Granite Construction Incorporated — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. Amounts below are in U.S. dollars; financial-statement amounts are converted to millions unless stated otherwise.
Business context and reporting period
Granite is a U.S. heavy-civil contractor and construction-materials producer, with Construction, Large Project Construction and Construction Materials segments. First-quarter results are seasonally affected by weather and are not necessarily indicative of full-year results.
Financial performance and liquidity
- Revenue: $563.4 million, up 20.3% from $468.4 million. Construction revenue rose 18.7%, Large Project Construction 20.0%, and Construction Materials 32.5%.
- Profitability: Gross profit was $56.3 million versus $25.1 million; gross margin increased to 10.0% from 5.4%. Operating loss narrowed to $12.8 million from $36.4 million. Net loss attributable to Granite was $11.4 million, or $0.29 per diluted share, versus $23.8 million, or $0.60 per share.
- Segment margins: Construction gross margin was 14.3% versus 12.0%; Large Project Construction was 8.2% versus 1.2%; Construction Materials remained loss-making, with a $2.5 million gross loss versus $4.8 million.
- Cash flow: Operating activities used $37.6 million, compared with $13.3 million provided in Q1 2017. Investing activities provided $10.1 million; financing activities used $12.6 million. Cash and cash equivalents declined $40.1 million during the quarter.
- Liquidity: Cash and cash equivalents were $193.6 million and marketable securities $107.3 million at March 31. Combined cash and securities were $300.8 million, although joint-venture cash is generally not available for Granite’s general needs until distributed. Current assets were $1.112 billion and current liabilities $578.2 million.
- Debt: Balance-sheet debt was $223.3 million, comprising $47.3 million current and $176.0 million long-term. The company reported $136.7 million of unused credit-facility availability and compliance with debt covenants.
- Other metrics: Backlog was $3.586 billion, versus $3.435 billion a year earlier and $3.718 billion at December 31, 2017. The quarterly dividend was $0.13 per share. 2018 capital expenditures were forecast at $85–$105 million.
Material changes versus the prior comparable period
- Higher revenue and gross profit reflected increased work volumes and improved margins, particularly in California Construction and Large Project Construction. Construction Materials’ gross loss also narrowed.
- Q1 2018 operating cash flow was $51.0 million lower year over year, principally due to increased net contributions to unconsolidated joint ventures and higher working-capital use as large projects wound down while new work was in early stages.
- Granite adopted ASC Topic 606 using the modified retrospective method. The adoption reduced opening retained earnings by a cumulative $15.2 million and changed contract-asset and contract-liability presentation. Its reported Q1 net loss was $2.1 million lower than it would have been under prior revenue guidance.
- Acquisition and integration expenses were $8.4 million, compared with none in Q1 2017, related to LiquiForce and the pending Layne acquisition.
Outlook, management commentary, risks and unusual items
- Management described public infrastructure demand as supportive, citing the FAST Act and California’s $52.4 billion, 10-year SB 1 program. It highlighted private markets as a growth and diversification opportunity and said it would pursue large projects selectively based on risk and expected returns. No specific revenue or earnings guidance was provided.
- Granite expected the Layne Christensen stock-for-stock acquisition to close in Q2 2018. Based on Granite’s April 19 share price, the estimated purchase price was $333.7 million, excluding assumption of Layne debt with approximate fair value of $200 million; final transaction value would be determined at closing. Granite acquired LiquiForce on April 3 for approximately $35 million, funded through its revolving facility.
- Four Large Project Construction projects had reasonably possible additional costs beyond amounts included in forecasts, with a potential 2018 gross-profit impact ranging from zero to $47.0 million. Management said future estimates could materially affect results, financial position or cash flows.
- Construction estimates depend on project costs, productivity, weather, owner delays, subcontractor performance, change orders and claims recovery. Unresolved claims and joint-venture performance obligations add uncertainty. Granite reported approximately $4.2 billion of remaining revenue on unconsolidated and line-item joint-venture contracts, of which its share was $1.4 billion; partners’ failure to perform could leave Granite and other partners responsible for outstanding work.
- Legal proceedings and government inquiries are ongoing in the ordinary course. Recorded related liabilities were approximately $1.1 million, but reasonably possible losses, including liquidated damages, could materially affect results if they become probable and estimable.
- Management stated that cash, securities, borrowing capacity and expected operating cash flow should meet liquidity needs for the next 12 months. It cautioned that prolonged operating deterioration or significant acquisitions could require additional financing. Weather and contract timing make quarterly results volatile.
Important facts for investors to verify
- Progress, final consideration, assumed debt and integration costs for the Layne acquisition, and the funding and performance of the LiquiForce acquisition.
- Updates on the four projects with up to $47.0 million of possible additional 2018 gross-profit exposure, and on unresolved claims and back-charge recoveries.
- Whether backlog converts into revenue at expected margins, especially as large projects progress and new work ramps up.
- Operating cash flow, working-capital needs and joint-venture contributions, including the availability of joint-venture cash for Granite’s own liquidity needs.
- Debt levels, covenant headroom and credit-facility availability following acquisitions; also verify the status of legal and government matters that could produce material losses.