Granite Construction Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Amounts below are in U.S. dollars. The company is a heavy civil contractor and construction materials producer, with Construction, Large Project Construction, Construction Materials and Real Estate segments.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $378.7 million | $310.2 million |
| Gross profit; gross margin | $30.1 million; 7.9% | $24.9 million; 8.0% |
| Operating loss | $(26.0) million | $(16.3) million |
| Net loss attributable to Granite; diluted EPS | $(22.0) million; $(0.57) | $(11.8) million; $(0.31) |
| Operating cash flow | $(54.7) million | $(22.9) million |
| Capital expenditures | $10.0 million | $9.2 million |
Revenue rose 22.1%, but higher selling, general and administrative expenses and weaker other income contributed to a larger operating and net loss. SG&A increased 27.9% to $57.7 million, partly due to Kenny acquisition and integration costs. Q1 2012 other income included a $5.3 million gain on sale of gold by-product that did not recur. The Construction Materials segment recorded a $6.0 million gross loss; Construction and Large Project Construction generated gross profit of $13.2 million and $22.7 million, respectively.
Liquidity, debt and balance sheet
- At March 31, cash and cash equivalents were $260.8 million and marketable securities were $102.8 million. The cash total includes $98.7 million held by consolidated construction joint ventures, generally unavailable for Granite’s working capital until distributed. Granite cash excluding those joint ventures was $162.0 million.
- Operating cash use increased year over year, reflecting the larger net loss and net cash contributions to construction joint ventures versus net distributions in Q1 2012. Cash and cash equivalents declined $61.2 million from year-end 2012.
- Balance-sheet long-term debt, including current maturities, was $278.5 million; non-recourse debt was $11.8 million. The company had $70.0 million drawn on its $215.0 million revolving facility and reported $145.0 million available. Separately, real estate entity debt is non-recourse to Granite.
- Total cash, cash equivalents and marketable securities, including consolidated joint venture cash, were $363.6 million. Total assets were $1.679 billion and equity was $847.9 million.
- Granite reported compliance with its senior-note and credit-agreement covenants. It also said cash, securities and expected operating cash generation should meet anticipated needs over the next twelve months.
Changes versus comparable period and backlog
- Construction revenue grew 50.2%, primarily reflecting Kenny and higher California private-sector activity. Large Project Construction revenue increased 4.7%, while Construction Materials revenue rose 16.1%. Real Estate revenue fell from $2.7 million to $0.1 million, partly because a California property sale occurred in Q1 2012 but not Q1 2013.
- Backlog was $2.400 billion at March 31, up from $1.707 billion at December 31, 2012 and $2.083 billion a year earlier. Large Project Construction backlog increased chiefly following the Tappan Zee Bridge award; Construction backlog also rose, including new California and Northwest public-sector awards.
- The Tappan Zee Bridge award was booked in Q1; Granite’s share was 23.3%. Management expected its 35% share of the $849 million IH-35E project and a $130 million North Carolina I-440 project to enter backlog in Q2, subject to award/bookings.
- The December 2012 acquisition of Kenny, for approximately $141.1 million, expanded Granite’s tunneling, electrical power and underground construction businesses. Kenny contributed to Q1 2013 results but not the comparable 2012 quarter. Approximately $8.5 million of post-closing adjustments was expected to be paid in Q2 and was accrued at quarter-end.
Outlook, risks and unusual items
- Management described bidding as highly competitive and public infrastructure funding and commercial/residential development demand as weak, with challenging conditions expected through most of 2013. It cited potential private-sector improvement beginning late in 2013, a strong large-project pipeline and diversification into rail, power, tunnel, water, industrial and federal markets.
- Granite expected 2013 capital expenditures of $40 million to $60 million. It said it may record up to $8 million of restructuring charges during 2013, depending in part on asset-sale conditions; Q1 included a net restructuring gain of $0.5 million.
- Construction results are seasonal and depend on project mix, completion stage, cost estimates, change orders and claims. The filing states interim results are not necessarily indicative of full-year results. Large Project Construction estimate revisions increased gross profit by a net $9.2 million in Q1 2013, including $6.9 million of reductions offset by $16.1 million of increases.
- A consolidated real estate entity’s debt-payment default was cured on March 29, 2013 and did not affect Granite’s senior notes or credit-facility borrowing ability. The filing also describes a federal investigation into disadvantaged-business-enterprise issues on the Grand Avenue Project; Granite could not estimate potential additional losses beyond amounts accrued and noted possible material adverse consequences.
- Granite paid a civil penalty in Q1 under a consent decree concerning stormwater issues on the US Highway 20 project. Management reported no material changes to previously disclosed risk factors and no significant change in market-risk exposure.
Important facts for investors to verify
- Whether the expected IH-35E and I-440 awards were secured and added to backlog, and the timing and economics of the Tappan Zee and other major projects.
- Whether operating cash use improves as joint-venture funding needs and project working-capital balances fluctuate; distinguish Granite cash from joint-venture cash.
- Whether 2013 revenue growth translates into improved operating profitability given SG&A growth, weak Construction Materials margins and competitive bidding.
- The final Kenny purchase-price adjustments, integration costs and contribution to earnings and cash flow.
- Developments in the Grand Avenue investigation, other legal contingencies, real estate debt and any further restructuring or asset-sale charges.