Granite Construction Incorporated — FY 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013. Granite is a U.S. heavy-civil contractor and construction-materials producer, with Construction, Large Project Construction, Construction Materials and Real Estate segments. Kenny Construction, acquired at the end of 2012, contributed to 2013 results.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $2,266.9 million | $2,083.0 million |
| Gross profit / margin | $185.3 million / 8.2% | $234.8 million / 11.3% |
| Operating income (loss) | $(54.7) million | $80.8 million |
| Net income (loss) attributable to Granite | $(36.4) million; $(0.94) per diluted share | $45.3 million; $1.15 per diluted share |
| Cash from operating activities | $5.4 million | $91.8 million |
| Cash, equivalents and marketable securities | $346.3 million | $433.4 million |
| Working capital | $452.6 million | $490.8 million |
| Total debt | $278.1 million | $290.1 million |
| Contract backlog | $2,526.8 million | $1,708.8 million |
Revenue rose 8.8%, largely reflecting Kenny and higher Construction-segment revenue. Gross profit fell 21.1%, and the company moved to an annual net loss. Operating cash flow declined sharply, primarily due to lower joint-venture distributions and less favorable working-capital movements. Cash and securities include $38.8 million held by consolidated joint ventures, generally not available for Granite’s own liquidity needs.
Segment revenue and gross margins: Construction, $1,251.2 million and 8.5% (2012: $984.1 million and 7.9%); Large Project Construction, $777.8 million and 9.2% (2012: $863.2 million and 17.2%); Construction Materials, $237.8 million and 2.9% (2012: $230.6 million and 3.3%). Real Estate revenue was $0.1 million.
Material changes and unusual items
- FY 2013 restructuring and impairment charges were $52.1 million, versus a $3.7 million net gain in 2012. The 2013 total included $31.1 million of real-estate impairments and $14.7 million of quarry impairments, as well as lease termination and other impairment charges. In the fourth quarter, the company recorded $49.0 million of EIP charges plus a separate $3.2 million quarry impairment.
- Large Project Construction revenue declined 9.9%, while its gross margin fell from 17.2% to 9.2%, reflecting projects completing, early-stage work and project estimate changes. Construction gross margin improved to 8.5% from 7.9%.
- Backlog increased 47.9%; Large Project Construction backlog rose 71.4% to $1.845 billion. Approximately $1.4 billion of year-end backlog was expected to be completed in 2014. Backlog is subject to customer cancellation or modification and is not a guarantee of profitable revenue.
- Potential recoveries on specified unresolved contract claims and modifications were estimated at $85 million to $120 million; no recovery or timing is assured. Large Project Construction backlog included $127.8 million of contracts with forecast losses.
- Second- and third-quarter 2013 interim results were revised for identified errors. Management concluded the errors were not material to those interim statements; the filing describes the adjustments.
Liquidity, debt and capital allocation
At year-end, debt comprised $200 million of 6.11% senior notes and a $70 million revolving-credit borrowing, in addition to mortgage and other debt. The $215 million revolver had $134.9 million available. The company reported $43.7 million of 2013 capital expenditures, paid $20.2 million in dividends, and forecast 2014 capital expenditures of $40 million to $60 million. Management said cash, securities and expected operating cash generation should cover anticipated needs for the next 12 months.
On March 3, 2014, Granite amended its credit agreement and note purchase agreement, including covenant changes and a waiver of the covenant requirement for the quarter ended December 31, 2013. The company reported year-end compliance with the agreements as amended.
Outlook, risks and contingencies
Management described public funding as stable but short-term, noted improved TIFIA execution and continued large-project bidding opportunities, and expected the Construction segment to perform better in 2014 amid modest economic and public-funding improvement. Granite planned to bid on more than $13 billion of large projects in 2014, about half representing potential Granite revenue, and was tracking a further $20 billion beyond 2014. Management highlighted uncertainty around long-term federal infrastructure funding and continued intense competition in traditional Western markets.
- Approximately 74.4% of 2013 revenue came from government-funded contracts. Risks include public-budget constraints, procurement and compliance exposure, and suspension or debarment.
- Fixed-price contracts increased to 63.5% of backlog from 56.8%. Cost overruns, labor and materials inflation, delays, design issues, subcontractor performance and claims recovery can reduce margins.
- Joint-venture obligations can be joint and several; Granite disclosed $4.4 billion of remaining revenue on unconsolidated and line-item JV contracts, of which $1.2 billion was its share.
- In the Grand Avenue DBE investigation, Granite said some penalty or sanction was probable and accrued its most likely liability; additional liability, up to the subcontract amount, was considered possible. The amount of the accrual is not clear in the filing text. Total recorded liabilities for legal proceedings and government inquiries were approximately $16.3 million at year-end.
- Other material risks include weather and seasonality, commodity costs, bonding capacity, environmental and quarry permitting requirements, multi-employer pension exposure, and estimates used in contract accounting. The company also identified IT disruption and cybersecurity as risks.
Important facts for investors to verify
- Track backlog conversion, new awards and the profitability of the large projects, including the Tappan Zee Bridge and the Washington State highway project with cost overruns.
- Monitor operating cash flow, working-capital movements and the availability of cash held in joint ventures.
- Review covenant headroom and the effect of the March 2014 amendments and waiver, especially as leverage limits tighten.
- Follow the DBE investigation, the amount accrued, and any resulting penalties, sanctions or contracting consequences.
- Check realized proceeds and any further gains or losses as remaining real-estate and impaired quarry assets are sold or disposed of.
- Assess the assumptions behind construction cost-to-complete estimates, claims recoveries and backlog, which may change and affect reported earnings.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2013.