Granite Construction Incorporated — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited results; dollar amounts below are in millions unless stated otherwise. Granite is a U.S. heavy-civil contractor and construction-materials producer, with Construction, Large Project Construction and Construction Materials segments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $569.2 | $585.9 | $989.5 | $965.7 |
| Gross profit / margin | $65.8 / 11.6% | $82.4 / 14.1% | $105.9 / 10.7% | $103.8 / 10.8% |
| Operating income | $17.1 | $34.3 | $5.9 | $7.4 |
| Net income (loss) attributable to Granite | $9.6 | $13.6 | $1.1 | $(6.9) |
| Diluted EPS | $0.24 | $0.34 | $0.03 | $(0.18) |
- Quarterly comparison: Revenue declined 2.8%, while gross profit fell 20.2% and operating income fell 50.0%. Large Project Construction revenue and gross profit were notably lower; Construction and Materials results improved.
- First-half comparison: Revenue rose 2.5% and gross profit rose 2.0%, but operating income declined. The prior-year first-half attributable loss included a large non-controlling-interest effect.
- Segment trends: Q2 Construction revenue rose 13.5% and gross margin increased to 13.1% from 9.2%; Large Project Construction revenue fell 25.1% and margin declined to 8.1% from 20.8%; Materials revenue rose 11.6% and margin increased to 13.5% from 9.4%. Management cited project mix, estimate revisions, project progress and prior-period settlements as key influences.
- Cash flow: First-half operating cash use was $56.7, compared with $72.4 a year earlier. Investing activities provided $3.5; financing activities used $14.7. Cash and cash equivalents declined $67.8 to $188.1.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $276.2, including cash held by consolidated joint ventures that is generally unavailable for Granite’s working capital. The company reported $270.1 of long-term debt—$200.0 of senior notes and a $70.0 revolving-facility borrowing—and $6.1 of current non-recourse real-estate debt. Revolver capacity available was $125.8. Granite said liquidity should be sufficient for expected needs over the next 12 months and expects to finance the $40.0 senior-note installment due in 2015.
- Other metrics: Total assets were $1,619.7 and total equity was $808.3 at June 30. Dividends were $0.13 per share for Q2 and $0.26 for the first half. Planned 2015 capital expenditures were $40–$60; first-half spending was $16.2.
Material changes, outlook and risks
- Backlog: Total contract backlog was $3.00 billion, up from $2.94 billion at March 31 and $2.56 billion a year earlier. Large Project Construction represented $2.17 billion, while Construction backlog was $831.1 million. Management attributed the year-over-year large-project increase to major awards, partly offset by work completed. Backlog contracts may generally be canceled or modified by customers.
- Management outlook: Management described markets as generally stable but highly competitive, with strong yet competitive large-project markets. It cited concern about uncertain federal transportation funding and the expiration of the then-current short-term highway funding extension on July 31, 2015. Granite was pursuing bids with partners on more than $20 billion of large-project opportunities over the following 18 months. No earnings or revenue forecast was provided.
- Claims accounting: Effective January 1, 2015, Granite prospectively began recognizing affirmative customer-claim revenue when recovery is probable and reasonably estimable, rather than generally upon settlement. This added $9.7 to revenue and gross profit in the first half; none was recorded in Q2. Q2 and first-half 2014 included a customer-claim settlement with $23.2 of gross-profit impact. The accounting change limits direct comparability, and future claim estimates or resolutions could materially affect results.
- Project estimates and seasonality: Construction results depend on cost-to-complete estimates, productivity, project stage and claims. Large Project Construction estimate revisions produced net gross-profit decreases of $1.1 in Q2 and $2.5 in the first half of 2015, versus substantial net increases in the comparable 2014 periods. Weather and seasonal maintenance also affect results; quarterly performance is not necessarily indicative of the full year.
- Legal contingency: Granite considers some form of penalty or sanction probable in the government investigation of disadvantaged-business-enterprise credit associated with the Grand Avenue project and other entities, and recorded its estimate of the most likely liability. The filing says further resolution could adversely affect financial position, results, cash flows or liquidity. Recorded liabilities for legal proceedings and government inquiries totaled approximately $9.5; the aggregate reasonably possible loss range beyond probable accruals was $0–$0.7 at June 30.
- Debt and other risks: Granite reported compliance with debt covenants; its leverage ratio was 2.69 against a maximum of 3.00. Failure to comply could trigger restrictions, acceleration or collateral enforcement. The filing reported no material change in previously disclosed risk factors or market-risk exposure.
Important facts for investors to verify
- Whether the $3.00 billion backlog converts to revenue and profit as expected, given customer cancellation rights and competitive conditions.
- Whether Large Project Construction margins stabilize and project cost estimates, productivity and claim recoveries develop as assumed.
- The amount, timing and potential business consequences of any resolution of the DBE investigation.
- How the prospective claims-accounting change affects reported results and comparability with prior periods.
- Whether operating cash flow improves, including the timing of joint-venture funding and distributions, and how Granite funds the 2015 note installment.
- Whether federal and state transportation funding supports the company’s project pipeline and management’s stated bidding opportunities.