Granite Construction Incorporated — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Financial statements are unaudited. Granite is a heavy civil contractor and construction materials producer with Construction, Large Project Construction, Construction Materials, and Real Estate segments.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $256.7 million | $220.7 million |
| Gross profit / margin | $30.0 million / 11.7% | $5.7 million / 2.6% |
| Operating loss | $10.7 million | $45.1 million |
| Net loss | $7.3 million | $37.7 million |
| Net loss attributable to Granite | $9.0 million; $0.24 per share | $41.0 million; $1.09 per share |
| Operating cash flow | $0.7 million provided | $24.4 million used |
| Capital expenditures | $11.8 million | $14.7 million |
Revenue increased 16.3% year over year. Large Project Construction revenue rose 29.6%, and Construction revenue rose 14.2%; Construction Materials revenue fell 9.0% and Real Estate revenue fell to $2.4 million from $7.0 million. Gross margin improved substantially, reflecting higher activity, recognition of deferred profit on a large project, and estimate revisions. Construction Materials remained loss-making, with a $7.3 million segment gross loss.
Selling, general and administrative expense declined 21.6% to $43.4 million, mainly due to workforce reductions and cost controls. The 2011 tax benefit included a favorable IRS examination settlement; the effective tax-benefit rate was 41.9%, versus 16.8% a year earlier. Q1 results are seasonal and are not necessarily indicative of full-year results.
Financial position and liquidity
- At March 31, 2011, cash and cash equivalents were $240.8 million and marketable securities were $129.3 million. Together they totaled $370.1 million, including $108.0 million of consolidated joint-venture cash generally unavailable for Granite’s own working capital.
- Cash and cash equivalents excluding consolidated joint ventures were $132.8 million. Current assets were $837.0 million and current liabilities were $378.7 million.
- Senior notes totaled $225.0 million in principal. The balance sheet also included $48.2 million of non-recourse real-estate debt. The $100 million revolving credit facility had no borrowings outstanding; standby letters of credit totaled approximately $3.2 million.
- Granite reported compliance with its senior-note and credit-facility covenants. It stated that available cash, securities, and expected operating cash generation should cover anticipated needs for the next 12 months.
- Operating cash flow improved by $25.0 million year over year, but remained close to break-even. Investing activities provided $5.0 million, while financing activities used $16.9 million. Cash declined $11.3 million during the quarter.
Material changes and operating trends
- Gross profit increased to $30.0 million from $5.7 million. Large Project Construction gross profit rose to $31.3 million from $9.5 million, including deferred profit recognized when a project reached the company’s recognition threshold and a net $5.9 million of large-project estimate revisions.
- Construction backlog was $696.1 million, up 49.6% from December 31, 2010. Large Project Construction backlog was $1.31 billion, down 8.8% from year-end as work progressed. Total backlog was $2.00 billion, versus $1.90 billion at year-end and $1.58 billion a year earlier.
- Management attributed the improvement in results to higher construction activity and lower overhead. It cited continued weak private-sector demand and constrained public infrastructure funding as sources of intense competition.
- Real estate held for development and sale was $77.1 million, down from $137.2 million a year earlier. Granite continued its plan to orderly divest its real-estate investment business over approximately three years, subject to market conditions.
Outlook, risks, and unusual items
- Management expected challenging market conditions to persist through 2011 and possibly beyond, citing public-budget pressure, weak commercial and residential development, property oversupply, and restricted financing.
- Granite anticipated up to $54 million of 2011 capital expenditures and $2 million to $11 million of restructuring charges in 2011 and beyond. Timing and amount depend partly on acceptable asset-sale terms.
- A $72 million Nevada highway project awarded in April was expected to enter backlog in Q2 2011.
- On a large Oregon highway project, unexpected ground movement damaged portions of completed bridge structures. Granite and the Oregon Department of Transportation were disputing responsibility for design issues and corrective work. The cost and financial impact could not be estimated; substantial company responsibility could materially adversely affect future results and cash flows.
- Legal matters include a proposed $4.3 million sanction and ongoing government scrutiny concerning disadvantaged-business participation on the Hiawatha light-rail project; a continuing federal investigation of stormwater issues on a U.S. Highway 20 project; and an investigation concerning DBE issues on a New York project. Granite said outcomes and potential penalties in the investigations could not be estimated. A San Diego cleanup-contract lawsuit was settled after quarter-end; the settlement was accrued and was not expected to materially affect the consolidated financial statements.
- One consolidated and one unconsolidated real-estate entity were in default on debt payments at quarter-end. The consolidated entity received an extension after quarter-end; the unconsolidated entity was negotiating with lenders. These loans were non-recourse to Granite and did not trigger cross-defaults on Granite’s obligations.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material change in market-risk exposure or previously disclosed risk factors.
Investor verification points
- Track conversion of the $2.00 billion backlog into revenue and cash, including the balance of large-project work and customer cancellation or modification rights.
- Seek updates on the Oregon highway project’s corrective-work scope, dispute resolution, and potential Granite liability.
- Monitor Construction Materials losses, public-sector funding and private-market demand, and progress against the real-estate divestiture and restructuring plans.
- Review liquidity availability separately from joint-venture cash, and monitor real-estate entity defaults and any support Granite may provide.
- Follow the Hiawatha, U.S. Highway 20, and Grand Avenue investigations, including potential sanctions, litigation, or effects on eligibility for public contracts.