Granite Construction Incorporated — Q3 2013 Form 10-Q
Business context and period. Granite is a U.S. heavy-civil contractor and construction-materials producer, with Construction, Large Project Construction, Construction Materials, and Real Estate segments. This unaudited report covers the quarter and nine months ended September 30, 2013; comparisons are with the same 2012 periods unless noted. Results are seasonal and may vary with weather, project timing, and estimates of costs to complete.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $741.6 million, up 1.8% | $1,670.4 million, up 5.8% |
| Gross profit / margin | $54.4 million / 7.3%, versus $101.1 million / 13.9% | $135.7 million / 8.1%, versus $178.0 million / 11.3% |
| Operating income (loss) | $10.6 million, versus $61.4 million | $(7.4) million, versus $59.2 million |
| Net income (loss) attributable to Granite | $11.0 million ($0.28 per diluted share), versus $37.1 million ($0.94) | $(8.3) million ($(0.21) per diluted share), versus $27.3 million ($0.70) |
| Operating cash flow | Not separately provided for the quarter | $(64.5) million, versus positive $20.2 million |
Drivers and margins. Construction revenue rose 22.0% in Q3 and 27.7% year to date, primarily reflecting the December 2012 Kenny acquisition; Construction gross margin improved to 10.5% and 9.2%, respectively. Large Project Construction revenue declined 26.6% in Q3 and 16.6% year to date. Its Q3 gross margin fell to negative 1.4% from 22.6%, including losses from cost increases and estimate revisions on a Washington State highway project. Construction Materials revenue and gross profit weakened amid continued commercial and residential market softness and competition. Companywide SG&A rose 12.9% in Q3 and 17.9% year to date, partly due to Kenny-related expenses.
Financial position and liquidity
- At September 30, cash and cash equivalents were $212.5 million and marketable securities were $86.9 million, totaling $299.4 million. This total includes $57.1 million held by consolidated joint ventures, generally unavailable for Granite’s general working-capital needs until distributed. Cash excluding those ventures was $155.3 million.
- Total debt was approximately $279.4 million, including $200.0 million of senior notes bearing 6.11%, $70.0 million drawn on the revolving facility, and $9.2 million of non-recourse real-estate debt. The $215.0 million revolving facility had $134.9 million available; it expires in October 2016.
- Management said cash, securities, and expected operating cash generation should cover anticipated needs for the next 12 months. The company was in covenant compliance; its leverage ratio was 2.52 against a then-current maximum of 3.25 under the credit facility. The maximum tightens beginning with the December 2013 quarter.
- Capital expenditures were $30.5 million for the nine months. Granite expected full-year 2013 capital expenditures of $40–$50 million. Nine-month dividends paid were $15.2 million; dividends were $0.13 per share for Q3.
Material changes, outlook, and risks
- Backlog: Total contract backlog was $2.75 billion at September 30, described by management as a record level, versus $1.59 billion a year earlier. Large Project Construction backlog was $2.05 billion, up 93.1% year over year; Construction backlog was $705.8 million, up 33.1%. Management expected the backlog profile to benefit the business in 2014. Backlog includes contracts that customers may cancel or modify and excludes certain task orders and contract options pending required notices or exercise.
- Outlook and market conditions: Management described the large-project outlook and bidding pipeline as robust, citing power-market wins and opportunities in power, tunnel, and water work added through Kenny. It also cautioned that weak commercial and residential demand and intense competition remained near-term headwinds for Construction and Construction Materials. No numerical revenue or earnings guidance was provided.
- Project estimates: A Washington State highway project faced lower productivity from unforeseen design issues, delays, resequencing, and scope changes. Management sought compensation from the client and subcontractors, but amount, sources, and timing were not finalized. Q3 Large Project Construction estimate revisions reduced gross profit by $6.8 million; the related project revisions included $19.7 million of decreases, partly offset by increases elsewhere.
- Restructuring: Granite expected to conclude its 2010 Enterprise Improvement Plan in Q4 2013 and record at least $30 million of restructuring charges, primarily related to consolidation and assets held for sale. Final amounts and timing depend on market conditions and achievable sale values.
- Legal contingency: Recorded liabilities for legal proceedings and government inquiries totaled approximately $18.0 million at September 30, versus $8.6 million at year-end 2012. In a federal investigation involving disadvantaged-business-enterprise credit on the Grand Avenue project and other entities, Granite said a penalty or sanction was probable and accrued the low end of its estimated range. It could not estimate total or most likely liability; additional exposure, up to the DBE subcontract amount, was considered reasonably possible. The subcontract amount is not stated in the provided filing text.
- Other unusual items: Granite corrected prior-period 2013 items totaling $3.9 million pretax ($2.4 million after tax), primarily increasing Q3 cost of revenue; management said the corrections were not material to the current or prior periods. Kenny acquisition purchase-price allocation remained preliminary, with finalization expected in Q4.
Key facts for investors to verify
- Whether the Washington project’s productivity, cost, schedule, and recovery prospects improve, and whether compensation is obtained.
- The actual Q4 restructuring charge and proceeds or losses from the planned asset dispositions.
- Developments in the DBE investigation, the recorded accrual, and potential exposure beyond that accrual.
- Conversion of the elevated backlog into profitable work, including the timing of excluded task orders and contract options.
- Operating cash flow and working-capital trends, particularly cash committed to construction joint ventures and collections of receivables and retainage.
- Covenant headroom as leverage limits tighten, and the final Kenny purchase-price allocation and integration results.