Granite Construction Incorporated — FY2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011; selected unaudited results for the fourth quarter are also included. Granite is a U.S. heavy-civil contractor and construction-materials producer, with a smaller real-estate investment and development business. Its reportable segments are Construction, Large Project Construction, Construction Materials and Real Estate.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $2,009.5 | $1,763.0 |
| Gross profit / margin | $248.0 / 12.3% | $177.8 / 10.1% |
| Operating income (loss) | $99.3 | ($109.3) |
| Net income (loss) attributable to Granite | $51.2 | ($59.0) |
| Diluted EPS | $1.31 | ($1.56) |
| Operating cash flow | $92.3 | $29.3 |
| Cash, cash equivalents and marketable securities | $406.6 | $395.7 |
| Working capital | $461.3 | $475.1 |
| Total debt, including non-recourse real-estate debt | $250.6 | $280.5 |
| Contract backlog at year-end | $2,022.5 | $1,899.2 |
Revenue increased 14.0% year over year. Construction revenue rose 10.6% to $1,043.6 million, Large Project Construction rose 24.1% to $725.0 million, Construction Materials was nearly flat at $220.6 million, and Real Estate revenue increased to $20.3 million. Construction, Large Project Construction and Materials gross margins improved to 11.9%, 14.4% and 7.5%, respectively. SG&A fell 15.3% to $162.3 million.
FY2011 quarterly revenue was $539.5 million in Q4, versus $417.2 million in Q4 2010. Q4 2011 gross profit was $79.1 million (14.7% margin), and net income attributable to Granite was $18.8 million, or $0.48 diluted EPS. Q4 2010 included approximately $107.3 million of restructuring charges.
Cash and securities increased by $10.9 million year over year, while operating cash flow improved by $63.0 million. The $406.6 million cash-and-securities balance includes $75.1 million held by consolidated construction joint ventures; the filing cautions that such funds generally are not available for Granite’s general liquidity needs. The company reported $250.6 million of total debt, including $32.7 million of mortgage debt of consolidated real-estate entities that is non-recourse to Granite. The $100 million secured revolving facility had no borrowings outstanding; $4.2 million of letters of credit were outstanding. Granite reported compliance with its principal debt covenants at year-end.
Material changes versus FY2010
- Granite returned to profitability from a FY2010 loss, with higher revenue and gross profit and sharply lower SG&A.
- FY2010 results included $109.3 million of restructuring charges, principally real-estate impairments; FY2011 charges were $2.2 million. The 2011 effective tax rate was 26.1%, compared with 41.3% in 2010, including a favorable IRS settlement and the effect of noncontrolling interests.
- Backlog increased 6.5% to $2.02 billion. Approximately $1.4 billion was expected to be completed during 2012. Large Project Construction backlog included $91.4 million of contracts with forecast losses, up from $49.8 million at year-end 2010.
- Construction results benefited from increased California activity and improved project and equipment cost management. Large Project Construction benefited from profit recognition on several projects reaching the company’s recognition threshold. The company’s accounting policy defers project profit recognition until at least 25% completion, and sometimes later for complex design-build work.
Outlook, risks and unusual items
- Management expected challenging conditions to persist into 2012: public infrastructure work faced funding constraints and competing priorities, while private construction and materials demand remained weak. The federal surface transportation program extension was due to expire in March 2012, with reauthorization unresolved when the report was filed.
- Granite planned to pursue traditional markets while expanding into federal, energy, water, rail and industrial opportunities. It anticipated capital expenditures of up to $53 million in 2012 and $1 million to $9 million of additional restructuring charges in 2012 and beyond. No specific revenue or earnings guidance was provided.
- The Enterprise Improvement Plan includes an orderly divestiture of the real-estate investment business by 2013, subject to market conditions and acceptable sale terms. Granite provided $8.4 million to real-estate entities during 2011 to pay off or refinance loans; real-estate mortgage debt was $32.5 million at year-end.
- A significant project contingency is the U.S. Highway 20 project in Oregon. Ground movement damaged portions of completed bridge structures, and Granite’s joint venture was in a dispute with ODOT over responsibility for design and corrective work. Granite recorded $4.5 million of cost adjustments in 2011, but said it could not reasonably estimate potential future impacts; substantial corrective costs could materially affect future results, liquidity and cash flows.
- Other principal risks include fixed-price project cost overruns, weather and delays, intense competition, government budget and contracting risks, commodity-price volatility, surety-bond availability, joint-venture partners’ performance and potential environmental or legal liabilities. Government-funded contracts generated 83.8% of FY2011 revenue; Caltrans accounted for 13.2%.
- Other notable items: Granite recorded a $3.7 million impairment on a preferred-stock investment and reported $15.8 million of gains on property and equipment sales. The company disclosed an ongoing federal civil-penalty matter concerning the Oregon project and a government investigation into disadvantaged-business participation on a New York project; outcomes were uncertain. Management stated that no material litigation accrual changes were recorded in 2011.
Most important facts for investors to verify
- Whether the $2.02 billion backlog converts to profitable revenue, especially the $91.4 million of forecast-loss large-project backlog and the schedule for the $1.4 billion expected to be completed in 2012.
- Developments in the U.S. Highway 20 dispute, including corrective-work scope, responsibility and any additional loss provisions.
- Actual cash available for corporate use after excluding joint-venture cash, and the company’s ability to maintain liquidity and meet debt covenants as those covenants tighten through 2013.
- Progress and realized proceeds from planned real-estate divestitures, associated mortgage refinancing needs and future restructuring charges.
- Federal transportation funding and other government project awards, given the high government revenue concentration and the March 2012 program expiration noted in the filing.
- Changes in project cost estimates, retainage collections, materials demand and margins, and the status or resolution of the disclosed government inquiries.
PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements and on the effectiveness of internal control over financial reporting as of December 31, 2011.