Granite Construction Incorporated — Q1 2012 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2012, compared with the same quarter of 2011. Granite operates in Construction, Large Project Construction, Construction Materials, and Real Estate; it plans to divest its real estate investment business over time. Management cautions that results are seasonal and the quarter is not necessarily indicative of the full year.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Revenue | $310.2 million | $256.7 million | Up 20.8% |
| Gross profit | $24.9 million | $30.0 million | Down $5.1 million |
| Gross margin | 8.0% | 11.7% | Down 3.7 percentage points |
| Operating loss | $16.3 million | $10.7 million | Loss widened |
| Net loss attributable to Granite | $11.8 million; $0.31 per share | $9.0 million; $0.24 per share | Loss widened |
| Operating cash flow | Use of $22.9 million | Source of $0.7 million | Weaker working-capital contribution |
| Capital expenditures | $9.2 million | $11.8 million | Company expected approximately $50 million for full-year 2012 |
Other income was $4.1 million, compared with expense of $1.8 million a year earlier. Q1 2012 included a $5.3 million gain from periodic sales of gold, a by-product of aggregate production, partially offset by other items. The income-tax benefit was $3.5 million; the effective tax rate was 28.9%, versus 41.9% in Q1 2011.
Liquidity and debt. At March 31, cash and cash equivalents were $226.2 million and marketable securities were $140.6 million, totaling $366.8 million. Cash and securities include $69.4 million of consolidated joint-venture cash generally unavailable for Granite’s own working capital. Current assets were $846.9 million and current liabilities $393.9 million. Corporate long-term debt, including current maturities, was $217.6 million; non-recourse real-estate debt was $21.1 million. The $100 million secured revolving facility had no borrowings outstanding, with $4.2 million of letters of credit. Granite said it expected available liquidity and operating cash generation to cover anticipated needs for the next 12 months.
Cash declined by $30.8 million during the quarter to $226.2 million. Investing activities provided $3.4 million and financing activities used $11.3 million. The company paid $5.0 million in dividends; the quarterly dividend was $0.13 per share.
Material changes versus Q1 2011
- Construction revenue rose 27.2%, helped by improved California weather, greater opening backlog, and growth in Northwest private-sector work. Its gross margin improved to 7.3% from 6.0%.
- Large Project Construction revenue increased 18.9%, but gross profit fell to $22.2 million from $31.3 million and margin declined to 13.6% from 22.7%. The comparison benefited in 2011 from deferred profit recognized when a project crossed the recognition threshold.
- Construction Materials revenue increased 7.7%, while its gross loss narrowed to $6.0 million from $7.3 million. Management cited better weather but continued weakness in residential, commercial, and private markets.
- Total backlog was $2.08 billion, up 3.0% year over year. Construction backlog was down 10.6% year over year, while Large Project Construction backlog was up 11.7%.
- Operating cash flow deteriorated from a small inflow to a $22.9 million outflow, primarily due to less favorable working-capital changes.
Outlook, risks, and unusual items
- Management expected challenging market conditions to persist through 2012, citing intense competition, constrained public funding, and weak commercial and residential development. It was hopeful—but noted uncertainty—about Congress reaching a longer-term federal transportation funding agreement.
- Granite was pursuing opportunities in rail, power, water, industrial, and federal markets and continuing its cost-reduction and real-estate divestiture plan. Up to $8.0 million of future restructuring charges could be recorded; timing and amount depend on market conditions and asset sales.
- Construction-project estimates can change as work progresses. Q1 estimate revisions on projects with individual gross-profit effects of at least $1 million were a net $0.2 million decrease in Construction and a net $4.4 million increase in Large Project Construction. One Construction project had a $3.0 million downward revision attributed to lower productivity.
- After quarter-end, the Oregon Department of Transportation and the Yaquina River Constructors joint venture settled their dispute over the U.S. Highway 20 project. The default notice was rescinded, and the settlement ended the joint venture’s obligation to complete the project after limited maintenance and demobilization; Granite said the settlement was not material to its financial position or results.
- One consolidated and one unconsolidated real-estate entity were in debt-agreement default. The loans are non-recourse to Granite, do not trigger cross-defaults under Granite’s own debt, and the entities were discussing revised terms with lenders.
- Disclosed legal matters include a potential unspecified civil penalty relating to the U.S. Highway 20 stormwater matter and a government investigation concerning disadvantaged-business-enterprise subcontracting on a New York project. Granite said it was cooperating; outcomes remain uncertain.
- Granite reported compliance with its own credit-facility and senior-note covenants. It reported no significant change in market-risk exposure and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the backlog converts into profitable work, especially given weaker Large Project Construction margins and the concentration of backlog in public-sector projects.
- Whether working-capital outflows persist and how much reported cash is available to Granite rather than held for joint-venture needs.
- Progress on the real-estate divestiture, potential restructuring costs, and resolution of the two real-estate-entity debt defaults.
- Developments in the disclosed legal and government-inquiry matters, including any effects on costs, contract eligibility, or liquidity.
- Execution and control monitoring following the first-quarter enterprise resource planning system implementation; management concluded disclosure controls were effective at quarter-end.