Granite Construction Incorporated — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited interim results; the company cautions that results are seasonal and are not necessarily indicative of full-year performance. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Revenue | $484.7 | $454.2 | $741.4 | $674.9 |
| Gross profit | $45.0 | $49.7 | $74.9 | $55.4 |
| Gross margin | 9.3% | 10.9% | 10.1% | 8.2% |
| Operating income (loss) | $9.4 | $2.1 | $(1.2) | $(43.0) |
| Net income (loss) attributable to Granite | $4.9 | $(6.7) | $(4.1) | $(47.6) |
| Diluted earnings (loss) per share | $0.13 | $(0.18) | $(0.11) | $(1.26) |
- Q2 revenue rose 6.7% year over year, while gross profit fell about 9.5%; lower large-project construction gross profit outweighed gains in construction materials.
- H1 revenue increased 9.9% and gross profit increased 35.3%. The smaller operating loss primarily reflects higher gross profit and lower selling, general and administrative (SG&A) expenses.
- SG&A was $38.8 million in Q2 and $82.2 million in H1, down 24.5% and 23.0%, respectively, from prior-year periods, mainly due to workforce and cost reductions.
- Q2 construction revenue increased, supported by California activity; large-project revenue also increased. Construction materials revenue declined amid weak commercial and residential development markets. H1 large-project gross profit benefited from recognition of previously deferred profit on a project reaching the company’s recognition threshold.
Cash flow, liquidity and debt
- H1 operating cash flow was a use of $16.7 million, compared with a use of $38.9 million in H1 2010. Working-capital demands included increases in receivables, costs in excess of billings, inventories and joint-venture equity.
- Cash and cash equivalents were $190.1 million and marketable securities were $127.8 million at June 30, 2011. Of the cash balance, $89.7 million was held by consolidated construction joint ventures and generally unavailable for Granite’s own working capital. Cash excluding those joint ventures plus marketable securities was approximately $228.2 million.
- Operating, investing and financing activities used $16.7 million, $4.8 million and $40.4 million, respectively, in H1. Cash declined $62.0 million to $190.1 million.
- Debt on the balance sheet comprised approximately $216.9 million of long-term debt, including current maturities, and $45.4 million of non-recourse debt, primarily associated with real estate entities. The $100 million revolving credit facility had no borrowings outstanding; $3.2 million of letters of credit were outstanding.
- Management said existing cash, investments and expected operating cash generation should cover anticipated needs for the next 12 months. H1 capital expenditures were $27.5 million; the company anticipated up to $45 million for full-year 2011.
- Granite reported compliance with its senior-note and credit-facility covenants. Credit-facility covenant measures were within required limits at June 30, 2011.
Backlog, outlook and management commentary
- Total construction backlog was $2.11 billion at June 30, up 36% from a year earlier. Construction backlog rose 34.7% year over year to $800.4 million; large-project backlog rose 36.6% to $1.31 billion. Backlog is not guaranteed: substantially all contracts may be canceled or modified by customers.
- Management cited intense competition, public funding constraints and weak commercial and residential demand as continuing pressures on margins and materials sales. It expected challenging conditions to persist through 2011 and into 2012, pending improvement in economic activity, public-agency tax revenues, competition and financing availability.
- The company said it was pursuing opportunities in traditional markets and diversifying into rail, energy and federal work. Its Enterprise Improvement Plan aims to reduce costs and orderly divest the real estate investment business over three years, subject to market conditions. It expected $2 million to $11 million of restructuring charges during 2011 and beyond; timing and amount depend partly on asset sales.
Risks, contingencies and unusual items
- Oregon highway project: Unanticipated ground movement damaged portions of completed bridge structures. Corrective work and responsibility for its cost remained unresolved with the Oregon Department of Transportation. The company could not estimate the potential impact; substantial costs borne by Granite could materially harm future results and cash flows.
- Real estate debt defaults: One consolidated real estate entity was in default at June 30 for missing a payment. Three unconsolidated real estate entities defaulted after quarter-end; one was subsequently cured. Remaining affected loans were non-recourse to Granite, but the entities were discussing revised terms with lenders.
- Government-contract investigations: The Hiawatha light-rail joint venture faced proposed sanctions of $4.3 million and possible further administrative, civil or criminal action over disadvantaged-business-enterprise compliance. A separate federal investigation concerned the Grand Avenue project; potential penalties were not estimable. The company also disclosed an ongoing investigation related to stormwater runoff on the US Highway 20 project, with expected penalties, if any, not exceeding $1 million.
- The San Diego fire-debris cleanup lawsuit was settled in May 2011 without a material financial-statement impact. The filing says other proceedings and inquiries are typical for the business, but acknowledges that unfavorable outcomes could adversely affect results, cash flows or liquidity.
- Granite added a risk warning that deterioration in the U.S. economy, potential sovereign credit-rating downgrade or reduced government spending could impair infrastructure funding and access to financing.
- H1 results included a favorable IRS examination settlement reflected in recognition of previously unrecognized tax benefits. No significant real-estate impairment charges were recorded during the periods presented.
Important facts for investors to verify
- Whether the Oregon project dispute is resolved and the scale and allocation of any corrective-work costs.
- Whether backlog converts into funded work and revenue, and whether large-project margins recover as projects progress past profit-recognition thresholds.
- Cash generation and working-capital needs, especially receivables, billings and costs in excess of billings, and the portion of reported cash unavailable because it belongs to joint ventures.
- Developments in real estate entity defaults, lender negotiations, and the planned divestiture of the real estate portfolio.
- Outcomes of the DBE and stormwater investigations, including potential sanctions, contract eligibility and other consequences.
- Actual restructuring charges and capital spending compared with the stated ranges and plans; no specific earnings guidance was provided.