Granite Construction Incorporated — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Granite is a heavy civil contractor and construction materials producer. Comparisons below are with Q1 2015 unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $439.5 million | $420.2 million | Up 4.6% |
| Gross profit | $39.2 million | $38.9 million | Up 0.8% |
| Gross margin | 8.9% | 9.3% | Down 0.4 percentage points |
| Operating loss | $16.3 million | $11.3 million | Loss widened |
| Net loss attributable to Granite | $11.2 million | $8.6 million | Loss widened |
| Diluted loss per share | $0.28 | $0.22 | Loss per share increased |
| Cash used in operating activities | $10.4 million | $6.9 million | Use increased |
Construction revenue rose 11.1% to $209.5 million, and segment gross margin improved to 12.9% from 10.9%, which management attributed primarily to better project execution and fewer net project write-downs. Large Project Construction revenue increased 2.7% to $195.4 million, but gross margin fell to 6.9% from 9.2%, primarily due to project estimate revisions and lower expected claim recoveries. Construction Materials revenue declined 16.7% to $34.5 million; the segment recorded a $1.2 million gross loss versus $0.8 million gross profit, mainly because wet weather reduced sales volume in the West.
Balance sheet, liquidity and debt
- At March 31, 2016, cash and cash equivalents were $198.3 million and marketable securities totaled $115.7 million. Combined cash, equivalents and securities were $314.0 million, including $47.0 million held by consolidated joint ventures; joint-venture funds generally are not available to Granite until distributed.
- Reported debt, including current maturities, was approximately $257.9 million. Debt included $160.0 million of senior notes and a $98.8 million term loan. The $200.0 million revolving facility had $183.7 million of unused availability after outstanding letters of credit.
- Current assets were $962.8 million and current liabilities were $469.5 million. Total equity was $855.7 million.
- Capital expenditures were $24.6 million, compared with $7.6 million a year earlier. Cash used in investing activities was $34.0 million; cash used in financing activities was $10.1 million. Cash and equivalents decreased $54.5 million during the quarter.
- Granite reported compliance with its debt covenants. Its consolidated leverage ratio was 1.79 against a maximum of 3.00, and its interest coverage ratio was 10.31 against a minimum of 4.00.
Material changes and operating developments
- Contract backlog reached $3.386 billion, up 15.3% from March 31, 2015 and 16.4% from December 31, 2015. Large Project Construction accounted for $2.386 billion and Construction for $1.000 billion; Construction Materials is not included in the reported backlog table.
- Higher Construction and Large Project Construction revenue was partly offset by lower materials sales. Construction Materials weakness reflected wet weather; management also noted seasonal weather effects and first- and second-quarter equipment and plant maintenance.
- SG&A increased 10.0% to $56.1 million, or 12.8% of revenue versus 12.1%. Management cited higher restricted-stock amortization, including awards that immediately vested.
- Q1 project-estimate changes included a $2.8 million net decrease in Large Project Construction gross profit on projects with changes of at least $1.0 million each, due to added costs and lower productivity. Construction had a $1.7 million increase from settlement of an outstanding claim.
Outlook, risks and contingencies
Management described market conditions as stable but highly competitive and said the record backlog reflected steady trends. Granite expects the five-year FAST Act highway program to begin benefiting the business in late 2016, with impact accelerating in 2017. Management expects 2016 capital expenditures to be consistent with 2015, apart from significant equipment investment for new Large Project Construction joint ventures. It said it expects to maintain a broad rolling two-year roster of $10 billion to $20 billion in bidding opportunities. These are expectations, not guarantees; the filing gives no numerical earnings or revenue guidance.
- Management believes cash, investments, borrowing capacity and expected operating cash flow will cover anticipated needs for the next 12 months. Cash flows are seasonal and can vary with project progress, working capital, joint-venture funding and claim resolution.
- Approximately $56.1 million of claim-recovery estimates were included in contract-related balances at March 31, 2016, up from $9.7 million a year earlier. Recovery depends on customer resolution and may take more than a year or a project cycle.
- Backlog contracts may generally be canceled or modified by customers. Granite also cautioned that increased project scale and competition can heighten contractual risk, particularly in Large Project Construction.
- Construction joint-venture members may have joint and several performance obligations if another member fails to perform. Joint-venture cash is generally restricted to project needs pending member approval for distributions.
- Accrued liabilities for legal proceedings and government inquiries were approximately $5.4 million. The aggregate reasonably possible loss range, including reasonably possible amounts above accruals, was described as immaterial at March 31, 2016. Outcomes remain uncertain and could affect results or liquidity.
- Granite entered into a cash-flow interest-rate swap intended to fix the term loan rate at 1.47% plus the applicable margin, effective April 29, 2016. The filing reported no material change in market-risk exposure since year-end and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the $3.386 billion backlog is funded, retained and converted to revenue at acceptable margins, particularly in large projects.
- Progress and outcomes of significant claims, estimate revisions, productivity and cost overruns; claim-recovery estimates have risen substantially year over year.
- How much reported liquidity is actually accessible after excluding joint-venture cash, and how seasonal working-capital needs affect cash flow.
- Repayment and refinancing of the 2016 senior-note installment, covenant headroom, and the effect of the term-loan interest-rate swap.
- Whether higher capital spending and increased SG&A are supported by operating cash generation and profitable project execution.