Business Context and Reporting Period
Company: Granite Construction Incorporated
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: One of the largest heavy civil construction contractors in the U.S., operating nationwide in public and private sectors. The company is organized into three reportable segments for 2009: Granite West (heavy civil and construction materials), Granite East (large, complex infrastructure projects), and Granite Land Company (real estate investment and development). The company announced a reorganization effective fiscal 2010 to align segments with product lines.
Key Financial Metrics
| Metric (in thousands) | 2009 | 2008 |
|---|---|---|
| Total Revenue | $1,963,479 | $2,674,244 |
| Gross Profit | $346,373 | $468,720 |
| Gross Margin | 17.6% | 17.5% |
| Operating Income | $129,179 | $216,691 |
| Net Income Attributable to Granite | $73,500 | $122,404 |
| Diluted EPS | $1.90 | $3.18 |
| Contract Backlog | $1,401,988 | $1,699,396 |
| Cash & Cash Equivalents | $338,956 | $460,843 |
| Total Debt (Long-term + Current) | $303,666 | $290,379 |
| Working Capital | $500,605 | $475,942 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 26.6% to $1.96 billion, driven by a 28.4% drop in Granite West revenue due to the economic downturn and reduced residential development. Granite East revenue fell 20.8% as large projects neared completion.
- Profitability: Net income attributable to Granite dropped 40% to $73.5 million. Despite lower revenue, the gross margin remained stable at 17.6% due to positive project forecast changes and claim settlements.
- Restructuring: The company recorded $9.5 million in restructuring charges in 2009 (none in 2008) associated with a reduction in force and plant facility impairments.
- Backlog Reduction: Total contract backlog decreased 17.5% to $1.4 billion. Granite West backlog fell 44.3% due to project completions and reduced new awards, while Granite East backlog increased 5.7%.
- Real Estate Losses: Granite Land Company (GLC) recorded a gross loss of $1.3 million and recognized $1.7 million in impairment charges on real estate assets, compared to a $4.5 million impairment in 2008.
Guidance, Outlook, and Risks
Outlook: Management expects 2010 to be a challenging year due to a competitive climate and uncertainty regarding federal and state funding. The company plans to reduce capital spending (projected at $50 million for 2010) and focus on cost reduction.
Key Risks and Contingencies:
- Legal Proceedings:
- Hiawatha Project: Proposed $4.3 million sanction by MnDOT for DBE compliance issues; DOJ investigation ongoing.
- US Highway 20: DOJ criminal investigation regarding stormwater runoff violations; potential penalties unknown.
- San Diego Fire Debris: Civil lawsuit under False Claims Act; company believes liability is remote.
- Silica Litigation: Six active lawsuits; company believes probability of material liability is remote.
- Market Risks: Reductions in government infrastructure spending, increased competition for public sector work, and volatility in commodity prices (diesel, asphalt).
- Real Estate: Continued decline in residential/commercial markets may trigger additional impairment charges.
- Joint Ventures: Joint and several liability exposure of approximately $1.5 billion in unconsolidated joint venture contracts.
Investor Verification Checklist
- Backlog Quality: Verify the profitability of the $1.4 billion backlog, noting that 9.0% of large projects have forecasted losses.
- Legal Exposure: Monitor the resolution of the Hiawatha DBE sanction and the US Highway 20 criminal investigation for potential financial impact.
- Real Estate Valuation: Assess the recoverability of the $139.4 million in real estate held for development and sale given the ongoing market downturn.
- Government Funding: Track state and federal infrastructure budget approvals, as 86% of revenue is derived from government contracts.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly tangible net worth and working capital requirements, amidst reduced earnings.