Granite Construction Incorporated (NYSE: GVA) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Dollar amounts below are in millions unless stated otherwise. Comparative 2022 figures were restated and recast.
Business context and reporting period
Granite provides infrastructure construction and materials, primarily in the United States, through its Construction and Materials segments. Approximately 65% of Construction revenue came from public-sector work. Results are seasonal and can vary with weather, project timing, contract estimates and working-capital movements.
The company restated prior 2022 quarterly information to correct deferred-tax and income-tax errors related to the sale of Inliner, along with other immaterial errors. It also recast 2022 results to move the retained Water Resources and Mineral Services businesses from discontinued to continuing operations. Comparisons below use the restated/recast figures presented in this filing.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $898.6 | $849.2 | $1,458.6 | $1,503.1 |
| Gross profit | $103.1 | $97.6 | $135.4 | $157.7 |
| Gross margin | 11.5% | 11.5% | 9.3% | 10.5% |
| Operating income (loss) | $28.9 | $29.7 | $(14.4) | $14.0 |
| Net income (loss) attributable to Granite | $(17.0) | $18.7 | $(40.0) | $(8.1) |
| Diluted EPS | $(0.39) | $0.39 | $(0.91) | $(0.18) |
| Cash from (used in) operations | Not presented as a quarterly figure | $(118.9) | $(103.3) |
Q2 revenue rose 5.8% year over year: Construction revenue increased 5.1% and Materials revenue 9.6%. Materials’ Q2 gross profit improved to $23.9 million from $17.3 million, while Construction gross profit declined to $79.2 million from $80.3 million. For the first half, revenue fell 3.0%, and Construction gross profit declined 16.5%, primarily reflecting unfavorable project estimate revisions and higher depreciation.
Q2 results included a $51.1 million loss on extinguishment of debt associated with the convertible-note exchange, contributing to the net loss despite positive operating income. The six-month net loss also reflects this charge. Q2 included a $12.0 million pretax charge, net of estimated insurance recovery, for the Salesforce Tower litigation matter.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $214.4 million, including $85.8 million held by consolidated construction joint ventures; marketable securities totaled $36.6 million. The combined $251.0 million is not all freely available to Granite because joint-venture funds generally require joint approval for distribution.
- Total debt was $460.2 million, including $373.8 million of new 3.75% convertible notes due 2028, $31.3 million of 2.75% convertible notes, and $55.0 million drawn on the revolver. Revolver availability was $275.9 million, net of outstanding letters of credit and borrowings. Granite reported compliance with credit-agreement covenants.
- Operating cash use was $118.9 million for the first half, reflecting working-capital timing and joint-venture funding. Investing cash use was $64.4 million; financing provided $103.8 million.
- Capital expenditures were $79.7 million in the first half; management expected full-year 2023 capital expenditures of approximately $100–$120 million.
- Committed and Awarded Projects (CAP) reached $5.44 billion at June 30, up $952.4 million from year-end 2022. Approximately $2.3 billion of unearned revenue was expected to be recognized within the next 12 months.
Outlook, risks and unusual items
- Management described public funding as strong and said IIJA-funded projects were being bid, with project lettings expected to increase through 2023 and more substantially in 2024 and beyond. Granite cited state and local transportation funding, including California’s SB-1, as support for demand. This is commentary, not quantified earnings guidance.
- Inflation, labor and supply constraints remain pressures; management cited fixed forward purchases, energy surcharges and schedule adjustments as mitigation measures, while warning further price increases could adversely affect results.
- Construction contract profits depend on estimates of costs, transaction prices, claims and change orders. First-half 2023 included $38.0 million of gross-profit reductions from two projects with individually significant downward estimate revisions, partly offset by a $6.9 million gross-profit increase from a separate revision.
- The Salesforce Tower claims seek approximately $100 million in total. Granite recorded a $12.0 million charge, net of estimated insurance recovery, and accrued a liability at the low end of its estimated loss range. Mediation was scheduled for August 2023; the company stated it could not assure a favorable outcome.
- Granite identified $29.0 million of contract-retention receivables from Brightline at June 30. It warned that Brightline’s past delays in securing funding could affect future payment timing and liquidity; $1.9 million of related receivables had been collected by the report date.
- CMR, a British Columbia aggregates producer, was acquired for approximately $26.9 million in cash on April 24, 2023. The company said the acquisition was not expected to materially affect results.
Important facts for investors to verify
- Review the restated/recast 2022 comparatives and the filing’s explanation of the Inliner tax errors and WMS reclassification.
- Track whether operating cash flow improves as receivables, contract assets and other working-capital balances convert to cash.
- Monitor project estimate revisions, especially the Central operating group, and whether CAP converts into revenue at acceptable margins.
- Follow developments, insurance recoveries and potential exposure in the Salesforce Tower matter, as well as Brightline collections.
- Assess debt and refinancing obligations, convertible-note dilution/cash settlement terms, revolver availability and covenant headroom.
- Compare actual 2023 capital expenditures and project activity with management’s stated $100–$120 million capex range and qualitative infrastructure outlook.