Granite Construction Incorporated — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results; comparative Q1 2022 figures are restated and recast. Granite provides infrastructure construction and construction materials, primarily in the United States.
Financial performance
| Metric | Q1 2023 | Q1 2022, restated/recast |
|---|---|---|
| Revenue | $560.1 million | $653.9 million |
| Gross profit / margin | $32.4 million / 5.8% | $60.1 million / 9.2% |
| Operating loss | $43.2 million | $15.7 million |
| Net loss attributable to Granite | $23.0 million; $0.53 per diluted share | $26.7 million; $0.58 per diluted share |
| Operating cash flow | $(76.7) million | $(50.2) million |
- Revenue declined 14.3%. Construction revenue fell 12.9%, primarily from the wind-down of large Central-region projects and the prior-year Inliner business; Materials revenue fell 25.1%, mainly because of weather-related lower sales volumes.
- Construction gross margin was 7.3%, down from 10.1%; Materials recorded a gross loss of $4.3 million versus $1.6 million gross profit. Consolidated operating margin was approximately negative 7.7%, compared with negative 2.4%.
- Two project estimate revisions reduced gross profit by $17.6 million and Granite-attributable earnings by $7.5 million, or $0.17 per diluted share. Cited causes included longer project duration, higher labor and material costs, lower productivity, and unfavorable weather.
- Cash, cash equivalents and marketable securities totaled $256.1 million at quarter-end, including $112.3 million held by consolidated construction joint ventures. Management notes that joint-venture assets generally are not available for Granite’s working capital until distributed. Current assets were $1.246 billion and current liabilities $723.4 million.
- Total debt was $288.5 million, including $230 million of 2.75% convertible notes due November 2024 and $50 million drawn on the revolver. Unused credit-facility availability was $269.5 million. Leverage and interest-coverage covenant ratios were 1.4 and 15.7, respectively, within stated limits of 3.25 maximum and 3.00 minimum.
- Capital expenditures were $40.5 million. Cash dividends paid were $5.7 million. The quarterly dividend declared was $0.13 per share.
Liquidity, outlook and management commentary
- Management believes available liquidity, borrowing capacity and expected operating cash flows will meet expected needs for the next 12 months and longer-term requirements, while noting that future capital availability is not assured.
- Committed and Awarded Projects (CAP) was $5.104 billion at March 31, up $618.8 million from December 31, 2022. Approximately $2.1 billion of the $3.164 billion in unearned revenue was expected to be recognized within 12 months. Four contracts with remaining CAP of at least $10 million each had forecast losses on $103.0 million of remaining revenue.
- Management cited ongoing Infrastructure Investment and Jobs Act funding rollout, a strong state and local funding environment, and a resilient private market. It expects project lettings to increase during 2023 and more meaningfully in 2024 and beyond. No specific full-year revenue or earnings guidance is provided in the filing text.
- Anticipated 2023 capital expenditures were $100 million to $120 million. On April 24, 2023, Granite completed its approximately $27 million acquisition of Coast Mountain Resources; the company does not expect a material operating impact.
- Weather and seasonality can make first-quarter results unrepresentative of full-year performance. Inflation, supply-chain constraints, labor availability and materials pricing remain risks; Granite cited mitigation measures including forward oil purchases, energy surcharges and schedule adjustments.
Restatement, contingencies and controls
- The filing restates Q1 2022 results for errors involving deferred taxes and income-tax expense related to the Inliner sale, as well as other immaterial errors, and recasts former Water and Mineral Services businesses into continuing operations. The company had previously disclosed a $12.3 million tax-related error associated with the sale. Comparative figures should therefore be read as restated and recast, not as originally reported.
- Granite reported a material weakness in internal control over financial reporting and concluded disclosure controls were not effective as of March 31, 2023. It implemented additional tax-control reviews but said remediation was not yet complete and requires controls to operate effectively for a sufficient period and be tested.
- In the Salesforce Tower foundation matter, claims against subsidiary Layne seek approximately $70 million in one lawsuit and approximately $30 million in related arbitration claims. Granite said a material loss was not probable; if unsuccessful, it estimated reasonably possible loss could be up to approximately $100 million. A hearing on summary-adjudication motions was scheduled for May 24, 2023.
- Other legal and government matters are described as ordinary-course contingencies. Recorded legal liabilities were immaterial, but possible losses, including amounts related to liquidated damages, could materially affect results if they become probable and estimable.
- Brightline Trains Florida had $4.8 million of receivables and $28.8 million of contract retention receivable at March 31. By the report date, $1.9 million of the receivables had been collected; the remaining $2.9 million was past due. Granite cautioned that further funding difficulties at Brightline could affect payment timing and liquidity.
Most important facts for investors to verify
- Progress and testing of remediation for the material weakness, especially controls over unusual transactions and income-tax calculations.
- Whether project cost estimates stabilize and whether the Q1 estimate revisions, weather impacts and weak Materials margins persist.
- Conversion of the $5.1 billion CAP into revenue and cash, including funding, project losses and joint-venture cash availability.
- Collections from Brightline and developments in the Salesforce Tower litigation and potential exposure.
- Cash generation, capital-spending trajectory, revolver use and plans for the $230 million convertible notes due in November 2024.