Granite Construction Incorporated — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; financial statements are unaudited. Comparisons are with the corresponding 2015 periods unless stated otherwise. Granite is a heavy-civil contractor and construction-materials producer, reporting Construction, Large Project Construction, and Construction Materials segments.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $803.9 million | $751.4 million | $1,847.9 million | $1,740.9 million |
| Gross profit / margin | $107.7 million / 13.4% | $96.1 million / 12.8% | $220.1 million / 11.9% | $199.2 million / 11.4% |
| Operating income | $53.9 million | $51.6 million | $63.5 million | $57.5 million |
| Net income attributable to Granite | $37.1 million | $30.8 million | $40.0 million | $31.8 million |
| Diluted EPS | $0.92 | $0.77 | $1.00 | $0.80 |
- Q3 revenue rose 7.0%; nine-month revenue rose 6.2%. Q3 attributable net income increased about 21%, and nine-month attributable net income increased about 26%.
- Construction revenue increased 8.8% in Q3 and 9.2% year to date, with higher gross margins. Large Project Construction revenue rose 14.9% in Q3 and 8.8% year to date; its year-to-date gross margin declined to 7.9% from 9.1%. Construction Materials revenue fell 16.2% in Q3 and 12.7% year to date, mainly on lower California external sales volume.
- SG&A was $54.2 million in Q3 and $159.0 million year to date, up 19.7% and 10.6%, respectively. Management cited higher salaries, incentive compensation, bidding activity, and stock-award amortization.
- Net cash used in operating activities was $20.3 million for nine months, versus $8.1 million used in 2015. Investing activities used $60.8 million, including $67.9 million of capital expenditures; financing activities used $21.5 million. Cash and cash equivalents declined $102.6 million from year-end 2015 to $150.2 million.
- At September 30, cash and cash equivalents plus marketable securities totaled $258.0 million, including $47.8 million held by consolidated joint ventures and generally unavailable for Granite’s working capital until distributed. Debt carrying value was about $255.5 million. The $296.3 million credit facility had $189.8 million of unused availability; the company reported compliance with debt covenants.
- Total assets were $1.785 billion, total equity $906.2 million, and current liabilities $592.1 million at September 30, 2016. Receivables were $512.8 million, up from $340.8 million at December 31, 2015.
Changes, outlook, risks, and notable items
- Backlog reached $3.765 billion at September 30, up from $3.089 billion a year earlier. Large Project Construction backlog was $2.662 billion; Construction backlog was $1.102 billion.
- Management described private-market activity as a source of growth and said the FAST Act provided stability and planning visibility, but was not yet a growth catalyst. It anticipated positive demand effects from improved public spending in 2017 and beyond, particularly for Construction and Construction Materials. No specific earnings or revenue guidance was provided.
- Management expected 2016 capital expenditures of $80–$90 million, including about $30 million for job-specific Large Project Construction equipment.
- Construction contract margins depend on estimates of costs to complete; estimate revisions are recognized in the period of change. For the first nine months, estimate revisions reduced gross profit by a net $3.1 million in Construction and $6.0 million in Large Project Construction. Large Project decreases included additional design, weather, and owner-related costs, lower productivity, and higher-than-expected costs.
- Claim and back-charge recoveries remain uncertain: settlement depends on customer resolution processes and may extend beyond one year. At September 30, aggregate claim recovery estimates in contract asset/liability balances were approximately $7.8 million; estimated back-charge recoveries were also included in receivables.
- Granite reported $5.4 billion of remaining revenue on unconsolidated and line-item joint-venture contracts, of which $1.7 billion was its share. Joint-venture assets are generally not available for Granite’s working capital until distributed. About $3.5 billion of backlog was bonded, making liquidity and working capital relevant to maintaining bonding capacity.
- Ordinary-course legal proceedings and government inquiries could lead to adjustments or new accruals; recorded related liabilities were approximately $0.7 million. The disclosed aggregate range of reasonably possible losses was immaterial at September 30, 2016. The filing reported no material change in previously disclosed risk factors.
- The company disclosed errors in joint-venture supplemental revenue and cost tables in prior quarterly filings. It said the errors did not affect consolidated financial statements and were not material; prior-period joint-venture tables were revised, and 2016 misstatements were to be corrected prospectively. Management stated disclosure controls were effective.
Investor verification priorities
- Assess whether backlog converts to profitable work, especially given estimate-driven margin pressure in Large Project Construction.
- Monitor operating cash flow, receivables and joint-venture funding/distributions; distinguish Granite-accessible liquidity from joint-venture cash.
- Verify progress against the $80–$90 million 2016 capital-expenditure outlook and the stated public-spending outlook.
- Review claim and back-charge recovery assumptions, project cost estimates, and the effect of weather, design, owner-related costs, and productivity on margins.
- Review the revised joint-venture supplemental tables and confirm that the disclosed reporting errors remain confined to those tables without consolidated financial-statement impact.