Business Context and Reporting Period
Company: Granite Construction Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: One of the largest heavy civil contractors and producers of construction materials in the United States. Operations are divided into three segments: Granite West (heavy civil construction and materials in the western U.S.), Granite East (large infrastructure projects east of the Rockies), and Granite Land Company (real estate development).
Key Financial Metrics (Nine Months Ended Sept 30, 2009)
| Metric | 2009 (9 Months) | 2008 (9 Months) |
|---|---|---|
| Total Revenue | $1,528.7 million | $2,046.9 million |
| Gross Profit | $256.4 million (16.8% margin) | $352.0 million (17.2% margin) |
| Operating Income | $93.5 million | $158.2 million |
| Net Income (Attributable to Granite) | $57.5 million | $90.5 million |
| Diluted EPS | $1.49 | $2.35 |
| Cash from Operating Activities | $57.6 million | $104.9 million |
| Cash and Cash Equivalents | $371.4 million | $281.0 million |
| Total Debt (Current + Long-term) | $301.8 million | $286.2 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 25.3% year-over-year. Granite West revenue dropped 26.4% due to increased competition for public sector work and a decline in private residential development. Granite East revenue fell 21.5% as large projects neared completion.
- Profitability Pressure: Operating income declined 40.9%. Gross profit margins compressed slightly across segments, particularly in construction materials where margins fell to 8.0% from 12.5% due to reduced volume and higher unit costs.
- Cost Management: General and administrative expenses decreased 14.4% to $169.8 million, reflecting ongoing cost reduction efforts.
- Real Estate Impairments: The company recorded a $1.7 million impairment charge on real estate held for development and sale, compared to $4.5 million in the prior year period.
- Backlog Shifts: Total contract backlog was $1.61 billion. Granite West backlog decreased 39.5% year-over-year, while Granite East backlog increased 16.8% due to new awards in the Northeast and Southeast.
Outlook, Risks, and Unusual Items
- Organizational Restructuring: The company announced a reorganization effective October 1, 2009, affecting approximately 8% of the salaried workforce. Pre-tax charges of approximately $6.0 million are expected in the fourth quarter of 2009.
- Legal Proceedings:
- Hiawatha Project: Facing a proposed $4.3 million monetary sanction from MnDOT regarding Disadvantaged Business Enterprise (DBE) compliance; discussions with the DOJ are ongoing.
- US Highway 20: Under criminal investigation by the DOJ regarding stormwater runoff violations; potential penalties cannot be estimated.
- San Diego Fire Debris: Civil lawsuit filed by the City of San Diego alleging false claims; company believes liability is remote.
- Market Risks: Outlook remains challenging due to intense competition for public works, uncertain federal highway funding (expiration of 2005 bill), and state budget constraints. The company expects the competitive environment to persist through 2010.
- Liquidity: The company maintains a $150 million revolving credit facility with $145.8 million available. Management believes current cash and credit facilities are sufficient for the next 12 months.
Investor Verification Checklist
- Restructuring Impact: Verify the timing and magnitude of the $6.0 million restructuring charge in Q4 2009 and its effect on full-year guidance.
- Backlog Conversion: Monitor the conversion rate of the $1.06 billion Granite East backlog into revenue, noting the $400 million Houston light rail project not yet in backlog.
- Legal Exposure: Track the resolution of the Hiawatha DBE sanction and the US Highway 20 criminal investigation for potential financial penalties.
- Real Estate Valuation: Assess the risk of further impairment charges on the $135.3 million real estate portfolio given the continued downturn in residential and commercial markets.
- Margin Trends: Watch for continued compression in construction materials margins as private sector demand remains weak.