Granite Construction Incorporated — Q1 2015 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2015. Granite is a heavy civil contractor and construction materials producer, reporting Construction, Large Project Construction, and Construction Materials segments. Results are unaudited; first-quarter activity is seasonally affected by weather and maintenance, so it may not indicate full-year performance. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $420.2 million | $379.8 million |
| Gross profit / margin | $40.1 million / 9.5% | $21.4 million / 5.6% |
| Operating loss | $(11.3) million | $(26.9) million |
| Net loss attributable to Granite | $(8.6) million | $(20.6) million |
| Loss per diluted share | $(0.22) | $(0.53) |
| Cash used in operating activities | $6.9 million | $19.8 million |
| Capital expenditures | $7.6 million | $10.4 million |
Revenue increased 10.6% year over year. Gross margin improved across all three segments: Construction was 11.5% versus 5.8%, Large Project Construction 9.3% versus 8.4%, and Construction Materials 1.6% versus a 9.9% loss. The Construction Materials comparison includes a prior-year loss.
At March 31, 2015, cash and cash equivalents were $239.4 million and marketable securities were $99.8 million, for $339.2 million combined. Some cash is held in joint ventures and generally is not available for Granite’s working capital without partner approval. Total current assets were $940.6 million and current liabilities $448.1 million. Debt included $200.0 million of senior notes and $70.0 million drawn on the revolving credit facility; $6.4 million of non-recourse real estate debt was current. The $215.0 million facility had $125.8 million available. A $40.0 million senior-note installment matures in 2015; management expected to fund repayment through borrowing or other financing. The company reported compliance with debt covenants.
Operating cash use improved by $12.9 million year over year, mainly from a $17.3 million favorable working-capital change, partly offset by lower net cash from unconsolidated joint ventures. Cash, cash equivalents, and securities totaled $339.2 million, down from $358.0 million at December 31, 2014.
Material changes and operating developments
- Gross profit rose by $18.7 million, reflecting stronger Construction results, higher materials volume, project progression, and estimated claim recoveries.
- Effective January 1, 2015, Granite prospectively changed its policy for customer affirmative claims: revenue is recognized when recovery is probable and reasonably estimable, to the extent of costs incurred. The change added $9.7 million to Q1 2015 revenue and gross profit. Prior periods were not restated. Management said estimating claims requires significant judgment and new controls.
- Q1 Construction gross profit included $6.8 million of estimated cost recovery on claims. Granite said estimate changes and claim recoveries can materially affect future-period gross profit.
- Total contract backlog was $2.94 billion, up 8.0% from December 31, 2014 and 14.3% from March 31, 2014. Large Project Construction backlog was $2.19 billion, up 22.7% year over year. An April award of a $152.4 million project was expected to enter backlog in Q2.
Outlook, risks, and contingencies
- Management described Large Project Construction markets as strong, cited continued private-sector recovery, and expected growing revenue and profit synergies from diversified markets. It was pursuing bids with partners on nearly $18 billion of Large Project opportunities over two years. These are qualitative outlook statements, not formal earnings guidance.
- Management anticipated 2015 capital expenditures of $40 million to $60 million and stated that available liquidity and expected operating cash flow should meet anticipated needs for the next 12 months.
- Federal highway funding remained uncertain: the short-term extension of the federal highway bill was due to expire in May 2015. Granite also cited flat or declining capital budgets in some traditional Western markets and continued competitive bidding conditions. Most backlog contracts may be canceled or modified by customers.
- Granite and its affiliates face ordinary-course litigation and government inquiries. Recorded liabilities for legal matters were approximately $9.4 million; the aggregate reasonably possible loss range was $0 to approximately $4.5 million. Separately, Granite said a penalty or sanction in the government investigation of disadvantaged-business-enterprise credit claims was probable and accrued its estimated most likely liability, but did not disclose that amount. It said additional liability was reasonably possible and that resolution could materially affect financial position, results, or liquidity.
- Joint-venture contract performance obligations can be joint and several if another member fails to perform. Granite reported approximately $6.1 billion of remaining revenue on unconsolidated and line-item joint-venture contracts, including $1.9 billion attributable to Granite; it could not estimate amounts that might be required beyond remaining work costs.
- Interest-rate and commodity swaps expose the company to market changes. Granite reported no significant change in market-risk exposure since year-end and no material change in previously disclosed risk factors.
Most important facts for investors to verify
- How much of the improved gross profit depends on the new customer-claims accounting policy and future changes in claim estimates.
- The amount accrued for the DBE investigation, the likely timing and range of potential outcomes, and whether any material effects are additional to disclosed legal-loss ranges.
- Whether the $40.0 million debt installment is refinanced or repaid as planned, and the availability and terms of financing beyond the current facility.
- Backlog conversion, cancellations or delays, project cost estimates, and whether the April award is added to backlog as expected.
- Federal infrastructure funding developments and the effect of seasonality, competitive bidding, and joint-venture cash restrictions on cash flow and liquidity.