Granite Construction Incorporated (NYSE: GVA) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter filing; quarterly Q4 figures are noted below. Granite provides infrastructure construction, water services and construction materials, primarily in the United States.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $3.318 billion | $2.990 billion | +11.0% |
| Gross profit / margin | $389.2 million / 11.7% | $314.9 million / 10.5% | Margin +1.2 percentage points |
| Operating income | $64.0 million | $98.7 million | -35.1% |
| Net income attributable to Granite | $42.4 million | $69.1 million | -38.6% |
| Diluted EPS | $0.96 | $1.71 | Down $0.75 |
| Operating cash flow | $86.4 million | $146.2 million | -40.9% |
| Capital expenditures | $111.1 million | $67.7 million | +$43.4 million |
Revenue increased across all four segments. Transportation remained largest at $1.977 billion; Water revenue rose to $338.3 million, primarily reflecting the Layne and LiquiForce acquisitions. Segment gross margins were Transportation 9.6% (up from 8.7%), Water 17.6% (up from 9.2%), Specialty 14.5% (up from 14.2%) and Materials 12.9% (down from 15.4%).
Q4 2018: Revenue was $892.3 million versus $801.3 million in Q4 2017; gross profit was $108.0 million and margin was 12.1%, compared with $100.7 million and 12.6%. Net income attributable to Granite was $6.5 million, down from $32.8 million; diluted EPS was $0.14 versus $0.81.
Liquidity, debt and backlog
- Year-end cash, cash equivalents and marketable securities totaled $338.9 million, including $132.0 million held by consolidated joint ventures; such joint-venture funds generally are not available for Granite’s general working-capital needs. Cash excluding those joint ventures was $140.8 million.
- Working capital was $737.5 million. The $500 million committed credit facility had $113.6 million of unused availability at year-end.
- Total debt principal was approximately $383.3 million: $40.0 million of 2019 notes, a $146.3 million term loan and $197.0 million drawn on the revolving facility. Reported balance-sheet debt, net of issuance costs, was $382.4 million. Granite reported compliance with its debt covenants.
- Operating cash flow fell to $86.4 million, primarily as net contributions to unconsolidated joint ventures increased by $110.4 million. Total cash provided by joint ventures may be restricted from distribution.
- Contract backlog was $3.690 billion, broadly unchanged from $3.718 billion. Approximately $2.3 billion was expected to be completed in 2019; about $700 million of project wins was not yet included pending task-order approvals. Backlog is subject to customer cancellation or scope changes and is not a guarantee of profitable work.
Material changes and unusual items
- Granite acquired Layne Christensen for approximately $349.8 million, primarily in Granite shares, and acquired LiquiForce for $35.9 million in cash. Layne contributed $271.7 million of 2018 revenue and recorded a $22.4 million pretax loss, which included $53.5 million of acquisition and integration expenses. Company-wide acquisition and integration expenses were $60.0 million.
- Debt increased from $224.5 million at year-end 2017 to $382.4 million, reflecting acquisition financing and other borrowings. Granite also issued shares for the Layne transaction; shares outstanding rose from 39.9 million to 46.7 million.
- Large downward revisions to project estimates reduced gross profit by $86.5 million in 2018, versus $67.2 million in 2017. The filing cites additional costs, lower productivity, weather-related costs and reduced estimated recoveries on claims. All 2018 revisions of at least $5 million were in Transportation.
- The 2018 effective tax rate was 16.2%, versus 27.4%, reflecting Tax Reform-related items, including an $8.0 million benefit from finalizing provisional tax accounting; nondeductible acquisition costs partly offset the benefit.
- Adoption of the new revenue standard resulted in a $15.2 million reduction to opening retained earnings. The filing’s comparison of 2018 results under the new versus prior revenue guidance shows $9.3 million higher revenue and $11.4 million higher net income attributable to Granite under the reported presentation.
- Transportation backlog included two forecast-loss contracts with $49.7 million of remaining revenue, compared with one such contract with $106.2 million of remaining revenue at year-end 2017.
Outlook, risks and contingencies
Management described public and private market demand as robust and cited state and local infrastructure funding, the federal FAST Act, California’s SB 1 and water infrastructure programs as supportive market factors. Management expressed optimism about further federal infrastructure legislation, but the filing provides no quantified revenue or earnings guidance. Expected 2019 capital expenditures were $110 million to $125 million.
Key risks include project cost overruns under fixed-price and fixed-unit-price contracts; estimate revisions, delays, weather and labor or materials cost changes; customer funding or contract cancellations; subcontractor and joint-venture partner performance; liquidated damages and recovery of claims; dependence on government contracting and bonding capacity; acquisition integration; environmental and safety regulation; commodity prices; and seasonal cash-flow variability. The company noted that legal and government matters were ordinary-course proceedings; recorded liabilities were immaterial, but the aggregate reasonably possible loss exposure, including liquidated damages, could materially affect financial statements if amounts become probable and estimable. No clear quantified range was provided.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Layne and LiquiForce were excluded from the 2018 internal-control assessment as recently acquired businesses.
Investor verification priorities
- Assess whether acquisitions can deliver sustainable earnings after the $60.0 million integration charge and Layne’s reported pretax loss.
- Review the causes and remaining exposure behind the $86.5 million of adverse project estimate revisions and the forecast-loss backlog contracts.
- Reconcile reported cash with cash accessible to Granite, joint-venture funding needs, debt maturities and remaining revolver capacity.
- Track task-order approvals and conversion of backlog into revenue and cash, while considering cancellation, margin and funding risks.
- Review the detailed notes for legal contingencies, claim recoveries, acquired tax positions and the revenue-standard transition effects.