Granite posts nearly 20% quarterly revenue loss as it works through less profitable projects

Dive Brief:

Granite Construction posted a loss in the first quarter of 2022, one it said was expected as it shifts its portfolio away from less profitable areas. The company’s Q1 profits fell by $4 million to $50 million, from nearly $54 million last year.
Granite attributed the loss in part to a $29 million revenue decline in its Central group, the region where it’s working through what it calls “old risk portfolio” projects. The Watsonville, California-based company builds a variety of public projects including bridges, airports and the Florida I-4 Express lanes pictured above.
The company on Wednesday also announced revenue of $548 million, down $18 million from last year’s $566 million, and $135.2 million less than last quarter. Stock prices fell slightly to $28.74 per share Thursday morning before climbing to $29.9 by market close, down from Wednesday but 23.2% lower year over year.

Dive Insight:

Granite is transitioning away from megaprojects and public-private partnerships and toward smaller contracts in regions where it sees the most activity, like Utah and Arizona. The company’s backlog (jobs won but not started) stands at $3.9 billion — down 1.7% from $4.01 billion last quarter and down 5.7% from last year — driven by the Central group losses.

Despite the drop in revenue, Granite President and CEO Kyle Larkin said he was pleased with recent bidding activity and backlog distribution, and said the company was well on its way in executing its strategic plan.

“Our new executive leadership team is in place and working to return Granite to the profitable company that our shareholders expect and we insist upon,” Larkin said in an investor call Thursday. “We believe that this transition has increased the quality of our committed and awarded projects, or CAP, and that our existing CAP portfolio positions us for increased profitability in 2022 and beyond.”

The company sold Granite Inliner, a trenchless pipe rehabilitation services business, to Inland Pipe Rehabilitation on March 16 for $159.7 million. Granite used some of the proceeds to pay off part of a loan and repurchase shares. Its debt is down $41 million in Q1, to $299 million from $340 million the prior year.

“We expect to use the proceeds from the sales to strengthen and grow our vertically integrated businesses, pay down debt and return value to shareholders through share repurchases,” Larkin said in a release about the sale. “During March, we spent $18.5 million to purchase 611,000 shares and intend to continue to be opportunistic as we evaluate further share repurchases in 2022.”

Granite also expects to complete its divestment from its Water Resources and Mineral Services businesses by the end of the year, and plans to focus on its core competencies in civil construction and materials going forward.

Looking ahead

Granite, which bills itself as “America’s infrastructure company,” said its muted guidance for 2022 was unchanged from its last release:

Low single-digit growth in revenue from continuing operations.
Adjusted EBITDA margin from continuing operations in the range of 6% to 8%.
SG&A Expense from continuing operations in the range of 8% to 8.5% of revenue.
Low- to mid-20s effective tax rate for continuing operations.
Capital expenditures from $100 million to $115 million.

Brent Thielman, analyst with D. A. Davidson, said in a report shared with Construction Dive his guidance remains to buy Granite stock.

“We still see attractive underlying values relative to the current share price, with net cash building through the year for deployment,” he said. ”Infrastructure leverage is also appealing.”

Despite dealing with the rising inflation, ongoing labor shortages and supply chain issues facing all U.S. contractors, there are also positive signs ahead for the firm. Revenue from Granite’s materials business increased from last year, Larkin said in the call, and the company was able to offset some costs of inflation through bulk order and by passing along the increases.

Plus, money from the federal infrastructure act is expected to show up on contractors’ balance sheets in earnest in 2023, and will provide a lift for the next several years.

“While inflation concerns persist in general, it seems our markets continue to be healthy,” Larkin said. “We’re optimistic there will be continued improvement later in the year and more opportunities funded by the infrastructure bill that will allow us to continue to build capital into 2023.