Granite Construction Incorporated Stock

Good morning. My name is Chloe, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite 2026 Second Quarter Conference Call. This call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Granite Vice President of Investor Relations, Mike Barker.

Good morning, and thank you for joining us. I'm pleased to be here today with President and Chief Executive Officer, Kyle Larkin; and Executive Vice President and Chief Financial Officer, Staci Woolsey. Please note that today's earnings presentation will be available on the Events and Presentations page of our Investor Relations website.

We begin with a brief discussion regarding forward-looking statements and non-GAAP measures. Some of the discussion today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, opportunities, targets, growth, demand, strategic plans, circumstances, activities, performance, shareholder value, outcomes, outlook, guidance, objectives, committed and awarded projects, or CAP, and results. Actual results could differ materially from statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these forward-looking statements. The company assumes no obligation to update forward-looking statements, except as required by law.

Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives. These include, but are not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted net income adjusted earnings per share, cash gross profit and cash gross profit per ton. The required disclosures regarding our non-GAAP measures are included as part of our earnings press releases and in company presentations, which are available on our website, graniteconstruction.com, under Investor Relations.

Now I'd like to turn the call over to Kyle Larkin.

Thanks, Mike. Let's start with the Construction segment. I'm pleased to report that cap growth continued to be strong, increasing $250 million sequentially to $7.4 billion as project wins outpaced revenue burn in what was a very strong [ growth ] quarter. The increase was driven by a healthy and active bidding environment across our markets as well as the addition of Kenny Seng Construction. This record CAP underscores the strength of our end markets, the effectiveness of our growth initiatives and provides strong visibility into future revenue.

We continue to see significant opportunities to grow CAP leveraging our leadership and publicly funded transportation infrastructure, while expanding our presence across a broader set of end markets. Publicly funded work for state and local departments of transportation a cornerstone of the Granite's and continues to support both our Construction and Materials segments. Over the past several years, the IIJA has provided significant funding to transportation agencies across our footprint. With the sustainable portion of those funds still available for deployment, we continue to benefit from a strong and robust transportation market.

In May, the UN House Representatives introduced the BUILD America 250 Act, or BA250. BA250 is designed to be the successor to the IIJA, which is expiring in September. While BA250 does not currently contemplate significant increases in highway funding, we view the draft positively because the shift to funding mix towards formula-based programs and bridge investments and away from larger discretionary mega projects. We believe this funding approach aligns well with Granite's geographic footprint and capabilities. While the timing and final content of the bill remain a work in progress, we expect the final bill may have a higher level of ending than the current draft, and we believe bipartisan support for infrastructure investment will sustain elevated funding levels, whether through new legislation or by way of a funding extension.

Against this backdrop, we see significant opportunities for continued growth through market share gains in our home markets, increased participation and collaborative contracting delivery methods, such as construction manager, general contractor and progressive design build, and disciplined geographic expansion, both organically and through acquisitions. These collaborative contracting delivery methods foster earlier engagement with project owners, better alignment throughout project execution and more balanced risk sharing. Over time, this approach has enabled us to build a higher-quality project portfolio and reduce volatility, allowing us to deliver more predictable outcomes, including improved margins.

Importantly, Granite has a much broader and more diversified growth platform than it did just a few years ago. By leveraging Granite's geographically diverse home markets, we have strategically expanded into attractive end markets to complement our traditional strengths and deepen relationships with key clients. This includes growing our federal business, increasing our participation in rail and transit infrastructure and establishing a meaningful presence in data centers like development.

Within federal, we've invested for more than a decade to build our capabilities, establish customer relationships and broaden our geographic reach, from the armed forces versus to the Department of Homeland Security to the U.S. Army Corps of Engineers. We have participated in building a nation's federal infrastructure in a variety of civil projects across United States in Guam. While the recently won task infrastructure projects provide near-term revenue growth in 2026 and 2027, we believe the greater opportunity lies to long-term expansion of our federal business, leveraging the strong customer relationships, proven execution and expertise we have developed.

Class 1 railroads continue to make significant investments in their infrastructure, with a particular focus on expanding intermodal capacity and increasing the movement from truck traffic to rail. Supported by a strong history of successful project execution and collaboration with these customers, Granite is well positioned to capitalize on growing opportunities within the rail market over the next several years. Mission-critical infrastructure, such as data center site development, there's another significant growth opportunity that structures across our footprint. Granite has over a decade of experience working with developers, vertical builders and hyperscalers in the civil infrastructure needs of data center construction, primarily in the Pacific Northwest and the [indiscernible].

Earlier this year, we launched a dedicated data center division with specialized leadership and resources to support these important clients across Granite's footprint. This team works alongside our regional operations to pursue, win and successfully deliver data center projects while providing a consistent best-in-class client experience. As a result, data center-related CAP is increasing from $65 million a year ago to $223 million at the end of the second quarter. Given the substantial demand driven by AI and digital infrastructure investment, we continue to see a robust pipeline of opportunities across many of our markets and expect this end market to remain an important contributor to CAP growth in 2026 and 2027.

The common theme across our rail, federal and data center pursuits is our ability to leverage the capabilities of our geographically diverse home markets to serve strategic clients in attractive markets. We have the people, equipment and expertise and relationships to capitalize on these opportunities efficiently and to scale. This same platform also positions us to pursue additional end markets over time, inputting water and power infrastructure, markets that we believe are poised for meaningful long-term investment. Taken together, our record CAP and strong opportunities across public and private markets give us confidence that Granite can continue to grow while driving sustained margin expansion in both the near and long term.

Turning to the Materials segment. Second quarter results underscore the strength and resilience of our Materials platform. Severe weather disrupt reduction and sales activity across the Southeast in the second half of the quarter, but our teams continue to execute well against those challenges. Overall, aggregate and asphalt volumes increased year-over-year, both from acquired companies and on an organic basis. Demand for Construction and Materials remains healthy across our footprint with orders outpacing prior year levels. This demand environment continues to support pricing, and through the second quarter, we are realizing our targeted mid-single-digit aggregate price increases.

We also continue to execute on strategic capital improvement projects, including automation, planned investments, and reserves expansion. These investments align with our long-term strategy to improve production efficiency, lower operating costs and strengthen our competitive position in our home markets. Finally, we continue to closely monitor the increases in oil prices driven by geopolitical uncertainty in the Middle East.

Energy prices during the second quarter were in line with our expectations, and the impact on segment performance was minimal. increases in [indiscernible] and diesel costs were largely mitigated through a combination of fixed-forward contracts, physical storage, financial hedges and energy surcharges.

I am pleased with the resilient performance of our teams. Demand remains healthy. Pricing is tracking to expectations, and we continue to make investments in Materials segment that we believe will support long-term growth and margin expansion.

Now I'll turn it over to Staci to review our financial performance for the quarter.

Thanks, Kyle. We delivered significant second quarter growth by building on the momentum generated in the first quarter and continuing to execute on our strategic priorities. Compared to the same period in the prior year, revenue increased 29% to $1.5 billion. Gross profit increased 20% to $239 million. Adjusted net income increased by $15 million to $101 million. And adjusted EBITDA increased by $34 million to arrive at $186 million. We also generated year-to-date operating cash flow of $142 million.

In the Construction segment, revenue increased $270 million or 29% year-over-year to $1.2 billion. Of the growth in the quarter, $98 million, or 11%, was attributable to acquired businesses, while organic growth contributed $172 million, or 18%. Our revenue growth was driven by our record CAP and strong project execution across many of our geographic markets. Gross profit margin increased slightly year-over-year, a strong outcome given the difficult comparison against the prior year. We recognized favorable claim recoveries in both periods. However, the gross profit margin impact was less significant in the current year due to increased revenue this year. As we enter our busiest quarter, the Construction segment is performing ahead of our expectations and is well positioned to deliver strong full year results.

Materials segment revenue increased [ $60 million ] year-over-year to $248 million with acquired business contributing $60 million in the quarter, led by Warren Paving. Total aggregate and asphalt revenue, prior to consolidation adjustments between our segments, increased $111 million, led by a significant increase in internal asphalt sales during the quarter of $42 million or 73%. While the majority of our volume growth was driven by the acquired businesses, we also delivered stronger-than-expected organic volume increases. With Materials orders ahead of the prior year and pricing performing in line with expectations, the Materials segment remains on track to deliver another year of profitable growth despite margin headwinds experienced in the second quarter. Gross profit margin decreased 800 basis points, and cash gross profit margin decreased 310 basis points, driven by severe weather in the Southeast as well as higher production costs associated with development activities in the quarter.

Turning to cash flow. Year-to-date cash provided by operating activities was $142 million compared to [ $5 million ] in the prior year. Generating this level of operating cash flow in the first half of the year is a significant achievement and demonstrates the quality of our earnings and execution across the business. We expect our operating cash flow in the second half of the year to be consistent with our traditional seasonality. With this performance through June, we are raising our annual operating cash flow target from 10% to 11% of revenue.

The second quarter marked an important step forward in strengthening Granite's capital structure. We secured inaugural credit ratings from Moody's and S&P, successfully completed a $600 million senior unsecured note offering and called our remaining 3.75% convertible notes. Together, these actions strengthened our balance sheet, enhanced financial flexibility and expanded our access to capital. The proceeds of the senior unsecured notes will mainly be utilized to settle the 3.75% convertible notes. We elected to settle the majority of our conversion obligation with cash rather than shares to minimize dilution. We expect to use approximately $570 million of cash, net of proceeds from the unwind determination of the associated CAP call transactions to settle conversions with the remainder to be settled in shares.

Based on our current assumptions, this approach is expected to reduce adjusted diluted shares outstanding by approximately 2 million shares and preserves the financial flexibility to pursue our growth acquisition and capital allocation strategy. With Granite's share price increasing significantly since the 3.75% convertible notes were issued, redeeming the notes ahead of maturity reduces potential future dilution associated with the convertible notes and represents another important milestone in optimizing our long-term capital structure. During the quarter, we recorded nonoperating charges of $363 million related to our convertible notes, which were excluded from adjusted net income and adjusted EBITDA. The primary drivers were a loss on remeasurement of the conversion option derivative embedded in the 3.75% convertible notes and amortization of debt discount.

The remaining debt discount of $270 million will be recognized as interest expense in the third quarter. The change in the fair value of the conversion option derivative through the settlement of the notes in the third quarter will be recognized in the income statement as a nonoperating gain or loss as applicable.

Our strong cash generation and balance sheet, particularly when coupled with support from the credit market, puts us in an excellent position to continue executing on our M&A and capital allocation strategy. which includes opportunistic share repurchases. We believe we have the capital, balance sheet flexibility and organizational capacity to complete additional acquisitions this year, and we continue to see a robust pipeline of M&A opportunities.

Now let's turn to an update on guidance for the year. With our performance in the first half of the year, CAP balance and project opportunities ahead of us, we are increasing our revenue guidance to a range of $5.3 billion to $5.5 billion from a range of $5.2 million to $5.4 million. This reflects annual organic growth of approximately 12% and growth of approximately 10% from acquired companies at the midpoint of the range. We are also increasing our organic revenue growth expectation for 2027 from a range of 6% to 8% to above 10%. This represents a substantial increase in our growth outlook and reflects the visibility provided by our CAP, the public infrastructure funding environment and the opportunities we continue to see across our end markets. Our annual guidance for adjusted EBITDA margin, SG&A expense as a percent of revenue, adjusted effective tax rate and CapEx is unchanged.

Now I'll turn it back over to Kyle.

Thanks, Staci. I'll close with the following points. I am confident that the strength of our public and private end markets, combined with the strategic actions we have taken, Granite is well positioned to continue growing revenue across our footprint, whether serving clients and data center in Granite, intermodal rail infrastructure, federal projects for our core transportation markets, our teams have the capabilities to deliver. I believe we have the teams, capabilities and expertise necessary to capitalize on the opportunities ahead of us and continue to grow our record CAP.

In the Materials segment, we are encouraged by the strength of demand across our markets and the level of orders entering the third quarter. Our teams are resilient to the second quarter, and I believe we remain on track to achieve our margin targets both in 2026 and 2027. Given our strong first half performance, record CAP and opportunities ahead, we raised our 2026 revenue guidance and increased our expectation for organic growth in 2027.

Finally, M&A pursuits are very active. We closed on the Kenny Seng Construction acquisition this quarter and believe we will close on additional transactions in 2026. Disciplined M&A remains an important component of our long-term growth strategy. We continue to evaluate opportunities to strengthen our market position, expand our geographic footprint and create long-term shareholder value.

Operator, I will now turn it back to you for questions.

[Operator Instructions] Our first question is from Brent Thielman with Oppenheimer.

Yes, I guess, just first question on the thoughts on Materials in the second half. Kind of margin recovery opportunity, obviously, some nuances here in the quarter with adverse weather and some other factors, but maybe you could just talk about your sort of cash, gross profit margin, expectations for the year for that business group as you move into the second half.

Yes, yes. Thanks, Brent. First, I'll start with some things I think are really positive. In the quarter, demand was strong, as we mentioned, both internal and external, which is good both in the external market. Obviously, we're still seeing a lot of public infrastructure demand data centers in certain markets, manufacturing. And our teams are executing well on the pull-through strategy. So I think that's -- I'm really pleased in the quarter. Our pricing is still at mid-single digits on the ag, so that's holding. So from a pricing/demand perspective, we feel really good.

It is unfortunate we did have -- we also [indiscernible] weather in the Southeast. We'll put in the ballpark of around $10 million in the quarter. So that obviously has a drag on our margins. But we feel good about the outlook for the full year. Those tons will shift to the right, and we expect to be where we want to be by the time that we wrap up 2026.

Got it. Appreciate that, Kyle. Yes, I guess, and just in terms of the kind of improved organic growth outlook for 2027 from 6% to 8% to now plus. And Kyle, I mean, in light of not having a highway reauthorization and waste and seemingly that getting pushed out, what else kind of -- I guess, what gives you the confidence around that improved profile? If you could just unpack some of the different factors that led you to increase that would be helpful here.

Yes. I think there's probably 2 things that we point to. First is our strong CAP balance. Obviously, it's another record-level and highest quality CAP in our opinion in the company history, which is something we've been able to say now for a few years. That CAP gives us a lot of visibility. So today, we have a lot of visibility being halfway through 2026. We raised our guidance for the remainder of this year based on that visibility and maybe a lot more visibility into 2027. And I think that's really combined what we believe is still a healthy market, both in the public and the private sectors. .

So the bid opportunities are really strong, continue to be strong, and our teams continue to demonstrate the fact that they can execute within the environment. So we feel very confident in 2026 and 2027.

The next question comes from Kevin Gainey with Thompson, Davis.

I was hoping that maybe we could dive into the comments you made around data centers. You said the backlog up from $60 million to $250 million, I think. Maybe you could talk about the success that your teams have in there and then maybe what that can also grow to over time?

Yes. So last year, at this time, we had a CAP of around $65 million within the data center space. Today, it's around $225 million. And as I mentioned on the last call, we have dedicated leadership within that part of our business today and leading that effort. And really, their job is to help [indiscernible] and support all the local business we have within our home markets, to support these clients and what they're trying to build. So we've made a lot of strides in a very short amount of time, which we're encouraged by.

I think the fact that we've had so much success really just in the last 6 months or so, just [indiscernible], we have a great service office offering for these clients, we can deliver these contracts safely, at speed and quality. So we expect to see it grow, as we mentioned before. We want it to be around 10% or better of our annual revenue, and I think we're on track to doing that relatively quickly.

Appreciate the color there. And then maybe as well, if we could touch on, I know, Brent talked about margin recovery, but maybe if we could talk about if there's going to be further costs associated with quarry development activities that would also kind of hold margins down? Or is that just a onetime or the first half kind of environment?

Yes, I look at it more at the first half environment. And I would say the kind of plant set up for redevelopment was the ballpark about a $5 million impact in the quarter. So yes, we wouldn't expect to see that similar drag in Q3 or Q4.

The next question is from Michael Dudas with Vertical Research Partners. Michael, your line may be muted.

Okay. Our next question comes from Trey Grooms Stephens.

So maybe if we could talk about the kind of preliminary DOT budgets for '27 that are out there. It seems like funding levels look pretty good in Granite state. California budget is above national average. Texas looks down, but I think that's more optical given that they have a biannual budget. But combined with also the where we are with reauthorization of IIJA, likelihood of CR, how are you thinking about the infrastructure demand backdrop kind of looking into the fiscal '27 outlook?

Yes. I think from an overall market perspective, we still feel like the book market is healthy. We're bidding more. We're -- today, we're adopting more work as well. So that's kind of the first driver that tells us we're improving and you can see it in our CAP. I think that, from an IA perspective, we're about 50% spent. So I think they obviously don't get allocated. It expires in September but continue in '27, '28 and '29, '30 likely. So it's not like the funds just turn off. We think that there likely will be some sort of funding extension while they still sort out what BA250 will look like.

I think there's 3 things that we look at in BA250 that are positive. First is, it looks like it will maintain a high level of public infrastructure investments, so that's good. The second is it's more formulaic than brand-based. And that really means that the spend will be more directly focused on the types of work that we do and the size of projects that we perform very well. And at these levels, combined with our market strategies, we feel very confident that we can grow our business over the long haul. So I think today, it's just to be determined on what this [indiscernible] like ultimately, but what we've seen so far, will still allow us to do what we want to do as a company.

Got it. Okay. And then maybe just more for housekeeping. Could you -- any details you could share on the Kenny Seng acquisition? Maybe how much it added to CAP or any details around that, please?

Yes. Kenny Seng, almost a full quarter with Kenny Seng in Q2, and that business continues to perform very well. Integration has gone very well. Their CAP for the quarter is about $150 million. .

The next question comes from [ Kathryn Thompson ] with Thompson Research Group.

SP-2 Just a follow-up on your comments on strong organic sales performance in second half and then '27. Is the CAP growth that gives you this confidence or other factors? And any other just additional color you can give on that organic cadence?

Yes. Thanks, Kathryn. Well, it really is, first and foremost, the cap, and we have great visibility with our cap today. Obviously, at this point in the year, we know where things are going to head for the balance of the year and '26. We also know how that cap is going to -- how it's going to burn through 2027. So that obviously gives us a lot of confidence from a cap perspective in 2027. And again, the market is healthy and strong. We have a really strong bid pipeline, so we have an idea of the work that we're bidding today, both in the public sector and the private sector. We know what our typical hit rates are, and that gives us a lot of confidence that we'll have the work that we need to make up the balance of that growth in 2027.

Okay. Great. And obviously, a lot of focus on data center site prep work and data center growth. But broadly, stepping back and looking at the force for the trees, there's just a broad trend of more things being built in the U.S. It would be helpful if you could, even if it's anecdotal story, tell us what you're seeing in terms of how Granite participates in the build-out of the industrial complex in the U.S. market.

Yes. And I think that what we like about where we're headed with data center growth, it's something that we've done for 10 years or so. We do it very well. I think the strength of our business is the home markets and the optionality that the home markets bring with our crews. And our crews within our home markets can perform work on data centers, the streets, highways, airports, mine sites, refineries. So it gives us a lot of optionalities to be able to be flexible. And I think that's a real differentiator for Granite. So our job today with our end market strategy is connecting these key clients across these home markets and these geographies so we can deliver for them at a high level.

The next question comes from Adam Bubes with Goldman Sachs.

This is Anuj on behalf of Adam. So to what extent are you seeing fuel inflation or other cost pressures impact margins across your construction and materials business? And as diesel costs move higher, are you generally able to incorporate those increases into new bids and recover them through pricing? Or is there typically a lag?

Yes. I think from an overall energy perspective, our teams have done a really nice job mitigating the energy price volatility in the marketplace today. I think from a net dollars perspective, we're a little bit more positive than negative, which is what we indicated we would be last quarter as well. I think our Materials segment teams did a nice job of implementing that energy surcharge back all the way back to Q1 2021, physical storage that we put in place some forward contracts. So we feel as though we're getting that covered up, again, a little bit more positive than negative. On the construction side, we do a lot of public works. And with that comes the benefit of owners that typically have escalators and de-escalators for certain commodities. So that gives us some support and kind of derisk things in that perspective.

Some other things that we do that I think that we shifted our business to derisk it from some volatility is we price most of our work at 100% design. That's pretty much the universal case. There's a few exceptions to that. And that's important because we can get contractor coverage, supplier coverage, and we can lock those things in and we can share that risk with those that manage that portion the best. And we also limit our pricing exposure on contracts to really less than 4 years. And that's another part of our derisking effort as a company. And we did all this really to create a consistently profitable business. That was what we set out to do with our derisking efforts related to energy and just in general. And I think our results reflect the effort of the entire team. So I think they've done a really nice job.

Got it. And one more. So what type of customers are you currently engaging with on future bids? And how would you characterize the depth of data center opportunity pipeline?

How do we price in the additional energy costs into future bids? I think that if I understand your question correctly, the answer is when we have 100% design, we can go out and get coverage on all these items that have potential risk associated with them. We can lock those prices in within the contract. There's always a few things that are still out there, maybe diesel prices. So we do make some adjustments and estimate what future diesel prices will be.

Labor costs can always be a little bit of one we have to estimate in future years. We do have our union partners out in the West. So most of those are already locked in, but we always have to factor in some sort of labor escalator as well. Those are probably the 2 that you can't completely pin down right on bid day.

Our next question comes from Michael Dudas with Vertical Research Partners.

Can you hear me now?

Yes.

Kyle, maybe just refresh us, you talked about certainly organic growth, which is helpful for next year and -- but added with that supported by acquisitions. So where do we stand on the pipeline? Remind us like average size, where, what you're focused on? And in that pipeline, the type of companies, maybe where the valuations are relative to what you've paid for some others in the last 18 to 24 months? And are they more negotiated or open book? Just get a sense of that and the timing so we can get a sense of how it's going to flow through your business over the next 2 to 3 years.

Yes. Thanks, Mike. Right now, there's still a really strong deal pipeline. We have a little bit of feedback there, Mike. There's a real strong deal pipeline still available, and that's going to allow us to execute on these strategic priorities that we've had in place now for a while, which is strengthen and support our existing businesses. Obviously, we want to continue to build out our Southeast platform and look for additional platforms along the way. I'd say that we have a really strong corporate development team.

We're out there self-sourcing a lot of our deals. I would say still about 3/4 of them are self-sourced and about 1/4 are bank processes that we look at. I think the valuations stayed fairly consistent, but I think it really depends on what type of company that you'd be looking at, whether it's a VI business, construction or materials only. Our expectations this year is we're still going to get a few more deals done by the balance of the year. So that will be in Q3 and Q4. I would say from a range of spend, it's be somewhere in the $200 million to $400 million range by the end of the year. I mean timing is always hard to predict, but that's our best guess today.

And is that a spend in 2027 and beyond? Is that the type of level you're looking at? Or is it going to be a little bit more opportunistic?

Yes. We've been somewhere between $300 million to $800 million over the last few years. So I think I would kind of look at that as maybe the range of outcomes in future years today.

This is the end of the Q&A session. And now I would like to turn the call back over to Mr. Larkin.

Okay. Well, thank you for joining the call today. As always, we want to thank our teams for all the work they put into delivering a strong quarter. Thank you for joining the call and your interest in Granite. We look forward to speaking with you all soon.

The conference has concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning. My name is Myron, and I will be the conference facilitator today. At this time, I would like to welcome everyone to the Granite 2026 First Quarter Conference Call. This call is being recorded.

[Operator Instructions]

It is now my pleasure to turn the floor over to your host of Granite Construction Inc. Vice President of Investor Relations, Mike Barker. Thank you, and over to you.

Good morning, and thank you for joining us. I'm pleased to be here today with President and Chief Executive Officer, Kyle Larkin; and Executive Vice President and Chief Financial Officer, Staci Woolsey. Please note that today's earnings presentation will be available on the Events and Presentations page of our Investor Relations website.

We begin with a brief discussion regarding forward-looking statements and non-GAAP measures. Some of the discussion today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, opportunities, targets, growth, demand, strategic plans, circumstances, activities, performance, shareholder value, outcomes, outlook, guidance, objectives, committed and awarded projects or CAP and results. Actual results could differ materially from statements made today.

Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these forward-looking statements. The company assumes no obligation to update forward-looking statements, except as required by law. Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives. These include, but are not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share, cash gross profit and cash gross profit per ton. The required disclosures regarding our non-GAAP measures are included as part of our earnings press releases and in company presentations, which are available on our website, graniteconstruction.com, under Investor Relations.

Now I would like to turn the call over to Kyle Larkin.

Thanks, Mike. Before turning to our first quarter results, I want to take a moment to discuss our recent acquisition. As a reminder, our approach to M&A is guided by a disciplined investment framework that we use to allocate capital across CapEx and M&A in ways to support growth and enhance shareholder value.

That framework is anchored by 2 pillars: support and strengthen and expand and transform. Over the last several years, we completed numerous acquisitions to strengthen our Western businesses while also building and expanding our Southeastern platform through disciplined materials-focused acquisitions and targeted investments. With an expanded corporate development team, a dedicated integration management office, strong operational engagement, a solid balance sheet and strong cash flow, our approach to M&A has fundamentally changed from the past.

The ability to self-source and integrate bolt-on transactions while simultaneously pursuing larger bank-led deals is a differentiator that allows us to accelerate our growth through acquisitions. Consistent with this strategy, we recently announced the acquisition of Kenny Seng Construction. Kenny Seng Construction is a leading provider of infrastructure construction services and construction materials in Utah County, Utah. Founded in 1985, the company has built a strong reputation for operational excellence and end-to-end project delivery across a diverse set of infrastructure end markets.

Kenny Seng Construction operates a vertically integrated business model with capabilities that include earthwork and site preparation, concrete work, utility installation, project management and contracting, aggregate production and materials processing.

The business brings end market diversification with over half of its revenue derived from education infrastructure and the remainder from civil infrastructure and private sector work. These markets align well with our focus on public funding and infrastructure demand. We expect Kenny Seng Construction to add approximately $150 million in revenue annually with an accretive adjusted EBITDA margin in the high teens. This acquisition expands our home market presence in a strong Utah market while deepening our capabilities in attractive end markets. We're excited to welcome the team to Granite.

Now let's move to the Construction segment. We ended the quarter with CAP of $7.2 billion, a $200 million increase from the fourth quarter. CAP increased despite a reduction of approximately $300 million related to the cancellation of a public sector highway project in California, where expanded scope exceeded available funding. While cancellation of a project in CAP can occur and happen in this circumstance, it is very rare in our experience.

The increase of CAP reflects a bidding environment that remains robust at the federal, state and local and private levels. We added a second tactical infrastructure project to CAP and ended the quarter with $1.3 billion of federal CAP, of which $640 million is related to tactical infrastructure projects.

We are proud to support the infrastructure needs of the various branches of the federal government. We have made significant investments in our federal business and expanded this platform significantly over the last several years. These projects are evidence of the progress we have made building capabilities and customer relationships over time.

Looking forward, I believe that our federal business is positioned to generate more than 15% of our Construction segment revenue as we continue to grow this part of our business. At the state level, funding and bidding opportunities remain strong. As we ramp up for our busy season, our CAP and potential new projects gives us confidence that we will meet our organic growth expectations for the year. In the private sector, we are focused on end markets that can drive growth and further improve the quality of CAP.

First, we are seeing opportunities in the rail market, including intermodal facilities for Class 1 roads. We have relevant experience and strong customer relationships in this end market, and we have successfully completed multiple intermodal projects for rail clients.

Second, we are seeing growing opportunities in mission-critical data center projects, which includes civil site development as well as water and solar power generation for the data centers. We have formed a dedicated team to oversee and focus on key client relationships and support our regional teams from pursuit to execution and pursuing or building projects with these clients. We have completed numerous data center projects in several of our home markets, and we believe Granite is uniquely positioned to construct these schedule intensive projects.

Overall, we believe we have a great opportunity to continue to build CAP. We have built what we believe is the highest quality project portfolio in Granite's history by focusing on our home markets and best value projects that better position us for success. With our CAP, the opportunities ahead of us and the continued emphasis on operational excellence, we believe the Construction segment is well positioned to deliver sustainable growth and margin expansion.

I'll now turn to the Materials segment, which had a fantastic start to the year. While the first quarter has traditionally been seasonally slower, we are encouraged by demand across our geographies by the performance of our newly acquired companies led by Warren Paving.

Our margin improvement expectations for 2026 were based on the inclusion of acquired businesses for a full year, modest volume growth across the company, mid-single-digit aggregate price increases and improved cost efficiency through plant automation and process improvements. Through the first 4 months of the year, I believe we are on track to meet or exceed our expectations. Aggregate and Asphalt orders were ahead of the prior year, and we are meeting our pricing expectations.

During the quarter, oil prices increased due to the conflict in Iran. Granite's primary oil exposures are through purchases of liquid asphalt and diesel usage and equipment and barge transport. We regularly work to mitigate exposure to pricing fluctuations in the energy sector. For instance, we entered into fixed forward contracts, maintain physical storage, apply financial hedges and include energy surcharges for material sales.

While we will continue to monitor the market closely, we do not presently expect that the current increases in oil prices will have a significant impact to our annual outlook. Overall, we believe the Materials segment is well positioned for continued growth and transformation.

Now I'll turn it over to Staci to review our financial performance for the quarter.

Thanks, Kyle. Building on the momentum from Q4, we are off to a strong start in 2026 compared to the same period of the prior year. Revenue increased 30% to $912 million. Gross profit increased 31% to $110 million. Adjusted net income increased by $12 million to end at $12 million and adjusted EBITDA increased by $30 million to arrive at $58 million.

In the Construction segment, revenue increased $151 million or 25% year-over-year to $766 million. Of the growth in the quarter, $43 million came from the acquired businesses and the remaining $108 million was organic. With record CAP entering the quarter, we achieved revenue growth in a number of home markets across the company. While gross profit margin decreased due to a revision in estimate related to a favorable claim settlement in the prior year, which did not recur in the current year, gross profit increased with the higher revenue.

As we enter the heart of the construction season, we believe the Construction segment is on track for an outstanding year. Materials segment revenue increased $61 million year-over-year to $146 million, with gross profit up $9 million to end at $8 million. The revenue increase was primarily due to $50 million from the acquired businesses led by Warren Paving. Cash gross profit increased $15 million year-over-year to $26 million or 18% of revenue, a great result in what is typically our most weather-impacted quarter.

While most volume increases came from the acquired businesses, we also saw organic volume increases ahead of expectations. With materials orders ahead of the prior year and pricing meeting expectations, the segment is on track for another year of growth. In the first quarter, SG&A as a percent of revenue is typically higher due to seasonally lower revenue and the timing of stock-based compensation expense. SG&A in the quarter was in alignment with our expectations.

Turning to cash flow. We used $31 million in operating cash in the quarter compared to an inflow of $4 million in the prior year. The prior year benefited from the collection of a long outstanding contract retention balance as well as the receipt of funds from a settled legal dispute. As expected, in the first quarter, there was a seasonal use of cash as plants and projects ramped up across the business. Our operating cash flow expectation of approximately 10% of revenue for the year remains unchanged.

In the first quarter, we completed privately negotiated transactions to settle $100 million principal amount of our convertible bonds that were scheduled to mature in 2028, leaving $274 million outstanding. The total cash used to settle the bonds, net of the associated capped call unwind proceeds was $233 million. As we have said previously, we continue to evaluate the capital markets and opportunities to proactively manage our capital structure, including our convertible bonds.

Our balance sheet remains well positioned to execute on our capital allocation priorities. Following the quarter, we utilized our revolving credit facility to fund the purchase of Kenny Seng Construction, and we now have $1.4 billion of debt outstanding and $415 million available under our revolving credit facility.

Now let's turn to an update on guidance for the year. With our strong start to the year, we are increasing our revenue guidance to a range of $5.2 billion to $5.4 billion from a range of $4.9 billion to $5.1 billion. This increase reflects an additional $200 million of revenue from our new tactical infrastructure contract and $100 million in revenue from Kenny Seng Construction. With this revenue growth, we are decreasing our SG&A as a percent of revenue guidance to a range of 8.25% to 8.75%, down from a range of 8.5% to 9%, inclusive of approximately $48 million in stock-based compensation expense.

As we continue to grow organically and through acquisition, we believe there are additional opportunities to further improve SG&A leverage over time. With the decrease in SG&A as a percent of revenue, we are also increasing our adjusted EBITDA margin guidance to a range of 12.25% to 13.25%, up from 12% to 13%. We continue to build high-quality CAP in strong public and private markets, and we believe we will realize our expected margin expansion in 2026 and our 2027 targets.

Finally, our CapEx guidance of $140 million to $160 million and our estimated adjusted effective tax rate in the mid-20s remain unchanged.

Now I'll turn it back over to Kyle.

Thanks, Staci. I'll close with the following points. The start of 2026 reinforces my confidence in Granite's ability to achieve the financial goals that we have set for both 2026 and 2027. Our federal, state, local and private markets continue to fuel growth in CAP. During the last 2 years, the public transportation market has led the way. While this market remains robust, we are also benefiting from years of investment in our capabilities and relationships across federal, rail and mission-critical data center markets. I expect each of these end markets to continue to grow and be meaningful components of our Construction segment in the future.

In the Materials segment, the acquisition of Warren Paving continues to transform the performance and trajectory of the segment. We are seeing demand exceed our original expectations and expect to see further gains as the integration of the Southeastern platform continues throughout the year. There continues to be a long runway of growth and margin expansion for this segment, both in the Western footprint and Southeast platform.

We raised our 2026 guidance this quarter. It is still early in the year, but we see many great opportunities ahead of us to continue to raise the bar in 2026.

Finally, we are already in the process of integrating Kenny Seng Construction into our Utah operations, and I'm excited to see growth in our Utah home market. Our M&A pipeline continues to evolve as we evaluate new targets, and I believe we have the opportunity to add several acquisitions this year to bolt on to our existing businesses or further expand our footprint.

Operator, I will now turn it back to you for questions.

[Operator Instructions]

We have the first question from the line of Steven Ramsey from Thompson Research Group.

Congrats on good results, good acquisition. Maybe we can start with the acquisition of KSC, clearly, very strong margin. Can you talk about the growth story that you can bring to KSC on a revenue or margin basis as it touches your existing operations in the area?

Steven, thanks for the question. We're obviously very excited to have Kenny Seng Construction as part of our business moving forward. As mentioned, it does about $150 million a year in terms of revenue. We expect it to contribute about $100 million in 2025, and it is a high EBITDA margin business. And the business operates at a high level. It's a specialty contractor of choice in that market and really just well positioned in the market.

I would say there's really 3 things that we would point to around Kenny Seng and really why we're the right owner and the value that we can bring to it. One is we can support their scale in the market. We think that their materials business is an opportunity for us to also scale and grow. And then they just bring a different end market to us within our Utah business around education, health care and even some mission-critical work around data centers as opportunities. And I think we can really share each other's client base, both inside the Utah market as well as outside of the Utah market.

Okay. That's excellent. And then maybe stick with the M&A theme. The Warren deal seems to be going very well. And you pointed out demand was better than expected. Can you talk about or give us a flavor of what that demand is? And is it still something that's shaping up to be good in this year?

Yes. I think we couldn't be more pleased with the Warren Paving acquisition, the integration, the performance of that business. It's just an incredible team to have as part of Granite and they're performing again at a really high level so far this year, and we expect that to continue. I think just in general, in our materials business, we had a really nice quarter.

We saw volume growth and also cash gross profit margin growth. And a lot of that did come from our Warren Paving acquisition, particularly on the aggregate side. But even outside of that, our legacy business also had some really nice growth in the quarter in our aggregates business and our asphalt business. So I think just in general, Warren Paving is obviously performing well, but our legacy business is doing the same.

Okay. And then last quick one for me. The SG&A leverage, is there any way to break that out a bit on how much of that is the border wall work flowing into the year versus the Kenny Seng contribution?

Yes. With our SG&A change in guidance, really, that's -- right now, it's being driven a lot by the revenue increase. So our -- the increase in our guidance on revenue of $300 million for the rest of the year is about $200 million coming from the tactical infrastructure job and $100 million of revenue from Kenny Seng Construction. And we're working to continue to get better efficiency out of SG&A. But at this time, really, it's the revenue piece that's driving the improvement.

We have the next question from the line of Michael Dudas from Vertical Research Partners.

Can you hear me better now?

Yes, this is much better.

Yes.

First, Kyle, maybe your comment about your federal exposure, certainly very solid performance getting those projects down to the south of the border. But also maybe you can touch on a little bit of what's going on in Guam and other parts of federal and that move to 15% of your total revenues over time seems pretty reasonable, but how does that compare? Is there any margin difference or any risk difference or cash difference on collections in that business versus some of the others?

Yes. I think we've been working on our federal business and really the division for years. I think it's one of the first opportunities for us to take an end market strategy and overlay it across our geographical home market strategy. And our team has done a really nice job. We started off with revenues in that space of less than 5% of our revenue. We've likely grown it up to around 10% previously. And now with the additional border, the type of infrastructure work at the border, we see that contribution being right around that 15%.

And we think with our continued focus, whether it's in Guam, which continues to have tremendous opportunities, whether it's the military installations within our home markets, maybe shoreline protection work that we see as opportunities down in the Southeast, we believe we can continue to grow that to being above 15% of our revenue even as the projects on the border wind-down over the next couple of years.

Terrific. And then maybe continuing diversification scheme, you touched some pretty interesting private sector opportunities, say rail, you say data center. Is that something that can continue to grow as a percent of total? And is that just because the overall market is coming to you there and because of your positioning and even some of the acquisitions in the Southeast certainly gives you better exposure to those types of markets?

Yes. We've been engaged in participating in, obviously, mining and rail and industrial and a lot of these things for a while. I think it's more just an overall company strategy. We still see that what we call mission-critical, which includes the data center work is still having tremendous opportunities for the company. And we mentioned in the remarks that we actually have dedicated leadership in place to pursue that work and support our teams but most importantly, for us, it's about aligning that dedicated leadership with our local business unit leaders.

So we can kind of leverage those key clients we have, and we can support the work with the local resources we have within the home markets. And we've actually been making a lot of progress. We're successfully delivering and/or supplying materials to projects in Washington, Oregon, Nevada, Arizona, Louisiana and Mississippi within those home markets today. So we're really able to tackle it from a civil component, a water component with our Lane Business and/or just Materials.

So we do expect that, again, that can grow up to around 10% of our overall revenues moving forward with opportunities to grow. We'll have to see how we perform. But so far, we're off on a good start.

We have the next question from the line of Kevin Gainey from Thompson, Davis.

Congrats on the quarter. Maybe if we could start with a little discussion on the CAP outlook. How do you see that shaping up as you move through the year? And then maybe you could touch on the California job? And then what are the chances that job comes back?

Okay. Yes. So we're obviously excited about our CAP. One of the things we've been able to say consistently now is that we've had CAP growth as well as the highest quality CAP, at least in our opinion, we've ever had in our company history. So that's a good thing to be able to say consistently really year-over-year or quarter-over-quarter, which is exciting for us. And we're continuing to bid more work and capturing more work. And that's really what's driving that CAP up for our business and really allowing us to see that growth. Obviously, we're off to a really strong growth start in our business in the first quarter, and we think the CAP is going to allow us to be in a position to continue to grow our business, not just in '26, but into 2027.

I would say that project in California is very unique. The one that -- obviously, the scope exceeded the available funding. I think one of the challenges on that particular project was that was one that we were selected on back in 2020. And so obviously, the cost, I think the state expected in 2020 did not end up being with the cost will be for a project in 2026 [indiscernible]. So I think that was one of the challenges that we saw there. It is unusual. I think the project will come back I'm not sure in what form and what size. So that will be still to be determined.

Appreciate the color on that. And then if we could talk around maybe expectations for like for construction margins, how they're going to maybe move throughout the year? I know the Q1 had the year-over-year impact, but how are you guys thinking about or what gives you confidence in the outlook for the back half or the rest of the year for margins?

Yes. So we feel great. I mean in the first quarter, we had a solid construction performance. I think one of the things to think about is we're about 60 basis points down in the first quarter year-over-year, but we did have a onetime insurance settlement or recovery in the first quarter that was about 130 basis points. So if you adjust that out for 2025, we're actually 70 basis points ahead of where we were last year at this time.

So our construction margins, net of that insurance recovery are actually trending well above where we were last year. So we're right on track. I think that, obviously, with our increased guidance on a full year company EBITDA margin adjusted, it's hard where we want to be. We get to that midpoint around 12.75%, right on track with where we want to be in 2027 to getting to that 13.5% adjusted EBITDA margin by the end of the year, so be in 2027.

So yes, I think we feel really good about our construction margins. Again, the CAP supports that, and we're right where we want to be.

We have the last question from the line of Adam Bubes from Goldman Sachs.

The capital infrastructure projects, nice to see those come in. Those are a little larger in size, I think, pretty quick burn. Just which -- what risk parameters or project attributes gave you comfort in taking on those projects that you've been evaluating, I think, for some time? And can you just talk about how margins on those projects compare to the base construction business?

Yes. Thanks for the question. And you're right. We mentioned that on the last call that some of these projects are getting a little bit larger than originally contemplated. But we're excited about the 2 projects that we have today. Again, we have the one in Southeastern Texas that has about $140 million remaining. And then the recent win in Laredo, Texas, which is about $500 million. And it is a quick burn. That project burns around 14 months. And so we expect to be right around 40% complete in 2026. And so again, that's one of the reasons why we're in a position to raise our guidance.

Just as a reminder, we have decades of experience delivering on these projects. And we've solicited resources from our entire company to go down to ensure that we can deliver this successfully for both ourselves and for our clients. And we actually have the capacity to take on more. So we continue to pursue these projects, and we'll see. We'll see if we can be successful in picking up another one before they get through the letting process, which we think will probably occur between June and July.

So again, we're remaining very disciplined on what we're doing. And I would think the risk, maybe the way to think about the risk is in 3 categories. One that you talked about is schedule. These are fast burning projects. They move very quickly. And that's really why we had to ensure that we have the resources available to deliver on those.

The other is this remoteness, and that comes down to access, logistics, recruiting people, and we believe that we have that risk pretty much mitigated. And then the third risk is the subcontractors and suppliers. You think about a $40 billion program along the border, there's a lot of subcontractors and suppliers are participating in that at levels that they probably typically don't participate in. And so there always is some risk that some of those subcontractors or suppliers can take on a little bit more work than they can handle. And so we're being very selective about the partners that we have on those projects.

So again, we feel like we understand the risk because we have a lot of experience doing this work and we're able to mitigate it with these projects that we have today. So yes, we're excited to have them, and we'll see if we're successful in picking up another one.

Terrific. And then you touched on it a little bit, but wondering if you can expand on your cost tied to fuel or energy. Is there a way to frame what percent of COGS in construction and materials are tied to energy? And can you just expand more on different levers to pull to offset the fuel costs? And it doesn't appear to be an impact in the current quarter. Is there any higher cost impact you're baking into the balance of the year?

Yes. I think the really short answer is our teams have done a really nice job. I'm really proud of what our team has done to mitigate, obviously, some volatility within liquid asphalt, diesel and natural gas. And overall, we have not seen a negative impact on the business. If anything, it's been slightly positive for our company. There are a couple of things I think are important to point out. One is the energy surcharge that we put in place after Q1 of 2021 and our materials business specifically, that's really provided us some good protection around just cost increases going up and certainly helps in this case.

We also work for public owners that have escalators and de-escalators. A big part of our business, as you know, is public works. And so they have some sort of backstop related to liquid asphalt and diesel in some cases, cement and steel. And then just a whole host of other things around fixed forward contracts or storage and some financial hedges. So I think there's a lot of things that we have done, I think, just across the entire business. It's hard to provide a number as to what those cost increases are. But what I can tell you is we've done a really nice job, credit to our team. And if anything, it's more positive than negative.

This is the end of the Q&A. And now I would like to turn the call back over to Mr. Larkin for closing comments.

Okay. Well, thank you for joining the call today. As always, we want to thank our teams for delivering a strong first quarter. Granite is an industry leader in safety, and I look forward to joining many of you next week as we recognize Construction Industries Safety Week. Let's continue to raise the bar and make 2026 our safest year yet.

Thank you for joining the call and your interest in Granite. We look forward to speaking with you all soon.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning. My name is Bailey, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite 2025 Fourth Quarter Conference Call. This call is being recorded.

[Operator Instructions]

It is now my pleasure to turn the floor over to Vice President of Investor Relations, Mike Barker.

Good morning, and thank you for joining us. I'm pleased to be here today with President and Chief Executive Officer, Kyle Larkin, and Executive Vice President and Chief Financial Officer, Staci Woolsey.

Please note that today's earnings presentation will be available on the Events and Presentations page of our Investor Relations website. We begin today with a brief discussion regarding forward-looking statements and non-GAAP measures. Some of the discussion today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, opportunities, targets, growth, demand, strategic plans, circumstances, activities, performance, shareholder value, outcomes, outlook, guidance, objectives, committed and awarded projects or CAP and results.

Actual results could differ materially from statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these forward-looking statements. The company assumes no obligation to update forward-looking statements, except as required by law. Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives. These include, but are not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share and cash gross profit.

The required disclosures regarding our non-GAAP measures are included as part of our earnings press releases and in company presentations, which are available on our website, graniteconstruction.com under Investor Relations.

Now I'd like to turn the call over to Kyle Larkin.

Good morning. Before we turn to the segment discussions, I'd like to discuss the progress we have been making to deliver on our strategic priorities. In 2025, we continue to focus on bidding and building the right projects, investing in our materials business and expanding our geographic footprint through targeted M&A. Our strategy to drive consistent, predictable financial performance across the company is working. We remain highly selective in the work we pursue emphasizing best value in high-quality bid build opportunities in our home markets where we believe we can earn an appropriate return for the risk we assume in constructing these projects. This disciplined approach, combined with a strong funding environment underpinned our efforts to build a strong project portfolio even as we grew our cap to a record $7 billion at year-end 2025, the highest in our history.

Since 2020, our teams across the company are focused on pursuing the projects where we can leverage our home market advantages and consistently deliver higher margin work. This strategy enabled us to drive significant improvement in profitability from 8.8% Construction segment gross profit margin in 2020 to 15.7% in 2025, all while demonstrating the ability to organically grow the top line across our footprint.

As I look at the landscape of the construction business entering 2026, I believe there are still significant public and private opportunities to capture work in our home markets, even as we maintain discipline and work to continually drive excellence in execution in the bid room and every day on our job sites.

During 2025, we also continued to invest in our materials business, both through acquisitions and CapEx. We've now completed the second year following our internal reorganization where we restructure our businesses to place materials leaders over our materials business. This change has allowed these teams to direct our strategy across the segment as we work to unlock value through market-based pricing and through application of efficiencies across the segment.

Over the last several years, we have focused our CapEx spend on the materials segment to improve plant performance, acquire additional aggregate reserves and expand our footprint. We have improved Materials segment cash gross profit from 19% in 2023 to 26% in 2025. The return on our investments has been exceptional. The team has many more initiatives in process, including partnering with our construction teams to drive more talents to our plants by leveraging our vertical integration, and we expect to spend another $50 million in strategic CapEx in the materials business in 2026 to continue the strong momentum we built.

In 2025, we completed 3 acquisitions, both expanding and strengthening our Southeast platform with the Warren Paving acquisition and strengthening the whole markets in California and Nevada with the acquisitions of Papich Construction and Sinai. These margin accretive acquisitions and strong growing markets are representative of the acquisitions, I expect to continue to complete in 2026 in the future. We expect acquisitions will continue to be a major component of our growth that should enhance the performance of the business, the existing home markets and expand our footprint to new geographies.

We expect to drive further gains and deliver significant shareholder value as we continue to execute on our strategic plan. We continue to build a larger, higher-quality project portfolio even as we invest in and grow our vertically integrated model. These efforts position Granite for continued organic growth, margin expansion and strong cash generation. We believe we are on track to achieve our 2027 financial targets supported by favorable market conditions, robust infrastructure funding and consistent execution across the business.

Turning now to the Construction segment. First, I want to say how excited I am about the performance of our construction teams across the company. Their execution throughout the year was outstanding and a key driver of our strong finish to 2025. We entered the fourth quarter with record CAP and despite some delays on certain projects and wet weather at the end of the quarter, year-over-year revenue growth accelerated as expected.

We continue to see sustained market strength and a healthy bidding environment across our footprint with California and Nevada, leading the way. With several significant awards in the quarter, CAP increased sequentially by $632 million, ending the year was $7 billion, a new record.

In California, the newly proposed California budget for the 2026 to 2027 fiscal year represents a significant increase in the key capital outlay projects and local assistance components of the transportation funding for the original 2025 to 2026 budget, which itself was to decrease significantly in the latest January forecast update. Stable and protected funding for transportation infrastructure in California continues to grow despite concerns about overall deficits. The strength of state transportation budgets is broad, and we see many meaningful opportunities across our regions to continue to grow CAP in the first quarter of 2026 and throughout the year.

Best value work continues to grow as a percentage of our portfolio ending the quarter at 48% of CAP. As we discussed in past quarters, best value procurement plays the Granite's home market strength. These projects tend to be awarded to teams with strong qualifications. Process is designed to promote risk mitigation during design and to reward collaboration, thereby enabling us to better manage construction risk, reduce disputes and deliver high-quality, complex projects more efficiently. Best value construction remains a key driver of our sustainable margin expansion strategy. This growth in best value work has been a core contributor to our derisked project portfolio and has allowed us to achieve consistent, predictable increases in our construction margins over the past several years, and we expect that trend to continue as more states adopt these procurement methods.

The high-quality CAP portfolio, we have built helped deliver the gross profit margin increase that we expected in 2025. We expect continued gross profit improvement in 2026, consistent with our 2027 financial targets. Overall, performance in this segment has improved meaningfully. And with record level, higher quality CAP and favorable market conditions, we expect continued revenue growth and construction margin expansion in 2026 in line with our long-term financial targets.

Moving to the Materials segment. 2025 was a transformational year for our materials business. We delivered both organic top line and bottom line growth, and we significantly expanded our addressable market through acquisitions most notably through the acquisition of Warren Paving, which significantly expands our reserves and resources in the Southeast. This was our first full quarter including Warren Paving, and we see the numerous opportunities as we continue to integrate it into our Southeast platform. We expect to continue growing this platform organically as we work to expand its distribution network, improve logistics efficiency and leverage Warren's Marine and river-based transportation capabilities. The expansion opportunities include potentially adding additional aggregate yards acquiring strategic assets to enhance both scale and margin profile of the platform.

With the addition of Warren, along with the acquisitions of Cinderlite and Papich Construction, our aggregate reserves and resources increased 34% year-over-year to 2.1 billion tons, more than doubling grants reserves in the last 5 years. This growth and long-life reserves provides a strong foundation for sustained margin expansion in the Materials segment. We expect the growth of our materials business to continue throughout 2026 and in the years to follow, supported by strong market conditions, our proven vertically integrated operational model and our ongoing commitment to disciplined investment.

Now I'll turn it over to Staci to review our financial performance for the quarter.

Thanks, Kyle. 2025 was a tremendous year of growth with year-over-year increases in a number of areas. Revenue increased 10% to $4.4 billion. Gross profit increased 24% to $711 million, adjusted net income increased 29% to $276 million. Adjusted EBITDA increased 31% to $527 million and operating cash flow increased 3% to $469 million.

Our teams have done a great job executing in strong markets and positioning Granite for continued organic growth, margin expansion and cash generation in 2026 and beyond.

Now let's discuss our results for the quarter. In the Construction segment, revenue increased $119 million or 14% year-over-year to $940 million. Throughout the year, CAP gradually increased, and we expected revenue conversion to accelerate in the second half of the year. In the fourth quarter, we saw this dynamic with organic revenue growth of 7% year-over-year as projects ramped up.

In addition, our newly acquired companies, Warren Paving and Papich Construction contributed $59 million in Construction segment revenue. The significant increase in revenue drove a $15 million improvement in Construction segment gross profit to $143 million, with segment gross profit margin of 15%. The improvement in our portfolio mix continues to translate into higher margins, and we expect further expansion in 2026, consistent with our 2027 financial targets.

In the Materials segment, revenue increased $69 million year-over-year to $225 million with gross profit of $2 million to $25 million. The increase in materials revenue was primarily due to the acquired businesses. Cash gross profit for the quarter increased $10 million year-over-year to $47 million or 21% of revenue despite wet weather conditions in certain geographies.

For the full year, cash gross profit margin improved 490 basis points year-over-year to 26%. For the year, volumes for both aggregate and asphalt and aggregate cash gross profit per ton increased significantly, primarily due to the addition of Warren Paving in August of 2025. Adjusted EBITDA for the full year grew $125 million to $527 million or an adjusted EBITDA margin of 11.9% compared to 10% in 2024.

Turning to cash flow. We had another outstanding quarter of cash generation and ended the year with operating cash flow of $469 million or 10.6% of annual revenue. Our disciplined focus on profitability and working capital efficiency is producing consistent high-quality cash flow that we are reinvesting to drive long-term value. Our 2025 operating cash flow benefited from the collection of a long outstanding contract retention balance and receipt of payment for several disputed claims in the first half of 2025. Excluding these nonrecurring cash collections in 2025, our operating cash flow as a percent of revenue was in line with our original target of 9%. With our expected profitability improvement in 2026 and sustained working capital management, our 2026 target for operating cash flow margin is 10% of revenue.

In 2025, we executed on our capital allocation priorities with CapEx of $138 million, acquisitions of $778 million and dividends of $23 million. We also repurchased 300,000 shares under our Board-approved share repurchase program to offset dilution from our stock-based compensation. We ended the year with $650 million in cash and marketable securities, debt of $1.3 billion and $583 million in availability under our revolving credit facility.

Going into 2026, our cash generation and strong balance sheet position us well to continue investing organically and through acquisitions while maintaining financial flexibility. We have a robust pipeline of acquisition opportunities that may either bolt-on to an existing home market or further expand our geographic footprint. While we are selective in our pursuits, we expect to achieve our goal of completing several strategic acquisitions in 2026.

Now let's turn to our 2026 guidance. We expect revenue to grow to a range of $4.9 billion to $5.1 billion. This reflects our record CAP balance and the strong macro environment and places organic growth at the high end of our 2027 target CAGR of 6% to 8%. This range includes a full year of the acquisitions completed in 2025. As we grow, driving efficiency to manage SG&A continues to be a top priority. We expect our SG&A to be in a range of 8.5% and 9% of revenue, inclusive of an estimated $48 million in stock-based compensation expense. We expect our adjusted EBITDA margin to be in the range of 12% to 13% of revenue. With our high-quality CAP portfolio, strong market and high-performing materials business, we expect continued adjusted EBITDA margin expansion, in line with our 2027 financial target of 12.5% to 14.5% of revenue.

Finally, we expect to invest in our business through CapEx in the range of $140 million to $160 million. Similar to 2025, this range contemplates approximately $50 million in strategic materials investments to expand reserves as well as investments in additional automation projects as we work to grow the materials business.

Now I'll turn it back over to Kyle.

Thanks, Staci. I'll close with the following points. I have strong confidence in the future of Granite. I believe Granite is in position to capitalize on the numerous opportunities in both of our segments as we work to our sustainable, long-term value creation and as we focus on growing revenue and driving margin and cash flow expansion. The strong public construction market is fueling our CAP growth. We have the big opportunities ahead of us to enhance portfolio quality and support disciplined CAP expansion in 2026.

In addition, while CAP growth has been concentrated in the public market, I believe our private markets such as rail and commercial site development remain robust and represent attractive incremental growth avenues for our Construction segment. In the Materials business, we have made outstanding strides over the last 2 years and I believe that will continue in 2026.

With the addition of Warren Paving, Papich Construction and Cinderlite for the full year, I expect meaningful increases in revenue and profit in the segment in 2026. I believe we are on track for our 2027 financial targets for adjusted EBITDA margin and operating cash flow margin with 2026 being another important step in demonstrating consistent performance against our long-term targets.

Finally, as we're integrating the acquisitions of 2025, I expect to add several more acquisitions in 2026 that will further strengthen our competitive position and support our ability to achieve our 2027 financial targets. We are evaluating bolt-ons in our existing markets and expansion opportunities in new markets as we continue to strengthen our position as America's infrastructure company.

Operator, I will now turn it back to you for questions.

[Operator Instructions] Our first question comes from Brent Thielman with D.A. Davidson.

Great. Kyle, some of your peers had offered some comments just in terms of thoughts on federal legislation. Obviously, IIJA expiring here in September, maybe your latest thoughts on what you're hearing coming? When we could get maybe more detail on what's coming? Maybe you'd start there.

Yes. So I think as we spoke before on previous calls, the IIJA expires, I think everybody knows now in September of this year. And then all the funds we expect to be allocated out. Now the spend to date is right around 50%. That's as of November. So there's still a really nice runway of spending to go so that will last luckily for a few more years.

I think what we hear really from industry today is that there's still bipartisan support. There's still a huge focus on coming up with another investment mechanism. And I think the really good news is the investment amount is significantly higher, at least that's what's in discussions today that are higher than what is in the IIJA. So it's all positive in terms of timing of when we might hear. I think we're going to start getting maybe some updates, I would say, around March, April, if they start -- if they can get a draft bill put in place for the transportation infrastructure committee to review. So I think that's kind of the next step in terms of when we get the next update.

Got it. Appreciate that, Kyle. And I guess my follow-up, Kyle, just in terms of -- you've got a great sort of book of business here that seems to continue to build or looks like it will continue to build. Can you talk about some of the direct federal opportunities that are out there that you've spoken about before? What does that pipeline look like? Are you optimistic that there could be some meaningful things that could get picked up there this year?

You mean federal, are you talking to a few more around the Board infrastructure, Brent or just the kind of the federal program in general?

Yes. Yes. I mean, I guess, border infrastructure, anything beyond that directly related to the federal government contracting. I think we've spoken to some large things before there.

Right. So we do have quite a bit of work with the federal government in Guam and that work continues to be going very well. We believe we'll continue to pick up work in Guam as part of that program.

With regards to the border, there is a huge board infrastructure program that it's probably just under about $40 billion, and there's around 11 contractors or so pursuing that work, and we're one of them. We actually have 1 contract today in Southeastern Texas construction or $200 million. And we started that work last November. So there is a huge program and opportunity in front of us.

One of the things that changed is the government is looking to get that work out and awarded, we believe, midyear, so sometime around June and July. And to help with that, these contracts are getting larger than what we originally contemplated. So the risk profile is changing a little bit on those to one that's just giving us reason to be more disciplined in our pursuits and ensuring that we can not only just win the work, but be successful in delivering for ourselves and for our clients. So we'll see. What I can tell you is but we don't have any additional border infrastructure work in the guidance that we provided you today.

Our next question comes from Steven Ramsey with Thompson Research Group.

Wanted to think high level that you're tracking to your 2027 targets, did you expect CAP to be at this level when you laid those targets out? Or would you say those targets were predicated on a CAP level that was lower or higher than this? I guess I'm trying to get a sense of how CAP dependent those targets are.

Yes. I don't know if we necessarily came out and said, here's what our CAP needs to be in order to hit those '27 targets. Simply because it's a balance of bid build and best value. And obviously, the burn rates on those 2 are very different, one being a lot shorter burn of a couple of years and the best value could be up to about a 5-year burn.

In the CAP today, it's back to about 50-50 between those 2, if we think it's very healthy. So that gives us a lot of confidence, not just in our ability to hit our numbers from an organic growth rate of around 8% in 2026, but it should allow us to continue to have that growth rate into 2027. So I think the best way to answer is we feel really good about the CAP. The $7 billion is a really high-quality CAP. The margin profile of inter CAP continues to improve, and that's going to also get us to those 2027 targets. So I think our CAP is right on track to where we want to be.

Okay. That's helpful. And then I wanted to think about the CapEx, the strategic CapEx of $50 million geared towards the Materials segment. Can you talk a bit about how much of that is in the legacy Western markets, how much of that is the recently acquired Warren assets? And maybe to tag along with that, how the Warren integration is going and how that is shaping up for growth in both sales and profits within the Southeast business?

Steven, I'll start and talk a little bit about the strategic materials CapEx of $50 million, that's more heavily weighted towards the legacy business and expanding reserves and doing automation projects there and also in our acquisition from a couple of years ago with Lehman-Roberts and Memphis Stone & Gravel and doing some investment there. So -- but really more heavily weighted towards the legacy Granite business.

And then as we think about the word integration, they performed really well so far this year in the 5 months we've had them on board, and we're really excited about that and feel good about that going forward. And then the opportunity is going to present to continue to expand in the overall healthy.

Yes. Maybe I'll add a little bit to the integration. We made an investment. So we have dedicated resources and our integration team today to help with these acquisitions and Warren Paving is off to a strong start, similar to the Papich Construction and Cinderlite. So all 3 of our acquisitions last year are performing very well, outperforming where we thought they were going to be. Again, we're excited about the teams that came with those companies, the leadership that came in those companies in the markets that they're in continue to be healthy and growing. So we really look forward to having them in our full year of business this year '26.

Our next question comes from Kevin Gainey with Thompson Davis.

Great quarter, guys. Maybe if you want to dive into the project bidding opportunities and more so maybe by vertical. I'm just kind of interested in what you guys are seeing out there for mining, rail, maybe renewables water.

Sure. In general, the market is strong. It's been strong. It remains strong. I think over the last 6 months, we did more work, we cashed more work with slightly higher margins. So that's kind of high level, really good news and obviously driving a very strong CAP for us. But the public market with the IIJA is still a big part of our business, around 85% or more today. And so I think that's or reflection of really strong IIJA and public funding. We see mining continue to be strong, whether it's our involvement on the processed water side or actually just doing work for the miners on-site development side of things.

Rail is an opportunity. We continue to see intermodal opportunities in our future, and hopefully, we'll continue to capture some of those that could maybe shift things back a little bit more weighted towards private than public as an overall company. Renewable stays strong. We're seeing solar projects continue to come out, and we continue to pursue them. And I think we're to continue to grow that part of our segment in construction in the next year or 2.

So I think, all in all, we feel really good about the market. We don't participate a whole lot in the residential market, but the markets that we are in the private side outside of that continue to be really strong. I would say we're starting to look a little bit harder in some of the data center work we do these data center projects up in the Pacific Northwest. Nevada, today, we're pursuing some projects outside of those markets down into Texas and even in Ohio. So hopefully there's some new opportunities for us that we can capture in the future here.

And then as we sit here and we think about the $7 billion CAP, do you guys have any concerns operationally or from maybe whether it's labor or equipment or anything like that, that could called an issue in executing on the project pipeline?

Not at all. Yes. That $7 billion of CAP, again, half of that is best value, half of its bid build. So the progression of that work is seeing a very a little bit. Historically, we've been as high as if you look at burning off our contract backlog in any given year, close to 50% of our CAP that this year is going to be closer to just over 40% of our CAP.

So we don't have any SKC concerns at all in that regard.

That sounds good. And then maybe just one more, just on the EBITDA guidance for margins. Would it take from to be able to get to the high end of that range? And maybe if you could talk about the low end as well.

Well, in any given year, there's a few factors. Obviously, we talked before about weather Q1, Q4, weather can always be an opportunity or it can be a hindrance for us. So far in Q1, it's been okay. There were some big weather issues in the Southeast. As we all know earlier this year, we don't think that's going to impact our ability to hit our guidance will obviously out the rest of this quarter shakes out as well as Q4. We still have to win and actually bid build some of the work that we're going to need this year to get our revenue numbers. So it's always a risk in the first half of the year actually capturing that work and getting started on that work.

And then execution, that's an opportunity for us in a risk as well. We have to perform. But I think today, our operational excellence is at a really high level. And it's a very different business than what we were several years ago. And I see execution as more of an opportunity today than the risk. We tend to outperform our projects more than we underperform today.

And then there's some unknown, unknown. So we'll have to see if any of those show up. But I feel as though the things that we control, we're in really good shape, and this should be a really nice year for us.

Our next question comes from Michael Dudas with Vertical Research Partners.

Is the best value practice backlog getting close to 50%, very helpful. And you mentioned in your prepared remarks, other states are aging in those types of contracts. Maybe you could share a little bit more what -- how much of a percentage of your backlog would that type of contract be?

And given how it's allocated and led throughout the process because of its building, is that going to provide some more project or award opportunities or revenue opportunities a little longer in the cycle, given that's been built up so high and that could give some more visibility to later this year into next year and beyond because of how big and how large that part of that lever...

Yes. So maybe you're breaking up a little bit. Let me -- I think I can answer the question based on what I think you said there, Mike. But if I get it wrong, let me know.

The questions come up before around what's the right balance between best value and bid build. And I don't think we necessarily know the answer to. I think we like what we have today is that 50-50 feels pretty good. And to your point, is more states pass legislation to allow CMGC or CMAR or progressive design build, we couldn't see that increase. And I think that's okay. It allows us to do some more complex larger contracts in a derisked manner, and we tend to perform very well on those.

So I think that if that progression happens, that would be a good thing for us. I think it is the future of contracting is to be more collaborative to be partners with our clients, and it really fits us well as we have a whole market strategy. So we'd like to know the customers that we're working for and having the resources to ensure that we can deliver these projects for them the way that we both would expect us to. So if it does increase, that's a good thing. I think another good thing about our CAP being about 50% of best value, it gives us some insight into the future.

And so we know that we're going to progress through a portion of that work this year, but it gives us confidence as we start working towards those 2027 numbers and beyond. So I think we feel really good about our CAP today, and we'll see what happens in terms of the best value over time.

Yes, that's perfect. And my follow-up is on the material side, since your reorganization of the business, certainly, the pricing and volumes have been quite good, organic and some of your acquisitions. How do you feel you are relative to pricing 2 years later with this change relative to the market? Is there still upside relative to market in certain regions? And what are you anticipating or budgeting for aggregate and asphalt pricing generally for 2026?

Yes. in 2026, I'll start with the pricing first, probably mid-single-digit price improvements on the ag side and more single digit on the asphalt. Every market is different. We look at every project every market uniquely and discretely. And so I think that there is still opportunities. I think our team consistently looks at that. And one of the things we did with reorg a couple of years ago as we bring some of that the sales strategy and feedback we're up to a higher level. And so we can look at things a little bit more broad and ensure that we're looking at things without maybe emotion. So I think still work to be done. I think our teams have done fantastic job. I'm impressed with what they've done. They've obviously unlocked a tremendous amount of value in our materials business, but I think there's still some more to do.

In the 2027 targets we've talked about another 3% or better cash gross profit over the next 2 years. So that's -- we expect to continue to see that this year -- that's contributing to our EBITDA margin expansion this year. And so I think we're right on track with all that.

And just quick follow-up on your -- and what about your cost, what you're budgeting in the materials business on a percentage basis relative to the pricing you're sharing?

Well, we've done a really, really nice job in legacy business, keeping costs under control. I think that's one of the real highlights that our team is cost for the year-over-year actually been flat. And in last 2 years. So I think the automation efforts we put in place, the standardization of our materials playbook. I think all that is paying off for us as well. Obviously, there are some cost inputs, some of the variable costs that will go up with inflation. But all in all, last year, mix adjusted, I think we ended up close to about 8%. I think net price increase.

On a net 8% price increase over, Yes. I appreciate it Kyle.

Our final question comes from Adam Bubes with Goldman Sachs.

Can you help us think through the '26 versus 2025 margin outlook? I think the guide is just over 50 basis points of margin expansion at the midpoint. How much of that margin expansion is coming from price versus better execution versus -- I know you have some favorable M&A rollover and then what are some of the offsets? I think you had a favorable claim last year. It looks like maybe slightly outsized equipment sales this year that you could be lapping just trying to think through the puts and takes.

Yes. Yes. I think the easiest way to look at it is we have been talking about a 1% construction PAUSE margin improvement over the next 2 years and split really between '26 and '27. So it's around 50 basis points improvement in our construction margins. materials. We've been talking about at least 3% over the next 2 years. So about 1.5% each year. So on a weighted average basis, that's around 20 basis points. So you put the 2 together, it's around a 70 basis point improvement between construction and materials.

As Staci mentioned in her remarks, there's about a 50 basis point improvement on SG&A. So it's about 120 basis point improvement in margin. But then you have to net out the things you talked about. So we have some claim recoveries we have PAUSE a little bit larger gain on sale. So that adds up to about a 50 basis point improvement, if that answers that question. I think the thing to think about is to get to the midpoint of 2027 EBITDA margin guidance, it's about a 100 basis point improvement from here. So we're on track with where we thought we'd be this year and right on track to get into that midpoint of our EBITDA margin in 2027.

Terrific. And then can you just talk about -- it sounds like the M&A pipeline is still pretty robust. What's the range of outcomes that you're contemplating for M&A in 2026 and -- can you just talk about how you view M&A in context of leverage as well if there are larger opportunities out there? Would you feel comfortable maybe above the leverage target of 2.5 or nothing of size that would really move the needle in the medium term on that front?

Well, as I mentioned previously, all 3 of the recent transactions have gone very well. So that gives us a lot of confidence as we move forward and look to do more deals. We've invested in record development team, which has been great, so we can really be through a whole lot of opportunities that come our way. We can also self-source a lot of our deals. So I do expect and we expect to get several things done this year.

I think from a leverage perspective, we are still targeting that 2.5x net debt if there was something larger that came out, you'd probably go up from there with a plan obviously to come back down. But I think that leverage kind of still holds. And yes, we're busy. I think our team is busy. I hope that we come back sometime in Q2 and provide you with some sort of update there.

This concludes our question-and-answer session. I would like to turn the conference back over to Kyle Larkin for any closing remarks.

Okay. Well, thank you for joining the call today. As always, we want to thank our teams for everything they did to make 2025 such a success. Most importantly, we would like to thank our teams for making 2025 our safest year yet. We are an industry leader in safety, and we expect to get even better in 2026.

Thank you for joining the call. In the interest of Granite, we look forward to speaking with you all soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning. My name is Steve, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Inc. 2025 Third Quarter Conference Call. This call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Vice President of Investor Relations, Mike Barker.

Good morning and thank you for joining us. I'm pleased to be here today with President and Chief Executive Officer, Kyle Larkin; and Executive Vice President and Chief Financial Officer, Staci Woolsey. Please note that today's earnings presentation will be available on the Events and Presentations page of our Investor Relations website. We begin today with a brief discussion regarding forward-looking statements and non-GAAP measures. Some of the discussion today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, opportunities, targets, growth demand, strategic plans, circumstances, activities, performance, shareholder value, outcomes, outlook, guidance, objectives, committed and awarded projects or CAP and results. Actual results could differ materially from statements made today.

Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these forward-looking statements. The company assumes no obligation to update forward-looking statements except as required by law. Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives. These include, but are not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share and cash growth problem. The required disclosures regarding our non-GAAP measures are included as part of our earnings press releases and in company presentations, which are available on our website, graniteconstruction.com under Investor Relations.

Now I'd like to turn the call over to Kyle Larkin.

Good morning. Before turning to our third quarter results, I wanted to highlight our most recent acquisition, Cinderlite, discuss how it aligns with our broader investment strategy and our commitment to deploying capital in ways to support growth and enhance shareholder value. In 2022, we introduced an investment framework that is designed to guide our investment decision-making from how we allocate CapEx to M&A and help drive margins and revenue growth across our existing businesses. This investment framework is anchored by 2 pillars, support and strengthen and expand and transform. When we are assessing investments that are designed to support and strengthen our business, we are focusing on our growth competencies and our home markets. These types of investments include automation projects, new plants, aggregate reserves and bolt-on acquisitions that complement our vertically-integrated model. Since launching this framework, we relied on it to assess and ultimately acquire a number of bolt-on acquisitions to support our strategy.

In 2023, we acquired the Brunswick Canyon Court, an asphalt plant in Carson City Nova. This added 17 million tons of reserves and expanded our vertically integrated footprint in Northern Nevada. We then acquired Coast Mountain Resources in British Columbia, introducing the potential to barge 40 million tons of high-quality reserves salt to support our Pacific Northwest operations. This year, we added Papich Construction to bolster our California operations while also adding 40 million tons of reserves. Under the expanded transform pillar over the last 2 years, we've applied our investment framework as we build out our Southeastern platform with the acquisitions of Waymon Roberts, Memphis Stone & Gravel, Dickerson and Bowen and just recently at the beginning of the third quarter, Warren Paving. We are excited about our Southeastern platform. It is a high-quality and profitable vertically-integrated business with numerous opportunities for growth and further expansion.

We expect to grow the platform organically with targeted investments to expand its distribution network, perhaps to the addition of more aggregate yards who by purchasing other strategic assets that will bring further capabilities to the platform. We also expect to build upon the Southeastern platform with M&A that will expand our footprint into new geographies and enable us to leverage the high-quality areas and distribution network of Warren Paving. Most recently, in early October, we announced our newest acquisition of Cinderlite, a well-established construction materials, landscape supply and transportation company based in Carston City, Nevada. Cinderlite operates 5 aggregate quarries and 1 recycling yard and its operations are supported by a fleet of trucks and drivers. The acquisition complements our existing operations in Northern Nevada and expands our reach in a high-growth region. The acquisition adds approximately 100 million tons of aggregate reserves and an annual production volume at 975,000 tons, significantly enhancing our material reserve base in the area. These acquisitions reflect our disciplined approach to M&A, targeting high-quality material focused businesses that strengthen our vertically-integrated model and support long-term growth in line with our 2027 financial targets.

Since 2021, we have more than doubled our average reserves to a current total of approximately 2.1 billion tons for the full year of our acquisitions. We have increased aggregate production to approximately 25 million tons from 16 million tons in 2021. These investments have allowed us to increase Materials segment cash gross profit margin from 18% in fiscal year 2022 to 29% through the first 9 months of 2025. The progress has been tremendous, and we are excited to see materials become a larger component of our business. We continue to evaluate bolt-on opportunities to complement our operations and unlock synergies. Looking ahead, we'll also continue to evaluate investment opportunities to allow us to expand and transform our business by entering new geographies and building new very integrated platforms. We believe our disciplined approach to growth, grounded in our investment framework and supplemented with our operational excellence positions Granite to deliver consistent profitability and sustainable value creation for years to come.

Now let's discuss our third quarter results, starting with the Materials segment. The Materials segment delivered an exceptional quarter, impressive growth on both the top and bottom line of our legacy business was bolstered by the inclusion of Warren Paving and Papich Construction for the last 2 months of the quarter. As I talk with our teams, I am encouraged that demand remains strong, led by the public market. I believe this environment should support volume growth both in aggregate and asphalt in the 2026 with orders as at the end of the third quarter, outpacing the prior year. Our Materials business has shown strong improvement in a relatively short period of time following our realignment to place materials experts and charge and materials business and centralized management functions, such as sales and quality control. We have made tremendous progress, but there's more to do to grow revenue and improve profitability in the segment from capital projects, including investments in aggregate plant automation and aggregate and asphalt plant efficiency to bolt-on acquisitions like Cinderlite to implementation of value-enhancing pricing across our geographies, I believe our materials business will continue to transform over the upcoming quarters and years.

Now let's move to the Construction segment. We had another strong quarter with gains in revenue, gross profit and CAP. We ended the quarter with record high CAP and entered it with a new record high cap of $6.3 billion despite the third quarter being our highest revenue current quarter. This underscores both the strength of the market and the talent of our project pursuit teams. We remain focused on best value projects, which now represent a significant portion of our cap. These projects allow us to collaborate with owners currently in the process, identify and mitigate risk and deliver work more efficiently. Best high delivery methods like construction manager, a general contractor or progressive design build are especially effective on complex projects. Our early involvement supports better planning, risk management and cost control. Larger best value projects for open broken into smaller work packages as they are collaboratively reviewed through workshops, allowing for more informed construction of the projects. These projects are generally completed faster and with significantly fewer claims than traditional delivery methods. While the timing of the construction portion of the best value projects can be difficult to predict, we've constructed more than 90 of them, and our confidence in the benefits of Best Value contracting continues to grow.

In the third quarter, we had a number of projects ramping up, and I believe we should see revenue accelerate in the fourth quarter and into 2026 as these projects move forward. This continues to be the strongest market I have seen in my career. I believe we are positioned to grow our cat portfolio and increase bid day margins in the fourth quarter and in 2026. With this market, I expect to achieve our organic growth targets of 6% to 8% through 2027.

Now I'll turn it over to Staci to review our financial performance for the quarter.

Thanks, Kyle. We had an outstanding third quarter. Revenue increased $158 million or 12%. Gross profit increased $58 million or 28%. Adjusted net income improved $33 million or 36%. Adjusted EBITDA improved $67 million or 45%, and we ended the third quarter with year-to-date operating cash flow of $290 million. In the Construction segment, revenue increased $82 million or 8% year-over-year to $1.2 billion, driven by the recently acquired Papich Construction and Warren Paving businesses and our record cap entering the quarter.

Construction segment gross profit improved $22 million to $192 million with a gross profit margin of 17%. This 70 basis point increase is largely due to improved execution and performance across our higher-quality project portfolio. In the Materials segment, we continue to realize year-over-year cash gross profit margin improvement. In the third quarter, aggregate and asphalt volumes increased 26% and 14%, respectively, over last year, and the newly acquired companies added 1.4 million tons of aggregates and 177,000 tonnes of asphalt. The public market environment drove demand and supported price increases in both aggregates and asphalt. The Southeastern platform, including Warren paving, performed better than expected with pricing and volumes leading to a significant increase in not margin in the quarter year-over-year.

Through the third quarter, margin increases at the aggregates, asphalt and segment level are all ahead of 2025 expectations. We believe there are opportunities to continue to significantly expand the South East platform by leveraging Warren Paving distribution network and driving further gains in margin. We plan to execute on these opportunities, both through strategic CapEx and through acquisitions. In addition, in our Western footprint, we expect to continue to strengthen our materials segment and vertically integrated businesses through bolt-on transactions, such as the recently acquired Cinderlite business.

Turning to cash flow. I am once again pleased by our cash generation. We generated $290 million of operating cash flow through the first 9 months of the year. Historically, the third and fourth quarters are when we have seen the most cash generation as our teams are fully mobilized to project sites and working hard to progress projects before year-end. As expected, the third quarter follows this pattern, and I expect cash generation will also be strong in the fourth quarter, allowing us to surpass our operating cash flow target of 9% of revenue for the year. As of the end of Q3, cash and marketable securities were $617 million, and we had $1.3 billion of debt outstanding. With our cash and marketable securities, revolver availability of $580 million and strong cash flow generation, we remain in a great position to act on future M&A opportunities that may either bolt-on to an existing home market or further expand our geographic footprint. While we will continue to be selective in our pursuits, I expect to achieve our goal of completing several M&A transactions each year. Now let's discuss our guidance for the rest of the year.

As we stated previously, we expected an acceleration of revenue growth in the second half of the year with several projects ramping up. Some anticipated project starts shifted later into the second half of the year. And as a result, we are revising our annual revenue target to a range of $4.35 billion to $4.45 billion. This target contemplates a busy fourth quarter with increased organic growth, which will position us well for 2026. In addition, due to our strong performance through Q3 and work ahead of us in Q4, we are increasing our adjusted EBITDA margin guidance to a range of 11.5% to 12.5%. Finally, we expect CapEx this year to be approximately $130 million. On a long-term basis, we believe approximately 3% of revenue remains an appropriate expectation for our annual CapEx. Our annual guidance for SG&A as a percent of revenue of 9% and adjusted effective tax rate in the mid-20s are unchanged.

Now I'll turn it back over to Kyle.

Thanks, Staci. I'll close with the following points. Our third quarter continued to demonstrate the strength of our people, the earning power of our strategic plan and our vertically integrated model. We continue to grow a cap, fueled by the public market to federal, state and local levels. As I look at the bidding opportunities ahead of us over the fourth quarter and next 6 months, I believe we have excellent opportunities skilled pursuit teams, improving relationships with our clients to continue to grow CAP and raise margins. While we have some work shift to the right, the quality of the work in our cat portfolio as well as the opportunities ahead of us, only strengthens my belief in being able to meet our growth and margin expectations in our 2027 guidance.

Both our Construction and Materials segments are operating at a high level and expect further gains in the years ahead. The recent acquisitions of Warren Paving, Papich Construction and now Cinderlite demonstrate our commitment to execute M&A to both strengthen our existing markets and to expand into new markets. We have the financial capacity to act on M&A opportunities that should continue to drive cash flows and build our footprint. And my expectation is that we will continue to complete several acquisitions annually in years to come. Finally, cash and cash generation remains a primary focus throughout the company. As in 2024, we are on track to deliver operating cash flows in excess of our target for 2025 and continue to drive significant shareholder value.

Operator, I will now turn it back to you for questions.

[Operator Instructions] The first question comes from Brent Thielman with D.A. Davidson.

Yes, maybe you could just [indiscernible] the first [indiscernible] you sound pretty positive continue [indiscernible] opportunity.

I'm sorry, Brent, your voice is not audible. Could you please come again?

Yes. Can you hear me now?

Yes, perfect.

Okay. Sorry for that. Yes, Kyle, just on the strength of CAP, maybe you could talk about the sources that you're seeing there and it sounds like bidding opportunities are pretty fortuitous over the next several months, maybe quarters. Where do you see that coming from as you sit here today?

Well, I'd say the overall market remains very strong. I think it's been that way now for a while. I think it's supported by the IIJA in our bio market. So we've seen that consistently now for a few years where we're just bidding more work procuring our work and the margins associated with that work continues to improve. I think that's one of the drivers behind our margin expansion in the quarter. I think our team is just doing a great job of bidding the right projects to and getting the right projects into CAP. I think we see that continuing. We expect our CAP balance to continue to grow in the balance of the year. And so for us to see a sizable increase in Q3. Again, it's our biggest burn revenue quarter. based on low bids that we have today, some selections, depending on the timing of the awards, we expect to see our CAP balance continue to grow again nicely in the fourth quarter. So the market is really strong in all our geographies. I would say a reminder, the IIJA will condo see spend beyond its expiration in 2026. We checked in with Arc of the American Road Transportation Builders Association. And right now, is like the send to date that the IIJA is around 50%. I guess there will continue to be opportunities in the marketplace and beyond its expiration next September. So yes, the markets are healthy, and we think we're going to continue to build a CAP.

Okay. And then I guess, just shorter term in nature, but maybe what specifically is limited some of the conversion of this cap into revenue and you sound feel confident in acceleration here in fourth quarter, maybe just speak on what you've seen so far?

Yes. Yes. We did speak on the last call about acceleration in the back half of the year. It is more weighted to Q4 than Q3. And Q4, we're looking at around an 8% organic growth rate in the quarter. It is a lot stronger than what we've seen certainly so far this year. And with the CAP that we have in place, we think that 8% growth rate organically is going to continue into 2026. So although we're not necessarily giving guidance yet for next year, but I think the way we're looking at it is a growth rate of 8% is pretty realistic as we go into the fourth quarter and into 2026.

The next question comes from Steven Ramsey with Thompson Research Group.

Wanted to examine the guidance a little bit further reflecting the better EBITDA margin. You called out materials orders and high-quality project portfolio being the drivers of that. Can you talk about the balance of which of these 2 factors is the greater driver for the margin outlook? And given some of the work maybe has pushed out to next year, I would assume this bodes well for margins in 2026 as well.

Yes. Yes, that's right. And if you go back to earlier this year, we did expect this year to see margin expansion in both our construction and our Materials segments. And we saw about 1% order in construction between '25, and we're trending ahead of that today. So our teams are just doing a really nice job getting the right work and executing at a high level on that work. And then we had talked before about a 3% margin expansion in our materials business. and we're trending a little bit ahead of that product level. We're sitting right around 4%. So we're well ahead of where we thought we were going to be in 2025 based on margin expansion expectations. So that gives us a lot of confidence as we bridge towards 2027. So we have about 1.5% or so of margin expansion from an EBITDA perspective to get to the midpoint of that 13.5% in 2027. I would say we see about 1% still coming from construction. Again, getting strong CAP, getting more margin on bid day and then really focus on operational excellence as we execute on those contracts. And we still believe there's another 3% or better margin expansion in our Materials segment. And of course, as we execute on these strategies within pricing, automation and just performing at a higher level of Materials business by leveraging on [indiscernible] playbook, we think that's going to be a -- and when our teams minable do so far in 2025 is right on, again, a little bit better, which gives us a lot of confidence that we're going to execute over the next 2 years towards that midpoint of 13.5%.

That's great to hear. Also wanted to stay [indiscernible] on the guidance, the operation -- cash flow from operations, that is and the lower CapEx combination. First off, what is driving the upside to operating cash flow. And then when you think about reducing CapEx on a dollar basis, even with a larger base of assets, particularly more material assets from Warren? Maybe share some on how you are adjusting the CapEx outlook for this year and the go-forward CapEx outlook, if I understand being lowered as a percentage of revenue? .

Yes. Steven, I'll talk a little bit about the operating cash flow guidance first. We were able to achieve some claim settlements earlier this year and have some really good collections. And along with our staying operating cash flow just from our current operations, we've had -- we've been able to achieve higher than our target of 9%. And we think that will push us above the 9% target there. When we talk about CapEx. So we did have -- our original guidance was in the range of about, I think, $140 million to $160 million, which was a bit above the 3% target we talked about in capital allocation, and that included some strategic materials that the timing of that sometimes just shift and also being very diligent and vigilant in looking at what types of investments we're making. And so some of that has shifted probably to next year. And so we were able to lower that CapEx guidance to about $130 million. That does include the new acquisitions of Warren Paving and Papich construction. So even considering those going forward, we still feel like about 3% is the right target. And occasionally, there will be some one-off things that are a little bit larger as we look at continuing to increase our material reserves and the things like that.

The next question comes from Michael Dudas with Vertical Research Partners.

Kyle, share some observations you've had Warren and Papich in for about 2 months -- I guess, 3 months now since the close, how do you like the aggregates on the river there, the opportunities that Warren provides you? And what are you seeing in their operations relative to best practice to what you could do through [indiscernible] and is that really -- is that could be a very good platform for you to focus on some of these forward integration and expansions in that market because it seems like there's a lot of demand and opportunity, given that your new found in strength conditioning and not only in the construction but the material side.

Yes. Thanks, Mike. It's a great question. And we're excited about where we're at with Warren and Papich I think the integration so far has gone very well. And both of those businesses I think with warrant paving, we're excited because there's tremendous opportunities in that marketplace. And today, they're already exceeding the deal model in the first 2 months. And I think one of the things that we're seeing down in the Southeast is really, really strong aggregate demand. So it's a significant private investment that we was already taking place in the Southeast, that's proving to be the case. And there's strong demand associated with data center infrastructure improvements and expansion and development. So we're already looking at ways that we can meet that demand. Now we have an extremely talented team at Warren Paving, and I get excited and we all get excited working with them because they have lots of ideas on how they can expand that business, increase production, expand their distribution network with yard managing costs and increasing internal sales. So we're here to figure out as we can be for them to those ends. And so we remain really excited about that opportunity and how we can best support and grow other business.

I appreciate that. My follow-up is, Kyle, when you think about your best value -- or your CAP, you've really emphasized over the past several years, you talk about the timing of the preconstruction, construction design and full construction. Where are we in that cycle from say the -- that the contracts that you negotiated 3 years ago are they to the point where we could see some more conversion in construction? Could that be a tailwind for conversion for reveal growth in the next couple of years? And how does that play out as we think about in some of the organic targets that you've put forth for the next couple of years?

Yes. I think that means a good point. If you look at certainly where we are in 2025, that meaningful original guidance had our organic growth rate somewhere around that 6%. We're going to come in just underneath that. And next year, we're already seeing up towards that 8%, as I mentioned previously. Some of that is coming from the conversion of that cap and those best value projects. It can take some time to convert from the preconstruction contract into the construction contract. I know there's a few contracts that we'll be converting into construction contracts for 2026. And so that will help drive up that organic growth. So it's always hard to predict the timing of these things, sims these projects that are best value have some challenges. And that's why they're looking for a partner like us to come in and help them navigate some of those challenges. Some can stakeholders. They're working with. It could be a city and there could be a county, it could be a railroad issue. And sometimes that reconstruction services can take more than the typical 2 years that we've talked about. There's actually a couple of contracts that we're looking at today. We've been in preconstruction for 4 and 5 years. So it can take a while to navigate through all those issues as we partner with our clients. And so I think that's going to help drive up that organic revenue growth in '26 and beyond.

The next question comes from Kevin Gainey with Thompson Davis.

It's a good quarter. Maybe we can start with the guide and how you guys are thinking about both at the top and the bottom line from kind of the low end to the high end and what it would take to get to each?

For overall guidance, at this point, we feel pretty good about where we're at [indiscernible] to Q3 now, and we got our final on Q4. I think the challenge for us and the opportunity for us in the fourth quarter always comes down to others. I think that's one of the things that they can help us or hurt us and we'll have to see how things shake out for the full quarter. So far in October, the weather has held and in support of what we're trying to do. I think it's just going to continue strong execution by our teams and operations and certainly a lot of momentum to the first 3 quarters of performing at a high level. So we expect that to continue as well. So I think really, at this point in time, Kevin is going to come down to web. .

That's always the tricky part with Q4.

Yes, it is.

And then -- go ahead.

No, I'm turning back to you, Kevin.

Maybe if we can talk about the organic materials segment and how that performed in the quarter? And how you're taking what you've got with Warren and how you might apply that there to maybe catch them up from like the standpoint of pricing and such any best practice there, too?

Yes. So far, we're actually pleased with our Materials segment in the quarter and the full year, as I mentioned earlier about the margin expansion. They've done a really nice job. Our teams have done a really as job expanding margins, just on track, a little bit ahead of where we thought we're going to be executing on that strategy, again, around pricing and the automation efforts and generic materials playbook. But we've also seen some nice volume increases. So we see mid-single-digit volume increases both on aggregate and asphalt. We expect it to be flat, slightly up and it turns out where we're going to be a little bit up in both. And it's also really nice to see that the orders are already up so far in Q3 and where we were certainly last year at the time. I think these are pointing to continued volume growth in our Materials segment into 2026. So that's really good news. And hopefully, we'll see our private market starts to come back a little bit stronger in '26 and that we continue to drive decreased volumes in the year. So I think we also saw that our pricing decreases helped. So we saw some really nice kind of mid-upper single-digit price increases in 2025. We expect to see kind of mid-single-digit price increases in 2026. And of course, we're working closely with Warren. We're working closer with Papich. And we're -- we collect the team trying to figure out how we can leverage those, those same things, pricing, how we can automate some of those facilities how we can leverage our materials playbook and learn from each other just continue to get better. And that's going to allow us to get the additional 3% gross profit margin in our Materials business, including Warren, including Papich to 2027.

That was the last question. This concludes the question-and-answer session. I would like to turn the conference back over to Kyle Larkin for any closing remarks.

Okay. Well, thank you for joining the call today. As always, we want to thank all of our employees for the work they do every day. I would also like to take this opportunity to welcome our newest team members from Cinderlite. We're excited to have you on the team and look forward to building that together. Thank you for joining the call and your interest in Granite. We look forward to speaking with you all soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.