Granite posts revenue gain, awaits federal infrastructure funding

Dive Brief:

• Watsonville, California-based Granite Construction announced last week increased revenue and backlog for the second quarter of 2021 compared to the period a year ago. The firm saw a slight decrease, though, in its sequential backlog from a quarter ago, a trend it attributed to intentionally burning off older, higher risk jobs in its heavy civil group.
• The company reported $964.2 million in revenue for Q2 2021, an increase of 5.3% over the $915.8 million it saw during the same span in 2020. Its backlog of $4.4 billion was 7% higher than the $4.1 billion it had a year ago, but down $6.6 million sequentially from the $4.45 billion it had during Q1.
• Moving forward, the company reiterated its fiscal guidance for the year of low- to mid-single-digit revenue growth, and margins of 5.5% to 7.5%.

Dive Insight:

Kyle Larkin, Granite’s CEO, said that slight sequential drop in backlog was due to the company’s new focus on smaller, lower risk projects, as opposed to the $500 million and larger design-build megaprojects it used to pursue in its heavy civil division.

Accounting irregularities in that division were responsible for the company having to restate its financials earlier this year, while setting aside $66 million to settle litigation with investors.

“The risks inherent in these megaprojects related to design duration, size and partners are no longer acceptable within our strategy,” Larkin said during a conference call with financial analysts. “We are now pursuing best value procurement projects such as CM/GC projects as well as bid-build projects and smaller, less complex design-build projects where the risks are well understood and priced into the bid.”

That approach reflects a broader trend among large, public contractors to de-risk their portfolios of projects.

Watching and waiting

While Granite’s call came a day after the U.S. Senate voted to move ahead on a $1.2 trillion, bipartisan infrastructure package that includes $550 billion in new spending, Larkin said the slow pace of negotiations thus far has pushed out Granite’s expectations for seeing meaningful spending from the bill.

That, in turn, means the company anticipates the Fixing America’s Surface Transportation (FAST) Act, which funds highway construction, will need to be renewed yet again in 2021, as it was late in 2020.

“While we are hopeful that an agreement will be reached in the near term, we believe a deal will most likely not be completed until the fourth quarter, resulting in the need for another continuing resolution of the FAST Act at the end of the third quarter,” Larkin said. “A federal bill will only serve to strengthen the environment further, with meaningful impacts starting to be felt in mid to late 2022 and then building into 2023 and beyond.”

In general, Larkin said the bid environment was brisk for both private and public projects, with funding at the state and local levels returning to pre-pandemic amounts. “We were really concerned last year about state funding, but that has not lived up to what our worries were,” said Larkin.

Higher prices

Brent Thielman, senior research analyst at investment banking firm D.A. Davidson, said Granite’s experience of a resurgence of activity at the state and municipal levels reflects a broader trend in the industry.

“It’s definitely starting to paint a better picture for that segment, especially versus what we’ve seen over the last three or four quarters,” Thielman said. “That’s pretty consistent with a lot of other companies I cover.”

Granite had a surprising uptick in business in its water segment during the unprecedented drought gripping the western U.S., due to demand for more water wells.

“That’s really shored up our well-drilling business,” Larkin said.

Asked by analysts whether he was concerned that labor and materials shortages could negatively impact the company, he said no. Rather, Granite has been able to pass on the higher costs of oil and diesel to its customers, while selling more aggregate and asphalt from its materials business at higher prices.

On the labor side, he said the firm has benefited from long-established relationships with employees and labor unions in the states where it works.

“We have really strong relationships with our union partners in the West,” Larkin said. “And a lot of our craft employees have been with the company for years.”

Thielman said that kind of resilience in the face of logistical challenges has been the hallmark of many public contractors this year.

“The public companies tend to be larger, with more sophisticated platforms that manage through labor and logistical constraints,” Thielman said. “For those types of companies, their results and their general outlook right now are pretty solid. They’re seeing a pickup in commercial work.”