California-based contractor Granite Construction faced mixed financials in the third quarter, experiencing reduced profits despite increased revenue and a record backlog. The company’s earnings were affected by the failed I-64 highway project in Virginia and a settlement concerning San Francisco’s Salesforce Tower, leading to a 17% drop in net income, totaling $57.6 million, though revenue saw an 11% increase, reaching $1.12 billion.
Record-Breaking Backlog and Stock Performance
Granite’s backlog surged to $5.58 billion, marking a 37% increase over the previous year. Investors witnessed a mixed reaction to these results, with a notable 18% surge in the stock following the announcement.
Project Setbacks Impact Bottom Line
Issues surrounding the completion of the $410 million I-64 High Rise Bridge in Virginia, initially scheduled for completion by year-end, faced multiple delays due to concrete problems and an unmapped water main. These challenges contributed to a $4 million hit on the company’s gross profit margin in the third quarter.
During its conference call for the second quarter, Granite stated that it would complete the $410 million I-64 High Rise Bridge project in Virginia by October, despite having originally stated that it would finish the project by the end of the year. Due to crew mishaps involving concrete and an unmapped water main, the project, which Granite won in 2017 through a joint venture with Parsons and Corman Construction, has experienced many delays.
Following more delays and design issues, the project resulted in an extra $4 million blow to the contractor’s gross profit margin in the third quarter. Plus a write-down of 8 million dollars was reported for the work carried out by Granite’s subsidiary Layne Christensen on San Francisco’s Salesforce Tower due to structural concrete problems and subsequent legal proceedings.
Strategic Shift and Positive Outlook
In its Old Risk Portfolio, Granite was attempting to complete more than 1 hundred-million dollar “megaprojects”. Now, rather than going after high-profile design-bid projects with long timelines where costs can fluctuate significantly, they have changed strategy and focus on smaller projects under a general contractor model that is a “best value,” where the company can collaborate with owners on smaller work packages. This shift has led to more profitable jobs and higher gross profit margins. This is reflected in the better profit percentage of the construction division to 14.5%.
The company maintains its financial guidance for 2023 while signalling solid execution of its big to small strategy. Granite also plans to step into the materials business, utilizing its resources for internal projects and selling aggregates and asphalt to other contractors.