Granite Construction Incorporated (NYSE: GVA) — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. Granite provides U.S.-focused infrastructure construction and construction materials through its Construction and Materials segments. Figures below are in U.S. dollars; amounts are rounded.
Key financial metrics
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Revenue | $3,509.1 million | $3,301.3 million | +6.3% |
| Gross profit / margin | $396.4 million / 11.3% | $369.5 million / 11.2% | +7.3%; margin +0.1 pp |
| Operating income / margin | $80.1 million / 2.3% | $85.4 million / 2.6% | -6.2% |
| Net income attributable to Granite / diluted EPS | $43.6 million / $0.97 | $83.3 million / $1.70 | -47.7% / -42.9% |
| Cash from operating activities | $183.7 million | $55.6 million | +$128.1 million |
| Cash, equivalents and marketable securities | $453.5 million | $359.9 million | +$93.6 million |
| Total debt | $654.7 million | $288.4 million | +$366.3 million |
Consolidated net income was $29.6 million in 2023 versus $78.9 million in 2022; the higher amount attributable to Granite reflects losses attributable to non-controlling interests in consolidated joint ventures. The reported effective tax rate rose to 50.6% from 14.1%, largely because of non-deductible costs from refinancing convertible notes and lower pretax income.
Material changes and business developments
- Construction revenue rose 6.7% to $2,992.3 million; Materials revenue increased 3.9% to $516.9 million. California construction revenue grew significantly, while Central construction revenue fell as large projects wound down and estimated recovery on a claim declined.
- Construction gross margin was 10.9%, compared with 10.8%; Materials gross margin improved to 13.8% from 13.2%, helped by pricing and normalized fuel and energy costs. Acquired operations recorded a $3.6 million gross loss, including purchase-accounting effects.
- Committed and Awarded Projects (CAP) increased 24% to $5.5 billion from $4.5 billion. Approximately $2.3 billion of year-end unearned revenue was expected to be completed in 2024. CAP includes awards that may be canceled or modified and is not a guarantee of revenue or profit.
- Granite acquired Coast Mountain Resources for $26.6 million and acquired Lehman-Roberts Company and Memphis Stone & Gravel Company (LRC/MSG) on November 30 for $278.0 million, subject to adjustments and estimated tax make-whole amounts. LRC/MSG contributed $7.7 million of 2023 revenue and a $2.3 million pretax loss after acquisition.
- Granite issued $373.8 million of 3.75% convertible notes due 2028, used proceeds in part to exchange approximately $198.7 million principal amount of 2.75% notes for cash and shares, and added a $150 million term loan to fund LRC/MSG. The refinancing generated a $51.1 million debt-extinguishment loss.
Cash, debt and capital resources
- Operating cash flow increased to $183.7 million, primarily due to improved working-capital cash flows and increased distributions from unconsolidated joint ventures and affiliates. Investing activities used $359.3 million, including $294.0 million for acquisitions net of cash acquired; financing activities provided $299.3 million.
- Year-end debt comprised $373.8 million of 3.75% convertible notes, $31.3 million of 2.75% convertible notes, a $150 million term loan and $100 million drawn on the revolver. The $350 million revolving facility had $230.7 million of unused availability after outstanding borrowings and letters of credit. Granite reported compliance with credit-agreement covenants.
- 2023 capital expenditures were $140.4 million. Management expects 2024 capital expenditures of approximately $130–$150 million, including about $50 million for strategic materials investments and about $20 million for a project-specific tunnel boring machine.
- Granite paid $22.8 million in cash dividends in 2023 and said it expects to continue quarterly dividends. It made no share repurchases under its authorization in 2023; $231.5 million remained available at year-end.
Outlook, risks and unusual items
- Management cited continued rollout of the Infrastructure Investment and Jobs Act, state and local funding, and resilient private markets as support for project opportunities and CAP growth in 2024 and beyond. This is management’s outlook, not guaranteed guidance for revenue or earnings.
- About 70% of 2023 Construction revenue was funded by federal, state and local government agencies. Caltrans was the largest customer, contributing $458.2 million, or 13.1% of total revenue. Funding changes, procurement delays, customer cancellations and customer concentration are relevant risks.
- Construction profitability depends on estimates of costs, schedules, productivity, claims and recoveries, particularly for multi-year fixed-price and fixed-unit-price contracts. Downward project estimate revisions reduced 2023 project profitability by $96.9 million; upward revisions added $8.1 million. The filing identifies revisions in estimates as a significant source of earnings variability.
- Other costs, net rose to $50.2 million from $24.1 million, primarily reflecting a $20.0 million net-of-insurance charge for settlement of the Salesforce Tower matter and costs and non-cash impairment charges from winding down international Mineral Services operations. The wind-down also resulted in a $4.5 million goodwill impairment.
- Material risks include labor and materials inflation, weather and project delays, subcontractor and joint-venture performance, bonding and insurance availability, environmental and permitting requirements, and interest-rate and refinancing exposure. The company has previously restated certain 2022 quarterly information and earlier periods; it reported that related material weaknesses have been remediated and that internal control over financial reporting was effective at year-end 2023.
- Legal liabilities recorded at year-end were described as immaterial, but the possible loss range for reasonably possible matters, including liquidated-damages matters, could materially affect the financial statements if those losses become probable and estimable. Brightline receivables included $29.1 million of contract retention; collection timing depends on final project completion and customer funding.
Important facts for investors to verify
- Whether the $5.5 billion CAP converts into funded, executable projects on expected schedules and margins, and how much of it is exposed to cancellation, options or task orders.
- Progress on 2024 cost control and project execution, including the Central group, disputed claims, loss-making contracts and any further revisions to estimates.
- Cash conversion and availability of liquidity, including the timing of Brightline retention collection, joint-venture cash restrictions, debt maturities and variable-rate borrowing costs.
- Integration, profitability and final purchase accounting for LRC/MSG, including the estimated seller tax make-whole amount and the acquired customer-relationship valuation.
- Any developments in legal contingencies, government funding, customer concentration, labor and materials costs, or internal controls that could materially change reported results.