Granite Construction Incorporated (NYSE: GVA) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Dollar amounts below are in millions unless otherwise stated.
Business context and reporting period
Granite is a diversified infrastructure contractor and materials producer, reporting Transportation, Water, Specialty and Materials segments. Results are seasonal and affected by weather, project progress and contract-estimate changes; management cautions that interim results are not indicative of full-year performance. The company cited unusually wet winter and spring weather across much of the U.S. and began an accelerated strategic review of Heavy Civil to reduce exposure to large, complex projects.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $789.5 | $807.1 | $1,409.3 | $1,370.5 |
| Gross profit (loss) | $(52.4) | $80.4 | $(11.9) | $136.7 |
| Gross margin | (6.6)% | 10.0% | (0.8)% | 10.0% |
| Operating loss | $(126.6) | $(5.7) | $(168.7) | $(18.6) |
| Net loss attributable to Granite | $(97.8) | $(8.4) | $(132.4) | $(19.8) |
| Loss per diluted share | $(2.09) | $(0.20) | $(2.83) | $(0.49) |
- Revenue mix and change: Q2 revenue fell 2.2% year over year, as Transportation declined 19.6%, partly offset by Water growth of more than 100% and Specialty growth of 15.3%. For the first half, revenue rose 2.8%; acquired Layne operations drove much of Water’s growth.
- Profitability: Transportation recorded a Q2 gross loss of $99.9 million, versus $36.0 million gross profit a year earlier. Water, Specialty and Materials generated Q2 gross profit of $11.3 million, $22.2 million and $14.0 million, respectively. SG&A rose 14.2% in Q2 and 23.3% year to date, largely reflecting acquired businesses.
- Cash flow: First-half operating cash used was $93.5 million, compared with $75.4 million in 2018; investing cash used was $47.9 million versus $38.5 million; financing cash provided was $13.6 million versus $81.5 million. Capital expenditures were $54.4 million versus $36.5 million.
- Cash and liquidity: June 30 cash and cash equivalents were $145.0 million, including $115.9 million held by consolidated construction joint ventures (CCJVs), and marketable securities were $61.0 million. Management said CCJV funds generally are not available for Granite’s working capital until distributed. Revolver availability was $97.7 million; management expected available liquidity and operating cash flow to meet needs for the next 12 months.
- Debt and leases: Total debt was $415.3 million, including $48.4 million current maturities; operating lease liabilities were $76.4 million undiscounted less imputed interest, with $60.9 million long-term and $15.6 million current liabilities reported on the balance sheet. The $350 million revolving facility had $220.0 million drawn and $32.3 million of letters of credit outstanding.
Material changes versus comparable periods
- Q2 and first-half earnings deteriorated sharply, chiefly from substantial downward revisions to Transportation project estimates and losses associated with legacy Heavy Civil joint ventures. Weather also weighed on California activity and Materials production.
- For projects with individual downward estimate changes of at least $5 million, revisions reduced gross profit by $161.1 million in Q2 and $167.8 million for the first half, compared with $30.2 million and $38.0 million, respectively, in 2018. Five projects were affected in Q2; the largest individual reduction was $77.3 million. The company attributed the 2019 changes to higher completion costs, delays, disputed work, an unfavorable court ruling on a designer back-charge claim, partly offset by higher estimated customer-claim recoveries.
- Management identified a $4.3 million correction relating to prior periods, reducing Transportation revenue and gross profit and increasing Granite-attributable net loss by $3.2 million. It concluded the correction was not material to prior or current-period financial statements.
- Backlog was $3.82 billion at June 30, up from $3.65 billion a year earlier. It included $2.94 billion Transportation, $318.1 million Water and $559.3 million Specialty. Management also cited $1.1 billion of awarded projects not yet in backlog, expected to enter as task orders are issued over 2019 and subsequent years.
Outlook, risks and unusual items
- Management described public and private demand as robust, pointing to state and local infrastructure investment, water-market demand and the FAST Act as supportive factors. No earnings or revenue forecast was provided. Full-year 2019 capital expenditures were estimated at $80 million to $100 million.
- Granite plans to consolidate Heavy Civil operations and pursue markets where its capabilities provide strategic advantages, with emphasis on smaller-scope, lower-risk and negotiated work. Management reported nearly $4.9 billion of Committed and Awarded Projects, including the $1.1 billion not yet in backlog.
- Four Transportation contracts with remaining revenue of $326.0 million, or 11.1% of Transportation backlog, had forecasted total losses. At June 30, the company reported $58.7 million of construction-joint-venture deficits, versus $11.5 million at December 31, 2018. Joint-venture arrangements may include joint-and-several performance obligations and guarantees.
- Backlog contracts are generally subject to customer cancellation or modification. Legal proceedings and government inquiries arise in the ordinary course; recorded related liabilities were immaterial, but reasonably possible losses, including liquidated damages, could materially affect results if they become probable and estimable.
- After quarter-end, on July 29, 2019, Granite amended its credit agreement’s financial covenant terms and redeemed $40 million of 6.11% notes originally due in December 2019. The company reported June 30 covenant ratios of 11.28 interest coverage and 2.09 leverage, within amended limits of at least 4.00 and no more than 3.25, respectively.
Important facts for investors to verify
- Progress, final costs and claim recoveries on the five projects driving the $167.8 million first-half gross-profit reductions, particularly the legacy Heavy Civil joint ventures.
- Whether Heavy Civil consolidation and risk reduction improve project execution and margins, and the pace at which the $1.1 billion of awarded work enters reported backlog.
- Cash conversion and working-capital needs, including the availability and distribution timing of joint-venture cash, and continued access to the revolving credit facility.
- Whether forecast losses, performance guarantees, legal matters or customer claims create additional material charges or cash obligations.
- Actual 2019 capital spending versus the $80 million–$100 million estimate, and whether demand and favorable market commentary translate into profitable project awards.