Granite Construction Incorporated — Q2 2018 Form 10-Q
Quarter ended June 30, 2018; financial statements are unaudited. Dollar amounts are USD millions except per-share data.
Business context and reporting period
Granite is a heavy civil construction contractor and construction materials producer, with Construction, Large Project Construction and Construction Materials segments. Results reflect the six months ended June 30, 2018, with second-quarter comparisons to 2017. The company says weather and project timing make quarterly results variable and not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $807.1 | $762.9 | $1,370.5 | $1,231.3 |
| Gross profit | $80.4 | $74.6 | $136.7 | $99.7 |
| Gross margin | 10.0% | 9.8% | 10.0% | 8.1% |
| Operating income (loss) | $(5.7) | $24.0 | $(18.6) | $(12.5) |
| Net income (loss) attributable to Granite | $(8.4) | $14.1 | $(19.8) | $(9.7) |
| Diluted EPS | $(0.20) | $0.35 | $(0.49) | $(0.24) |
- Revenue increased 5.8% in Q2 and 11.3% for the first half. Construction Materials revenue rose 27.5% in Q2 and 29.0% year to date, primarily on higher aggregate and asphalt prices and volume. Large Project Construction revenue rose 7.7% and 13.2%, respectively.
- Q2 operating results included $26.3 million of acquisition and integration expenses; first-half expenses were $34.7 million. Large Project Construction also recorded significant unfavorable project estimate revisions: a net $30.3 million reduction to gross profit in Q2 and $39.8 million for the first half.
- First-half operating cash flow was $(75.4) million, versus $22.7 million provided in 2017. Management attributed the deterioration mainly to increased contributions to unconsolidated joint ventures and working-capital movements. Investing cash flow was $(38.5) million; financing provided $81.5 million.
- At June 30, cash and cash equivalents were $195.5 million and marketable securities were $81.2 million. These totals include joint-venture cash that is generally not available for Granite’s general liquidity needs. Revolving credit facility availability was $218.0 million.
- Total debt was $488.7 million, up from $224.5 million at December 31, 2017, largely reflecting Layne-related convertible notes and acquisition financing. Current maturities were $208.0 million. The company reported compliance with debt covenants.
Material changes versus comparable periods
- Granite completed its $349.8 million acquisition of Layne on June 14, 2018, largely funded with Granite stock, and acquired LiquiForce for $35.9 million cash on April 3. Layne added water management, infrastructure and drilling operations, as well as international exposure. Only about two weeks of Layne results were included in reported Q2 results.
- Construction Materials and Construction segment gross profit improved year over year. Large Project Construction gross profit also rose for the first half, but its Q2 margin remained low at 0.5%, amid adverse project estimate revisions.
- Adoption of Topic 606 reduced opening retained earnings by $15.2 million. The company reported a $15.2 million cumulative-effect decrease; the standard also changed presentation of contract assets and liabilities.
- Contract backlog was $3.652 billion at June 30, down from $4.064 billion a year earlier and up from $3.586 billion at March 31. Large Project Construction backlog declined during the quarter as work progressed.
Outlook, risks and unusual items
- Management described public and private markets as providing growth opportunities, citing state and local infrastructure spending, the FAST Act’s funding visibility through 2020, and a focus on selective large projects with returns commensurate with risk. Four project wins announced after quarter-end, totaling more than $875 million, were expected to enter backlog in the second half of 2018 and early 2019; they were not included in June backlog.
- Management expected 2018 capital expenditures of $105–$115 million and said existing cash, securities, borrowing capacity and expected operating cash flow should cover anticipated liquidity needs for the next 12 months. No earnings guidance was provided in the supplied filing text.
- Three large projects had reasonably possible additional costs that could reduce 2018 gross profit by up to $15 million. Future changes in project cost estimates, claims and recovery assessments could materially affect results and cash flows.
- Legal proceedings and government inquiries are part of the ordinary course of business. Recorded liabilities were approximately $1.0 million; reasonably possible losses, including liquidated damages, could be material if they become probable and estimable. Joint-venture performance guarantees also create potential exposure that the company says it cannot quantify beyond remaining work costs.
- Layne’s international operations add foreign currency and compliance risks, including FCPA exposure; transaction-related currency effects were immaterial in the period. Approximately $15 million of uncertain tax-position liability was assumed in the Layne acquisition. Tax Reform accounting remained provisional and subject to review within the measurement period.
Important facts for investors to verify
- Progress, margin recovery and remaining cost exposure on the large projects with unfavorable estimate revisions.
- Whether the announced post-quarter project wins are awarded, funded and added to backlog, and how backlog converts to revenue and cash.
- Layne and LiquiForce integration costs, operating performance, and final purchase-price allocations, which were preliminary.
- Repayment, redemption or conversion plans for the assumed convertible notes, including near-term maturities and the associated effect on liquidity or share count.
- Cash conversion, joint-venture funding requirements, claims recoveries, and availability of cash held within joint ventures.
- Developments in legal, tax, foreign-corruption compliance and other acquisition-related contingencies.