Granite Construction Incorporated — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Unaudited interim results; management cautions that seasonality makes them not necessarily indicative of full-year results. Granite operates in heavy civil construction, construction materials and real estate.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $454.2 million | $461.1 million | $674.9 million | $808.4 million |
| Gross profit / margin | $49.7 million / 10.9% | $83.9 million / 18.2% | $55.4 million / 8.2% | $152.6 million / 18.9% |
| Operating income (loss) | $2.1 million | $30.4 million | $(43.0) million | $47.3 million |
| Net income (loss) attributable to Granite | $(6.7) million | $17.9 million | $(47.6) million | $26.9 million |
| Diluted earnings (loss) per share | $(0.18) | $0.46 | $(1.26) | $0.70 |
| Cash used in operating activities | Not presented quarterly | $38.9 million | $6.0 million |
Q2 revenue declined 1.5% year over year; first-half revenue declined 16.5%. The first-half operating loss included a weak first quarter. Q2 pretax income was $1.8 million, but a $4.4 million tax provision contributed to the net loss; the reported quarterly effective tax rate was unusually high at 248.5%, principally reflecting an update to the estimated annual rate and forecast noncontrolling interests.
- Segments: Q2 Construction revenue fell 14.2% and gross profit fell to $22.9 million from $52.8 million. Large Project Construction revenue rose 21.9% in Q2, while gross profit was broadly flat at $21.8 million. Construction Materials revenue rose 6.6%, but gross profit declined to $4.5 million from $9.6 million. Real Estate reported $0.5 million gross profit versus a $1.0 million loss.
- Balance sheet and liquidity at June 30: Cash and equivalents were $208.5 million and marketable securities totaled $141.9 million. Of reported cash, $105.7 million was held by consolidated joint ventures and generally unavailable for Granite’s working capital. Current assets were $975.4 million and current liabilities $528.4 million.
- Debt: Long-term debt, including current maturities, totaled approximately $225.4 million; non-recourse real-estate debt totaled $56.3 million. Senior notes had a $225.0 million carrying amount and estimated fair value of $246.1 million. Granite reported compliance with debt covenants.
- Cash flow and investment: First-half investing cash use was $40.2 million and financing cash use was $51.4 million. Capital expenditures were $21.8 million, versus $55.7 million a year earlier; the company anticipated up to $50 million for full-year 2010. Cash and equivalents declined $130.5 million from year-end 2009.
- Backlog: Total construction backlog was $1.55 billion, up 1.2% from June 2009. Construction backlog was $594.2 million, down 13.6%; Large Project Construction backlog was $957.1 million, up 13.3%. Management said the large-project segment was tracking more than $9 billion of work expected to be bid over the following 12 months.
Material changes and management outlook
- Management attributed lower Construction revenue and margins to weak residential demand, intense competition for public work, reduced public funding pressure, fewer active public-sector projects and adverse first-quarter weather. First-half 2009 revenue also benefited from $69.2 million of federally funded security work that was substantially completed in 2009.
- Management expected lower revenue and gross margins in 2010 than in previous years, with difficult conditions likely to continue into 2011 amid uncertainty over transportation funding and a slow economic recovery. Slow residential and commercial development was also expected to continue weighing on Construction Materials.
- Construction gross margins fell amid lower revenue, weaker margins in beginning backlog and the absence of prior-year deferred-profit recognition. Large Project Construction’s first-half results were affected by wet weather, design issues and higher-than-anticipated job costs; $59.4 million of first-half 2010 revenue was on projects that had not yet reached the profit-recognition threshold.
- Q2 other income included $2.9 million of previously deferred income from a 2008 affiliate investment sale. First-half 2009 other income included an approximately $4.4 million gain from gold sales.
- The company refinanced its $150 million revolving credit facility in June, extending availability through June 22, 2013. At quarter-end, $145.8 million was unused and available; the interest margin was 2.75% over LIBOR. Management believed available liquidity would cover expected needs for the next 12 months.
- In July, the company received awards expected to enter backlog in Q3, including $78 million for a California rail project, $29 million for a New Mexico highway project and approximately $106 million for a Utah project.
Risks, contingencies and unusual items
- On an Oregon highway project, unexpected hillside movement damaged completed portions of bridge structures. Granite and the Oregon Department of Transportation were assessing possible remedies; the financial impact could not be reasonably estimated, and no estimate revision was recorded this quarter.
- For the Hiawatha light-rail project, agencies identified disadvantaged-business-enterprise compliance issues. Minnesota proposed a $4.3 million sanction against the joint venture and training requirements; discussions and a federal investigation continued. Civil or criminal actions or penalties could not be ruled out.
- A U.S. Department of Justice investigation continued into alleged stormwater-permit violations on the US Highway 20 project in Oregon; potential penalties could not be estimated. A separate grand-jury investigation concerning DBE issues on the Grand Avenue project was ongoing; Granite said it had complied with the subpoena and was cooperating.
- A City of San Diego false-claims lawsuit concerning wildfire debris cleanup remained stayed while the City Attorney pursued a proposed resolution. Granite considered the claims without factual or legal basis and assessed the City’s entitlement to relief as remote.
- Granite disclosed joint-and-several performance exposure in construction joint ventures: if a partner fails to perform, Granite and other partners may have to complete outstanding work. Unconsolidated joint ventures had approximately $1.8 billion of remaining contract work, of which Granite’s share was $634 million.
- Real-estate development remained exposed to weak market conditions. Granite had increased support commitments to consolidated real-estate entities by $9.7 million in 2010 and had contributed $11.5 million of the combined $18.5 million increased commitment disclosed for 2010 and 2009.
Important facts for investors to verify
- Whether the construction margin decline and first-half operating loss persist, and how much of the large-project revenue deferred from profit recognition converts into reported profit.
- Developments, remedial costs and potential schedule or financial effects on the Oregon highway project with hillside movement.
- Outcomes and potential financial exposure from the Hiawatha DBE matter, Oregon stormwater investigation and Grand Avenue investigation.
- How much reported cash is practically available for corporate needs, given joint-venture restrictions, and whether operating cash flow improves.
- Backlog conversion, cancellation or funding risk, and whether anticipated 2010 capital spending remains within management’s stated limit.