021 were $4.5 billion compared to $2.4 billion in 2020. The increase in new awards in 2021 was primarily due to the impacts of the COVID-19 pandemic in 2020, which delayed certain customers from moving forward with planned project bid solicitations and contract awards until 2021 and beyond, due to budgetary impacts, funding uncertainties and customer staffing challenges. The Building and Civil segments were the primary contributors to the new award activity in 2021. Significant new awards included the Cedars-Sinai Marina del Rey Hospital in California (contract value was not publicly announced); the $471 million LAX Airport Metro Connector project; $434 million for various Civil segment projects in the Midwest; more than $385 million of additional funding for certain mass-transit projects in California; the $269 million Yountville Veterans Home in California; the $220 million I-70 Missouri River Bridge project; the $162 million Tinian International Airport aircraft parking apron and taxiway project in the Northern Mariana Islands; the $152 million Santa Rosa Courthouse project in California; and a $122 million military range project and a $98 million military housing project, both in Guam.
Consolidated backlog as of December 31, 2021 was $8.2 billion, essentially level compared to $8.3 billion as of December 31, 2020. Backlog for both 2020 and 2021 was negatively impacted by the COVID-19 pandemic due to reduced bidding and proposal activity. In addition, the Company’s lack of success in its pursuit of certain large prospective Civil segment projects in the second half of 2021 also negatively impacted backlog. As of December 31, 2021, the mix of backlog by segment was 55% for Civil, 28% for Building and 17% for Specialty Contractors, compared to 57% for Civil, 20% for Building and 23% for Specialty Contractors at the end of 2020. Importantly, Building segment backlog, which carries a substantially lower margin, increased $607 million year-over-year, whereas backlog for the higher-margin Civil and Specialty Contractors segments declined $230 million and $487 million, respectively, year-over-year.
Most projects in the Civil segment’s backlog typically convert to revenue over a period of three to five years and in the Building and Specialty Contractors segments over a period of one to three years. We estimate that approximately $4 billion, or 46%, of our backlog as of December 31, 2021 will be recognized as revenue in 2022. As a result of the changes in the backlog mix and the rate of conversion from backlog to revenue discussed above, we anticipate that in 2022 the Building segment will contribute proportionately higher revenue at a lower operating margin relative to contributions from the Civil and Specialty Contractors segments.
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The following table presents the changes in backlog in 2021:
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(a)New awards consist of the original contract price of projects added to our backlog plus or minus subsequent changes to the estimated total contract price of existing contracts.
(b)Backlog may differ from the transaction prices allocated to the remaining performance obligations as disclosed in Note 3 of the Notes to Consolidated Financial Statements. Such differences relate to the timing of executing a formal contract or receiving a notice to proceed. More specifically, backlog sometimes may include awards for which a contract has not yet been executed or a notice to proceed has not been issued, but for which there are no remaining major uncertainties that we will proceed with our work on the project (e.g., adequate funding is in place).
The outlook for the Company’s growth over the next several years remains favorable, but the impact of the COVID-19 pandemic could continue to adversely affect performance and operations, and the amount and timing of new work awarded. In addition, the Company’s growth could continue to be impacted by future project delays or the timing of project commencements, ramp-up activities and completions. We anticipate that we will continue to win our share of significant new awards resulting from long-term capital spending plans by state, local and federal customers, as well as limited competition for some of the largest project opportunities.
In elections over the past several years, voters in numerous states approved dozens of long-term transportation funding measures totaling approximately $200 billion in long-term funding. The largest of these was in Los Angeles County, where Measure M, a half-cent sales tax increase, was approved and is expected to generate $120 billion of funding over 40 years. In addition, California's Senate Bill 1, which was signed into law in 2017, is providing an average of $5.4 billion annually through 2027 for various transportation, mass-transit and bridge projects. Interest rates have remained near historically low levels, which may be conducive to continued, and potentially increased, spending on infrastructure projects if borrowing rates remain at relatively low levels following anticipated interest rate increases by the Federal Reserve in 2022.
As discussed above, the IIJA was enacted into law on November 15, 2021, and it provides for $1.2 trillion of federal infrastructure funding, including $550 billion in new spending for improvements to the country’s surface-transportation network and enhancements to core infrastructure. The IIJA marks the largest federal investment in public transit ever, the single largest dedicated bridge investment since the construction of the interstate highway system and the largest federal investment in passenger rail since the creation of Amtrak, all in addition to providing for regular annual spending for numerous infrastructure projects. This significant incremental funding is anticipated to be spent over the next 10 years, and much of it will be invested in end markets that are directly aligned with the Company’s market focus. Accordingly, the Company believes that this significant level of sustained, incremental funding will favorably impact the Company’s current work and prospective opportunities over the next decade.
The Company has certain large Civil segment projects in the Northeast that completed or were nearing completion in 2021. The Company is pursuing several large prospective projects on the West Coast, in the Northeast and in Guam that are expected to be bid and/or awarded in 2022 and 2023. However, the timing and magnitude of revenue contributions from these prospective projects may not fully offset revenue reductions associated with the projects that have completed or are progressing toward completion in 2021. In addition, as discussed above, the COVID-19 pandemic has resulted in, and could again result in, delays in the bidding and awarding of certain projects the Company is pursuing, which may further delay large, new revenue streams.
For a more detailed discussion of operating performance of each business segment, corporate general and administrative expenses and other items, see Results of Segment Operations, Corporate, Tax and Other Matters and Liquidity and Capital Resources below.
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Results of Segment Operations
The results of our Civil, Building and Specialty Contractors segments are discussed below:
Civil Segment
Revenue and income from construction operations for the Civil segment are summarized as follows:
Year Ended December 31,
Income from construction operations 266.2 245.8
Revenue for 2021 decreased 5% compared to 2020. The decrease was primarily due to reduced project execution activities on various completed or nearly completed projects in the Northeast, partially offset by increased activities on various projects in California and Guam. Revenue for both 2020 and 2021 was reduced by the aforementioned COVID-19 impacts.
Income from construction operations for 2021 increased 8% compared to 2020. Despite the modest revenue decline, income from construction operations increased primarily due to $29.0 million of favorable adjustments on a mass‐transit project and $16.3 million of favorable adjustments on another mass-transit project, both reflecting improved profitability as a result of the negotiation and settlement of certain change orders in 2021. The increase was partially offset by a $13.3 million negative impact due to changes in estimates on a transportation project in the Northeast that included a charge and the temporary negative impact to earnings from growth in unapproved change orders.
Operating margin was 12.7% for 2021 compared to 11.2% in 2020. The increase in operating margin for 2021 was primarily due to the factors discussed above that drove the increase in income from construction operations.
New awards in the Civil segment totaled $1.9 billion in 2021 compared to $946 million in 2020. As discussed earlier, the larger volume of new awards in 2021 was primarily due to the impacts of the COVID-19 pandemic, which delayed the bidding and awards for various projects until 2021 and beyond. In spite of the improvement in new award activity in 2021, the level of new awards was negatively impacted by the Company’s lack of success in its pursuit of certain large Civil segment projects in the second half of 2021. New awards in 2021 included $434 million for various Civil segment projects in the Midwest; more than $385 million of additional funding for certain mass-transit projects in California; the $220 million I-70 Missouri River Bridge project; the $162 million Tinian International Airport aircraft parking apron and taxiway project in the Northern Mariana Islands; and a $122 million military range project and a $98 million military housing project, both in Guam. The COVID-19 pandemic has resulted in significant revenue shortfalls for many state and local government agencies since 2020, and could continue to cause deferrals or cancellations of certain new projects, depending on the allocation and prioritization of state and local funding, as well as the availability, timing and magnitude of anticipated funding from the federal government, including funding from the recently enacted IIJA.
New awards in 2020 included more than $732 million of additional funding for various mass-transit projects, the Company’s $121 million share of a joint-venture mass-transit project in Massachusetts, and a $64 million mining project in Alabama.
Backlog for the Civil segment was $4.6 billion as of December 31, 2021, a modest decrease of 5% compared to $4.8 billion as of December 31, 2020. The segment continues to experience strong demand reflected in a large, multi-year pipeline of prospective projects, supported by substantial anticipated funding from various voter-approved transportation measures and the IIJA, and by public agencies’ long-term spending plans. The Civil segment is well-positioned to capture its share of these prospective projects.
Building Segment
Revenue and income from construction operations for the Building segment are summarized as follows:
Year Ended December 31,
Income from construction operations 28.7 53.2
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Revenue for 2021 decreased 28% compared to 2020, primarily due to reduced project execution activities on certain projects in California and Oklahoma that are completed or nearing completion. Revenue for both 2020 and 2021 was reduced by the aforementioned COVID-19 impacts.
Income from construction operations for 2021 decreased 46% compared to 2020, primarily due to volume reductions mentioned above, as well as a $13.3 million negative impact due to changes in estimates on a transportation project in the Northeast that included a charge and the temporary negative impact to earnings from growth in unapproved change orders.
Operating margin was 2.0% in 2021 compared to 2.7% in 2020. The decrease in operating margin was driven by the factors mentioned above that drove the lower revenue and income from construction operations.
New awards in the Building segment totaled $2.0 billion in 2021 compared to $897 million in 2020. The substantially increased level of new awards in 2021 was due to delays of certain new awards in 2020 that resulted from impacts of the COVID-19 pandemic. New awards in 2021 included the Cedars-Sinai Marina del Rey Hospital in California (contract value was not publicly announced); the $471 million LAX Airport Metro Connector project; the $269 million Yountville Veterans Home in California; and the $152 million Santa Rosa Courthouse project in California. The COVID-19 pandemic could continue to result in certain delayed project opportunities.
New awards in 2020 included approximately $615 million for various building projects in California and $271 million for several government facilities projects nationwide.
Backlog for the Building segment was $2.3 billion as of December 31, 2021, an increase of 36% compared to $1.7 billion as of December 31, 2020. The increase was driven by the heightened new award activity mentioned above. The Building segment continues to have a large volume of prospective projects across various end markets and geographic locations. We expect demand to grow as economic conditions remain conducive to increased customer spending on new building facilities and renovations to existing buildings, supported by what has been and is expected to remain a favorable, relatively low interest rate environment despite the prospect of higher interest rates in 2022. However, the COVID-19 pandemic has resulted in, and could continue to result in, reduced demand for our building construction services.
Specialty Contractors Segment
Revenue and income (loss) from construction operations for the Specialty Contractors segment are summarized as follows:
Year Ended December 31,
Income (loss) from construction operations (10.0) 17.2
Revenue for 2021 declined slightly compared to 2020. Revenue for 2020 and 2021 was reduced by the aforementioned COVID-19 impacts.
Loss from construction operations for 2021 was $10.0 million compared to income from construction operations of $17.2 million for 2020. The change was due to negative impacts of $19.0 million and $17.6 million on the mechanical and electrical components, respectively, of a transportation project in the Northeast and $16.2 million on an electrical mass-transit project also in the Northeast, all of which were due to changes in estimates that included charges and/or the temporary negative impact to earnings from growth in unapproved change orders. The decrease was partially offset by a $20.1 million favorable adjustment related to a legal judgment on a completed electrical project in New York, as well as the absence of the following largely offsetting items that had a net negative impact on the Company’s results in 2020: a $25.7 million prior-year gain as a result of a favorable arbitration decision and subsequent settlement of the related employment dispute, a $15.2 million prior-year unfavorable legal ruling pertaining to a mechanical project in California and a $13.2 million prior-year impact from an adverse arbitration ruling related to another electrical project in New York.
Operating margin was (0.9)% in 2021 compared to 1.5% in 2020. The decrease in operating margin was mainly attributable to the aforementioned factors that drove the lower income from construction operations.
New awards in the Specialty Contractors segment totaled $631 million in 2021 compared to $600 million in 2020. New awards in 2021 were mostly comprised of $370 million for various electrical and mechanical projects in the Northeast, and $260 million for various electrical and mechanical projects in Florida, Texas and California. The COVID-19 pandemic has resulted in, and could continue to result in, reduced demand from certain commercial and government customers that have been experiencing funding constraints.
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New awards in 2020 included $286 million for various electrical projects in Texas, California and Florida, and $158 million for various electrical projects in New York.
Backlog for the Specialty Contractors segment was $1.4 billion as of December 31, 2021, a decrease of 26% compared to $1.9 billion as of December 31, 2020. The decrease corresponds with the reduction in Civil segment backlog, as certain large Civil segment projects that were not awarded to the Company would have included substantial amounts of subcontract work for the Specialty Contractors segment. The decrease is also due to lower demand from certain customers, particularly in New York, that have experienced adverse budgetary impacts as a result of the COVID-19 pandemic and that have consequently delayed and/or reduced certain spending. The Specialty Contractors segment continues to be increasingly focused on servicing the Company’s backlog of large Civil and Building segment projects, but also remains well-positioned to capture its share of new projects for external customers, leveraging the size and scale of our business units that operate in New York, Texas, Florida and California and the strong reputation held by these business units for high-quality work on large, complex projects.
Corporate, Tax and Other Matters
Corporate General and Administrative Expenses
Corporate general and administrative expenses were $58.0 million in 2021 compared to $53.9 million in 2020. The increase in corporate general and administrative expenses in 2021 was predominantly due to higher travel-related expenses compared to 2020, when the COVID-19 pandemic caused significant travel reductions.
Other Income (Expense), Interest Expense and Income Tax Expense
Year Ended December 31,
Other income (expense) $ 2.0 $ (11.9)
Income tax expense (25.6) (21.9)
Net other income for 2021 was $2.0 million compared to net other expense of $11.9 million for 2020. The improvement in 2021 was primarily due to the absence of charges incurred in 2020 related to the unfavorable resolutions of certain disputes pertaining to past business acquisitions, which were not material.
Interest expense decreased $7.2 million in 2021 compared to 2020. The decrease in 2021 was primarily due to the absence of extinguishment costs recognized in 2020 related to debt refinancing.
The effective income tax rate was 16.0% for 2021 compared to 12.6% for 2020. The 2021 effective income tax rate reflects an $8.2 million benefit related to a federal claim of right tax credit, which resulted in a tax rate adjustment associated with an adverse 2019 jury verdict that rendered certain income recognized in 2016 to be uncollectible.
The effective income tax rate for 2020 primarily reflected the favorable tax rate differential realized on the 2019 net operating loss (“NOL”) carryback. Under the CARES Act, enacted on March 27, 2020, the NOL generated in 2019 may be carried back up to five years, whereas under previous rules NOLs were only allowed to be carried forward. This allowed the Company to realize the benefit of the tax rate differential by carrying back the NOL to tax years when the federal statutory tax rate was 35% rather than the current rate of 21%. For a further discussion of income taxes, refer to Note 5 of the Notes to Consolidated Financial Statements.
The effective income tax rates for 2021 and 2020 were unfavorably impacted by state income taxes and favorably impacted by earnings attributable to noncontrolling interests, for which income taxes are not the responsibility of the Company.
Liquidity and Capital Resources
Liquidity is provided by available cash and cash equivalents, cash generated from operations, credit facilities and access to capital markets. We have a committed line of credit totaling $175 million, with sublimits for the issuance of letters of credit and swing line loans up to the aggregate amounts of $75.0 million and $10.0 million, respectively, which may be used for revolving loans, letters of credit and/or general purposes. We believe that cash generated from operations, along with our unused credit capacity of $148 million and available cash balances as of December 31, 2021, will be sufficient to fund any working capital needs and debt maturities for the next 12 months and beyond, provided that we are not adversely impacted by unanticipated future events, including further impacts related to the COVID-19 pandemic as discussed above in COVID-19 Update. Liquidity has been, and could continue to be, adversely impacted by our inability to collect cash due to the follow-on impacts of
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COVID-19, which have constrained certain customers’ funding sources and delayed their ability to make payments on approved contract work. As discussed above in COVID-19 Update, the COVID-19 pandemic has delayed court and arbitration schedules and also hindered the Company’s ability to resolve unapproved work, which has largely contributed to an increase in CIE. We believe that the follow-on impacts of COVID-19 could be alleviated with the anticipated funding from the IIJA, as discussed above, and the relief of customers’ revenue and funding constraints as travel and commuting continue to resume, providing higher fare, toll and fuel tax revenue. Furthermore, the bottleneck of accumulated court and arbitration proceedings that grew during 2020 and 2021 due to the pandemic has recently begun to alleviate, although the timing of resolution and collection of amounts due to the Company related to such matters remains uncertain. We anticipate substantially improved operating cash generation in 2022 compared to 2021, as a result of projected cash collections, both from project execution activities and the resolution of various outstanding claims and change orders.
Cash and Working Capital
Cash and cash equivalents were $202.2 million as of December 31, 2021 compared to $374.3 million as of December 31, 2020. Cash immediately available for general corporate purposes was $60.2 million and $210.8 million as of December 31, 2021 and 2020, respectively, with the remainder being amounts held by our consolidated joint ventures and also our proportionate share of cash held by our unconsolidated joint ventures. Cash held by our joint ventures was available only for joint venture-related uses, including distributions to joint venture partners. In addition, our restricted cash and restricted investments totaled $93.6 million as of December 31, 2021 compared to $156.5 million as of December 31, 2020. Restricted cash and restricted investments are primarily held to secure insurance-related contingent obligations. Restricted cash as of December 31, 2020 also included $69.9 million of cash held to repay the outstanding principal balance of the Convertible Notes, which were repaid at maturity on June 15, 2021 (see Note 7 of the Notes to Consolidated Financial Statements).
During the year ended December 31, 2021, net cash used in operating activities was $148.5 million due primarily to investments in project working capital, partially offset by cash generated from earnings sources. The increase in working capital in 2021 primarily reflects a decrease in accounts payable due to timing of payments to suppliers and subcontractors and an increase in CIE. The increase in CIE was primarily due to the follow-on impacts of the COVID-19 pandemic, which has caused delays in the negotiation and resolution of certain claims and unapproved change orders (due to the postponement or deferrals of certain legal and arbitration proceedings and settlement discussions, which have recently begun to resume), and constrained customers’ revenue and funding sources, thereby limiting their budgetary discretion to pay the Company for changes approved in scope but for which pricing is pending. As discussed above, we expect the follow-on impacts of COVID-19 to ease as a result of anticipated funding from the IIJA and improved customer revenue and funding sources. During the year ended December 31, 2020, net cash provided by operating activities was $172.8 million due primarily to cash generated from earnings sources, partially offset by investment in working capital.
The $321.3 million decrease in cash provided by operating activities when comparing 2021 with 2020 substantially reflects an increased investment in working capital principally as a result of a current-year decrease in accounts payable compared to an increase in the prior year due to timing of payments to vendors and subcontractors, partially offset by a current-year decrease in retainage receivable compared to an increase in the prior year.
During 2021 and 2020, we used $37.3 million and $46.4 million of cash from investing activities, respectively. The net cash used in investing activities for 2021 and 2020 was primarily due to the acquisition of property and equipment for projects, which totaled $38.6 million and $54.8 million, respectively. The decrease in capital expenditures in 2021 was primarily due to higher capital expenditures in 2020 related to project-specific equipment funded directly by our customers.
During 2021, net cash used in financing activities was $54.7 million, which was primarily driven by net repayment of borrowings of $37.0 million and $22.7 million of cash distributions to noncontrolling interests, partially offset by $7.0 million of cash contributions from noncontrolling interests. During 2020, net cash provided by financing activities was $123.3 million, which was primarily driven by increased net borrowings of $181.4 million, partially offset by $48.5 million of cash distributions to noncontrolling interests and debt issuance costs of $11.2 million.
As of December 31, 2021, we had working capital of $2.1 billion, a ratio of current assets to current liabilities of 2.17 and a ratio of debt to equity of 0.59 compared to working capital of $1.8 billion, a ratio of current assets to current liabilities of 1.80 and a ratio of debt to equity of 0.66 at December 31, 2020.
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Debt
Summarized below are the key terms of our debt as of December 31, 2021. For additional information, refer to Note 7 of the Notes to Consolidated Financial Statements, as applicable.
2020 Credit Agreement
On August 18, 2020, the Company entered into a credit agreement (the “2020 Credit Agreement”) with BMO Harris Bank N.A., as Administrative Agent, Swing Line Lender and L/C Issuer and other lenders. The 2020 Credit Agreement provides for a $425.0 million term loan B facility (the “Term Loan B”) and a $175.0 million revolving credit facility (the “2020 Revolver”), with sublimits for the issuance of letters of credit and swing line loans up to the aggregate amounts of $75.0 million and $10.0 million, respectively. The Term Loan B will mature on August 18, 2027 and the 2020 Revolver will mature on August 18, 2025, in each case, unless any of the 2017 Senior Notes are outstanding on January 30, 2025 (which is 91 days prior to the maturity of the 2017 Senior Notes), in which case, both the Term Loan B and the 2020 Revolver will mature on January 30, 2025 (subject to certain further exceptions). For more information regarding the terms of our 2020 Credit Agreement, refer to Note 7 of the Notes to Consolidated Financial Statements.
The table below presents our actual and required first lien net leverage ratio under the 2020 Credit Agreement for the period, which is calculated on a rolling four-quarter basis:
Trailing Four Fiscal Quarters Ended
Actual Required
First lien net leverage ratio 1.23 to 1.00 < or = 2.75 : 1.00
As of December 31, 2021, we were in compliance and expect to continue to be in compliance with the covenants under the 2020 Credit Agreement.
Repurchase and Repayment of 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. On August 19, 2020, the Company used proceeds from the Term Loan B to repurchase $130.1 million aggregate principal amount of the Convertible Notes for an aggregate purchase price of $132.4 million (including accrued and unpaid interest to the repurchase date). The Company repaid the remaining principal balance of the Convertible Notes at maturity on June 15, 2021 using proceeds from the Term Loan B, which were held in a restricted cash account for this purpose. None of the Convertible Notes remained outstanding as of December 31, 2021.
2017 Senior Notes
On April 20, 2017, the Company issued $500 million in aggregate principal amount of 6.875% Senior Notes due May 1, 2025 (the “2017 Senior Notes”) in a private placement offering. Interest on the 2017 Senior Notes is payable in arrears semi-annually in May and November of each year, beginning in November 2017.
Equipment Financing and Mortgages
The Company has certain loans entered into for the purchase of specific property, plant and equipment and secured by the assets purchased. The aggregate balance of equipment financing loans was approximately $41.7 million and $36.9 million at December 31, 2021 and 2020, respectively, with interest rates ranging from 2.54% to 3.89% with equal monthly installment payments over periods up to five years. The aggregate balance of mortgage loans was approximately $14.6 million and $10.7 million at December 31, 2021 and 2020, respectively, with interest rates ranging from a fixed 2.25% to LIBOR plus 3% and equal monthly installment payments over periods up to 10 years, as well as one loan with a balloon payment of $6.8 million due in 2023.
Contractual Obligations
Our contractual obligations and commitments as of December 31, 2021 include:
•Debt obligations of $1.0 billion (of which $24.4 million are due in 2022) and interest payments of $259.5 million (of which $62.1 million are due in 2022) based on rates in effect as of December 31, 2021. See Note 7 of the Notes to Consolidated Financial Statements for further detail of our debt and the timing of expected future principal and interest payments.
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•Operating lease obligations of $102.9 million (of which $12.4 million are due in 2022). See Note 9 of the Notes to Consolidated Financial Statements for further detail of our lease obligations and the timing of expected future payments.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on information available through the date of the issuance of the financial statements; accordingly, actual results in future periods could differ from these estimates. Significant judgments and estimates used in the preparation of the Consolidated Financial Statements apply to the following critical accounting policies:
Method of Accounting for Contracts — Contract revenue is recognized over time using the cost-to-cost method which measures progress towards completion based on the ratio of contract costs incurred to date compared to total estimated costs for each performance obligation. The estimates used in accounting for contracts with customers require judgment and assumptions regarding both future events and the evaluation of contingencies such as the impact of change orders, liability claims, other contract disputes, the achievement of contractual performance standards and potential variances in project schedule and costs. Changes to the total estimated contract cost, either due to unexpected events or revisions to management’s initial estimates, for a given project are recognized in the period in which they are determined.
In certain instances, we provide guaranteed completion dates and/or achievement of other performance criteria. Failure to meet schedule or performance guarantees could result in unrealized incentive fees and/or liquidated damages. In addition, depending on the type of contract, unexpected increases in contract cost may be unrecoverable, resulting in total cost exceeding revenue realized from the projects. The Company generally provides limited warranties for work performed, with warranty periods typically extending for a limited duration following substantial completion of the Company’s work on a project. Historically, warranty claims have not resulted in material costs incurred.
Claims arising from construction contracts have been made against the Company by customers, and the Company has made claims against customers for costs incurred in excess of current contract provisions. The Company recognizes revenue for claims as variable consideration in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). Assumptions as to the occurrence of future events and the likelihood and amount of variable consideration are made during the contract performance period. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of anticipated performance and all information (historical, current and forecasted) that is reasonably available to management. Estimated amounts are only included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for variable consideration have been satisfied.
Construction Joint Ventures — Certain contracts are executed through joint ventures. The arrangements are often formed for the execution of single contracts or projects and allow the Company to share risks and secure specialty skills required for project execution.
In accordance with ASC 810, Consolidation (“ASC 810”) the Company assesses its joint ventures at inception to determine if any meet the qualifications of a variable interest entity (“VIE”). The Company considers a joint venture a VIE if either (a) the total equity investment is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or their rights to receive the expected residual returns of the entity and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events outlined in ASC 810, the Company reassesses its initial determination of whether the joint venture is a VIE.
The Company also evaluates whether it is the primary beneficiary of each VIE and consolidates the VIE if the Company has both (a) the power to direct the economically significant activities of the entity and (b) the obligation to absorb losses of, or the right to receive benefits from, the entity 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
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rights and board representation of the respective parties in determining whether it qualifies as the primary beneficiary. The Company also considers all parties that have direct or implicit variable interests when determining whether it is the primary beneficiary. When the Company is determined to be the primary beneficiary, the VIE is consolidated. In accordance with ASC 810, management’s assessment of whether the Company is the primary beneficiary of a VIE is performed continuously.
For construction joint ventures that do not need to be fully consolidated, the Company accounts for its interest in the joint ventures using the proportionate consolidation method, whereby the Company’s proportionate share of the joint ventures’ assets, liabilities, revenue and cost of operations are included in the appropriate classifications in the Company’s consolidated financial statements. Intercompany balances and transactions are eliminated. See Note 1(b) and Note 13 of the Notes to Consolidated Financial Statements for additional discussion regarding VIEs.
Recoverability of Goodwill — Goodwill represents the excess of amounts paid over the fair value of net assets acquired from an acquisition. In order to determine the amount of goodwill resulting from an acquisition, we perform an assessment to determine the value of the acquired company's tangible and identifiable intangible assets and liabilities. In our assessment, we determine whether identifiable intangible assets exist, which typically include backlog, customer relationships and trade names.
We test goodwill for impairment annually as of October 1 of each year. This test requires us to estimate the fair value of each reporting unit carrying goodwill using income and market approaches, and to compare the calculated fair value of each reporting unit to its carrying value, which is equal to the reporting unit’s net assets. If the calculated fair value of a reporting unit is less than its carrying value, we recognize an impairment charge equal to the difference.
The impairment evaluation process requires assumptions that are subject to a high degree of judgment such as revenue growth rates, profitability levels, discount rates, industry market multiples and weighted-average cost of capital. Changes in these assumptions would impact the results of our impairment tests.
During interim periods, including those subsequent to the Company’s October 1 annual test date, we evaluate events and circumstances, including, but not limited to, an examination of macroeconomic conditions, cost factors, overall financial performance by each reporting unit, other relevant entity-specific events, and trends in the stock prices of our Company and peers to determine if such factors indicate that it is likely that the goodwill for one or more of our reporting units is impaired, thus warranting the performance of a quantitative impairment test sooner than the fourth quarter of the year. The Company performed an interim impairment test as of June 1, 2019 and recognized a non-cash impairment loss totaling $379.9 million, which eliminated the carrying value of goodwill for the Building and Specialty Contractors reporting units. See Note 1(g) and Note 6 of the Notes to Consolidated Financial Statements.
During the fourth quarter of 2021, we conducted our annual goodwill impairment test and determined that goodwill was not impaired since the estimated fair value of the Civil reporting unit exceeded its net book value by a significant amount. As such, there is a risk of goodwill impairment if future events are less favorable than what we assumed or estimated in our impairment analysis.
The Company has considered relevant events and circumstances since the annual goodwill impairment test, including, but not limited to, an examination of macroeconomic conditions, industry and market conditions, impacts from the COVID-19 pandemic, cost factors, overall financial performance by each reporting unit, other relevant entity-specific events, and trends in the stock prices of the Company and its peers. In considering the totality of qualitative factors known as of the reporting date, we determined that no triggering events occurred or circumstances changed since our October 1, 2021 annual test that would more likely than not reduce the fair value of the Civil reporting unit below its carrying amount. We will continue to monitor events occurring or circumstances changing which may suggest that goodwill should be reevaluated. These events and circumstances include, but are not limited to, changes in the overall financial performance of the Civil reporting unit, impacts to our business as a result of the COVID-19 pandemic, as well as other quantitative and qualitative factors specific to the Civil reporting unit which indicate potential triggering events that would more likely than not reduce the fair value of the Civil reporting unit below its carrying amount.
New Accounting Pronouncements — For a discussion of recently adopted accounting standards and updates, see Note 1(p) of the Notes to Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not enter into derivative financial instruments for trading, speculation or other purposes that would expose the Company to market risk. In the normal course of business, our results of operations are exposed to certain market risks, primarily associated with fluctuations in interest rates. Borrowings under our 2020 Credit Agreement and certain other debt obligations have variable interest rates subject to interest rate risk. See Note 7 of the Notes to Consolidated Financial Statements for further
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discussion of our 2020 Credit Agreement. We had approximately $453.9 million and $431.5 million of borrowings with variable interest rates as of December 31, 2021 and 2020, respectively. If short-term floating interest rates on these borrowings were to change by 0.50% and our variable indebtedness were to remain unchanged, interest expense would increase or decrease by approximately $2.3 million for the next twelve months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements are set forth in Item 15 in this Annual Report on Form 10-K and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures — An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined by Rule 13a-15(e) under the Exchange Act, as of December 31, 2021 was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the SEC’s rules. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting — Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining an adequate system of internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f). In designing and evaluating our system of internal control over financial reporting, we recognize that inherent limitations exist in any control system no matter how well designed and operated, and we can only provide reasonable, not absolute, assurance of achieving the desired control objectives. In making this assessment, management utilized the criteria issued in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2021, our internal control over financial reporting was effective based on those criteria.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
Deloitte & Touche LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2021.
Changes in Internal Control over Financial Reporting — There were no changes in our internal control over financial reporting for the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Tutor Perini Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Tutor Perini Corporation and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 24, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Los Angeles, California
February 24, 2022
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ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is hereby incorporated by reference from our definitive proxy statement to be filed within 120 days after the end of 2021.
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive, principal financial and principal accounting officers. Our Code of Business Conduct and Ethics is posted on our website located at http://investors.tutorperini.com/corporate-governance/overview/default.aspx. We intend to disclose future amendments to certain provisions of the Code of Business Conduct and Ethics, and waivers of the Code of Business Conduct and Ethics granted to executive officers and directors, on the website within four business days following the date of the amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by reference from our definitive proxy statement to be filed within 120 days after the end of 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information for 2021
As of December 31, 2021, the Company’s share-based compensation plan had outstanding securities and securities available to be awarded as follows:
(a) (b) (c)
Equity compensation plans not approved by security holders — — —
Additional information required by this Item 12 is hereby incorporated by reference from our definitive proxy statement to be filed within 120 days after the end of 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is hereby incorporated by reference from our definitive proxy statement to be filed within 120 days after the end of 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is hereby incorporated by reference from our definitive proxy statement to be filed within 120 days after the end of 2021.
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PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Tutor Perini Corporation and Subsidiaries
(a) List of Documents Filed as a Part of This Report.
1. Financial Statements:
Our Consolidated Financial Statements as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021 and the Notes thereto, together with the Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) on those Consolidated Financial Statements are hereby filed as part of this Annual Report on Form 10-K, beginning on page F-1.
2. Financial Statement Schedules:
All consolidated financial statement schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements and in the Notes thereto.
3. Exhibits:
See exhibits listed under Part (b) below.
(b) Exhibits.
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed herewith or have heretofore been filed with the SEC under the Securities Act or the Exchange Act and are referred to and incorporated herein by reference to such filings.
Exhibit 3. Articles of Incorporation and By-laws
Exhibit 10. Material Contracts
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Exhibit 21 Subsidiaries of Tutor Perini Corporation.
Exhibit 23 Consent of Independent Registered Public Accounting Firm.
Exhibit 95 Mine Safety Disclosure.
Exhibit 101.SCH Inline XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.
Exhibit 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Exhibit 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.
_____________________________________________________________________________________________________________
* Management contract or compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Tutor Perini Corporation
(Registrant)
Date: February 24, 2022 By: /s/ Gary G. Smalley
Gary G. Smalley
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
= Principal Executive Officer and Director
/s/ Ronald N. Tutor
Ronald N. Tutor Chairman and Chief Executive Officer February 24, 2022
= Principal Financial Officer
/s/ Gary G. Smalley
= Principal Accounting Officer
/s/ Ryan J. Soroka
Ryan J. Soroka Vice President and Chief Accounting Officer February 24, 2022
= Other Directors
Peter Arkley )
Jigisha Desai )
Sidney J. Feltenstein )
Michael F. Horodniceanu ) /s/ Gary G. Smalley
Michael R. Klein ) Gary G. Smalley
Robert C. Lieber ) Attorney in Fact
Dennis D. Oklak )
Raymond R. Oneglia )
Dale A. Reiss )
Dickran M. Tevrizian, Jr. ) Dated: February 24, 2022
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TUTOR PERINI CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Consolidated Financial Statements of the Registrant
Report of Independent Registered Public Accounting Firm F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Income (Loss) F-5
Consolidated Balance Sheets F-6
Consolidated Statements of Cash Flows F-7
Consolidated Statements of Changes in Equity F-8
Notes to Consolidated Financial Statements F-9
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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Tutor Perini Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tutor Perini Corporation and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue, Accounts Receivable, Contract Assets and Liabilities — Accounting for Construction Contracts – Refer to Notes 1, 3, 4, and 8 to the consolidated financial statements
Critical Audit Matter Description
The Company recognizes revenue for construction contracts over the contract term (“over time”) as construction work progresses. The accounting for these contracts involves judgment, particularly as it relates to the process of determining total estimated revenue (transaction price) and estimating total costs to be incurred at contract completion. Costs of operations are typically recognized as incurred, and the Company’s revenues, including estimated profits, are recorded proportionately as costs are incurred based on the ratio of costs incurred to date to the total estimated costs at completion for the respective performance obligations. Assumptions as to the occurrence of future events and the likelihood and amount of variable consideration, including the impact of change orders, claims, contract disputes and the achievement of contractual performance criteria, and award or other incentive fees are made during the contract performance period (collectively referred to as “variable consideration”). The Company estimates variable consideration at the most likely amount it expects to receive and includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Also, the Company often engages subcontractors, suppliers, or vendors, to provide underlying materials or services, or a combination of both. Judgment
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is involved in determining estimated recoveries from disputes regarding performance under these contracts (“back charges”), which are a reduction in costs and are recorded as a receivable on the consolidated balance sheet.
Given the significant judgment necessary to account for the Company’s construction contracts including the use of estimates, such as total estimated revenue, total costs to be incurred at contract completion, variable consideration and back charges, which are complex and subject to many variables, auditing the corresponding balances and related accounting estimates required extensive audit effort due to the complexity of these estimates, and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates and judgments included within the Company’s total estimated revenues, total costs to be incurred at contract completion, variable consideration, and back charges included the following, among others:
•We tested the effectiveness of controls over revenues, including those over the determination of estimated costs at completion of the contract, total estimated revenue (including the estimated percentage of completion), variable consideration (including significant change orders and claims), and back charges.
•We selected a sample of construction contracts and performed the following:
◦Compared the total estimated revenue (transaction price), including estimated variable consideration, to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers.
◦We evaluated the reasonableness of the estimated variable consideration by 1) evaluating the information supporting management’s judgment as to the cause and contractual rights and 2) testing the accuracy of the identification of the underlying costs.
◦Tested the accuracy and completeness of costs incurred to date.
◦Evaluated the reasonableness of management’s estimates of total cost and profit at completion for selected contracts by:
•Evaluating management’s ability to achieve the estimates of total cost and profit by performing corroborating inquiries with the Company’s project managers, and comparing the estimates to management’s work plans, engineering specifications, and supplier contracts.
•Comparing management’s estimates to supporting documents for those estimates, when applicable.
•Evaluating management’s ability to accurately estimate total costs and profits at completion by comparing actual costs and profits to management’s historical estimates for performance obligations that have been fulfilled.
•Evaluating trends on changes in estimates and obtaining evidence on timing and amounts supporting these changes in estimates.
◦Tested the mathematical accuracy of management’s calculation of revenue recognized.
•We evaluated selected quarter over quarter changes in contract profit estimates by obtaining explanations from the Company’s project managers regarding timing and amount and corroborating these inquiries by reading documents such as management work plans, customer communications, invoices and supplier communications.
•Performed procedures on recorded back charges to evaluate the reasonableness of the estimated recovery by 1) evaluating the information supporting management’s judgment as to the cause and contractual rights and 2) testing the accuracy of the identification of the underlying costs.
/s/ Deloitte & Touche LLP
Los Angeles, California
February 24, 2022
We have served as the Company's auditor since 2002.
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TUTOR PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OFOPERATIONS
Year Ended December 31,
(in thousands, except per common share amounts) 2021 2020 2019
Goodwill impairment — — (379,863)
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 42,225 43,943 27,465
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 1.80 $ 2.14 $ (7.72)
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 1.79 $ 2.12 $ (7.72)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
The accompanying notes are an integral part of these consolidated financial statements.
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TUTOR PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Defined benefit pension plan adjustments 6,221 (6,261) 844
Foreign currency translation adjustments (325) 279 1,337
Unrealized gain (loss) in fair value of investments (2,650) 1,571 1,561
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX 3,246 (4,411) 3,742
The accompanying notes are an integral part of these consolidated financial statements.
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TUTOR PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
(in thousands, except share and per share amounts) 2021 2020
ASSETS
CURRENT ASSETS:
PROPERTY AND EQUIPMENT:
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
COMMITMENTS AND CONTINGENCIES (Note 8)
EQUITY
Stockholders' equity:
Preferred stock – authorized 1,000,000 shares ($1 par value), none issued — —
Accumulated other comprehensive loss (43,635) (46,741)
The accompanying notes are an integral part of these consolidated financial statements.
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TUTOR PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
Cash Flows from Operating Activities:
Goodwill impairment — — 379,863
Change in debt discounts and deferred debt issuance costs 5,756 20,153 13,207
Gain on remeasurement of investment in joint venture — — (37,792)
(Gain) loss on sale of property and equipment 2,639 (1,673) (4,688)
Cash Flows from Investing Activities:
Business acquisition, cash balance acquired net of cash paid — — 6,607
Cash Flows from Financing Activities:
Cash payments related to share-based compensation (1,989) (1,397) (2,363)
Contributions from noncontrolling interests 7,000 3,000 9,813
Debt issuance, extinguishment and modification costs — (11,194) (504)
The accompanying notes are an integral part of these consolidated financial statements.
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TUTOR PERINI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Contributions from noncontrolling interests — — — — 9,813 9,813
Distributions to noncontrolling interests — — — — (46,500) (46,500)
Other comprehensive income (loss) — — — (4,641) 230 (4,411)
Contributions from noncontrolling interests — — — — 3,000 3,000
Distributions to noncontrolling interests — — — — (48,467) (48,467)
Share-based compensation — 8,848 — — — 8,848
Contributions from noncontrolling interests — — — — 10,000 10,000
Distributions to noncontrolling interests — — — — (22,655) (22,655)
The accompanying notes are an integral part of these consolidated financial statements.
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TUTOR PERINI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in compliance with generally accepted accounting principles in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). Certain amounts in the notes to the consolidated financial statements of prior years have been reclassified to conform to the current year presentation.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Tutor Perini Corporation and its wholly owned subsidiaries (the “Company”). The Company occasionally forms joint ventures with unrelated third parties for the execution of single contracts or projects. The Company assesses its joint ventures to determine if they meet the qualifications of a variable interest entity (“VIE”) in accordance with ASC 810, Consolidation (“ASC 810”). If a joint venture is a VIE and the Company is the primary beneficiary, the joint venture is fully consolidated (See Note 13). If a joint venture is not a VIE, it may be consolidated under the voting interest method if the Company holds a controlling financial interest in the joint venture. The Company is considered to hold a controlling financial interest when it is able to exercise control over the joint venture’s operating and financial decisions. For construction joint ventures that do not need to be consolidated, the Company accounts for its interest in the joint ventures using the proportionate consolidation method, whereby the Company’s proportionate share of the joint ventures’ assets, liabilities, revenue and cost of operations are included in the appropriate classifications in the Company’s consolidated financial statements. Intercompany balances and transactions have been eliminated.
(c) Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available through the date of the issuance of the financial statements; therefore, actual results could differ from those estimates.
(d) Revenues
Revenue Recognition
The Company derives revenue from long-term construction contracts with public and private customers primarily in the United States and its territories and in certain other international locations. The Company’s construction contracts are generally each accounted for as a single unit of account (i.e., as a single performance obligation).
Throughout the execution of construction contracts, the Company and its affiliated entities recognize revenue with the continuous transfer of control to the customer. The customer typically controls the asset under construction by either contractual termination clauses or by the Company’s rights to payment for work already performed on the asset under construction that does not have an alternative use for the Company.
Because control transfers over time, revenue is recognized to the extent of progress towards completion of the performance obligations. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services provided. The Company generally uses the cost-to-cost method for its contracts, which measures progress towards completion for each performance obligation based on the ratio of costs incurred to date to the total estimated costs at completion for the respective performance obligation. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Revenue, including estimated fees or profits, is recorded proportionately as costs are incurred. Cost of operations includes labor, materials, subcontractor costs, and other direct and indirect costs, including depreciation and amortization.
Due to the nature of the work required to be performed on many of the Company’s performance obligations, estimating total revenue and cost at completion is complex, subject to many variables and requires significant judgment. Assumptions as to the occurrence of future events and the likelihood and amount of variable consideration, including the impact of change orders, claims, contract disputes and the achievement of contractual performance criteria, and award or other incentive fees are made during the contract performance period. The Company estimates variable consideration at the most likely amount it expects to receive. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal
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of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of anticipated performance and all information (historical, current and forecasted) that is reasonably available to management. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for variable consideration have been satisfied.
Changes in Estimates on Construction Contracts
The Company’s estimates of contract revenue and cost are highly detailed and many factors change during a contract performance period that result in a change to contract profitability. These factors include, but are not limited to, differing site conditions; availability of skilled contract labor; performance of major material suppliers and subcontractors; on-going subcontractor negotiations and buyout provisions; unusual weather conditions; changes in the timing of scheduled work; change orders; accuracy of the original bid estimate; changes in estimated labor productivity and costs based on experience to date; achievement of incentive-based income targets; and the expected, or actual, resolution terms for claims. The factors that cause changes in estimates vary depending on the maturation of the project within its lifecycle. For example, in the ramp-up phase, these factors typically consist of revisions in anticipated project costs and during the peak and closeout phases, these factors include the impact of change orders and claims, as well as additional revisions in remaining anticipated project costs. Generally, if the contract is at an early stage of completion, the current period impact is smaller than if the same change in estimate is made to the contract at a later stage of completion. Management evaluates changes in estimates on a contract-by-contract basis and discloses significant changes, if material, in the Notes to Consolidated Financial Statements. The cumulative catch-up method is used to account for revisions in estimates.
(e) Depreciation of Property and Equipment and Amortization of Long-Lived Intangible Assets
Property and equipment and long-lived intangible assets are generally depreciated or amortized on a straight-line basis over their estimated useful lives ranging from three to forty years.
(f) Recoverability of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever circumstances indicate that the future cash flows generated by the assets might be less than the assets’ net carrying value. In such circumstances, an impairment loss will be recognized by the amount the assets’ net carrying value exceeds their fair value.
(g) Recoverability of Goodwill
The Company tests goodwill for impairment annually as of October 1 for each reporting unit and between annual tests if events occur or circumstances change which suggest that goodwill should be reevaluated. Such events or circumstances include significant changes in legal factors and business climate, recent losses at a reporting unit, and industry trends, among other factors. The Civil, Building and Specialty Contractors segments each represent a reporting unit, and the Civil reporting unit carried the remaining goodwill balance at December 31, 2021 as a result of the $379.9 million impairment loss recognized in 2019. The Company performs its annual quantitative impairment assessment during the fourth quarter of each year using a weighted average of an income and a market approach. These approaches utilize various valuation assumptions, and small changes to the assumptions could have a significant impact on the concluded fair value. The income approach is based on estimated present value of future cash flows for each reporting unit carrying a goodwill balance. The market approach is based on assumptions about how market data relates to each reporting unit carrying a goodwill balance. The weighting of these two approaches is based on their individual correlation to the economics of each reporting unit carrying a goodwill balance. The annual quantitative assessment performed in the fourth quarter of 2021 resulted in an estimated fair value that exceeded the net book value of the Civil reporting unit; therefore, no impairment charge was necessary.
(h) Recoverability of Non-Amortizable Trade Names
Certain trade names have an estimated indefinite life and are not amortized to earnings, but instead are reviewed for impairment annually, or more often if events occur or circumstances change which suggest that the non-amortizable trade names should be reevaluated. The Company performs its annual quantitative impairment assessment during the fourth quarter of each year using an income approach (relief from royalty method). The assessment performed in the fourth quarter of 2021 resulted in an estimated fair value for the non-amortizable trade names that exceeded their respective net book values; therefore, no impairment charge was necessary.
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(i) Income Taxes
Deferred income tax assets and liabilities are recognized for the effects of temporary differences between the financial statement carrying amounts and the income tax basis of assets and liabilities using tax rates expected to be in effect when such differences reverse. Income tax positions must meet a more-likely-than-not threshold to be recognized. The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision.
(j) Earnings Per Common Share
Basic earnings per common share (“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 and unexercised stock options. Potentially dilutive securities also included the Convertible Notes (as defined in Note 7) prior to their repayment on June 15, 2021; however, the Convertible Notes had no impact on diluted EPS. The Company calculates the effect of the potentially dilutive restricted stock units and stock options using the treasury stock method.
Year Ended December 31,
Effect of dilutive restricted stock units and stock options 352 421 —
Net income (loss) attributable to Tutor Perini Corporation per common share:
Anti-dilutive securities not included above 1,892 1,862 3,640
For the year ended December 31, 2019, all outstanding restricted stock units and stock options were excluded from the calculation of weighted-average diluted shares outstanding due to the net loss for the period.
(k) Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the amounts shown in the Consolidated Statements of Cash Flows:
As of December 31,
Total cash, cash equivalents and restricted cash $ 211,396 $ 451,852
Cash equivalents include short-term, highly liquid investments with maturities of three months or less when acquired. Cash and cash equivalents consist of amounts available for the Company’s general purposes, the Company’s proportionate share of cash held by the Company’s unconsolidated joint ventures and 100% of amounts held by the Company’s consolidated joint ventures. In both cases, cash held by joint ventures is available only for joint venture-related uses, including future distributions to joint venture partners.
Restricted cash primarily includes amounts held as collateral to secure insurance-related contingent obligations, such as insurance claim deductibles, in lieu of letters of credit. As of December 31, 2020, restricted cash also included $69.9 million held to repay the outstanding principal balance of Convertible Notes, which matured and were repaid on June 15, 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(l) Restricted Investments
The Company has restricted investments primarily held as collateral to secure insurance-related contingent obligations, such as insurance claim deductibles, in lieu of letters of credit. Restricted investments are primarily comprised of investments in U.S. government agency securities and corporate debt securities that are rated A3 or better.
(m) Share-Based Compensation
The Company’s long-term incentive plans allow the Company to grant share-based compensation awards in a variety of forms, including restricted stock units, stock options, cash-settled performance stock units (“CPSUs”) and unrestricted stock.
Restricted 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. These awards generally vest subject to service, performance or market conditions, with related compensation expense equal to the fair value of the award on the date of grant and recognized on a straight-line basis over the requisite period. The fair value of restricted stock units with service or performance-vesting conditions is generally based on the closing price of the Company’s common stock on the New York Stock Exchange (“NYSE”). Certain restricted stock units are classified as liabilities because they contain guaranteed minimum payouts.
Stock options give the holder the right to purchase shares of the Company’s common stock subsequent to the vesting date at a defined exercise price. A stock option exercise price must be equal to or greater than the fair value of the Company’s common stock on the date of the award. The term for stock options is limited to 10 years from the award date. Stock options generally vest subject to certain service, performance or market conditions, with related compensation expense equal to the fair value of the award on the date of grant and recognized on a straight-line basis over the requisite period. The fair value of stock options with service or performance-vesting conditions is generally based on the Black-Scholes model.
CPSUs give the holder the right to exchange their stock units for cash based on the value of the Company’s common stock on the vesting date. These awards vest subject to service and market or performance conditions. CPSUs are classified as liability awards and are remeasured at fair value at the end of each reporting period with the change in fair value recognized in earnings. The fair value of performance-based CPSUs is generally based on the closing price of the Company’s common stock on the NYSE at the measurement date. Since CPSUs are settled in cash and no shares are issued, these awards do not dilute equity.
Certain restricted stock unit, stock option and CPSU awards contain market condition components tied to the Company’s total shareholder return in relation to its peer companies, as calculated over a multi-year performance period (“TSR awards”).The fair value of the market-based awards is estimated using a Monte Carlo simulation model. Significant assumptions used in this simulation model include the Company’s expected volatility, a risk-free rate based on U.S. Treasury yield curve rates with maturities consistent with the performance period, and the volatilities for each of the Company’s peers.
Unrestricted stock awards vest immediately upon grant with related compensation expense equal to the fair value of the award on the date of grant.The fair value of unrestricted stock is based on the closing price of the Company’s common stock on the NYSE.
For all awards with only a service-based vesting condition, the Company accounts for forfeitures upon occurrence, rather than estimating the probability of forfeiture at the date of grant. Accordingly, the Company recognizes the full grant-date fair value of these awards on a straight-line basis throughout the requisite service period, reversing any expense if, and only if, there is a forfeiture.
For all awards that have a performance-based vesting condition, the Company evaluates the probability of achieving the performance criteria quarterly throughout the performance period, and will adjust share-based compensation expense if it estimates that the achievement of the performance criteria is not probable. In addition, liability awards with a performance-based vesting condition are remeasured at fair value at each reporting period and the compensation expense is adjusted accordingly.
For equity awards with a market-based vesting condition, compensation expense is recognized regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. Conversely, liability awards with market-based vesting requirements are remeasured at fair value at each reporting period using a Monte Carlo simulation model and the compensation expense is adjusted accordingly.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(n) Insurance Liabilities
The Company typically utilizes third-party insurance coverage subject to varying deductible levels with aggregate caps on losses retained. The Company assumes the risk for the amount of the deductible portion of the losses and liabilities primarily associated with workers’ compensation and general liability coverage. In addition, on certain projects, the Company assumes the risk for the amount of the deductible portion of losses that arise from any subcontractor defaults. Losses are accrued based upon the Company’s estimates of the aggregate liability for claims incurred using historical experience and certain actuarial assumptions followed in the insurance industry. The estimate of insurance liability within the deductible limits includes an estimate of incurred but not reported claims based on data compiled from historical experience.
(o) Other Comprehensive Income (Loss)
ASC 220, Comprehensive Income, establishes standards for reporting comprehensive income and its components in the consolidated financial statements. The Company reports the change in pension benefit plan assets/liabilities, cumulative foreign currency translation, and change in fair value of investments as components of accumulated other comprehensive income (loss) (“AOCI”).
The components of other comprehensive income (loss) and the related tax effects for the years ended December 31, 2021, 2020 and 2019 were as follows:
Year Ended December 31,
Other comprehensive income (loss):
________________________________________________________________________________________
(a)The only component of other comprehensive income (loss) attributable to noncontrolling interests is foreign currency translation.
The changes in AOCI balances by component (after tax) attributable to Tutor Perini Corporation during the years ended December 31, 2021, 2020 and 2019 were as follows:
Attributable to Tutor Perini Corporation:
Other comprehensive income (loss) before reclassifications (539) 944 1,621 2,026
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The significant items reclassified out of AOCI and the corresponding location and impact on the Consolidated Statements of Operations during the years ended December 31, 2021, 2020 and 2019 are as follows:
Location in Consolidated Year Ended December 31,
Component of AOCI:
Income tax benefit Income tax expense (benefit) (807) (675) (550)
Income tax expense Income tax expense (benefit) 74 66 16
(p) Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), modifying Accounting Standards Codification (“ASC”) 740, Income Taxes (“ASC 740”). The amendments in ASU 2019-12, among other things, remove certain exceptions to the general principles in ASC 740 and seek more consistent application by clarifying and amending the existing guidance. The Company adopted this ASU effective January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s financial position, results of operations or cash flows.
2. Consolidated Statements of Cash Flows
Below are the changes in other components of working capital, net of balances related to incremental interest acquired in a Civil segment joint venture during 2019 (see Note 6), as shown in the Consolidated Statements of Cash Flows, as well as the supplemental disclosures of cash paid for interest, income taxes and non-cash investing activities:
Year Ended December 31,
(Increase) Decrease in:
(Decrease) Increase in:
Supplemental disclosures:
Non-cash investing activities:
Real property acquired in settlement of a receivable $ — $ 11,660 $ —
Receivable recognized from sale of subsidiary $ 4,163 $ — $ —
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Revenue
Disaggregation of Revenue
The following tables disaggregate revenue by end market, customer type and contract type, which the Company believes best depict how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors for the years ended December 31, 2021, 2020 and 2019.
Year Ended December 31,
Civil segment revenue by end market:
Year Ended December 31,
Building segment revenue by end market:
Year Ended December 31,
Specialty Contractors segment revenue by end market:
(in thousands) Civil Building SpecialtyContractors Total
Revenue by customer type:
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(in thousands) Civil Building SpecialtyContractors Total
Revenue by customer type:
(in thousands) Civil Building SpecialtyContractors Total
Revenue by customer type:
State and local agencies. The Company’s state and local government customers include state transportation departments, metropolitan authorities, cities, municipal agencies, school districts and public universities. Services provided to state and local customers are primarily pursuant to contracts awarded through competitive bidding processes. Construction services for state and local government customers have included mass-transit systems, tunnels, bridges, highways, judicial and correctional facilities, schools and dormitories, health care facilities, convention centers, parking structures and other municipal buildings. The vast majority of the Company’s civil contracting and building construction services are provided in locations throughout the United States and its territories.
Federal agencies. The Company’s federal government customers include the U.S. State Department, the U.S. Navy, the U.S. Army Corps of Engineers, the U.S. Air Force and the National Park Service. Services provided to federal agencies are typically pursuant to competitively bid contracts for specific or multi-year assignments that involve new construction or infrastructure repairs or improvements. A portion of revenue from federal agencies is derived from projects in overseas locations.
Private owners. The Company’s private owners (i.e., customers) include real estate developers, health care companies, technology companies, hospitality and gaming resort owners, Native American sovereign nations, public corporations and private universities. Services are provided to private customers through negotiated contract arrangements, as well as through competitive bids.
Most federal, state and local government contracts contain provisions that permit the termination of contracts, in whole or in part, for the convenience of government customers, among other reasons.
(in thousands) Civil Building SpecialtyContractors Total
Revenue by contract type:
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(in thousands) Civil Building SpecialtyContractors Total
Revenue by contract type:
(in thousands) Civil Building SpecialtyContractors Total
Revenue by contract type:
Fixed price. Fixed price or lump sum contracts are most commonly used for projects in the Civil and Specialty Contractors segments and generally commit the Company to provide all of the resources required to complete a project for a fixed sum. Usually, fixed price contracts transfer more risk to the Company, but offer the opportunity for greater profits. Billings on fixed price contracts are typically based on estimated progress against predetermined contractual milestones.
Guaranteed maximum price (“GMP”). GMP contracts provide for a cost plus fee arrangement up to a maximum agreed upon price. These contracts place risks on the Company for amounts in excess of the GMP, but may permit an opportunity for greater profits than under cost plus fee contracts through sharing agreements with the owner on any cost savings that may be realized. Services provided by our Building segment to various private customers are often performed under GMP contracts. Billings on GMP contracts typically occur on a monthly basis and are based on actual costs incurred plus a negotiated margin.
Unit price. Unit price contracts are most prevalent for projects in the Civil and Specialty Contractors segments and generally commit the Company to provide an estimated or undetermined number of units or components that comprise a project at a fixed price per unit. This approach shifts the risk of estimating the quantity of units required to the project owner, but the risk of increased cost per unit is borne by the Company, unless otherwise allowed for in the contract. Billings on unit price contracts typically occur on a monthly basis and are based on actual quantity of work performed or completed during the billing period.
Cost plus fee. Cost plus fee contracts are used for many projects in the Building and Specialty Contractors segments. Cost plus fee contracts include cost plus fixed fee contracts and cost plus award fee contracts. Cost plus fixed fee contracts provide for reimbursement of approved project costs plus a fixed fee. Cost plus award fee contracts provide for reimbursement of the project costs plus a base fee, as well as an incentive fee based on cost and/or schedule performance. Cost plus fee contracts serve to minimize the Company’s financial risk, but may also limit profits. Billings on cost plus fee contracts typically occur on a monthly basis based on actual costs incurred plus a negotiated margin.
Changes in Contract Estimates that Impact Revenue
Changes to the total estimated contract revenue or cost for a given project, either due to unexpected events or revisions to management’s initial estimates, are recognized in the period in which they are determined. Revenue was negatively impacted during the year ended December 31, 2021 related to performance obligations satisfied (or partially satisfied) in prior periods by a net $37.5 million for various projects. Revenue was negatively impacted during the year ended December 31, 2020 related to performance obligations satisfied (or partially satisfied) in prior periods by a net $77.0 million for various projects. Revenue was negatively impacted during the year ended December 31, 2019 related to performance obligations satisfied (or partially satisfied) in prior periods by a net $177.5 million for various projects, including a $123.9 million revenue impact that resulted from the charge related to the Alaskan Way Viaduct Matter discussed in Note 8.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed and exclude unexercised contract options. As of December 31, 2021, the aggregate amounts of the transaction prices allocated to the remaining performance obligations of the Company’s construction contracts were $4.6 billion, $2.2 billion and $1.3 billion for the Civil, Building and Specialty Contractors segments, respectively. As of December 31, 2020, the aggregate amounts of the transaction prices allocated to the remaining performance obligations of the Company’s construction contracts were $4.8 billion, $1.5 billion and $1.8 billion for the Civil, Building and Specialty Contractors segments, respectively. The Company typically recognizes revenue on Civil segment projects over a period of three to five years, whereas for projects in the Building and Specialty Contractors segments, the Company typically recognizes revenue over a period of one to three years.
4. Contract Assets and Liabilities
The Company classifies contract assets and liabilities that may be settled beyond one year from the balance sheet date as current, consistent with the length of time of the Company’s project operating cycle.
Contract assets include amounts due under retainage provisions, costs and estimated earnings in excess of billings and capitalized contract costs. The amounts as included on the Consolidated Balance Sheets consisted of the following:
As of December 31,
Costs and estimated earnings in excess of billings:
Total costs and estimated earnings in excess of billings 1,356,768 1,236,734
Retainage receivable represents amounts invoiced to customers where payments have been partially withheld pending the completion of certain milestones, satisfaction of other contractual conditions or the completion of the project. Retainage agreements vary from project to project and balances could be outstanding for several months or years depending on a number of circumstances, such as contract-specific terms, project performance and other variables that may arise as the Company makes progress toward completion. As of December 31, 2021, the amount of retainage receivable estimated by management to be collected beyond one year is approximately 31% of the balance.
Costs and estimated earnings in excess of billings represent the excess of contract costs and profits (or contract revenue) over the amount of contract billings to date and are classified as a current asset. Costs and estimated earnings in excess of billings result when either: (1) the appropriate contract revenue amount has been recognized over time in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), but a portion of the revenue recorded cannot be billed currently due to the billing terms defined in the contract, or (2) costs are incurred related to certain claims and unapproved change orders. Claims occur when there is a dispute regarding both a change in the scope of work and the price associated with that change. Unapproved change orders occur when a change in the scope of work results in additional work being performed before the parties have agreed on the corresponding change in the contract price. The Company routinely estimates recovery related to claims and unapproved change orders as a form of variable consideration at the most likely amount it expects to receive and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Claims and unapproved change orders are billable upon the agreement and resolution between the contractual parties and after the execution of contractual amendments. Increases in claims and unapproved change orders typically result from costs being incurred against existing or new positions; decreases normally result from resolutions and subsequent billings. As discussed in Note 8, the resolution of these claims and unapproved change orders may require litigation or other forms of dispute resolution proceedings. 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 incremental progress toward contractual requirements or milestones. The amount of costs and estimated
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
earnings in excess of billings as of December 31, 2021 estimated by management to be collected beyond one year is approximately $795.2 million.
Capitalized contract costs are included in other current assets and primarily represent costs to fulfill a contract that (1) directly relate to an existing or anticipated contract, (2) generate or enhance resources that will be used in satisfying performance obligations in the future and (3) are expected to be recovered through the contract. Capitalized contract costs are generally expensed to the associated contract over the period of anticipated use on the project. During the years ended December 31, 2021, 2020 and 2019, $47.3 million, $46.7 million and $33.8 million, respectively, of previously capitalized contract costs were amortized and recognized as expense on the related contracts.
Contract liabilities include amounts owed under retainage provisions and billings in excess of costs and estimated earnings. The amount as reported on the Consolidated Balance Sheets consisted of the following:
As of December 31,
Billings in excess of costs and estimated earnings 761,689 839,222
Retainage payable represents amounts invoiced to the Company by subcontractors where payments have been partially withheld pending the completion of certain milestones, other contractual conditions or upon the completion of the project. Generally, retainage payable is not remitted to subcontractors until the associated retainage receivable from customers is collected. As of December 31, 2021, the amount of retainage payable estimated by management to be remitted beyond one year is approximately 24% of the balance.
Billings in excess of costs and estimated earnings represent the excess of contract billings to date over the amount of contract costs and profits (or contract revenue) recognized to date. The balance may fluctuate depending on the timing of contract billings and the recognition of contract revenue. Revenue recognized during the years ended December 31, 2021, 2020 and 2019 and included in the opening billings in excess of costs and estimated earnings balances for each period totaled $638.7 million, $690.7 million and $479.6 million, respectively.
5. Income Taxes
Income (loss) before income taxes is summarized as follows:
Year Ended December 31,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The income tax expense (benefit) is as follows:
Year Ended December 31,
Current expense (benefit):
Deferred expense (benefit):
The following table is a reconciliation of the Company’s income tax provision at the statutory federal tax rate to the Company’s effective tax rate:
Year Ended December 31,
(dollars in thousands) Amount Rate Amount Rate Amount Rate
Impact of federal tax law changes — — (14,476) (8.3) — —
Goodwill impairment — — — — 43,990 (10.3)
Federal claim of right credit (8,191) (5.1) — — — —
The Company’s provision for income taxes and effective tax rate for the year ended December 31, 2021 was favorably impacted by a federal claim of right tax credit resulting in a tax rate adjustment associated with an adverse 2019 jury verdict that rendered certain income recognized in 2016 to be uncollectible.
The Company's provision for income taxes and effective tax rate for the year ended December 31, 2020 was significantly impacted by a change in tax law. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. A major provision of the CARES Act allows net operating losses from the 2018, 2019 and 2020 tax years to be carried back up to five years. As a result, for the year ended December 31, 2020, the Company was able to recognize tax benefits in excess of the current federal statutory rate of 21% due to the effects of carrying back its net operating loss arising in 2019 to tax years in which the federal statutory rate was 35%.
The Company’s provision for income taxes and effective tax rate for the year ended December 31, 2019 was significantly impacted by the goodwill impairment charge discussed in Note 6. Of the total goodwill impairment charge of $379.9 million, approximately $209.5 million pertained to goodwill that was not tax deductible and yielded permanent differences between
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
book income and taxable income. For the year ended December 31, 2019, the Company recognized U.S. federal and state tax benefits totaling $49.4 million as a result of the impairment charge.
The following is a summary of the significant components of the deferred tax assets and liabilities:
As of December 31,
Deferred tax assets:
Deferred tax liabilities:
Intangible assets, due primarily to purchase accounting (16,453) (15,212)
Construction contract accounting (9,196) (9,769)
As of December 31, 2021, the Company had net operating loss carryforwards in various states totaling $166.0 million with expiration dates ranging from 2022 to 2040. As of December 31, 2020, the Company had net operating loss carryforwards in various states totaling $196.5 million. As of December 31, 2021, the Company had federal and state tax credit carryforwards of approximately $0.1 million and $2.6 million, respectively. As of December 31, 2020, the Company had federal and state tax credit carryforwards of approximately $1.4 million and $2.0 million, respectively.
The net deferred tax liabilities are presented in the Consolidated Balance Sheets as follows:
As of December 31,
The Company’s policy is to record interest and penalties on unrecognized tax benefits as an element of income tax expense. The cumulative amounts related to interest and penalties are added to the total unrecognized tax liabilities on the balance sheet. The total amount of gross unrecognized tax benefits as of December 31, 2021 that, if recognized, would impact the effective tax rate is $7.5 million. The Company does not expect any significant release of unrecognized tax benefits within the next twelve months.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company accounts for its uncertain tax positions in accordance with GAAP. The following is a reconciliation of the beginning and ending amounts of these unrecognized tax benefits for the three years ended December 31, 2021:
As of December 31,
Change in tax positions of prior years (1,319) 2,286 351
Reduction in tax positions for statute expirations (823) (489) (773)
The Company conducts business internationally and, as a result, one or more of its subsidiaries files income tax returns in U.S. federal, U.S. state and certain foreign jurisdictions. Accordingly, in the normal course of business, the Company is subject to examination by taxing authorities principally throughout the United States, Guam and Canada. The Company's open tax years for a U.S. federal income tax audit are 2018 and later. The 2018 federal income tax return is currently under audit by the Internal Revenue Service. The Company has various years open to audit in a number of state and local jurisdictions and is currently under audit by various state and local taxing authorities.
6. Goodwill and Intangible Assets
Goodwill
The following table presents the changes in the carrying amount of goodwill since its inception through December 31, 2021:
(in thousands) Civil Building SpecialtyContractors Total
2020 activity — — — —
Current year activity — — — —
_____________________________________________________________________________________________________________
(a)As of December 31, 2021, accumulated impairment was $867.8 million.
The Company performed its annual impairment test in the fourth quarter of 2021 and concluded goodwill was not impaired. In addition, the Company determined that no triggering events occurred and no circumstances changed since the date of our annual impairment test that would more likely than not reduce the fair value of the Civil reporting unit below its carrying amount.