Granite Construction Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Granite is a U.S. heavy civil contractor and construction materials producer, with a real estate business being divested as part of its strategy to focus on core operations. Comparisons are with Q1 2013 unless otherwise noted. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $379.8 | $378.7 |
| Gross profit / margin | $21.4 / 5.6% | $30.1 / 7.9% |
| Operating loss | $(26.9) | $(26.0) |
| Net loss attributable to Granite | $(20.6) | $(22.0) |
| Diluted loss per share | $(0.53) | $(0.57) |
| Operating cash flow | $(19.8) | $(54.7) |
- Revenue was nearly flat as lower Construction revenue was offset by growth in Large Project Construction and Construction Materials. Construction revenue fell 11.3%; Large Project Construction rose 9.1%; Construction Materials rose 19.2%.
- Gross profit declined 28.8%. Construction gross margin fell to 5.8% from 7.5%, and Large Project Construction margin to 8.4% from 13.2%. Materials’ gross loss narrowed to $3.6 million from $6.0 million.
- SG&A decreased 13.9% to $49.2 million, or 13.0% of revenue versus 15.1%. Lower incentive compensation, restricted-stock amortization, consulting fees and integration costs contributed.
- Cash used in operations improved by $34.9 million, primarily because net contributions to unconsolidated joint ventures decreased and the adjusted net loss was lower. Investing activities provided $1.0 million; financing activities used $4.6 million. Cash and cash equivalents fell $23.3 million during the quarter.
Balance sheet and liquidity
- At March 31, 2014, cash and cash equivalents were $205.8 million and marketable securities were $107.1 million, totaling $312.9 million. Consolidated joint ventures held $27.6 million of the cash; those funds generally are not available to Granite for its own working capital until distributed.
- Current assets were $898.7 million and current liabilities $461.4 million. Total assets were $1.56 billion; total equity was $764.7 million.
- Debt included $200.0 million of senior notes and a $70.0 million revolving-credit borrowing, plus $7.7 million of non-recourse real estate debt. The $215.0 million revolving facility had $130.1 million available; it expires in October 2016. Granite reported compliance with debt covenants.
- Management said cash, investments and operating cash generation should cover expected working capital, capital expenditures, dividends and other liquidity needs for the next 12 months. Planned 2014 capital expenditures were $40–$60 million.
- A $100 million interest-rate swap entered in March converts part of the 2019 Notes’ fixed 6.11% rate to a floating rate of 4.15% plus six-month LIBOR, through June 2018.
Backlog, outlook and material risks
- Contract backlog was $2.57 billion at March 31, up 1.7% from December 31, 2013 and 7.0% from March 31, 2013. Construction backlog was $786.5 million; Large Project Construction backlog was $1.78 billion. Backlog is subject to customer cancellation or modification.
- Management expected Construction and Large Project Construction to improve financially in 2014, with Large Project profitability expected to improve late in the year. Materials revenue was expected to remain stable or rise slightly, with improved margins. The company anticipated profitable bidding opportunities, while noting that timing of an economic recovery remained difficult to determine.
- Management warned that the federal highway bill was due to expire in September 2014 and the Highway Trust Fund was estimated to become insolvent by late summer absent congressional action. It said uncertainty in infrastructure funding threatened industry recovery and growth.
- Q1 results are seasonal: weather and scheduled equipment and plant maintenance affect the first and fourth quarters, so the quarter is not necessarily indicative of full-year results. Project timing, cost-to-complete estimates, claims, contract mix and payment timing can also make revenue, margins and cash flows variable.
- Construction estimate revisions reduced gross profit by $3.5 million. Large Project Construction revisions were a net $8.2 million increase, comprising $16.1 million of increases and $7.9 million of decreases. Additional project revenue was recognized at cost before reaching the profit-recognition threshold: $85.5 million in Q1 2014 versus $20.9 million in Q1 2013.
- Granite recorded approximately $11.1 million of liabilities for legal proceedings and government inquiries. In a federal investigation concerning disadvantaged-business-enterprise credit on the Grand Avenue project and other entities, Granite considered some penalty or sanction probable and accrued its most likely estimated liability; additional exposure was reasonably possible but not estimable and could materially affect results, financial position or liquidity.
- Other disclosed risks include competitive bidding, public funding levels, project execution and collection timing. The filing reported no material change in previously disclosed risk factors and no significant change in market-risk exposure.
Important facts for investors to verify
- Whether backlog converts to profitable revenue, particularly given lower Q1 construction margins and the substantial increase in revenue on projects deferring profit recognition.
- Progress on federal highway funding and potential effects on public-sector awards and the company’s outlook.
- Developments in the DBE investigation, including any penalties, sanctions, compliance costs or additional accruals beyond the amount recorded.
- Operating cash flow, working-capital needs and availability of liquidity, distinguishing Granite’s funds from cash held in joint ventures.
- Debt-covenant headroom: the reported leverage ratio was 2.71 against a 3.75 maximum at March 31, with the maximum scheduled to tighten to 3.50 from the June quarter.