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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2014

 

OR

 

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

 

For the transition period from             to             

 

Commission File Number:  1-6314

 

Tutor Perini Corporation

(Exact name of registrant as specified in its charter)

 

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

 

15901 OLDEN STREET, SYLMAR, CALIFORNIA 91342-1093

(Address of principal executive offices)

(Zip code)

 

(818) 362-8391

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

 

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

 

The number of shares of common stock, $1.00 par value per share, of the registrant outstanding at May 2, 2014 was 48,527,960.

 

 

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TUTOR PERINI CORPORATION AND SUBSIDIARIES

 

INDEX

 

					Page Number
Part I.	Financial Information:
	Item 1.		Financial Statements (unaudited)
			Consolidated Condensed Balance Sheets — March 31, 2014 and December 31, 2013		3 - 4
			Consolidated Condensed Statements of Operations — Three months ended March 31, 2014 and 2013		5
			Consolidated Condensed Statements of Comprehensive Income — Three months ended March 31, 2014 and 2013		6
			Consolidated Condensed Statement of Stockholders’ Equity — Three months ended March 31, 2014		7
			Consolidated Condensed Statements of Cash Flows — Three months ended March 31, 2014 and 2013		8
			Notes to Consolidated Condensed Financial Statements		9 - 31
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		32 - 38
	Item 3.		Quantitative and Qualitative Disclosures About Market Risk		39
	Item 4.		Controls and Procedures		39
Part II.	Other Information:
	Item 1.	Legal Proceedings			40
	Item 1A.	Risk Factors			40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			40
	Item 3.	Defaults Upon Senior Securities			40
	Item 4.	Mine Safety Disclosures			40
	Item 5.	Other Information			40
	Item 6.	Exhibits			41
	Signatures				42

 

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Part I.— Financial Information

 

TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

MARCH 31, 2014 AND DECEMBER 31, 2013

(in thousands, except share data)

 

		March 31, 2014
		(unaudited)			December 31, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	133,064		$	119,923
Restricted cash		43,269			42,594
Accounts receivable, including retainage		1,263,390			1,291,246
Costs and estimated earnings in excess of billings		698,423			573,248
Deferred income taxes		8,195			8,240
Other current assets		54,858			50,669
Total current assets		2,201,199			2,085,920
LONG-TERM INVESTMENTS		46,283			46,283
PROPERTY AND EQUIPMENT (net of accumulated depreciation of $192,780 in 2014 and $183,793 in 2013)		516,683			498,125
OTHER ASSETS:
Goodwill		577,756			577,756
Intangible assets, net		110,071			113,740
Other		73,357			75,614
Total assets		$	3,525,349		$	3,397,438

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (continued)

MARCH 31, 2014 AND DECEMBER 31, 2013

(in thousands, except share data)

 

 

		March 31, 2014
		(unaudited)			December 31, 2013
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt		$	122,947		$	114,658
Accounts payable, including retainage		791,638			758,225
Billings in excess of costs and estimated earnings		264,118			267,586
Accrued expenses and other current liabilities		148,986			158,017
Total current liabilities		1,327,689			1,298,486
LONG-TERM DEBT, less current maturities		697,823			619,226
DEFERRED INCOME TAXES		114,186			114,333
OTHER LONG-TERM LIABILITIES		118,631			117,858
Total liabilities		2,258,329			2,149,903
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS’ EQUITY:
Preferred stock, $1 par value:
Authorized — 1,000,000 shares
Issued and outstanding — none		—			—
Common stock - $1 par value: 75,000,000 shares authorized;
Shares issued and outstanding: 48,527,960 shares and 48,421,467 shares		48,528			48,421
Additional paid-in capital		1,011,381			1,007,918
Retained earnings		240,514			224,575
Accumulated other comprehensive loss		(33,403		)	(33,379		)
Total stockholders’ equity		1,267,020			1,247,535
Total liabilities and stockholders’ equity		$	3,525,349		$	3,397,438

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

 

		THREE MONTHS ENDED
		MARCH 31,
		2014			2013
Revenues		$	955,233		$	992,928
Cost of operations		849,886			892,571
Gross profit		105,347			100,357
General and administrative expenses		63,850			64,278
INCOME FROM CONSTRUCTION OPERATIONS		41,497			36,079
Other (expense) income, net		(3,373		)	(827		)
Interest expense		(10,831		)	(11,336		)
Income before income taxes		27,293			23,916
Provision for income taxes		(11,354		)	(9,116		)
NET INCOME		$	15,939		$	14,800
BASIC EARNINGS PER COMMON SHARE		$	0.33		$	0.31
DILUTED EARNINGS PER COMMON SHARE		$	0.33		$	0.31
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		48,440			47,559
Effect of dilutive stock options and restricted stock units		490			954
DILUTED		48,930			48,513

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

 

		THREE MONTHS ENDED
		MARCH 31,
		2014			2013
NET INCOME		$	15,939		$	14,800
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation		(490		)	(335		)
Change in fair value of investments		188			178
Change in fair value of interest rate swap		138			280
Other comprehensive income before taxes		(164		)	123
INCOME TAX EXPENSE (BENEFIT):
Foreign currency translation		(204		)	(149		)
Change in fair value of investments		7			77
Change in fair value of interest rate swap		57			112
Income tax expense		(140		)	40
NET OTHER COMPREHENSIVE INCOME (LOSS)		(24		)	83
TOTAL COMPREHENSIVE INCOME		$	15,915		$	14,883

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

FOR THE THREE MONTHS ENDED MARCH 31, 2014

(in thousands)

 

											Accumulated
					Additional						Other
		Common			Paid-in			Retained			Comprehensive
		Stock			Capital			Earnings			(Loss) Income			Total
Balance - December 31, 2013		$	48,421		$	1,007,918		$	224,575		$	(33,379	)	$	1,247,535
Net income		—			—			15,939			—			15,939
Other comprehensive loss		—			—			—			(24		)	(24		)
Total comprehensive income														15,915
Tax effect of stock-based compensation		—			—			—			—			—
Stock-based compensation expense		—			5,145			—			—			5,145
Issuance of common stock, net		107			(1,682		)	—			—			(1,575		)
Balance - March 31, 2014		$	48,528		$	1,011,381		$	240,514		$	(33,403	)	$	1,267,020

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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TUTOR PERINI CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

		THREE MONTHS ENDED
		MARCH 31,
		2014			2013
Cash Flows from Operating Activities:
Net income		$	15,939		$	14,800
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		14,659			13,793
Stock-based compensation expense		5,429			3,078
Deferred income taxes		45			348
(Gain) loss on sale of property and equipment		427			(76		)
Other long-term liabilities		3,494			1,851
Other non-cash items		(427		)	(197		)
Changes in other components of working capital		(80,696		)	(118,052		)
NET CASH USED IN OPERATING ACTIVITIES		(41,130		)	(84,455		)
Cash Flows from Investing Activities:
Acquisition of property and equipment		(8,352		)	(12,179		)
Proceeds from sale of property and equipment		1,417			239
Change in restricted cash		(675		)	(6,514		)
NET CASH USED IN INVESTING ACTIVITIES		(7,610		)	(18,454		)
Cash Flows from Financing Activities:
Proceeds from debt		178,038			293,014
Repayment of debt		(113,551		)	(225,684		)
Business acquisition-related payments		(1,031		)	—
Issuance of common stock and effect of cashless exercise		(1,575		)	(159		)
NET CASH PROVIDED BY FINANCING ACTIVITIES		61,881			67,171
Net Increase/(Decrease) in Cash and Cash Equivalents		13,141			(35,738		)
Cash and Cash Equivalents at Beginning of Year		119,923			168,056
Cash and Cash Equivalents at End of Period		$	133,064		$	132,318
Supplemental Disclosure of Cash Paid For:
Interest		$	5,383		$	5,107
Income taxes		$	11,703		$	(2,902	)
Supplemental Disclosure of Non-cash Transactions:
Property and equipment acquired through financing arrangements		$	22,332		$	—
Grant date fair value of common stock issued for services		$	3,491		$	439

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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TUTOR PERINI CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

(1)                Basis of Presentation

 

The unaudited consolidated condensed financial statements presented herein include the accounts of Tutor Perini Corporation and its wholly owned subsidiaries (“Tutor Perini” or the “Company”). The Company’s interests in construction joint ventures are accounted for using the proportionate consolidation method whereby the Company’s proportionate share of each joint venture’s assets, liabilities, revenues and cost of operations are included in the appropriate classifications in the consolidated financial statements. All intercompany transactions and balances have been eliminated in consolidation.

 

The unaudited consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification . These statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

In the opinion of management, the accompanying unaudited consolidated condensed financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2014 and December 31, 2013, results of operations and comprehensive income for the three months ended March 31, 2014 and 2013, and cash flows for the three months ended March 31, 2014 and 2013. The results of operations for the three months ended March 31, 2014 are not indicative of the results that may be expected for the year ending December 31, 2014 because, among other reasons, such results can vary depending on the timing of progress achieved and changes in estimated profitability of projects being reported.

 

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.

 

(2)                Significant Accounting Policies

 

The significant accounting policies followed by the Company and its subsidiaries in preparing its consolidated financial statements are set forth in Note 1 to such financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Recently Issued Accounting Pronouncements

 

In February 2013, the FASB issued ASU 2013-04, which provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This ASU is an update to FASB ASC Topic 405, “Liabilities” . The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a concensus of the Emerging Issues Task Force). This ASU addresses when unrecognized tax benefits should be presented as reductions to deferred tax assets for net operating loss carryforwards in the financial statements. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

Use of and Changes in Estimates

 

The Company’s construction business involves making significant estimates and assumptions in the normal course of business relating to its contracts and its joint venture contracts. Management focuses on evaluating the performance of contracts individually. These estimates can vary in the normal course of business as projects progress, when estimated productivity assumptions change based on experience to date and uncertainties are resolved. Change orders and claims, as well as changes in related estimates of costs to complete, are considered revisions in estimates. The Company uses the cumulative catch-up method applicable to construction contract accounting to account for revisions in estimates. The impact on operating margin in a reporting period and future periods from a change in estimate will depend on the stage of contract completion. There were no significant changes in contract estimates at completion that impacted gross profit for both the three months ended March 31, 2014 and 2013.

 

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(3)                Cash and Cash Equivalents and Restricted Cash

 

Cash and cash equivalents include short-term, highly liquid investments with original maturities of three months or less when acquired.

 

Cash and cash equivalents, as reported in the accompanying Consolidated Condensed Balance Sheets, consist of amounts held by the Company that are available for general corporate purposes and the Company’s proportionate share of amounts held by construction joint ventures that are available only for joint venture-related uses, including future distributions to joint venture partners. Restricted cash is primarily held to secure insurance-related contingent obligations, such as insurance claim deductibles, in lieu of letters of credit.

 

Cash and cash equivalents and restricted cash consisted of the following:

 

		March 31			December 31,
		2014			2013
		(in thousands)
Corporate cash and cash equivalents (available for general corporate purposes)		$	25,520		$	36,579
Company’s share of joint venture cash and cash equivalents (available only for joint venture purposes, including future distributions		107,544			83,344
Total Cash and Cash Equivalents		$	133,064		$	119,923
Restricted Cash		$	43,269		$	42,594

 

(4)                Costs and estimated earnings in excess of billings

 

Costs and estimated earnings in excess of billings related to the Company’s contracts and joint venture contracts consisted of the following:

 

		March 31			December 31,
		2014			2013
		(in thousands)
Unbilled costs and profits incurred to date*		$	291,188		$	204,276
Unapproved change orders		163,921			146,787
Claims		243,314			222,185
		$	698,423		$	573,248

 

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* Represents the excess of contract costs and profits recognized to date on the percentage of completion accounting method over the amount of contract billings to date on certain contracts.

 

Of the balance of “Unapproved change orders” and “Claims” included above in costs and estimated earnings in excess of billings at both March 31, 2014 and December 31, 2013, approximately $58.8 million are amounts subject to pending litigation or dispute resolution proceedings as described in Note 7 — Contingencies and Commitments . These amounts are management’s estimate of the probable cost recovery from the disputed claims considering such factors as evaluation of entitlement, settlements reached to date and experience with the customer. In the event that future facts and circumstances, including the resolution of disputed claims, cause a reduction in the aggregate amount of the estimated probable cost recovery from the disputed claims, the amount of such reduction will be recorded against earnings in the relevant future period.

 

The prerequisite for billing “Unbilled costs and profits incurred to date” is provided in the defined billing terms of each of the applicable contracts. The prerequisite for billing “Unapproved change orders” or “Claims” is the final resolution and agreement between the parties.

 

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(5)                Fair Value Measurements

 

The Company measures certain financial instruments, including cash and cash equivalents, such as money market funds, at fair value. The fair values were determined based on a three-tier valuation hierarchy for disclosure of significant inputs. These hierarchical tiers are defined as follows:

 

Level 1 — inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2 — inputs are other than quoted prices in active markets that are either directly or indirectly observable through market corroboration.

 

Level 3 — inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions based on the best information available in the circumstances.

 

The carrying amount of cash and cash equivalents approximates fair value due to the short-term nature of these items. The carrying value of receivables, payables and other amounts arising out of normal contract activities, including retainage, which may be settled beyond one year, is estimated to approximate fair value. Of the Company’s long-term debt, the fair values of the fixed rate senior unsecured notes as of March 31, 2014 and December 31, 2013 were $320.0 million and $321.0 million, respectively, compared to the carrying value of $298.6 million and $298.5 million, respectively. The fair value of the senior unsecured notes was estimated using Level 1 inputs based on market quotations including broker quotes or interest rates for the same or similar financial instruments at March 31, 2014 and December 31, 2013. The carrying values of the remaining balance of the Company’s long-term debt of $522.2 million and $435.4 million at March 31, 2014 and December 31, 2013, respectively, were estimated to approximate their fair values.

 

The following is a summary of financial statement items carried at estimated fair values measured on a recurring basis as of the dates presented:

 

					Fair Value Measurements Using
								Significant
					Quoted prices			other			Significant
		Total			in active			observable			unobservable
		Carrying			markets			inputs			inputs
At March 31, 2014		Value			(Level 1)			(Level 2)			(Level 3)
		(in thousands)
Assets:
Cash and cash equivalents (1)		$	133,064		$	133,064		$	—		$	—
Restricted cash (1)		43,269			43,269			—			—
Short-term investments (2)		2,565			—			2,565			—
Investments in lieu of retainage (3)		21,339			12,412			8,927			—
Long-term investments - auction rate securities (4)		46,283			—			—			46,283
Total		$	246,520		$	188,745		$	11,492		$	46,283
Liabilities:
Interest rate swap contract (5)		$	835		$	—		$	835		$	—
Contingent consideration (6)		48,395			—			—			48,395
		$	49,230		$	—		$	835		$	48,395

 

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(1)                Cash, cash equivalents and restricted cash consist primarily of money market funds with original maturity dates of three months or less, for which fair value is determined through quoted market prices.

(2)                Short-term investments are classified as other current assets and are comprised primarily of municipal bonds, the majority of which are rated Aa2 or better. The fair values of the municipal bonds are obtained from readily-available pricing sources for comparable instruments, and as such, the Company has classified these assets as Level 2.

 

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(3)                Investments in lieu of retainage are classified as account receivables, including retainage and are comprised of U.S. Treasury Notes and other municipal bonds, the majority of which are rated Aa3 or better. The fair values of the U.S. Treasury Notes and municipal bonds are obtained from readily-available pricing sources for comparable instruments, and as such, the Company has classified these assets as Level 2.

(4)               At both March 31, 2014 and December 31, 2013 the Company had $46.3 million invested in auction rate securities (“ARS”) which the Company considers as available-for-sale long-term investments. The long-term investments in ARS held by the Company at both March 31, 2014 and December 31, 2013 are in securities collateralized by student loan portfolios. At both March 31, 2014 and December 31, 2013, most of the Company’s ARS were rated AA+.

(5)                As discussed in Note 10 — Financial Commitments , the Company entered into a swap agreement with Bank of America, N.A. to establish a long-term interest rate for its $200 million five-year term loan. The swap agreement became effective for the term loan principal balance outstanding at January 31, 2012 and will remain effective through the maturity date of the term loan. The Company values the interest rate swap liability utilizing a discounted cash flow model that takes into consideration forward interest rates observable in the market and the counterparty’s credit risk. This liability is classified as a component of other long-term liabilities.

(6)                The liabilities listed as of March 31, 2014 and December 31, 2013 above represent the contingent consideration for the Company’s acquisitions in 2011 for which the measurement periods for purchase price analyses for the acquisitions have concluded.

 

The Company did not have any transfers between Levels 1 and 2 of financial assets or liabilities that are fair valued on a recurring basis during the three months ended March 31, 2014 and 2013.

 

The following is a summary of changes in Level 3 assets measured at fair value on a recurring basis during the three months ended March 31, 2014 and 2013:

 

		Auction Rate
		Securities
		(in thousands)
Balance at December 31, 2013		$	46,283
Purchases		—
Settlements		—
Realized loss included in other income (expense), net		—
Reversal of pretax impairment charges included in accumulated other comprehensive income (loss)		—
Balance at March 31, 2014		$	46,283

 

		Auction Rate
		Securities
		(in thousands)
Balance at December 31, 2012		$	46,283
Purchases		—
Settlements		—
Realized loss included in other income (expense), net		—
Reversal of pretax impairment charges included in accumulated other comprehensive income (loss)		—
Balance at March 31, 2013		$	46,283

 

At both March 31, 2014 and December 31, 2013, the Company had $46.3 million invested in auction rate securities (“ARS”) classified as available-for-sale. All of the ARS are securities collateralized by student loan portfolios guaranteed by the United States government. At both March 31, 2014 and December 31, 2013, most of the Company’s ARS were rated AA+. On May 1, 2014, the Company sold all of its Auction Rate Securities for approximately $44.5 million.

 

The Company has classified its ARS investment as long-term investments due to the uncertainty in the timing of future ARS calls and the absence of an active market for government-backed student loans. At the date of the balance sheet, the Company expected that it would take in excess of twelve months before the ARS can be refinanced or sold.

 

The Company performs a fair market value assessment of its ARS on a quarterly basis. To estimate fair value, the Company utilizes an income approach valuation model, with consideration given to market-based valuation inputs. The model considers, among other items, the following inputs: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions (discount rates range from 3% to 7% for investment grade securities); (iii) consideration of the probabilities of default or repurchase at par for each period (term periods range from 6 to 8 years); (iv) prices from recent comparable transactions; and (v) other third party pricing information.

 

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The inputs and the Company’s analysis consider: (i) contractual terms of the ARS instruments; (ii) government-backed guarantees, if any; (iii) credit ratings on the ARS; (iv) current interest rates on the ARS and other market interest rate data; (v) trade data available, including trade data from secondary markets, for the Company’s ARS or similar ARS; (vi) recovery rates for any non-government guaranteed assets; (vii) historical transactions of the Company’s ARS being called at par; (viii) refunding initiatives of ARS; and (ix) risk of downgrade and default. Current market conditions, including repayment status of student loans, credit market risk, market liquidity and macro-economic influences are reflected in these inputs.

 

On a quarterly basis, the Company also assesses the recoverability of the ARS balance by reviewing: (i) the regularity and timely payment of interest on the securities; (ii) the probabilities of default or repurchase at par; (iii) the risk of loss of principal from government-backed versus non-government-backed securities; and (iv) the prioritization of the Company’s tranche of securities within the investment in case of default. The potential impact of any principal loss is included in the valuation model.

 

When the Company’s analysis indicates an impairment of a security, several factors are considered to determine the proper classification of the charge including: (i) any requirement or intent to sell the security; (ii) failure of the issuer to pay interest or principal; (iii) volatility of fair value; (iv) changes to the ratings of the security; (v) adverse conditions specific to the security or market; (vi) expected defaults; and (vii) length of time and extent that fair value has been less than the cost basis. The accumulation of this data is used to conclude if a credit loss exists for the specific security, and then to determine the classification of the impairment charge as temporary or other-than-temporary.

 

Based on the fair value assessment performed as of March 31, 2014, the Company does not believe that any change to the carrying value of the ARS is appropriate as the carrying value is within the range of fair market values.

 

The following is a summary of changes in Level 3 liabilities measured at fair value on a recurring basis during the three months ended March 31, 2014 and 2013:

 

		Contingent
		Consideration
		(in thousands)
Balance at December 31, 2013		$	46,022
Fair value adjustments included in other income (expense), net		3,404
Contingent consideration settled		(1,031		)
Balance at March 31, 2014		$	48,395

 

		Contingent
		Consideration
		(in thousands)
Balance at December 31, 2012		$	42,624
Fair value adjustments included in other income (expense), net		1,380
Contingent consideration settled		—
Balance at March 31, 2013		$	44,004

 

The liabilities listed above represent the contingent consideration for the acquisitions in 2011 for which the measurement periods for purchase price analyses have concluded.

 

The fair values of the contingent consideration were estimated using an income approach based on the cash flows that the acquired entity is expected to generate in the future. This approach requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period, as well as determine the weighted-average cost of capital to be used as a discount rate (weighted-average cost of capital inputs have ranged from 14-18%).

 

(6)                Goodwill and Intangible Assets

 

The Company tests goodwill and intangible assets with indefinite lives for impairment by applying a fair value test in the fourth quarter of each year and between annual tests if events occur or circumstances change that suggest a material adverse change to the most recently concluded valuation. Intangible assets with finite lives are also tested for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. The Company did not observe any changes in facts or circumstances during the three months ended March 31, 2014 that would suggest a material decline in the value of goodwill and intangible assets as concluded in the fourth quarter of the year ended December 31, 2013.

 

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During the first quarter of 2014, the Company completed a reorganization which resulted in the elimination of the Management Services reporting unit and reportable segment. The Management Services reporting unit formerly consisted of the following subsidiary companies: Black Construction and Perini Management Services. The reorganization eliminating the Management Services segment has been completed due to the unit no longer meeting the criteria set forth in FASB ASC Topic 280, “Segment Reporting” . The Company reallocated goodwill between its reorganized reporting units based on a relative fair value assessment in accordance with the guidance on segment reporting.

 

The following table presents the carrying amount of goodwill, and the effect of the reorganization, allocated to the Company’s reporting units as of March 31, 2014:

 

								Specialty			Management
		Civil			Building			Contractors			Services			Total
		(in thousands)
Gross Goodwill Balance		$	429,893		$	420,267		$	148,943		$	66,638		$	1,065,741
Accumulated Impairment		(55,740		)	(409,765		)	—			(22,480		)	(487,985		)
Balance at December 31, 2013		$	374,153		$	10,502		$	148,943		$	44,158		$	577,756
Goodwill redistribution in connection with reorganization		41,205			2,953						(44,158		)	—
Balance at March 31, 2014		$	415,358		$	13,455		$	148,943		$	—		$	577,756

 

Intangible assets consist of the following:

 

		March 31, 2014												Weighted
								Accumulated						Average
					Accumulated			Impairment			Carrying			Amortization
		Cost			Amortization			Charge			Value			Period
		(in thousands)
Trade names (non-amortizable)		$	117,600		$	—		$	(67,190	)	$	50,410		Indefinite
Trade names (amortizable)		74,350			(6,963		)	(23,232		)	44,155			20 years
Contractor license		6,000			—			(6,000		)	—			Indefinite
Customer relationships		39,800			(14,636		)	(16,645		)	8,519			11.4 years
Construction contract backlog		73,706			(66,719		)	—			6,987			3.6 years
Total		$	311,456		$	(88,318	)	$	(113,067	)	$	110,071

 

		December 31, 2013												Weighted
								Accumulated						Average
					Accumulated			Impairment			Carrying			Amortization
		Cost			Amortization			Charge			Value			Period
		(in thousands)
Trade names (non-amortizable)		$	117,600		$	—		$	(67,190	)	$	50,410		Indefinite
Trade names (amortizable)		74,350			(6,341		)	(23,232		)	44,777			20 years
Contractor license		6,000			—			(6,000		)	—			Indefinite
Customer relationships		39,800			(14,315		)	(16,645		)	8,840			11.4 years
Construction contract backlog		73,706			(63,993		)	—			9,713			3.6 years
Total		$	311,456		$	(84,649	)	$	(113,067	)	$	113,740

 

Amortization expense for the three months ended March 31, 2014 and 2013 totaled $3.7 million and $3.3 million, respectively. As of March 31, 2014, amortization expense is estimated to be $9.8 million for the remainder of 2014, $3.7 million in 2015, $3.5 million in 2016, $3.5 million in 2017, $3.5 million in 2018 and $35.5 million thereafter.

 

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(7)                Contingencies and Commitments

 

The Company and certain of its subsidiaries are involved in litigation and are contingently liable for commitments and performance guarantees arising in the ordinary course of business. The Company and certain of its clients have made claims arising from the performance under their contracts. The Company recognizes certain significant claims for recovery of incurred cost when it is probable that the claim will result in additional contract revenue and when the amount of the claim can be reliably estimated. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims and the cost of both pending and future claims. In addition, because most contingencies are resolved over long periods of time, liabilities may change in the future due to various factors.

 

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

 

Tutor-Saliba-Perini Joint Venture vs. Los Angeles MTA Matter

 

During 1995 Tutor-Saliba-Perini (“Joint Venture”) filed a complaint in the Superior Court of the State of California for the County of Los Angeles against the Los Angeles County Metropolitan Transportation Authority (“LAMTA”), seeking to recover costs for extra work required by LAMTA in connection with the construction of certain tunnel and station projects, all of which were completed by 1996. In 1999, LAMTA countered with civil claims under the California False Claims Act against the Joint Venture, Tutor-Saliba and the Company jointly and severally (together, “TSP”), and obtained a judgment that was reversed on appeal and remanded for retrial before a different judge.

 

Between 2005 and 2010, the court granted certain Joint Venture motions and LAMTA capitulated on others, which reduced the number of false claims LAMTA may seek and limited LAMTA’s claims for damages and penalties. In September 2010, LAMTA dismissed its remaining claims and agreed to pay the entire amount of the Joint Venture’s remaining claims plus interest. In the remanded proceedings, the Court subsequently entered judgment in favor of TSP and against LAMTA in the amount of $3.0 million after deducting $0.5 million, representing the tunnel handrail verdict plus accrued interest against TSP. The parties filed post-trial motions for costs and fees. The Court ruled that TSP’s sureties could recover costs, LAMTA could recover costs for the tunnel handrail trial, and no party could recover attorneys’ fees. TSP is appealing the false claims jury verdict on the tunnel handrail claim and other issues, including the denial of TSP’s and its sureties’ request for attorneys’ fees. LAMTA subsequently filed its cross-appeal. The hearing before the Court of Appeal is scheduled for the end of May, 2014.

 

The Company does not expect this matter to have any material effect on its consolidated financial statements.

 

Perini/Kiewit/Cashman Joint Venture-Central Artery/Tunnel Project Matter

 

Perini/Kiewit/Cashman Joint Venture (“PKC”), a joint venture in which the Company holds a 56% interest and is the managing partner, is currently pursuing a series of claims, instituted at different times since 2000, for additional contract time and/or compensation against the Massachusetts Highway Department (“MHD”) for work performed by PKC on a portion of the Central Artery/Tunnel (“CA/T”) project in Boston, Massachusetts. During construction, MHD ordered PKC to perform changes to the work and issued related direct cost changes with an estimated value, excluding time delay and inefficiency costs, in excess of $100 million. In addition, PKC encountered a number of unforeseen conditions during construction that greatly increased PKC’s cost of performance. MHD has asserted counterclaims for liquidated damages and back charges.

 

Certain of PKC’s claims have been presented to a Disputes Review Board (“DRB”), which consists of three construction experts chosen by the parties. To date, five DRB panels issued several awards and interim decisions in favor of PKC’s claims, amounting to total awards to PKC in excess of $128 million plus interest, of which $110 million were binding awards.

 

In December 2010, the Suffolk County Superior Court granted MHD’s motion for summary judgment to vacate the Third DRB Panel’s awards to PKC for approximately $56.5 million on the grounds that the arbitrators do not have authority to decide whether particular claims are subject to the arbitration provision of the contract. MHD subsequently moved to vacate approximately $13.7 million of the Fourth DRB Panel’s total awards to PKC on the same arbitrability basis that the Third DRB’s awards were vacated. In October 2011, the Suffolk County Superior Court followed its earlier arbitrability rulings holding that the Fourth DRB exceeded its authority in deciding arbitrability with respect to certain of the Fourth DRB Panel’s awards (approximately $8 million of the $13.7 million discussed above). PKC appealed the Superior Court decisions and in January 2013, the Superior Court decisions were affirmed in MHD’s favor. The Appeals Court remanded the case back to the lower court to determine how and by whom the claims must be decided. PKC filed an application for further appellate review by the Massachusetts Supreme Judicial Court and a motion for reconsideration in the Appeals Court. The Appeals Court rejected PKC’s petition for rehearing. The Massachusetts Supreme Judicial Court denied the application in June 2013. PKC is now litigating the issue of arbitrability in Superior Court on review of the Engineer’s Decisions. The parties participated in a Court scheduled hearing on the motion for judgment on the pleadings challenging the Engineer’s Decisions in September 2013. The Court has not yet ruled and no trial dates have been set in any of the court cases.

 

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In February 2012, PKC received a $22 million payment for an interest award associated with the Second DRB panel’s awards to PKC. In January 2013, PKC received a $14.8 million payment for back charges and interest associated with the Fourth DRB panel’s awards to PKC that were confirmed.

 

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

 

Long Island Expressway/Cross Island Parkway Matter

 

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

 

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

 

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

 

Fontainebleau Matter

 

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

 

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

 

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

 

In October 2013, a settlement was reached by and among the Statutory Lienholders and the other interested parties. The agreed upon settlement did not have an impact on the Company’s recorded accounting position as of the period ended March 31, 2014. The execution of that settlement agreement continues under the supervision of a mediator appointed by the Bankruptcy Court. Management has made an estimate of the total anticipated recovery on this project, and such estimate is included in revenue recorded to date. To the extent new facts become known or the final recovery included in the claim settlement varies from the estimate, the impact of the change will be reflected in the financial statements at that time.

 

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MGM CityCenter Matter

 

Tutor Perini Building Corp. (“TPBC”) (formerly Perini Building Company, Inc.), a wholly owned subsidiary of the Company, contracted with MGM MIRAGE Design Group (“MGM”) in March 2005 to construct the CityCenter project in Las Vegas, Nevada. The project, which encompasses nineteen separate contracts, is a 66-acre urban mixed use development consisting of hotels, condominiums, retail space and a casino.

 

The Company achieved substantial completion of the project in December 2009, and MGM opened the project to the public on the same date. In March 2010, the Company filed suit against MGM and certain other property owners in the Clark County District Court alleging several claims including breach of contract, among other items.

 

In a Current Report on Form 8-K filed by MGM in March 2010, and in subsequent communications issued, MGM asserted that it believes it owes substantially less than the claimed amount and that it has claims for losses in connection with the construction of the Harmon Tower and is entitled to unspecified offsets for other work on the project. According to MGM, the total of the offsets and the Harmon Tower claims exceed the amount claimed by the Company.

 

In May 2010, MGM filed a counterclaim and third party complaint against the Company and its subsidiary TPBC. The court granted the Company and MGM’s joint motion to consolidate all subcontractor initiated actions into the main CityCenter lawsuit. In July 2012, the Court granted MGM’s motion to demolish the Harmon Tower, one of the CityCenter buildings, as a “business decision.”

 

Evidence had been presented at the Harmon related hearings that the Harmon Tower could be repaired for approximately $21 million, more than $15 million of which is due to design defects that are MGM’s responsibility. In mid-September 2012, MGM filed a request for additional destructive testing of the Harmon Tower. In October 2012, the Court ruled it would allow additional testing but with certain conditions including but not limited to the Court’s withdrawing MGM’s right to demolish the Harmon Tower and severing the Harmon Tower defects issue from the rest of the case. In February 2013, MGM filed third-party complaints against the project designers, which were resolved through third party settlements including $33.0 million attributable to MGM’s alleged damages on the Harmon, effective October 2013. In early April 2013, MGM started additional destructive testing of the Harmon Tower.

 

With respect to alleged losses at the Harmon Tower, the Company has contractual indemnities from the responsible subcontractor, as well as existing insurance coverage that it expects will be available and sufficient to cover any liability that may be associated with this matter. The Company’s insurance carrier initiated legal proceedings seeking declaratory relief that their insurance policies do not provide for defense or coverage for matters pertaining to the Harmon Towers. Those proceedings are stayed pending the outcome of the underlying dispute in Nevada District Court. The Company is not aware of a basis for other claims that would amount to material offsets against what MGM owes to the Company. The Company does not expect this matter to have any material effect on its consolidated financial statements.

 

During July 2013, a settlement was reached for $39.8 million related to outstanding receivables for various subcontractors, which included consideration for, and brought resolution to, disputes between the Company’s subsidiaries Fisk and DMI and MGM. Payment was received in August 2013.

 

As of March 2014, MGM has reached agreements with subcontractors to settle $348 million of amounts previously billed to MGM. The Company has reduced and will continue to reduce amounts included in revenues, cost of construction operations, accounts receivable and accounts payable for the reduction in subcontractor pass-through billings, which the Company would not expect to have an impact on recorded profit. As of March 2014, the Company had approximately $165.7 million recorded as contract receivables for amounts due and owed to the Company. As of March 2014, the Company’s mechanic’s lien against the project was $173.7 million.

 

In January 2014, the Parties reached a confidential settlement on most of the non-Harmon related issues, including the majority of the Company’s affirmative claims. Court ordered mediation is ongoing for the remaining claims.

 

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

 

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Honeywell Street/Queens Boulevard Bridges Matter

 

In 1999, the Company was awarded a contract for reconstruction of the Honeywell Street/Queens Boulevard Bridges project for the City of New York (the “City”). In June 2003, after substantial completion of the project, the Company initiated an action to recover $8.75 million in claims against the City on behalf of itself and its subcontractors. In March 2010, the City filed counterclaims for $74.6 million and other relief, alleging fraud in connection with the DBE requirements for the project. In May 2010, the Company served the City with its response to the City’s counterclaims and affirmative defenses. The Company’s motion to dismiss the City’s counterclaims was granted and is currently under appeal.

 

The Company does not expect this matter to have any material effect on its consolidated financial statements.

 

Westgate Planet Hollywood Matter

 

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

 

WPH filed a cross-complaint alleging non-conforming and defective work for approximately $51 million, primarily related to alleged defects, misallocated costs, and liquidated damages. Some or all of the allegations will be defended by counsel appointed by TSC’s insurance carrier. WPH has since revised the amount of their counterclaims to approximately $45 million.

 

Following multiple post-trial motions, final judgment was entered in this matter on March 20, 2014. TSC was awarded total judgment in the amount of $19,677,731 on its breach of contract claim, which includes an award of interest up through the date of judgment, plus attorney’s fees and costs. Westgate has paid $649,568 of that judgment. Westgate was awarded total judgment in the amount of $3,099,719 on its construction defect claims, which includes interest up through the date of judgment. The awards are not offsetting.  Westgate and its Sureties have filed a notice of appeal. TSC has filed a notice of appeal on the defect award.

 

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

 

100th Street Bus Depot Matter

 

The Company constructed the 100th Street Bus Depot for the New York City Transit Authority (“NYCTA”) in New York. Prior to receiving notice of final acceptance from the NYCTA, this project experienced a failure of the brick facade on the building due to faulty subcontractor work. The Company has not yet received notice of final acceptance of this project from the NYCTA. The Company contends defective structural installation by the Company’s steel subcontractor caused or was a causal factor of the brick facade failure.

 

The Company tendered its claim to the NYCTA OCIP and to Chartis Claims, Inc. (“Chartis”), its insurance carrier. Coverage was denied in January 2011. The OCIP and general liability carriers filed a declaratory relief action in the United States District Court, Southern District of New York against the Company seeking court determination that no coverage is afforded under their policies. In mid-February 2012, the Company filed a third-party action against certain underwriters (“Lloyd’s”). In mid-November 2012, the Court granted Chartis’ and Lloyd’s respective motions for summary judgment without oral argument. In 2013, parties filed appellate briefs and the matter is under submission in the Court of Appeal.

 

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

 

Brightwater Matter

 

In 2006, the Department of Natural Resources and Parks Wastewater Treatment Division of King County (“King County”), as Owner, and Vinci Construction Grands Projects/Parsons RCI/Frontier-Kemper, Joint Venture (“VPFK”), as Contractor, entered into a contract to construct the Brightwater Conveyance System and tunnel sections in Washington State. Frontier-Kemper, a wholly owned subsidiary of the Company, is a 20% minority partner in the joint venture.

 

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In April 2010, King County filed a lawsuit alleging damages in the amount of $74 million, plus costs, for VPFK’s failure to complete specified components of the project in the King County Superior Court, State of Washington. Shortly thereafter, VPFK filed a counterclaim in the amount of approximately $75 million, seeking reimbursement for additional costs incurred as a result of differing site conditions, King County’s defective specifications, for damages sustained on VPFK’s tunnel boring machines (“TBM”), and increased costs as a result of hyperbaric interventions. VPFK’s claims related to differing site conditions, defective design specifications, and damages to the TBM were presented to a Dispute Resolution Board (“DRB”). King County amended the amount sought in its lawsuit to approximately $132 million. In August 2011, the DRB generally found that King County was liable to VPFK for VPFK’s claims for encountering differing site conditions, including damages to the TBM, but not on VPFK’s alternative theory of defective specifications. From June through August 2012, each party filed several motions for summary judgment on certain claims and requests in preparation for trial, which were heard and ruled upon by the Court. The Court granted and denied various requests of each party related to evidence and damages.

 

In December 2012, a jury verdict was received in favor of King County in the amount of $155.8 million and a verdict in favor of VPFK in the amount of $26.3 million. In late April 2013, the Court ruled on post-trial motions and ordered VPFK’s sureties to pay King County’s attorneys’ fees and costs in the amount of $14.7 million. All other motions were denied. On May 7, 2013, VPFK paid the full verdict amount and the associated fees, thus terminating any interest on the judgment. VPFK’s notice of appeal was filed on May 31, 2013.

 

The ultimate financial impact of King County’s lawsuit is not yet specifically determinable. In the fourth quarter of 2012, management developed a range of possible outcomes and has recorded a charge to income and a contingent liability of $5.0 million in accrued expenses. In developing a range of possible outcomes, management considered the jury verdict, continued litigation and potential settlement strategies. Management determined that there was no estimate within the range of possible outcomes that was more probable than the other and recorded a liability at the low end of the range. As of December 31, 2013, there were no changes in facts or circumstances that led management to believe that there were any changes to the probability of outcomes. The amount of payments in excess of the established contingent liability is recorded in Accounts Receivable on the Company’s Consolidated Condensed Balance Sheet as of March 31, 2014. Estimating and recording future outcomes of litigation proceedings require significant judgment and assumptions about the future, which are inherently subject to risks and uncertainties. If a final recovery turns out to be materially less favorable than our estimates, this may have a significant impact on the Company’s financial results. To the extent new facts become known or the final recovery included in the claim settlement varies from the estimate, the impact of the change will be reflected in the financial statements at that time.

 

156 Stations Matter

 

In December 2003, Five Star Electric Corporation (“FSE”), a wholly owned subsidiary of the Company, entered into an agreement with the Prime Contractor Transit Technologies, L.L.C (“Transit”), a Consortium member of Siemens Transportation Transit Technologies, L.L.C (“Siemens”), to assist in the installation of new public address and customer information screens system for each of the 156 stations for the New York City Transit Authority (“NYCTA”) as the owner. Work on the project commenced in early 2004 and was substantially completed.

 

In June 2007, FSE submitted a Demand for Arbitration against Transit to terminate FSE’s subcontract due to: the execution of a Cure Agreement between the NYCTA, Siemens and Transit, which amended FSE’s rights under the Prime Contract; Transit’s failure to provide information and equipment to allow work to progress according to the approved schedule, and Transit’s failure to tender payment in excess of a year. In June 2012, the arbitration panel awarded FSE a total of approximately $11.9 million to be paid within 45 days, and Transit’s claims were denied. FSE filed a motion to confirm arbitration award in District Court in July 2012. In late August 2012, Transit Technologies filed a cross petition to vacate the award. In November 2012, the Court granted FSE’s petition to confirm the arbitration award and denied Transit Technologies’ cross-petition to vacate the award. In February 2013, the Court affirmed FSE’s award and entered judgment in the amount of $12.3 million including award, costs and interest. The deadline for Transit to file an appeal regarding the judgment passed on April 4, 2013, rendering the judgment final for all purposes. Settlement discussions have taken place with Siemens to avoid further litigation. FSE is also pursuing its bond claim to recover judgment. The eventual resolution of this matter is not expected to have a material effect on the Company’s consolidated financial statements.

 

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(8)                Income Taxes

 

The Company’s income tax provision was $11.4 million for the three months ended March 31, 2014, compared to income tax provision of $9.1 million for the three months ended March 31, 2013. The effective income tax rate was 41.6% for the three months ended March 31, 2014, as compared to 38.1% for the same period in 2013.

 

As of March 31, 2014, the total amount of unrecognized tax benefits, including related interest and penalties was $5.5 million. If the total amount of unrecognized tax benefits was recognized, $4.9 million of unrecognized tax benefits and $0.6 million of interest would impact the effective tax rate.

 

(9)                Stock-Based Compensation

 

The Company is authorized to grant up to 6,900,000 stock-based compensation awards to key executives, employees and directors of the Company under the Tutor Perini Corporation Long-Term Incentive Plan (the “Plan”). The Plan allows stock-based compensation awards to be granted in a variety of forms, including stock options, stock appreciation rights, restricted stock unit awards, unrestricted stock awards, deferred stock awards and dividend equivalent rights. The terms and conditions of the awards granted are established by the Compensation Committee of the Company’s Board of Directors who also administers the Plan.

 

The Company’s intent is to settle stock awards in shares upon vesting to the extent that the Company has approved shares available under the Plan.  A total of 75,461 shares of common stock remain available for future grant under the Plan at March 31, 2014.  As a result, awards of 250,000 stock options that were made in March 2014 under the Plan were not deducted from the shares of common stock remaining available for future grant and these option awards, which may at the Company’s election be settled in cash, were classified as liabilities, and compensation cost for these liability-classified awards will be remeasured at each balance sheet date until such time that the Plan has been amended to increase the number of shares available. Under FASB ASC Topic 718, “ Stock Compensation” (ASC 718),  options or similar instruments on shares are classified as liabilities when a cash settlement feature exists in the stock based award that can be exercised only upon the occurrence of an event that is outside the employee’s control.

 

Restricted Stock Unit Awards

 

Restricted stock unit awards generally vest subject to the satisfaction of service requirements or the satisfaction of both service requirements and achievement of certain performance targets. Upon vesting, each restricted stock unit award is exchanged for one share of the Company’s common stock. The grant date fair values of these awards are determined based on the closing price of the Company’s stock on either the award date (if subject only to service conditions), or the date that the Compensation Committee establishes the applicable performance target (if subject to performance conditions). The related compensation expense is amortized over the applicable requisite service period. As of March 31, 2014, the Compensation Committee has approved the grant of an aggregate of 5,498,333 restricted stock unit awards to eligible participants.

 

In March 2014, the Compensation Committee established the 2014 performance targets for 866,500 restricted stock units awarded in 2014, 2013 and 2012. The restricted stock unit awards granted during the first quarter of 2014 had a weighted average grant date fair value of $27.33.  The grant date fair value is determined based on the closing price of the Company’s common stock on the date of the grant.

 

There were no restricted stock unit awards forfeited during the three months ended March 31, 2014.

 

For the three months ended March 31, 2014 and 2013, the Company recognized $3.9 million and $2.3 million, respectively, of compensation expense related to restricted stock unit awards, and such expense is included in general and administrative expenses in the Consolidated Statements of Operations. As of March 31, 2014 there was $22.3 million of unrecognized compensation cost related to the unvested awards which, absent significant forfeitures in the future, is expected to be recognized over a weighted average period of approximately 3.1 years.

 

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