Granite Construction's Q3 income plummets 63% year over year

Dive Brief:

On the heels of a $69.3 million loss in its heavy civil group, Granite Construction reported that its 2019 third-quarter income had fallen 63% from the same time period last year. The Watsonville, California, firm's Q3 net income was $20.5 million, compared to 2018's Q3 figure of $55.7 million. Revenue for the period ending Sept. 30 was up 3.1%, to $1.1 billion.
Attributing the loss primarily to disputed heavy civil projects, CEO James Roberts told investors that the company will only pursue projects in markets with "strategic, competitive advantages." Its heavy civil division includes transportation and infrastructure work ranging from aviation and roads to rail and mass transit.
The firm is also replacing senior vice president of its heavy civil group, Dale Swanberg, who joined the company in 2015, with James D. Richards, a 28-year company veteran who manages its northwest U.S. group.

Dive Insight:

The Oct. 25 earnings call echoed many issues that came up in the firm's second quarter results announcement in early August, when it reported a $97 million loss for that quarter. On that call, CEO James Roberts said the disputed projects have been in the company’s pipeline since between 2012 and 2014 and that Granite has been evaluating them quarterly since then, as it does with all of its projects.

Ranging in value from $1 billion to $4 billion, each of the four design-build projects in question was contracted at a fixed price, he told investors. Granite is in dispute with owners on all four projects and these negotiations will “take some time to resolve,” he said.

During last week's earnings call, Roberts told investors that the firm is focused on resolving the disputes, which he said "continue to have a distorted impact on our cash flows and earnings."

To end the problem, the company will aggressively pursue dispute avoidance and resolution, implement "refined estimating and risk mitigation approach to project pricing," and pursue limited types of projects.

"A critical component of our current and future success is consistent performance on projects at scale, in this case projects typically in a range of about $100 million to $500 million, with particular emphasis on best-value procurements with more defined design and appropriate risk-sharing," he said.

This move away from megaprojects will help the firm mitigate future risks, Roberts said, echoing sentiments from other major contractors like Fluor and Skanska that are also moving away from large public/private work.

The company's pipeline reflects this new approach, he said, noting that the majority of projects are well below this level. "Steady funding and buoyant market conditions have resulted in strong bookings, driving more than 44 percent growth in our CAP to $4.7 billion," he said.

Granite is No. 4 on ENR’s list of top domestic heavy contractors in the U.S. and No. 24 overall.