Granite Construction Incorporated (NYSE: GVA) — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; fourth-quarter figures are noted separately below. Granite is a U.S. heavy-civil contractor and construction-materials producer, with Construction, Large Project Construction and Construction Materials segments.
Key financial results
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $2.515 billion | $2.371 billion | +6.1% |
| Gross profit / margin | $301.4 million / 12.0% | $299.8 million / 12.6% | Profit +0.5%; margin down 0.6 points |
| Operating income | $92.4 million | $110.3 million | Down 16.3% |
| Net income attributable to Granite | $57.1 million | $60.5 million | Down 5.6% |
| Diluted EPS | $1.42 | $1.52 | Down 6.6% |
| Operating cash flow | $73.1 million | $67.0 million | Up $6.2 million |
| Cash, cash equivalents and marketable securities | $317.1 million | $358.5 million | Down $41.4 million |
| Total debt | $244.3 million | $259.1 million | Down $14.8 million |
| Working capital | $559.1 million | $519.2 million | Up $39.9 million |
Capital expenditures were $91.0 million, versus $44.2 million in 2015. Investing cash flow was a use of $96.4 million and financing cash flow a use of $40.3 million. The company paid $0.52 per share in dividends for the year.
Cash and marketable securities exceed reported debt, but some cash is held in joint ventures and generally is not available for Granite’s general working-capital needs until distributed. The $295 million credit facility had $161.2 million of unused availability at year-end.
Performance and changes versus prior year
- Construction revenue rose 8.1% to $1.365 billion; segment gross margin improved to 15.3% from 14.8%, supported by higher volume and improved project performance.
- Large Project Construction revenue increased 9.3% to $888.2 million, but gross profit fell 19.3% to $64.1 million and margin declined to 7.2% from 9.8%. Management cited higher estimated costs associated with affirmative claims, change orders and back charges.
- Construction Materials revenue declined 11.6% to $261.2 million and gross profit fell 14.7% to $28.0 million, primarily on lower external sales volumes and prices.
- SG&A increased 7.6% to $219.3 million, including higher restricted-stock amortization and bidding-related costs. Lower interest expense and higher affiliate and other income partly offset lower operating income.
- Year-end contract backlog reached a record $3.484 billion, up 19.8% from $2.908 billion. About $1.9 billion was expected to be completed in 2017. Backlog includes joint-venture work and may be canceled or modified by customers.
Fourth quarter: Revenue was $666.7 million versus $630.2 million in Q4 2015. Gross margin was 12.2%, versus 16.0%; net income attributable to Granite was $16.2 million versus $28.7 million.
Outlook, risks and notable items
- Management described demand as steady amid modest economic growth and cited potential growth in Construction and Construction Materials from private non-residential activity and anticipated infrastructure spending. Federal spending under the FAST Act had not yet become a growth catalyst; the federal budget remained under continuing resolution.
- Management expected 2017 capital expenditures to be consistent with 2016. The filing provides no numerical revenue or earnings guidance.
- Key exposures include dependence on public-sector funding and government contracts, intense competition, weather and seasonality, fixed-price project cost overruns, labor and materials costs, subcontractor and joint-venture performance, bonding capacity, and permitting and environmental requirements.
- Construction results depend on estimates of costs to complete and recovery of claims. In 2016, significant downward project estimate revisions outweighed upward revisions in Large Project Construction, contributing to lower segment profitability. Delays or unsuccessful claim recoveries could further affect margins, cash flow and liquidity.
- Legal matters arise in the ordinary course. Recorded related liabilities were approximately $4.3 million at year-end; the disclosed aggregate range of reasonably possible losses, including amounts above accruals, was immaterial at that date. Outcomes remain uncertain.
- Debt covenants were in compliance at year-end. Granite reported leverage of 1.54 against a maximum of 3.00 and interest coverage of 12.30 against a minimum of 4.00. The 2019 Notes carried a 6.11% rate; the term loan’s rate was hedged at 1.47% plus the applicable margin.
- New revenue-recognition guidance was expected to take effect in 2018. Management was still assessing its impact, particularly for Large Project Construction contracts, mobilization costs and significant permanent materials.
Important facts for investors to verify
- Whether backlog converts to profitable revenue, especially the large-project awards, and whether cancellations, funding delays or schedule changes alter expected execution.
- Whether Large Project Construction margins stabilize and whether claim, change-order and back-charge recoveries are realized as estimated.
- How much reported cash is accessible to Granite, given joint-venture restrictions, and whether operating cash generation covers elevated capital spending and dividends.
- Whether public infrastructure funding translates into awarded work, and how government-contract concentration and competitive bidding affect margins.
- The eventual financial-statement effects of adopting the new revenue-recognition standard and any changes in project-cost estimates, contingencies or bonding requirements.