Granite Construction Incorporated — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2013. Granite is a heavy civil contractor and construction materials producer, with Construction, Large Project Construction, Construction Materials and Real Estate segments. Results include Kenny Construction, acquired effective December 31, 2012.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $550.2 million | $539.6 million | $928.9 million | $849.8 million |
| Gross profit | $51.2 million | $51.9 million | $81.3 million | $76.9 million |
| Gross margin | 9.3% | 9.6% | 8.7% | 9.0% |
| Operating income (loss) | $8.0 million | $14.1 million | $(18.0) million | $(2.3) million |
| Net income (loss) attributable to Granite | $2.7 million | $1.9 million | $(19.3) million | $(9.8) million |
| Diluted EPS | $0.07 | $0.05 | $(0.50) | $(0.26) |
Cash flow and liquidity. For the six months, operating cash use was $51.6 million, versus $34.6 million a year earlier; investing activities provided $17.6 million and financing activities used $40.1 million. Cash and equivalents were $247.8 million and marketable securities $76.5 million at June 30, 2013, totaling $324.3 million. Of cash, $63.8 million was held by consolidated joint ventures and generally was not available for Granite’s working capital until distributed. The company reported $132.0 million available under its $215.0 million revolving facility.
Debt and capital. Long-term debt was $270.1 million, including $70.0 million drawn under the revolving facility; non-recourse debt was $9.5 million, primarily associated with real estate entities. The company paid $10.1 million in dividends in the first half. It reported compliance with debt covenants at June 30, 2013.
Material changes versus comparable periods
- Q2 revenue increased 2.0%; first-half revenue increased 9.3%. Construction growth was driven largely by Kenny, while Large Project Construction revenue declined as projects in the East and Northwest neared completion.
- Q2 gross profit was slightly lower year over year; first-half gross profit increased, but the first-half operating loss widened to $18.0 million. SG&A rose 21.2% in the first half, primarily reflecting Kenny expenses, consulting and integration costs.
- Construction backlog was $807.7 million, up 9.1% from March 31, 2013. Large Project Construction backlog was $2.0 billion, up 19.8% sequentially; total backlog was $2.8 billion, versus $2.0 billion a year earlier. Backlog includes joint-venture work and may be canceled or modified by customers.
- Construction Materials recorded a first-half gross loss of $2.0 million, compared with a $1.0 million loss in the prior-year period. Real Estate revenue remained very low as Granite continued its planned divestiture of that business.
Outlook, risks and unusual items
- Management expected challenging competitive conditions and public-sector funding constraints to persist through most of 2013, while citing improving private-sector conditions as a potential positive for 2014. No specific revenue or earnings guidance was provided.
- Management said cash, investments and expected operating cash generation should cover anticipated needs for the next 12 months. It anticipated 2013 capital expenditures of $45–$55 million.
- Granite may record up to approximately $25 million of restructuring charges in 2013, depending on market conditions and acceptable asset-sale terms; first-half 2013 included a $0.5 million net restructuring gain.
- A federal investigation into disadvantaged-business-enterprise issues on the Grand Avenue project remains ongoing. Granite is cooperating, says penalties or sanctions are probable, has accrued the low end of its estimated loss range, and cannot estimate the total or most likely loss. An adverse outcome could materially affect results, liquidity or financial position.
- Construction estimates and project productivity can change; first-half Large Project Construction estimate revisions included net profit increases of $17.9 million, while Construction revisions reduced gross profit by $0.3 million. Weather and project timing also make interim results seasonally variable.
- The December 2012 Kenny acquisition had a $141.1 million purchase price, including $43.7 million of goodwill. Granite paid a $4.6 million post-closing adjustment in Q2 and expected another $3.9 million in Q3.
Key facts for investors to verify
- Progress, margins and cost estimates on major projects, especially given backlog growth and the company’s reliance on project-level estimates.
- Cash conversion and the availability of cash held in joint ventures; first-half operating cash flow was negative.
- Developments in the Grand Avenue investigation, related accruals and any potential government-contract consequences.
- Kenny’s contribution to revenue and gross profit, integration costs, remaining purchase adjustments and acquisition-related debt.
- Actual restructuring charges and asset-sale proceeds compared with the possible 2013 charge of up to approximately $25 million.
- Debt covenant headroom and liquidity if operating results weaken; the filing notes covenant compliance could come under pressure if net income declines further.