Granite Construction Incorporated (NYSE: GVA) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The unaudited results cover a diversified U.S. infrastructure contractor operating in Transportation, Water, Specialty and Materials. Results are seasonal and management cautions that interim performance is not indicative of the full year.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,088.1 million | $1,055.6 million | $2,497.5 million | $2,426.1 million |
| Gross profit | $91.4 million | $144.5 million | $79.5 million | $281.1 million |
| Gross margin | 8.4% | 13.7% | 3.2% | 11.6% |
| Operating income (loss) | $22.4 million | $67.4 million | $(146.4) million | $48.8 million |
| Net income (loss) attributable to Granite | $20.5 million | $55.7 million | $(111.9) million | $35.9 million |
| Diluted EPS | $0.43 | $1.17 | $(2.39) | $0.84 |
| Operating cash flow | Not presented separately | Not presented separately | $(26.5) million | $14.7 million |
Segment trends: For the first nine months, Transportation revenue fell 9.0% and reported a $65.0 million gross loss; Water revenue rose 61.1%, Specialty rose 17.1%, and Materials declined 2.9%. Q3 Transportation revenue was down 2.0%, while Water and Specialty increased 9.3% and 17.6%, respectively. Transportation’s Q3 gross margin fell to 2.3% from 11.6% a year earlier.
Cash, liquidity and debt at September 30, 2019: Cash and cash equivalents were $184.7 million, and marketable securities totaled $47.9 million. Some cash is held in construction joint ventures and generally is not available for Granite’s working capital until distributed. Total debt was $403.1 million, including $250.0 million drawn on the revolving facility; $67.7 million of facility capacity remained available. The company reported compliance with its credit agreement financial covenants and said existing liquidity sources should meet expected needs for the next 12 months. Lease liabilities were $72.7 million.
Operating cash flow was negative amid the net loss and working-capital demands, including receivables and joint venture activity. Investing cash outflow was $45.2 million and financing cash outflow was $16.6 million for the nine months. Capital expenditures were $83.3 million; management forecast full-year 2019 capital expenditures of $90–$100 million.
Material changes and notable items
- Nine-month revenue increased 2.9%, but gross profit fell 71.7% and results shifted from profit to a substantial loss, primarily reflecting adverse project estimate revisions.
- Project estimate revisions of at least $5 million each reduced gross profit by $264.1 million for the nine months, including a $200.6 million reduction to net income ($4.29 per diluted share). Six projects drove $80.7 million of the Q3 gross-profit reduction; nine projects drove the nine-month reduction. Causes included higher completion costs, delays, lower productivity and disputed work; the year-to-date impact also included an unfavorable court ruling on a designer back-charge claim and an acquired business that Granite exited.
- Granite reported a $173.0 million equity-method loss from unconsolidated construction joint ventures for the nine months, versus $16.3 million in 2018. Its share of losses differed substantially from the ventures’ aggregate results because of project forecast and accounting differences.
- The company disclosed a nonmaterial misclassification in previously reported first-half 2019 cash-flow line items related to unconsolidated joint ventures. It did not affect net cash from operating activities or the other cited consolidated financial statements; Granite planned to correct the presentation prospectively.
- A $37.0 million discrete tax benefit related to reduced profitability on four legacy unconsolidated Heavy Civil joint venture projects affected the nine-month tax provision.
Outlook, risks and contingencies
- Management cited strong public and private market demand, improved weather beginning in June, and a strategic focus on bidding discipline and lower-risk work. It reported $3.6 billion of contract backlog and an additional $1.0 billion of construction-manager/general-contractor and alternative-procurement projects expected to enter backlog as task orders are issued. Committed and Awarded Projects totaled nearly $4.6 billion.
- Granite completed a strategic review of Heavy Civil and plans to narrow that group’s footprint and reduce exposure to large, complex projects, citing risks and pricing that do not align with stakeholder expectations. Management said the timing and benefits are uncertain; Heavy Civil underperformance could materially affect results, cash flows and liquidity.
- Four Transportation contracts with $298.8 million of remaining revenue were forecast to incur losses. Backlog is subject to customer cancellation or modification, and management noted that approximately $3.1 billion of backlog was bonded.
- Construction estimates, customer claims and back charges remain significant sources of uncertainty. Aggregate estimated claim recoveries included in contract asset and liability balances were $60.6 million at quarter-end. Joint venture performance guarantees and potential partner nonperformance may also expose Granite to costs.
- Ordinary-course legal matters and government inquiries could result in material future charges, although recorded liabilities were described as immaterial. A putative securities class action filed in August 2019 alleges misleading statements concerning the company’s business and prospects; Granite said it would defend the case and could not predict the outcome.
- Management identified weather, project execution, public funding, commodity prices, working-capital timing and access to financing as relevant business risks. No specific earnings guidance was provided; the filing states that results are seasonal.
Investor verification points
- Review the project-level causes and remaining exposure behind the $264.1 million of nine-month estimate reductions, including claim recoveries and the exited acquired business.
- Track Heavy Civil restructuring, forecast-loss contracts, project completion costs and subsequent backlog conversion.
- Assess cash availability after distinguishing Granite’s funds from joint venture balances, alongside revolver availability, debt maturities and covenant headroom.
- Monitor receivable collection, operating cash flow, joint venture funding needs and the outlook for full-year capital expenditures.
- Follow developments in the securities action, government inquiries and other contingencies, and verify future correction of the disclosed cash-flow presentation misclassification.