Dive Brief:
- Granite Construction posted lower earnings on increased revenue and record backlog for the third quarter, while its troubled I-64 highway job in Virginia and a settlement over San Francisco’s iconic Salesforce Tower weighed on operations, giving investors a mixed bag of financial results.
- The Watsonville, California-based contractor reported net income, or bottom line profits, of $57.6 million, a 17% drop from a year ago. It grew its top line revenue by 11% to $1.12 billion, compared to just over $1 billion for the same period last year.
- Granite increased its backlog to $5.58 billion, a record for the company and a 37% jump from the $4.01 billion it recorded a year ago. Investors drove the stock 18% higher during a positive trading session Tuesday.
Dive Insight:
After pushing out completion of its $410 million I-64 High Rise Bridge project in Virginia to October on its second quarter conference call, Granite said it would be finished with the project by the end of the year.
The project, which Granite won in 2017 via a joint venture with Parsons and Corman Construction, has faced numerous delays, including crews hitting concrete and an unmapped water main.
In the third quarter, the project amounted to a further negative $4 million hit to the contractor’s gross profit margin after additional delays and design conflicts emerged.
“While less impactful than prior quarters, we can’t finish this job soon enough,” said Kyle Larkin, Granite’s CEO, on a conference call with Wall Street analysts.
The firm also took an $8 million write-down related to work by its subsidiary Layne Christensen on San Francisco’s iconic Salesforce tower, stemming from issues found in the foundation’s structural concrete in 2014 and subsequent litigation. The company said it was taking the charge following a $12 million write-down on the project during the second quarter.
Both projects represent the type of multi-hundred-million-dollar “megaprojects” Granite has sought to finish in its Old Risk Portfolio.
Instead of pursuing high-profile design-bid projects that have drawn out timelines where costs can change dramatically, it has instead targeted smaller jobs under a “best value” construction manager general contractor model where it can work collaboratively with owners on more diminutive work packages parsed out over time.
That shift, Larkin said, has resulted in Granite booking higher profit jobs with fewer issues and disputes. For example, in the firm’s construction segment, gross profit as a percent of revenue increased to 14.5% for the quarter, compared to 11.5% a year ago.
Although the firm didn’t change its financial guidance — it is still predicting revenue in the range of $3.35 billion to $3.45 billion for 2023 — going forward, Larkin said that it has largely completed the big-to-small pivot.
As a result, the company will be looking to expand into new markets in the future, including in its materials business, where it sells asphalt and aggregate to other contractors, while supplying its own projects as well. That unit also saw increased gross profits, due to higher prices for materials, of 17.2%, compared to 13.6% a year ago.
“We see further opportunities to strengthen our current home markets and to expand into new geographies,” Larkin said. “While much of the focus of the past couple of years has been on internal transformation, we are now growing and plan to pursue opportunities to drive growth and expand our footprint in both our materials and construction segments.”
Privately funded construction projects have faced pressures from high interest rates and escalated costs this year, but Larkin said his public clients were continuing to roll out projects, particularly those spurred by the $1.2 trillion Infrastructure Investment and Jobs Act.
“As we move into 2024 further, I believe the IIJA funding will continue to expand bid opportunities in 2024 across all of our key markets and we are well positioned to capitalize on those opportunities,” Larkin said.
