Granite Construction Incorporated — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report; quarterly results are noted where relevant. Granite is a U.S. heavy-civil contractor and construction-materials producer, with a smaller real-estate business.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $2.083 billion | $2.010 billion |
| Gross profit / margin | $234.8 million / 11.3% | $248.0 million / 12.3% |
| Operating income | $80.8 million | $99.3 million |
| Net income attributable to Granite | $45.3 million | $51.2 million |
| Diluted EPS | $1.15 | $1.31 |
| Operating cash flow | $91.8 million | $92.3 million |
| Capital expenditures | $37.6 million | $45.0 million |
| Cash, equivalents and marketable securities | $433.4 million | $406.6 million |
| Working capital | $490.8 million | $461.3 million |
| Total debt, including current maturities | $290.1 million | $250.6 million |
| Contract backlog | $1.707 billion | $2.022 billion |
Cash and securities include $105.9 million held by consolidated construction joint ventures, generally unavailable for Granite’s general working-capital needs. The company reported $321.990 million of consolidated cash and cash equivalents. The $215 million revolving facility had $70 million drawn at year-end, principally to fund the Kenny acquisition. Granite said it expected existing liquidity and operating cash generation to cover anticipated needs for the next 12 months.
Material changes and operating trends
- Revenue rose 3.7%, but gross profit fell 5.3% and attributable net income fell 11.5%. SG&A increased 14.0%, to $185.1 million, including $4.4 million of Kenny-related acquisition costs.
- Construction revenue declined 5.7% to $984.1 million; segment gross margin fell to 7.9% from 11.9%, reflecting competition, difficult California conditions and a net $18.1 million adverse impact from project estimate revisions.
- Large Project Construction revenue increased 19.1% to $863.2 million and margin improved to 17.2% from 14.4%. Favorable estimate revisions contributed $64.6 million to segment project profitability, primarily from lower costs and owner-directed scope changes.
- Construction Materials revenue increased 4.6% to $230.6 million, but margin declined to 3.3% from 7.5%, primarily due to weak conditions at certain California locations. Real Estate revenue fell 75.0% to $5.1 million as the company continued its planned divestiture.
- Backlog decreased 15.6% year over year. Large Project Construction backlog fell 28.6% to $1.077 billion, while Construction backlog increased 22.6% to $629.9 million, partly due to Kenny. About $1.4 billion of year-end backlog was expected to be completed during 2013.
- The company acquired Kenny Construction Company on December 31, 2012, for approximately $141.5 million, subject to adjustments. The purchase added $70 million of revolving-credit borrowing; approximately $8.7 million of post-closing adjustments was expected to be paid in 2013. Kenny contributed no FY2012 revenue to Granite’s results.
Outlook, risks and unusual items
- Management expected challenging, highly competitive conditions to persist through 2013, citing public-project funding constraints and weak commercial and residential development demand. It also cited progress on federal transportation funding under MAP-21 and potential project financing through TIFIA.
- Management expected the Kenny transaction to be approximately break-even to 2013 EPS, including integration costs and intangible amortization. It forecast 2013 capital expenditures of $40 million to $60 million and said restructuring charges could reach $8 million, depending on asset sales and consolidation actions.
- Granite’s joint venture team was awarded the $3.1 billion Tappan Zee Bridge project in January 2013; Granite’s 23.3% share, about $733 million, was expected to enter backlog in Q1 2013. Granite was selected for the $849 million base IH-35E design-build project; its 35% share was expected to enter backlog after final approval and notice to proceed, then anticipated in Q2 2013.
- Large Project Construction backlog included $172.6 million, or 16.0%, of contracts with forecast losses, versus $91.4 million, or 6.1%, a year earlier. A Washington highway project faced lower productivity, design issues, delays, resequencing and scope growth; Granite was seeking additional compensation, whose amount, source and timing were undetermined.
- Quarterly FY2012 results were seasonal and uneven: Q4 revenue was $504.8 million and attributable net income was $18.0 million. Q4 included an $18.0 million quarry-sale gain, a $5.8 million state tax valuation-allowance benefit and $4.4 million of pre-tax Kenny acquisition costs.
- Granite disclosed an ongoing DOJ investigation into alleged disadvantaged-business-enterprise issues involving the Grand Avenue Project. The company was cooperating; it could not rule out civil, criminal or administrative penalties and could not estimate additional reasonably probable losses beyond amounts accrued.
- Other key exposures include fixed-price project cost overruns, estimate changes, schedule/liquidated damages, joint-venture joint-and-several obligations, government-contract compliance, commodity prices, weather, permitting and environmental rules, bonding capacity, and real-estate market and financing risk. One consolidated real-estate entity defaulted on a debt payment after year-end; the loan was non-recourse to Granite and did not trigger cross-defaults on Granite’s other debt.
- Year-end leverage covenant measures were reported as compliant: consolidated leverage ratio 2.39, interest coverage 9.52, and tangible net worth $753.1 million. The filing notes that leverage limits tighten beginning in Q4 2013. Management reported effective disclosure controls and internal control over financial reporting; Kenny was excluded from the year-end control assessment because it was acquired on December 31.
Investor verification priorities
- Track the profitability, cost-to-complete estimates and any compensation recovery on the Washington highway project, and reconcile the forecast-loss backlog.
- Review the Grand Avenue DBE investigation for subsequent developments, potential sanctions and any change in accruals or risk disclosure.
- Verify 2013 backlog conversion and awards, including the Tappan Zee and IH-35E projects, and assess their margins, funding and award timing.
- Assess Kenny integration, acquisition-related cash payments, amortization and realized earnings contribution against management’s break-even EPS expectation.
- Monitor cash availability apart from joint-venture balances, debt maturities, covenant headroom and resolution of the real-estate entity’s post-year-end default.
- Evaluate whether project estimate revisions, segment margins and the asset-sale gain indicate sustainable operating performance; the quarry gain was an unusual item.