Granite Construction Incorporated — Q2 2014 Form 10-Q
Business context and reporting period. This unaudited report covers the quarter and six months ended June 30, 2014. Granite is a U.S. heavy civil contractor and construction materials producer, with Construction, Large Project Construction, Construction Materials and Real Estate segments. Prior-year comparatives were revised to correct errors, primarily involving $1.7 million of equipment-related costs; the company said the errors were not material to the previously issued interim statements.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $585.9 million, up 6.5% year over year | $965.7 million, up 3.9% |
| Gross profit / margin | $82.4 million / 14.1%, versus $49.6 million / 9.0% | $103.8 million / 10.8%, versus $79.7 million / 8.6% |
| Operating income (loss) | $34.3 million, versus $6.1 million | $7.4 million, versus a $19.9 million loss |
| Net income (loss) attributable to Granite | $13.6 million; diluted EPS $0.34 | $(6.9) million; diluted EPS $(0.18) |
| Operating cash flow | Not presented separately for the quarter | $(72.4) million, versus $(51.6) million |
Quarterly revenue growth reflected Large Project Construction and Construction Materials gains, partly offset by lower Construction revenue. Large Project Construction revenue rose 34.6% in Q2 and 22.2% for the six months; Construction revenue fell 12.8% and 12.2%, respectively. Q2 gross profit improved notably in Large Project Construction, while six-month Construction Materials gross profit turned positive.
At June 30, cash and cash equivalents were $146.5 million and marketable securities were $112.1 million, totaling $258.6 million, compared with $346.3 million at December 31, 2013. Cash used in operations was driven in part by working-capital investment and lower distributions from unconsolidated joint ventures. Cash used in investing was $9.2 million; capital expenditures were $20.1 million. Cash used in financing was $1.1 million.
Debt included $200.0 million of senior notes, $70.0 million outstanding under the revolving credit facility and $7.4 million of non-recourse real-estate debt. Of the $215.0 million revolving facility, $134.3 million was available. Granite reported compliance with its debt covenants. Total equity was $793.5 million. The quarterly dividend was $0.13 per share.
Contract backlog was $2.562 billion at June 30, down from $2.798 billion a year earlier. Construction backlog was $975.0 million, up 20.7% year over year; Large Project Construction backlog was $1.587 billion, down 20.3%.
Outlook, commentary and risks
- Management expected Construction and Large Project Construction to deliver improved 2014 financial performance; Large Project Construction profitability was expected to improve late in 2014. Construction Materials revenue was expected to remain stable or rise slightly, with improved margins versus 2013.
- Granite expected to grow new work over the next 12 months and cited healthy backlog of approximately $2.6 billion. A selected Florida highway design-build project with a $2.3 billion total value was expected to enter backlog in Q3 2014 once funding was in place; Granite’s share is 30%.
- Management cited uncertainty around short- and long-term federal highway funding, including the Highway Trust Fund and a new highway bill, as a risk to industry recovery and growth. Competitive bidding, public funding, project timing, weather, and changes in estimated costs to complete also affect results and cash flow.
- Project-estimate revisions were significant: Large Project Construction had net upward revisions of $25.7 million in Q2 and $34.5 million for the six months, reflecting productivity, scope changes and issue settlements. Construction had net downward revisions of $1.4 million in Q2 and $8.3 million for the six months, attributed to added costs and lower productivity. Granite cautioned that estimates may change.
- Granite stated that cash, investments and expected operating cash generation should meet liquidity needs for the next 12 months. It anticipated 2014 capital expenditures of $40 million to $60 million.
- A federal investigation concerning disadvantaged-business-enterprise credit claims on the Grand Avenue Project and other projects remains a material contingency. Granite considered some penalty or sanction probable and accrued its estimated most likely liability, but said any excess exposure could not be reasonably estimated and could materially affect financial position, results, cash flow or liquidity. Recorded liabilities for legal proceedings and government inquiries totaled approximately $9.9 million.
- Six-month results are not necessarily indicative of full-year results because of seasonality and project timing. The six-month effective tax rate was 70.1%, which the company attributed to low pretax income relative to the effect of state tax laws enacted in Q1.
Most important facts for investors to verify
- Whether Large Project Construction’s estimate revisions and elevated Q2 gross margin are repeatable, and how remaining project costs and productivity develop.
- Conversion of the $2.6 billion backlog into revenue and cash, including funding and task-order timing; backlog contracts may generally be canceled or modified by customers.
- Working-capital needs, joint-venture distributions and the availability of joint-venture cash, which is generally not available to Granite until distributed.
- Developments, accrual adequacy and potential consequences of the DBE investigation and other legal proceedings.
- Highway funding developments, covenant headroom and liquidity if operating results weaken or a significant acquisition is pursued.