Granite Construction Inc. 2002 Annual Report Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2002. Granite Construction Inc. is a leading heavy civil construction contractor operating nationwide in the U.S. The company is organized into two primary segments: the Branch Division, which serves local markets with smaller, shorter-duration projects, and the Heavy Construction Division (HCD), which pursues major infrastructure projects (highways, dams, transit) with durations typically exceeding two years. In 2002, the company consolidated Wilder Construction Company (increasing ownership to ~59%) and acquired assets from Robinson Construction, Parnum Paving, and West Coast Aggregates.
Key Financial Metrics
| Metric (in thousands) | 2002 | 2001 |
|---|---|---|
| Total Revenue | $1,764,742 | $1,547,994 |
| Gross Profit | $224,584 | $183,616 |
| Gross Margin | 12.7% | 11.9% |
| Operating Income | $78,117 | $64,334 |
| Net Income | $49,279 | $50,528 |
| Diluted EPS | $1.21 | $1.24 |
| Backlog (Year End) | $1,856,451 | $1,377,172 |
| Working Capital | $220,396 | $248,413 |
| Long-Term Debt | $132,380 | $131,391 |
| Cash & Equivalents | $52,032 | $125,174 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 14.0% to $1.76 billion. This was driven by a 24.3% increase in HCD revenue (due to full-year contribution from the Granite Halmar acquisition and higher backlog) and a 9.6% increase in Branch Division revenue (driven by acquisitions of Wilder, Robinson, and Parnum). Excluding acquisitions, organic Branch Division revenue declined 9.5% due to a slowdown in private development and increased competition for public work.
- Profitability: Gross margin improved to 12.7% from 11.9%, primarily due to a more profitable mix of HCD projects and the absence of margin deterioration seen in a specific East Coast joint venture in 2001. However, net income decreased slightly by 2.5% due to higher general and administrative expenses (G&A) and lower "Other Income."
- Backlog: Backlog increased 34.8% to a record $1.86 billion, with HCD representing 73.6% of the total. Significant additions included a $170.7 million railroad project in Nevada and a $162.0 million NYC transit project.
- Cash Flow: Operating cash flow decreased to $104.0 million from $124.6 million, largely due to timing differences in billings on large projects compared to 2001. Investing cash outflows increased due to business acquisitions and purchases of marketable securities.
Outlook, Risks, and Management Commentary
- 2003 Outlook: Management expresses cautious optimism, citing a record backlog and strong bidding opportunities for HCD, particularly in design/build projects. However, the Branch Division faces headwinds from state budget deficits (notably in California) and a weak private sector economy.
- Key Risks:
- Government Funding: Significant reliance on public sector funding (71.6% of revenue) exposes the company to state budget shortfalls and federal reauthorization delays.
- Contract Risks: Fixed-price and fixed unit-price contracts expose the company to cost overruns due to site conditions, labor availability, and material price fluctuations (specifically diesel and asphalt).
- Joint Ventures: The company faces joint and several liability for partner performance in joint ventures, with approximately $900 million of partner work remaining at year-end.
- Legal Proceedings: The company is a defendant in a False Claims Act lawsuit regarding a Utah highway project, seeking over $46 million in damages. Management intends to contest vigorously but notes potential costs and liability.
- Unusual Items: The company expects to record a gain of $10.0–$12.0 million (net of tax) in Q1 2003 from the sale of its interest in the State Route 91 Tollroad Franchise.
Investor Verification Checklist
- Acquisition Integration: Verify the financial performance and integration progress of the newly consolidated Wilder Construction Company and other 2002 acquisitions.
- California Budget Impact: Monitor the resolution of California's state budget shortfall and its specific impact on the California Department of Transportation (11.9% of 2002 revenue) bidding schedule.
- Joint Venture Exposure: Review the status of the Utah False Claims Act litigation and the financial health of joint venture partners given the $900 million exposure to partner work.
- Margin Sustainability: Assess whether the improved 12.7% gross margin is sustainable given the expected increase in competition for public sector work in 2003.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the tangible net worth requirement of approximately $370.2 million.