Granite Construction Incorporated — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Granite is a U.S. heavy civil contractor and construction materials producer, reporting Construction, Large Project Construction, and Construction Materials segments. Financial statements are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $751.4m | $719.8m | $1,740.9m | $1,685.5m |
| Gross profit | $100.9m | $66.7m | $206.8m | $170.5m |
| Gross margin | 13.4% | 9.3% | 11.9% | 10.1% |
| Operating income | $51.6m | $22.3m | $57.5m | $29.7m |
| Net income attributable to Granite | $30.8m | $15.3m | $31.8m | $8.4m |
| Diluted EPS | $0.77 | $0.38 | $0.80 | $0.21 |
- Q3 revenue rose 4.4%; nine-month revenue rose 3.3%. Q3 Large Project Construction revenue increased 21.0%, while Construction revenue declined 4.5%. Materials revenue increased 15.1%.
- Q3 gross profit improved across all three segments. Nine-month Large Project Construction gross profit fell 23.7% to $55.1m, partly offset by gains in Construction and Materials.
- SG&A was $50.1m in Q3 and $151.4m year to date, up 5.7% and 2.5%, respectively; management attributed the increase primarily to higher incentive compensation.
- Net cash used in operations was $8.1m for the nine months, versus $46.8m used in 2014. Investing activities used $5.4m and financing activities used $20.7m. Capital expenditures were $26.1m, compared with $37.5m.
- At September 30, cash and cash equivalents were $221.8m and marketable securities were $88.3m. Some joint-venture cash is not freely available to Granite. Current assets were $1,102.7m and current liabilities $549.2m.
- Long-term debt was $270.1m, plus $5.8m of current non-recourse debt. The company had $70.0m drawn on its credit agreement and $126.0m available under the then-current facility.
Changes, outlook, and key risks
- Claims accounting change: From January 1, 2015, Granite prospectively recognizes affirmative customer-claim revenue when recovery is probable and reasonably estimable, rather than generally waiting for settlement. This increased revenue and gross profit by $35.0m in Q3 and $44.7m for the nine months. The company said retrospective effects could not be reasonably determined. Claims estimates may materially affect future results.
- Backlog and outlook: Record backlog was $3.09bn at September 30, up from $2.97bn a year earlier. Management described markets as stable but highly competitive and expressed confidence in continued steady growth. It cited more than $16bn of Large Project bidding opportunities through the end of 2016; Granite’s expected share was described as consistent with recent history. No specific earnings or revenue guidance was provided.
- Funding and execution: Management said infrastructure demand is strong but accelerated industry growth depends on improved, dedicated public funding. Schedule, scope, cost-to-complete, productivity, and claim-estimate revisions—particularly on large projects—could materially affect results. Weather and seasonality also cause variability.
- Credit facility: On October 28, 2015, after quarter-end, Granite amended its facility, increasing total commitments to $300m ($200m revolving and $100m term loan) and extending maturity to October 28, 2020. The company intended to use the facility to pay a $40m note installment due in Q4 2015. It reported covenant compliance at September 30.
- Legal contingency: Granite considers some penalty or sanction probable in a government investigation concerning disadvantaged-business-enterprise credit on the Grand Avenue project and other entities; it recorded its estimate of the most likely liability. Additional consequences could materially affect financial position, results, or liquidity. Aggregate recorded liabilities for legal proceedings and inquiries were approximately $9.2m; the disclosed reasonably possible loss range was $0–$0.3m.
- Unconsolidated and line-item joint ventures carry joint-and-several performance exposure. Approximately $5.6bn of joint-venture contract revenue remained, including $1.7bn attributable to Granite; the company could not estimate obligations beyond remaining work costs.
Important facts for investors to verify
- How much of the reported profit improvement reflects the new claims-recognition policy, and whether the estimated recoveries are collected or revised.
- Backlog conversion, project awards, cancellations, and cost-to-complete changes, especially in Large Project Construction.
- Operating cash conversion and the availability of joint-venture cash, given negative year-to-date operating cash flow.
- Debt repayment and use of the amended credit facility, covenant headroom, and interest-rate exposure.
- Developments and ultimate financial or operational consequences of the DBE investigation.