Granite Construction Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The unaudited quarter and six months ended June 30, 2022 cover Granite’s continuing Construction and Materials businesses. Water and Mineral Services (WMS) is reported as discontinued operations; Granite sold Inliner in March 2022 and expected to sell the remaining Water Resources and Mineral Services businesses by year-end. Granite performs infrastructure construction and produces construction materials, primarily in the United States.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue from continuing operations | $768.3 million | $834.7 million | $1,315.9 million | $1,401.0 million |
| Gross profit | $78.5 million | $98.2 million | $128.3 million | $151.9 million |
| Gross margin | 10.2% | 11.8% | 9.7% | 10.8% |
| Operating income (loss) | $5.5 million | $34.8 million | $(11.1) million | $(44.7) million |
| Net income (loss) attributable to Granite, including discontinued operations | $17.2 million | $54.5 million | $4.2 million | $(11.7) million |
| EPS attributable to common shareholders | $0.39 | $1.19 | $0.10 | $(0.26) |
| Cash from (used in) operating activities | Not presented by quarter | $(103.3) million | $(31.0) million |
- Revenue and margins: Q2 continuing revenue fell 8.0% year over year. Construction revenue declined 11.4%, mainly reflecting the wind-down of large Central projects, delayed awards, supply-chain-related slower progress, and unfavorable California weather early in the year. Materials revenue rose 12.2% on stronger demand and higher sales volumes, but Materials gross profit declined due to lower California asphalt volumes and higher fuel costs. Construction gross margin was 9.7% in Q2 versus 10.7% a year earlier; Materials gross margin was 12.7% versus 18.1%.
- Earnings: Q2 continuing operations produced a $3.0 million net loss; total reported net income attributable to Granite was $17.2 million, including $19.5 million from discontinued operations. Six-month continuing operations recorded a $18.9 million net loss, while discontinued operations contributed $25.6 million.
- Cash, liquidity and debt: At June 30, cash and equivalents were $175.0 million and marketable securities were $66.7 million. Total debt was $288.2 million, including $230.0 million principal of 2.75% convertible notes and $50.0 million drawn on the revolver. The new $350 million revolving facility had $267.1 million unused availability after borrowings and letters of credit. The company reported compliance with leverage and interest-coverage covenants.
- Cash flow and capital spending: Operating cash use increased to $103.3 million for the first half, primarily due to working-capital timing. Investing activities provided $30.3 million, including $142.6 million of proceeds from the Inliner sale, offset in part by capital spending. Financing activities used $157.1 million, including $124.7 million of term-loan repayments and $70.4 million of share repurchases. First-half capital expenditures were $73.2 million; management expected 2022 continuing-operations capital expenditures of approximately $100–$115 million.
Material changes and outlook
- Committed and Awarded Projects (CAP) totaled $4.214 billion at quarter-end, up $278.9 million from March 31, 2022 and slightly above the $4.181 billion reported a year earlier. Unearned revenue was $2.885 billion; approximately $2.4 billion was expected to be recognized within 12 months. Six contracts representing $178.5 million of remaining revenue were forecast to incur losses.
- Management cited the Infrastructure Investment and Jobs Act and state/local funding as potential sources of stronger future project lettings. It expected IIJA effects to build gradually, with meaningful project lettings beginning in late 2022 and a greater financial impact in 2023 and beyond. The filing provides no specific full-year revenue or earnings guidance.
- Management described inflation, supply-chain disruption and labor constraints as ongoing pressures. Mitigation actions included forward purchases of oil-related inputs, schedule adjustments, energy surcharges, and a California liquid-asphalt-terminal acquisition. Further input-cost increases could still adversely affect results.
- Q2 construction estimate revisions reduced gross profit by $25.2 million across four projects; the six-month impact was $35.6 million across five projects. The company attributed these decreases to extended project durations, higher labor and material costs, and disputed work subject to ongoing claims.
- Q2 other costs included a $12 million accrual for the expected resolution of an SEC investigation and $4.8 million of non-recurring legal fees. The filing also reports immaterial out-of-period adjustments that increased Q2 continuing-operations pretax loss by $4.1 million, with no net effect on the six-month period.
Risks, contingencies and unusual items
- Granite disclosed a lawsuit concerning Layne’s work on the Salesforce Tower foundation. The company said it did not consider a material loss probable; if unsuccessful, it estimated reasonably possible loss could be up to approximately $100 million.
- The $12 million SEC-investigation accrual is based on management’s current estimate; Granite had not reached a final resolution and stated the amount or terms could change.
- The previously accrued $129 million securities-litigation settlement received final court approval in March 2022; the filing notes an appeal notice. A separate derivative-litigation settlement stipulation contemplated insurers paying $7.5 million to Granite, subject to court approval and settlement terms.
- Granite reported $19.9 million of receivables and $27.1 million of contract retention receivable from Brightline. Of the receivable balance, $16.5 million was past due at June 30; Granite received $6.0 million on July 1 but said timing and probability of subsequent payments remained uncertain.
- Management cautioned that construction results vary with weather, project progress, claims and contract estimates, and that quarterly results are not necessarily indicative of full-year results. It stated liquidity sources should meet expected needs for the next 12 months, while noting availability of capital cannot be assured.
Important facts for investors to verify
- Whether the Central construction projects with unfavorable estimate revisions stabilize, and whether further project-cost changes affect margins.
- Collection progress on Brightline balances and the concentration and recoverability of contract retentions and claim-related contract assets.
- Final resolution, timing and total cost of the SEC investigation, Salesforce Tower claims, and remaining litigation matters.
- Completion terms and proceeds from the planned sales of Water Resources and Mineral Services, and final settlement of the accelerated share repurchase.
- Conversion, refinancing and covenant implications of the $230 million convertible notes due in 2024, alongside revolver usage and cash needs.
- Whether CAP converts into funded, profitable work as expected, and whether management’s capital expenditure outlook changes.