Granite Construction Incorporated (NYSE: GVA) — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing; it also provides unaudited fourth-quarter results. Granite is a U.S. heavy civil contractor and construction materials producer, operating in Construction, Large Project Construction, and Construction Materials.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $2.371 billion | $2.275 billion | Up 4.2% |
| Gross profit / margin | $303.4 million / 12.8% | $242.2 million / 10.6% | Margin up 2.2 points |
| Operating income | $110.3 million | $65.1 million | Up 69% |
| Net income attributable to Granite | $60.5 million | $25.3 million | Up 139% |
| Diluted EPS | $1.52 | $0.64 | Up $0.88 |
| Operating cash flow | $67.0 million | $43.1 million | Up $23.8 million |
Segment revenue and gross margins: Construction, $1.263 billion and 15.1% (2014: $1.186 billion and 9.7%); Large Project Construction, $812.7 million and 9.8% (2014: $825.0 million and 13.0%); Construction Materials, $295.6 million and 11.2% (2014: $263.8 million and 7.4%). Construction and Materials margins improved; Large Project Construction margin declined.
Cash, cash equivalents and marketable securities totaled $358.5 million at year-end, broadly unchanged from $358.0 million. Working capital was $519.2 million. Total debt was $260.1 million, including $15.0 million current maturities; long-term debt was $245.1 million. The $300 million credit facility had $181 million of unused availability. Granite reported compliance with debt covenants; leverage ratio was 1.83 against a maximum of 3.00, and interest coverage was 10.05 against a minimum of 4.00. Capital expenditures were $44.2 million; dividends were $0.52 per share.
Contract backlog reached $2.908 billion, up 7.0% from $2.719 billion; approximately $1.5 billion was expected to be completed in 2016. About 70% of backlog was Large Project Construction. Backlog is subject to customer cancellation or modification and is not a guarantee of profitable revenue.
Material changes and unusual items
- Revenue increased primarily from Construction and Construction Materials growth, partly offset by lower Large Project Construction revenue. Improved Construction and Materials profitability was partly offset by weaker Large Project Construction gross profit.
- A prospective accounting-policy change effective January 1, 2015 permitted earlier recognition of probable, reasonably estimable customer claims and vendor/design/subcontractor back-charges. Management reported the change increased 2015 revenue by $48.5 million and gross profit by $7.0 million. Customer affirmative-claim revenue recognized under the policy totaled $48.5 million; the filing says claim and back-charge recoveries require significant judgment.
- FY2015 included $6.0 million of net restructuring and impairment gains, principally from sales of previously impaired real estate and quarry assets. FY2014 included $2.6 million of net gains. Gains on property and equipment sales were $8.3 million in 2015 versus $16.0 million in 2014.
- Fourth-quarter 2015 revenue was $630.2 million, gross profit $102.0 million, and net income attributable to Granite $28.7 million. Fourth-quarter 2014 figures were $589.8 million, $73.7 million, and $17.0 million, respectively.
Outlook, risks and contingencies
Management described market conditions as stable but highly competitive. It expected the five-year federal FAST Act, passed in December 2015, to support improved state transportation planning, with a positive business effect beginning late in 2016 and accelerating in 2017. Granite was pursuing more than $15 billion of Large Project Construction opportunities through 2017 with partners; its expected share was described as consistent with recent history. No specific 2016 revenue or earnings guidance was provided. Management expected 2016 capital expenditures to be broadly consistent with 2015, potentially higher if significant tunnel-boring equipment was needed.
- Government agencies generated 82.8% of Construction and Large Project Construction revenue in 2015. Funding levels, procurement rules, competition, customer payment timing, and the ability to obtain surety bonds are key exposures.
- Fixed-price and fixed-unit-price contracts, design-build work, project delays, cost overruns, subcontractor or joint-venture partner failures, and uncertain claims recoveries can pressure margins and liquidity. Unconsolidated and line-item joint ventures had $5.1 billion of remaining contract revenue, of which Granite’s share was $1.6 billion; joint-and-several performance obligations may expose it to partner nonperformance.
- The company settled a DBE-related investigation under a Non-Prosecution Agreement requiring $8.25 million in payments. It paid $3.5 million in 2015 and accrued the remaining $4.75 million for 2016; ongoing compliance obligations remain.
- Recorded legal liabilities were $5.2 million at year-end; management said the aggregate reasonably possible loss range was immaterial. It cautioned that future developments could change accruals.
- Environmental permitting, quarry reserves, weather, commodity prices, safety, cybersecurity, and multi-employer pension funding are additional risks. California diesel-emissions compliance costs were $18.4 million to date, with $13.3 million expected in 2016; future total costs and potential silica-rule costs were not clear.
- Operating cash flow improved, but cash is affected by project timing and joint-venture funding. Cash held by joint ventures is generally restricted to project needs and may not be available for Granite’s general liquidity.
Most important facts for investors to verify
- How much of the 2015 earnings and margin improvement is repeatable, given the $48.5 million claim-revenue recognition and $7.0 million back-charge gross-profit effects.
- Whether backlog converts to revenue and acceptable margins, especially in Large Project Construction, where margins declined and projects remain exposed to cost estimates and claims.
- Collection timing and ultimate recovery of claim-related balances, including approximately $48.5 million of claim recovery estimates disclosed at year-end.
- 2016 debt repayments, borrowing availability, covenant headroom, and the effect of interest rates; verify the planned 2016 interest-rate swap and refinancing of $30 million of 2016 note maturities.
- Completion of the remaining $4.75 million DBE settlement payment and compliance with the Non-Prosecution Agreement.
- Restrictions on joint-venture cash and Granite’s potential exposure if partners fail to fund or perform.