Granite Construction Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Granite is a diversified U.S. infrastructure contractor and materials producer, reporting Transportation, Water, Specialty and Materials segments. The quarter includes Layne and LiquiForce acquisition-related operations. Unless otherwise stated, dollar figures below are in millions.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $619.8 | $563.4 | Up 10.0% |
| Gross profit | $40.5 | $56.3 | Down 28.1%; margin 6.5% vs. 10.0% |
| SG&A | $81.2 | $61.3 | Up 32.5%; 13.1% of revenue vs. 10.9% |
| Operating loss | $(42.1) | $(12.8) | Loss widened |
| Net loss attributable to Granite | $(34.6) | $(11.4) | Basic and diluted loss per share: $(0.74) vs. $(0.29) |
| Operating cash flow | $(36.4) | $(37.6) | Cash use decreased $1.3 |
| Capital expenditures | $28.7 | $16.0 | Higher year over year |
Revenue growth reflected primarily the acquired Water and Mineral Services businesses and higher Specialty revenue; Transportation and Materials revenue declined. Gross profit fell in each segment except that the filing describes Specialty gross profit as down modestly; Materials remained loss-making. Segment gross margins were Transportation 6.3% (8.8% prior year), Water 8.2% (28.9%), Specialty 10.6% (13.3%), and Materials negative 9.0% (negative 5.4%).
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $200.3, including $131.5 held by consolidated construction joint ventures; marketable securities were $66.0. Granite-only cash excluding consolidated joint ventures was $68.8. Joint-venture funds generally are not available for Granite’s general liquidity needs until distributed.
- Total debt, net of issuance costs, was $380.6, comprising $40.0 of senior notes, $144.4 of term debt and $197.0 drawn on the revolving facility. The company reported $120.5 of remaining credit availability, after outstanding letters of credit.
- Granite reported compliance with debt covenants at quarter-end. Management said cash, investments, borrowing capacity and expected operating cash generation should cover anticipated needs for the next 12 months.
- Operating cash use reflected seasonal working-capital requirements and contributions to unconsolidated joint ventures. Cash and cash equivalents declined $72.5 during the quarter. Full-year 2019 capital expenditures were estimated at $110–$125.
Backlog, outlook and material developments
- Contract backlog was $3.59 billion at March 31, 2019, broadly level with $3.59 billion a year earlier and down from $3.69 billion at December 31, 2018. Transportation represented $2.78 billion, Water $317.8 million and Specialty $490.2 million.
- Management characterized demand across public and private end markets as robust and highlighted state and local infrastructure spending, water infrastructure needs, and private-market opportunities. It cited nearly $4.50 billion of backlog plus prospective project wins/task orders. The filing gives differing figures for those additional projects—$844 million in one passage and $884 million elsewhere—so the amount is not clear from the text.
- Management said unusually wet and cold winter and spring weather delayed work and hurt Q1 operations, particularly California activity, but had not weakened demand. It cautioned that first-quarter results are not indicative of full-year results because of seasonal weather and construction cycles. No full-year revenue or earnings guidance is provided in the supplied filing text.
- One Transportation project estimate revision reduced gross profit by $5.7 million in Q1, due to additional costs, lower productivity and weather-related costs. Acquisition and integration expenses were $3.3 million, down from $8.4 million.
- Adoption of lease accounting added $71.5 million of right-of-use assets and $60.2 million of lease liabilities at March 31. Operating lease expense was $4.3 million for the quarter.
Risks and contingencies
Key exposures include weather and seasonality, construction-cost and productivity overruns, contract claims and change orders, customer payment and retention timing, commodity prices, and public funding levels. Most backlog contracts may be canceled or modified by customers. Granite participates in joint ventures with joint-and-several performance obligations; its share of revenue remaining on unconsolidated joint-venture contracts was $914.5 million. The company disclosed ordinary-course legal proceedings and government inquiries; recorded related liabilities were immaterial, but reasonably possible losses, including liquidated damages, could become material if they become probable and estimable. Management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether weather-related delays and weaker gross margins persist as construction activity increases seasonally.
- The composition and conversion timing of the approximately $4.5 billion backlog-plus-project-opportunity figure, including the filing’s $844 million/$884 million discrepancy and the probability of task-order issuance.
- Cash availability after considering joint-venture restrictions, working-capital needs, debt maturities, and the $120.5 million of reported revolver availability.
- Project-estimate revisions, claims recoveries, joint-venture performance obligations, and the potential range of legal or government-contract losses.
- Progress integrating Layne and LiquiForce and whether acquired operations improve Water segment profitability.