Granite Misses on Earnings, Shares Fall

Shares of Granite Construction Incorporated (GVA) dropped 11.7% since the company reported its third-quarter 2013 earnings on Nov 4. Earnings fell 70% year over year to $11 million or 28 cents per share from $37.1 million or 94 cents a share, due to the negative impact from a large highway project in Washington State. The results lagged the Zacks Consensus Estimate of 78 cents.

Operational Updates

Granite’s net sales dipped 1.8% year over year to $742 million. The results also missed the Zacks Consensus Estimate of $906 million.

Gross profit during the quarter dropped 46% to $54.4 million from $101 million in the prior-year quarter. Gross margin contracted 660 basis points (bps) year over year to 7.3%.

Selling, general and administrative expenses improved 12.8% year over year to $46.6 million. A significant portion of the increase was led by the integration of Kenny. Adjusted operating gain was $7.8 million versus $59.8 million in the prior-year quarter.

Segment Performance

Construction: Net sales grew 22% year over year to $470.6 million, primarily attributable to the Kenny acquisition and improved western markets, partly offset by the weakness in California. Gross profit increased 48.9% to $49.6 million from $33.3 million in the year-ago quarter. Gross margin was 10.5%, roughly 190 bps higher than the prior-year quarter, led by improved project execution.

Large Project Construction: The segment reported sales of $187.8 million against $255.9 million in the year-ago quarter reflecting the timing of new projects. The segment reported a loss of $2.5 million in the third quarter versus gross profit of $57.8 million last year, driven by a significant negative forecast change on a large project in Washington State and by the timing of overall project portfolio progression.

Construction Materials: Net sales in the reported quarter went down 4% year over year to $83 million. Consequently, gross profit fell 27% year over year to $7.3 million. Gross margin contracted 270 bps year over year to 8.8%.

Real Estate: Revenues at the Real Estate segment were $0.02 million compared with $0.04 million in the year-ago quarter. Gross profit plunged 42.8% to $0.02 million.

Backlog

Total contract backlog increased to $2.8 billion as of Sep 30, 2013 compared with $1.6 billion as of Sep 30, 2012.

Financial Update

As of Sep 30, 2013, cash and cash equivalents amounted to $212 million versus $287 million as of Sep 30, 2012. As of Sep 30, 2013 long-term debt increased to $270 million from $200 million as of Sep 30, 2012. The debt-to-capitalization ratio expanded 490 bps to 24.6% as of Sep 30, 2013 from 19.7% as of Sep 30, 2012. Cash used in operating activities for the nine-month period ended Sep 30, 2013, was $64.5 million in contrast to cash from operations of $20 million in the year-ago comparable period.

Outlook

On an adjusted basis, Granite expects to report a small loss to break-even results in the fourth quarter of 2013. For full-year 2013, Granite revised the construction segment’s revenues forecast to the range of $1.2–$1.3 billion from $1.25–$1.4 billion. Gross margin outlook for the segment was also modified to the band of 8.5–9.5% from 8–10%. The Large Project Construction segment’s revenues were modified to the range of $750–$800 million from $850–$950 million, with a corresponding gross margin range of 8.5%–9.5%. Revenues from the Construction Materials segment were changed to $220–$230 million from $200–$230 million, with a gross margin range of 2%–3%.

Selling, general and administrative expenses were revised to the $205–$210 million band from $210–$220 million.

Watsonville, Calif.-based Granite Construction is one of the largest infrastructure contractors and construction materials producing companies. Its project teams represent the best in the industry; serving both public and private-sector clients in the transportation, power, federal, tunneling, underground, and industrial/mining and water resources markets.

Granite Construction currently holds a short-term Zacks Rank #3 (Hold). Jiangsu Expressway Co. Ltd. (JEXYY) belongs to the same industry and carries a Zacks Rank #2 (Buy).

Peer Performance

Among Granite’s peers, Chicago Bridge & Iron Company N.V. (CBI) reported third-quarter 2013 adjusted earnings of $121.3 million or $1.12 per share (excluding the one- time items), in line with the Zacks Consensus Estimate. Adjusted net income improved 46.7% year over year on the back of strong project activities during the quarter.

Another competitor, Great Lakes Dredge & Dock Corporation (GLDD) reported earnings per share of 2 cents in the third quarter of 2013, compared to a loss per share of 9 cents in the year-ago quarter. Earnings missed the Zacks Consensus Estimate of 6 cents.

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