Business Context and Reporting Period
Company: Granite Construction Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: One of the largest heavy civil contractors in the U.S., engaged in infrastructure construction, construction materials production, and real estate development. Effective January 1, 2010, the company reorganized its reportable segments from geography-based to line-of-business based: Construction, Large Project Construction, Construction Materials, and Real Estate.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenue | $220,683 | $347,372 |
| Gross Profit | $5,714 | $68,736 |
| Gross Margin | 2.6% | 19.8% |
| Operating (Loss) Income | $(45,126) | $16,902 |
| Net (Loss) Income Attributable to Granite | $(40,954) | $8,920 |
| Diluted EPS | $(1.09) | $0.23 |
| Cash and Cash Equivalents | $222,095 | $390,483 |
| Total Debt (Current + Long-term) | $290,913 | $267,771 |
| Net Cash Used in Operating Activities | $(24,354) | $(13,982) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 36.5% year-over-year. The Construction segment saw a 51.7% drop due to lower demand, competitive bidding, and weather delays. Large Project Construction revenue fell 28.7%, partly due to the absence of a $17.3 million claims settlement recognized in Q1 2009.
- Profitability Collapse: Gross profit plummeted from $68.7 million to $5.7 million. The Construction Materials segment reported a gross loss of $7.1 million (margin of -27.2%) compared to a loss of $0.3 million in the prior year, driven by fixed plant costs and decreased sales.
- Operating Loss: The company reported an operating loss of $45.1 million, a reversal from an operating income of $16.9 million in Q1 2009. This was driven by the sharp decline in gross profit and a slight increase in Selling, General, and Administrative (SG&A) expenses to $55.3 million.
- Liquidity: Cash and cash equivalents decreased by $168.4 million to $222.1 million. Net cash used in operating activities increased to $24.4 million, primarily driven by the net loss.
Outlook, Risks, and Management Commentary
- Outlook: Management expects the remaining quarters of 2010 to remain "very challenging" due to a highly competitive environment, uncertainty regarding public and private funding levels, and a slow economic recovery. While contract backlog increased to $1.58 billion (matching Q1 2009 levels), it is projected to deliver lower gross margins than in recent years.
- Legal Proceedings:
- Hiawatha Project: Facing a proposed $4.3 million monetary sanction and potential civil/criminal penalties regarding Disadvantaged Business Enterprise (DBE) compliance issues.
- US Highway 20 Project: Under criminal investigation by the U.S. Department of Justice regarding stormwater runoff violations; potential penalties cannot be estimated.
- San Diego Fire Debris: Subject to a civil lawsuit under the California False Claims Act; management believes the probability of material liability is remote.
- Capital Resources: The company maintains a $150 million revolving line of credit with $145.8 million available. Management believes current liquidity is sufficient for the next 12 months.
Investor Verification Checklist
- Margin Sustainability: Verify the impact of the new backlog on future gross margins, as management explicitly states current backlog yields lower margins.
- Legal Exposure: Monitor the resolution of the Hiawatha DBE investigation and the US Highway 20 criminal probe for potential financial sanctions.
- Construction Materials Segment: Assess the turnaround plan for the Construction Materials segment, which posted a significant gross loss due to fixed costs and low demand.
- Real Estate Valuation: Review the valuation of $137.2 million in real estate held for development and sale, particularly given the downturn in the commercial and residential markets.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically tangible net worth requirements, given the current operating loss.