Business Context and Reporting Period
Company: Granite Construction Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: One of the largest heavy civil contractors and producers of construction materials in the United States. Operations are divided into three segments: Granite West (heavy civil construction and materials in the western U.S.), Granite East (large infrastructure projects east of the Rockies), and Granite Land Company (real estate development).
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (YTD) | 2008 (YTD) |
|---|---|---|
| Total Revenue | $808.4 million | $1,149.1 million |
| Gross Profit | $151.3 million | $207.7 million |
| Operating Income | $47.3 million | $83.9 million |
| Net Income (Attributable to Granite) | $26.9 million | $38.7 million |
| Diluted EPS | $0.70 | $1.00 |
| Cash and Cash Equivalents | $356.2 million | $286.6 million |
| Total Debt (Current + Long-term) | $298.5 million | $286.2 million |
| Contract Backlog | $1.53 billion | $2.14 billion |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 29.6% year-over-year. Granite West revenue dropped 28.0% and Granite East dropped 31.9%, primarily due to the contraction of residential construction, credit market tightening, and large projects nearing completion.
- Profitability: Operating income decreased 43.6%. However, gross profit margins improved in the Granite East segment (21.4% vs. 20.1%) due to project settlements and improved productivity, while Granite West margins remained stable.
- Cash Flow: Operating cash flow turned negative at $(6.4) million, a $50.2 million decrease from the prior year's positive $43.8 million. This was driven by higher inventory levels (liquid asphalt), reductions in billings in excess of costs, and increased other assets.
- Backlog Reduction: Total contract backlog decreased 28.5% to $1.53 billion, reflecting project progress and weak demand for residential construction.
Guidance, Outlook, and Risks
- Outlook: Management expects 2009 to be challenging but believes the company's diverse business model provides resiliency. The outlook for Granite East is improving with selective bidding on large projects. Stimulus funds (American Recovery and Reinvestment Act) are expected to generate new bidding opportunities.
- Real Estate Strategy: Granite Land Company (GLC) will remain flexible and patient. Continued declines in real estate markets could lead to further impairment charges on development assets.
- Liquidity: The company maintains $356.2 million in cash and $145.8 million in available credit under its revolving line of credit. Management believes these resources are sufficient for the next 12 months.
- Legal Proceedings:
- Hiawatha Project: Facing a proposed $4.3 million sanction and training requirements from MnDOT regarding DBE compliance issues.
- US Highway 20: Under criminal investigation by the USDOJ regarding stormwater runoff violations; potential penalties are currently unquantifiable.
- San Diego Fire Debris: Civil lawsuit filed by the City of San Diego alleging false claims; management believes the probability of material liability is remote.
- Grand Avenue Project: Under investigation by the USDOJ regarding DBE subcontractor compliance.
Investor Verification Checklist
- Project Estimates: Verify the stability of project profitability estimates, as significant changes in estimates (both upward and downward) materially impacted gross profit in both 2009 and 2008.
- Real Estate Impairments: Monitor the valuation of real estate held for development and sale, as the segment recorded impairment charges of $1.0 million in the first half of 2009.
- Legal Exposure: Track the resolution of the Hiawatha DBE sanctions and the USDOJ investigations (US Highway 20 and Grand Avenue) for potential financial penalties.
- Backlog Composition: Assess the shift in backlog composition toward public sector projects (97.3% of Granite West backlog) and the reliance on federal stimulus funding.
- Operating Cash Flow: Monitor the reversal of negative operating cash flow, specifically the management of inventory levels and billings in excess of costs.