Granite Construction Incorporated — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2016, compared with the same 2015 periods. Granite is a U.S. heavy-civil contractor and construction materials producer, reporting Construction, Large Project Construction, and Construction Materials segments. Construction results are seasonal; interim results are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $604.6 million | $569.2 million | $1,044.0 million | $989.5 million |
| Gross profit / margin | $73.2 million / 12.1% | $64.2 million / 11.3% | $112.4 million / 10.8% | $103.1 million / 10.4% |
| Operating income | $25.9 million | $17.1 million | $9.6 million | $5.9 million |
| Net income attributable to Granite | $14.1 million; $0.35 diluted EPS | $9.6 million; $0.24 diluted EPS | $2.9 million; $0.07 diluted EPS | $1.1 million; $0.03 diluted EPS |
| Operating cash flow | Not presented quarterly | $(53.9) million | $(56.7) million |
- Q2 revenue increased 6.2%; six-month revenue increased 5.5%. Construction and Large Project Construction grew, while Construction Materials declined.
- Six-month cash used in investing was $21.3 million, including $48.8 million of capital expenditures, versus $3.5 million provided in 2015. Financing used $16.3 million, primarily for dividends and debt repayments.
- At June 30, cash and cash equivalents were $161.2 million and marketable securities were $77.6 million. Combined cash, cash equivalents, and securities totaled $238.8 million, including cash held by consolidated joint ventures that is generally not available for Granite’s working capital.
- Reported debt carrying value was approximately $256.7 million. Debt included a $97.5 million term loan and $160.0 million of senior notes; $186.7 million of the $297.5 million credit facility was available. Granite reported compliance with debt covenants.
- Quarterly dividends were $0.13 per share; six-month dividends were $0.26 per share.
Material changes and management commentary
- Gross margin improved overall, led by Construction, where segment margin rose to 14.8% in Q2 from 12.7%. Large Project Construction margin fell to 6.9% from 7.9%; Construction Materials margin was 13.8% versus 13.4% in Q2, but its six-month margin declined to 8.4% from 9.5%.
- Management cited improved Construction volume and margins, while Large Project Construction profitability was affected by project estimate revisions, additional costs, and productivity. Materials revenue fell partly due to a slower California start and sales shifting to internal projects.
- Other income benefited from a gain associated with a consolidated real estate entity. Six-month net income also reflects $5.0 million attributable to non-controlling interests.
- Backlog reached $3.75 billion at June 30, up from $3.00 billion a year earlier. Management described markets as stable but highly competitive, with modest economic growth and tepid public spending. It expects the FAST Act to begin benefiting activity late in 2016 and more strongly in 2017, particularly Construction and Construction Materials.
Outlook, risks, contingencies, and unusual items
- Management expects 2016 capital expenditures of $70–$80 million, including equipment for new consolidated joint ventures. It believes liquidity sources will cover expected needs for the next twelve months, but notes financing availability could be affected by operating performance, acquisitions, and debt covenants.
- Construction estimates included $17.4 million of Q2 and $20.2 million of six-month revenue and gross profit from estimated customer affirmative-claim recoveries; estimated costs exceeded recoveries by $15.3 million in each period. Back-charge claim recoveries increased gross profit by $7.6 million in both periods. Claims depend on resolution and may take more than a year.
- Large Project Construction revisions in estimates reduced gross profit by a net $4.8 million in Q2 and $7.8 million in the six-month period. Project outcomes remain sensitive to design, weather, owner-related costs, productivity, and claim resolutions.
- Legal matters and government inquiries arise in the ordinary course. Recorded related liabilities were approximately $0.7 million; the aggregate range of reasonably possible losses, including possible amounts above accruals, was described as immaterial at June 30. The filing cautions that future developments could nevertheless require material adjustments.
- Joint venture members may have joint and several performance obligations. Granite reported $5.1 billion of remaining construction revenue on unconsolidated and line-item joint venture contracts, of which $1.6 billion represented Granite’s share; JV assets are generally not freely available to Granite.
- Approximately $3.5 billion of backlog was bonded. Backlog contracts may generally be canceled or modified by customers. Management reported no material change in previously disclosed risk factors or market-risk exposure.
Most important facts for investors to verify
- How much of reported earnings and margins depends on estimated affirmative-claim and back-charge recoveries, and whether those amounts are ultimately collected.
- Backlog conversion, cancellations, project execution, and the concentration of Large Project Construction backlog in major projects and joint ventures.
- Cash generation and working-capital trends, including receivables growth and the availability of joint-venture cash for Granite’s own liquidity needs.
- Capital spending versus the $70–$80 million 2016 outlook, debt repayments, and continued covenant compliance.
- Whether expected FAST Act funding translates into awards and revenue on management’s anticipated timeline.