Granite Construction Incorporated — Q1 2017 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Granite is a U.S. heavy civil contractor and construction materials producer, reporting Construction, Large Project Construction, and Construction Materials segments. The company cautions that first-quarter results are affected by seasonal weather and are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $468.4 million | $439.5 million |
| Gross profit | $25.1 million; 5.4% margin | $39.2 million; 8.9% margin |
| Operating loss | $36.4 million | $16.3 million |
| Net loss attributable to Granite | $23.8 million; $0.60 per share | $10.4 million; $0.26 per share |
| Operating cash flow | $13.3 million provided | $10.4 million used |
| Investing cash flow | $20.2 million used | $34.0 million used |
| Financing cash flow | $13.0 million used | $10.1 million used |
- Revenue increased 6.6%. Construction revenue rose 8.3% to $226.8 million, Large Project Construction rose 5.9% to $207.0 million, and Construction Materials revenue was essentially flat at $34.5 million.
- Construction gross profit was $27.9 million (12.3% margin), versus $26.9 million (12.9%). Large Project Construction gross profit fell to $2.6 million (1.2%) from $13.5 million (6.9%). Construction Materials recorded a $5.4 million gross loss, compared with a $1.2 million loss.
- Cash and cash equivalents were $169.5 million at March 31, 2017; marketable securities totaled $127.8 million. Combined cash, cash equivalents, and securities were $297.3 million, including cash held in consolidated joint ventures that is generally not available for Granite’s working capital until distributed.
- Total debt was approximately $243.1 million, comprising $14.8 million of current maturities and $228.3 million of long-term debt. The company had $161.2 million of unused credit-facility availability. It reported compliance with debt covenants.
- Capital expenditures were $21.4 million, versus $24.6 million. Dividends were $0.13 per share in both periods.
Material changes and operating developments
- Gross profit declined $14.1 million despite higher revenue, largely reflecting a $13.0 million net reduction in Large Project Construction project profitability from estimate revisions, compared with a $2.8 million reduction in Q1 2016. The 2017 decreases affected five projects and reflected higher-than-anticipated costs, design, weather, and owner-related costs, net of estimated and actual claim recoveries.
- Construction Materials’ larger loss was attributed primarily to exceptionally wet weather, which reduced aggregate and asphalt production and fixed-cost absorption. Weather also constrained work in California Construction.
- SG&A increased 10.2% to $61.8 million, including higher selling costs and restricted-stock-unit amortization.
- Operating cash flow improved by $23.8 million year over year, primarily from higher net distributions from unconsolidated joint ventures and improved working-capital cash flow, including receivable collections.
- Backlog was $3.44 billion at March 31, 2017, up from $3.39 billion a year earlier and down from $3.48 billion at year-end 2016. Construction backlog rose 14.1% from year-end to $1.18 billion; Large Project Construction backlog declined 7.9% to $2.26 billion as work progressed. Backlog contracts are generally subject to customer cancellation or modification.
Outlook, risks, contingencies, and unusual items
- Management described markets as competitive and the economic backdrop as consistent with modest growth. It expected improved public-spending trends to create positive, multi-year demand opportunities beginning late in 2017, particularly for Construction and Construction Materials. The filing provides no formal revenue or earnings guidance.
- Management said 2017 capital expenditures were expected to be consistent with 2016. It cited the FAST Act as supporting state and local planning, and California’s recently approved SB1 as providing $52.4 billion of incremental transportation funding over ten years.
- Management reported a robust Large Project Construction market and emphasized risk management in bidding. The company’s share of revenue remaining on unconsolidated and line-item joint venture contracts was included in approximately $4.6 billion of total joint-venture contract revenue remaining to be recognized; partner shares comprise the balance. A 30% share of an approximately $855 million Grand Parkway project was not yet included in backlog and was expected to be booked in Q2 2017.
- In Q1 2017, Granite corrected amounts that should have been recorded in Q3 2016. The correction reduced Large Project Construction revenue and gross profit by $4.9 million and increased Granite’s net loss by $1.6 million. Management concluded the correction was not material to prior periods and was not expected to be material to 2017 full-year statements.
- The filing also disclosed a prior-period misstatement in unconsolidated joint-venture revenue information for Q1 2016; Granite stated it did not affect consolidated financial statements and would be corrected prospectively.
- Recorded liabilities for legal proceedings and government inquiries were approximately $1.0 million. Possible losses above accrued amounts were described as immaterial in aggregate, but certain matters involving contractually agreed liquidated damages could have a material adverse effect in the future. Outcomes of legal proceedings and government inquiries are uncertain.
- Other key risks include project cost-estimate revisions, claims and back charges, weather and seasonality, joint-venture cash availability, customer funding and contract cancellation, and the possibility that prolonged operating deterioration or a significant acquisition could require additional financing. Management said liquidity was expected to meet needs for the next 12 months.
Most important facts for investors to verify
- Whether Large Project Construction project costs, claim recoveries, and estimate revisions stabilize after the $13.0 million Q1 net reduction in project profitability.
- Whether weather-related production and work delays continue to affect Construction Materials margins and California operations.
- Backlog conversion, new awards, customer funding, and the expected Q2 inclusion and execution of the Grand Parkway project share.
- Cash availability after accounting for joint-venture restrictions, upcoming debt installments, and the $161.2 million of available credit capacity.
- Developments in legal and liquidated-damages matters, and the financial effects of adopting new revenue-recognition guidance, which the company was still assessing.