Granite Construction Incorporated — Q2 2017 Form 10-Q
Business context and reporting period
Granite is a U.S. heavy-civil construction contractor and construction-materials producer. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the same 2016 periods unless stated otherwise. Construction activity is seasonal, and interim results may not indicate full-year performance.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $762.9 million | $604.6 million | $1,231.3 million | $1,044.0 million |
| Gross profit (margin) | $74.6 million (9.8%) | $73.2 million (12.1%) | $99.7 million (8.1%) | $112.4 million (10.8%) |
| Operating income (loss) | $24.0 million | $25.9 million | $(12.5) million | $9.6 million |
| Net income (loss) attributable to Granite | $14.1 million | $14.2 million | $(9.7) million | $3.8 million |
| Diluted EPS | $0.35 | $0.35 | $(0.24) | $0.09 |
| Operating cash flow | Not separately presented | Not separately presented | $22.7 million | $(53.1) million |
Q2 revenue rose 26.2%, while gross profit increased only 1.9% and gross margin fell 2.3 percentage points. First-half revenue increased 17.9%, but gross profit declined 11.3% and the company recorded a net loss. Construction generated Q2 revenue of $429.3 million and gross profit of $62.5 million; Large Project Construction generated $254.5 million and $0.5 million, respectively; Construction Materials generated $79.2 million and $11.6 million.
At June 30, 2017, total assets were $1.803 billion, current assets $1.150 billion, and current liabilities $612.6 million. Cash and cash equivalents were $178.1 million and marketable securities were $107.8 million. Total debt on the balance sheet was $241.9 million, including $14.8 million current maturities; long-term debt was $227.1 million. The company reported $161.2 million of unused credit-facility availability and compliance with debt covenants. The credit facility matures in 2020; $120 million of 2019 Notes remained outstanding, with three annual installments remaining.
Six-month investing cash use was $14.7 million and financing cash use was $19.2 million. Capital expenditures were $37.5 million, compared with $48.8 million in the prior-year period. The quarterly dividend was $0.13 per share; first-half dividends were $0.26 per share.
Material changes versus the prior comparable period
- Q2 growth in Construction and Large Project Construction drove higher revenue; Construction Materials revenue rose 4.3%. First-half segment revenue also increased across all three segments.
- Large Project Construction gross profit fell to $0.5 million in Q2 from $13.7 million, and to $3.1 million for the first half from $27.2 million. Management attributed the decline mainly to unfavorable project estimate revisions.
- Construction gross profit rose with higher volume. First-half Construction Materials gross profit declined 33.4%, primarily reflecting wet first-quarter weather, lower production and reduced fixed-cost absorption.
- Operating cash flow improved by $75.8 million year over year for the first half, with management citing increased joint-venture distributions and improved working capital.
- Contract backlog was $4.064 billion, up from $3.751 billion a year earlier and $3.435 billion at March 31, 2017. Large Project Construction backlog rose to $2.798 billion, including significant new awards.
Outlook, commentary, risks and unusual items
- Management described public and private markets as competitive and cited record backlog, modest economic growth and potential multi-year public infrastructure demand. It highlighted the FAST Act and California’s SB1 transportation funding law as sources of funding visibility. No specific earnings or revenue guidance was provided.
- Management anticipated 2017 capital expenditures to be consistent with 2016 spending of $91 million. It said available cash, securities, borrowing capacity and expected operating cash flow should meet anticipated needs for the next 12 months, subject to business conditions and financing availability.
- Large Project Construction had net downward gross-profit estimate changes of $23.8 million in Q2 and $37.8 million in the first half, involving five and seven projects, respectively. Cited causes included higher-than-expected costs, design, weather and owner-related costs. The company also disclosed additional project costs, including possible liquidated damages, for which the range was not estimable and which could materially affect future results or cash flows.
- First-half revisions included $14.0 million of estimated customer affirmative-claim revenue and a $3.0 million cost-of-revenue reduction from estimated back-charge recoveries. These amounts depend on recoveries and estimates.
- The company identified and corrected a prior-period construction estimate error related to the third quarter of 2016: $4.9 million less Large Project Construction revenue and gross profit and $1.6 million greater net loss attributable to Granite. Management concluded the correction was not material to prior or current financial statements. It also disclosed nonmaterial prior-quarter misstatements in unconsolidated joint-venture summary revenue; these did not affect consolidated statements.
- Legal proceedings and government inquiries are part of the ordinary course of business. Recorded related liabilities were approximately $1.0 million; reasonably possible losses beyond accruals, including liquidated damages, could be material, but the filing does not provide a clear estimable aggregate range. Joint-venture performance obligations may be joint and several.
- Backlog contracts may generally be canceled or modified by customers. Joint-venture cash is generally not available to Granite until distributed. Management reported no material changes to previously disclosed risk factors or market-risk exposure.
Important facts for investors to verify
- Whether Large Project Construction cost overruns and estimate revisions persist, and whether claim or back-charge recoveries are realized.
- Progress, margin quality and funding certainty in the $4.064 billion backlog, particularly the large-project awards and customer cancellation rights.
- Cash conversion and working-capital trends, including the availability of joint-venture cash and the effect of seasonal construction activity.
- Debt repayment and refinancing capacity for the remaining 2019 Notes installments, alongside covenant compliance and credit availability.
- Potential exposure from legal matters, liquidated damages, project guarantees and costs that management cannot yet estimate.
- Implementation effects of revenue-recognition and lease-accounting standards; the filing anticipated that lease adoption would materially increase reported assets and liabilities.