Granite Construction Incorporated — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. Granite is a U.S. heavy-civil contractor and construction-materials producer serving public and private customers. In the fourth quarter, it ceased reporting Real Estate as a separate segment; prior-period segment results were reclassified.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $2,275.3 million | $2,266.9 million |
| Gross profit / margin | $250.3 million / 11.0% | $185.3 million / 8.2% |
| Operating income (loss) | $65.1 million | $(54.7) million |
| Net income (loss) attributable to Granite | $25.3 million; $0.64 diluted EPS | $(36.4) million; $(0.94) diluted EPS |
| Operating cash flow | $43.1 million | $5.4 million |
| Capital expenditures | $43.4 million | $43.7 million |
| Cash, equivalents and marketable securities | $358.0 million | $346.3 million |
| Working capital | $507.4 million | $452.6 million |
| Total debt, including current maturities | $276.9 million | $278.1 million |
| Contract backlog | $2,718.9 million | $2,526.8 million |
Annual revenue was nearly flat, while gross margin and operating results improved substantially. The 2013 loss included $52.1 million of restructuring and impairment charges; 2014 recorded a $2.6 million net gain in that line. Net income attributable to Granite also reflects non-controlling interests in consolidated ventures.
Segment revenue and gross margin: Construction was $1,186.4 million and 10.0% (2013: $1,251.2 million and 8.5%); Large Project Construction was $825.0 million and 13.6% (2013: $777.8 million and 9.2%); Construction Materials was $263.8 million and 7.2% (2013: $237.9 million and 3.0%). Construction revenue declined 5.2%; Large Project Construction grew 6.1%; Materials revenue grew 10.9%.
At December 31, 2014, the company had a $215 million revolving facility, with $134.8 million available and $70 million drawn. Management said existing liquidity and expected operating cash flow should cover anticipated needs for the next 12 months. Cash held by joint ventures is generally restricted to project needs and may not be available to Granite. The company intended to refinance the $40 million first installment of its senior notes due in 2015.
Fourth-quarter results
Fourth-quarter 2014 revenue was $589.8 million, gross profit was $79.8 million (13.5% margin), and net income attributable to Granite was $17.0 million ($0.43 diluted EPS). In fourth-quarter 2013, revenue was $598.1 million, gross profit was $49.8 million (8.3% margin), and Granite reported a $28.9 million attributable loss ($(0.74) diluted EPS), including substantial restructuring and impairment charges.
Backlog, outlook and material developments
- Year-end backlog increased 7.6% to $2.72 billion; about $1.4 billion was expected to be completed in 2015. Large Project Construction backlog rose 8.7%, including a $696.6 million Florida highway award. Additional project amounts were not yet booked pending funding or owner releases, including $359.6 million of the company’s share of a Pennsylvania bridge project.
- Management described large-project markets as strong and private-sector recovery as encouraging, and expected growing revenue and profit synergies in power, tunnel and underground markets. It was pursuing bids with partners on more than $15 billion of opportunities over several years. No specific 2015 revenue or earnings guidance was provided.
- Management highlighted uncertainty over dedicated federal infrastructure funding: the federal highway bill had expired in September 2014, with a short-term extension scheduled to expire in May 2015. Traditional Western markets remained competitive, with some public capital budgets flat or declining.
- Management expected 2015 capital expenditures of $40 million to $60 million. The company paid $0.52 per share in annual dividends and said it expected to continue quarterly dividends, subject to board discretion and covenant limits.
- Project-estimate revisions and claim resolutions materially affected results. Large Project Construction had $46.9 million of net favorable revisions in project profitability estimates in 2014; $74.7 million of gross profit was recognized on projects reaching initial profit recognition. Future estimate changes or claim outcomes could affect earnings.
- Legal contingencies included a DOJ and agency investigation into disadvantaged-business-enterprise credit claims by a subsidiary. Granite considered some penalty or sanction probable and accrued its best estimate, but said additional liability was reasonably possible; the filing does not clearly state the specific amount accrued for this investigation. Recorded liabilities for legal proceedings and inquiries overall were $9.7 million; the stated reasonably possible loss range for disclosed matters was $0 to $4.0 million.
Key investor verification points
- Check the status, funding and conversion to backlog of major awards and pending project releases, and whether backlog converts to profitable revenue.
- Assess the sustainability of 2014 margin improvement, including favorable estimate revisions, claim settlements and deferred-profit recognition.
- Verify the outcome and financial exposure of the DBE investigation, including potential penalties, compliance costs or government-contract consequences.
- Review federal and state infrastructure funding developments and their implications for award activity in Granite’s core markets.
- Monitor debt refinancing and covenant headroom: year-end leverage ratio was 2.77 against a 3.00 maximum; interest coverage was 6.93 against a 4.00 minimum.
- Distinguish reported liquidity from cash available for corporate use, particularly funds held in joint ventures, and track working-capital and operating-cash-flow needs.