Granite Construction, one of the country’s largest contractors, reported a net loss of $97.8 million for the second quarter of 2019. Granite is No. 4 on ENR’s list of top domestic heavy contractors in the U.S. and No. 24 overall.
In an earnings call on Friday, CEO James Roberts attributed some of the downturn to delivery methods that put too much risk on recent megaprojects and said that the firm is changing the way it does business.
The decline was caused by a combination of increased project costs due to weather delays and by the execution of disputed work in the firm’s heavy civil sector that resulted in before-tax charges of $143.7 million, according to a company release. These issues brought the full amount of revenue reduction to more than $114.2 million in the second quarter, causing the company to revise its full year expectations for 2019, Roberts said during the call.
While he would not disclose specifics about the four disputed projects, Roberts said they 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 said, and the remaining work on the projects represents $350 million in backlog.
Granite is in dispute with owners on all four projects and these negotiations will “take some time to resolve,” he said, noting the projects did not turn out the way company executives had planned.
“Instead of entering into what we believed to be a partnering relationship, it is now clear that, especially in the context of these megaprojects, the fixed-price design-build contract delivery model and the public-private partnership contract-delivery model resulted in an untenable imbalance in risk-sharing between Granite and the project owners,” he said.
Three of the disputed projects are around 90% complete. In late July, the company received an "unfavorable court ruling" regarding the fourth project, which is about two-thirds complete, Roberts said. He did not give details about the case nor the bench ruling but told investors that the company would consider appealing it.
Granite's leadership is taking steps to make sure such disputes don't affect the company going forward.
“This is not business as usual and all options are certainly on the table,” he said.
Project delivery review
Roberts told investors that the announcement represents the end of megaproject work for the firm’s heavy civil division, which had been active in transportation and infrastructure work ranging from aviation and roads to rail and mass transit. Although it recently announced a contract with the California Department of Transportation, the company is also moving away from public-private partnerships (P3s).
"We are accelerating our strategic review of the heavy civil group operations and how we approach larger projects in our portfolio," he said.
Granite's shift to other delivery methods such as negotiated work, construction manager general contractor, construction manager at risk and progressive design-build began two years ago.
“We have walked away from projects, leaving some bids to our competitors that we might have been more wiling to chase just a few years ago," he said.
Instead, the company is focusing on smaller projects, which can be turned over more quickly, Roberts said. According to CFO Jigisha Desai, the division has not bid on any projects worth more than $510 million since 2017 and has only bid on jobs less than $150 million in the past three months.
“We’ve seen a complete flip in the dynamics of the portfolio with pursuing these smaller jobs instead of going after $800 million or $1 billion jobs,” she said during the investor call. “We’re bidding $1 billion worth of work a month on smaller jobs.”
The shift marks a move away from many joint-venture operations like the work the company did on the Tappan Zee Bridge renovation several years ago.
“We are now focused on sole venture or projects with Granite in the lead position," Roberts noted. “By taking the lead we are in a far better position to control our operational and financial destiny.”
The company is also exploring a potential exit from some geographical markets that pose too much risk, he said. While Granite's operational home base is in California, it does work all over the country, and recently announced it had been awarded a $505 million contract to build a portion of Virgin Trains USA's $4 billion Florida expansion from West Palm Beach to a new terminal at Orlando International Airport.
Granite shares have dropped 15% since the beginning of the year and the stock has dropped 36% in the last 12 months, according to Zacks Investment Research.
In contrast to the problems in the heavy civil group, Roberts said the company, which is active in water and mineral exploration markets as well, is operating within a positive backdrop. Overall, it posted revenue of $789.5 million for Q2.
"Business is poised to grow steadily for quite some time," he said, adding that he expects the summer and fall construction season to be Granite’s busiest ever across its portfolio.