Granite Construction Incorporated — Q3 2014 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2014. Granite is a heavy-civil contractor and construction-materials producer, with Construction, Large Project Construction, Construction Materials and Real Estate segments. 2013 comparisons were revised to correct errors the company deemed immaterial to the previously issued statements.
Financial performance
| Metric | Q3 2014 | Q3 2013 revised | Nine months 2014 | Nine months 2013 revised |
|---|---|---|---|---|
| Revenue | $719.8m | $739.8m | $1,685.5m | $1,668.8m |
| Gross profit / margin | $66.7m / 9.3% | $55.9m / 7.6% | $170.5m / 10.1% | $135.5m / 8.1% |
| Operating income (loss) | $22.3m | $13.6m | $29.7m | $(6.3)m |
| Net income (loss) attributable to Granite | $15.3m | $13.0m | $8.4m | $(7.5)m |
| Diluted EPS | $0.38 | $0.33 | $0.21 | $(0.19) |
Cash flow and liquidity. Nine-month operating cash flow was a use of $46.8m, versus a use of $64.5m a year earlier. Investing cash flow used $11.3m; financing cash flow used $3.8m. Cash and equivalents were $167.2m and marketable securities were $102.1m at September 30. The $269.3m combined total includes $29.5m held by consolidated joint ventures, which generally is not available to Granite until distributed. The company reported $134.3m available under its $215m revolving facility.
Debt and capital. Long-term debt was $270.1m, including $70m outstanding on the revolving facility; non-recourse debt was $7.0m. The $200m senior notes bear 6.11% interest and are due in five equal annual installments beginning in 2015. Granite reported compliance with debt covenants. Nine-month capital expenditures were $37.5m; full-year 2014 capex was expected to be $50m–$60m. Dividends were $0.13 per share for the quarter.
Changes versus comparable periods
- Quarterly revenue fell 2.7%, while nine-month revenue rose 1.0%. Construction revenue declined, partly offset by growth in Large Project Construction for the nine months and growth in Construction Materials in both periods.
- Gross profit increased in both periods. Large Project Construction and Construction Materials improved, while Construction gross profit declined with lower volume. Nine-month operating results moved from a loss to income.
- Nine-month cash use from operations improved by $17.7m year over year, but remained negative; working-capital movements and joint-venture cash flows remained significant.
- Backlog was $2.97bn at quarter-end, up 7.9% year over year and 16.0% from June 30. Large Project Construction backlog rose following a $696.6m Florida design/build highway award.
Outlook, commentary and risks
- Management expected improved full-year 2014 financial performance, with Large Project Construction expected to drive improved profitability late in the year. It also expected continued Construction Materials margin improvement and sought growth in new work across segments over the next 12 months.
- Management cited a federal highway funding extension through May 2015 but warned that limited long-term funding visibility could delay or slow project lettings. Some Western-market opportunities had been delayed by one to three quarters. The company said prolonged funding uncertainty could put industry recovery and growth at risk.
- Project margins depend on cost-to-complete estimates, productivity, claims and change orders. Nine-month revisions in project estimates included a $9.4m net gross-profit decrease in Construction and a $25.9m net increase in Large Project Construction. Weather and seasonality also make interim results an uncertain guide to full-year performance.
- In a longstanding government investigation into disadvantaged-business-enterprise credit, Granite said some form of penalty or sanction was probable and recorded its best estimate. It also said additional liability was reasonably possible and resolution could materially adversely affect financial position, results, cash flow or liquidity. Separately, recorded liabilities for legal proceedings and inquiries totaled $9.9m; the stated reasonably possible loss range for matters covered by that disclosure was $0–$5m.
- Other risks include joint-venture performance obligations, including joint and several exposure on certain contracts, and customer cancellation or modification of substantially all backlog contracts. Granite said it believed liquidity would cover expected needs for the next 12 months. It noted that the 2014 revenue-recognition standard was under assessment and was not expected to take effect until 2017.
Important facts for investors to verify
- Whether the reported $2.97bn backlog converts to revenue and profit on schedule, particularly the large Florida award and the prospective Pennsylvania bridge project, which was not yet in backlog pending final approval and notice to proceed.
- Cash conversion: operating cash flow remained negative, and substantial cash and assets in joint ventures are not freely available to Granite.
- Exposure from project estimate revisions, unresolved claims and change orders, including the net estimate movements disclosed for both construction segments.
- Developments, potential penalties and any additional accruals related to the DBE investigation; the filing does not clearly quantify the potential additional exposure in that matter.
- Debt repayment beginning in 2015, revolver availability and covenant headroom; monitor funding conditions that could affect awards and project timing.