Granite Construction Incorporated — Q2 2012 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2012, compared with the same 2011 periods. Granite operates Construction, Large Project Construction, Construction Materials and Real Estate businesses. Results are seasonal and interim results are not necessarily indicative of the full year.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $539.6 | $484.7 | $849.8 | $741.4 |
| Gross profit | $51.9 | $45.0 | $76.9 | $74.9 |
| Gross margin | 9.6% | 9.3% | 9.0% | 10.1% |
| Operating income (loss) | $14.1 | $9.4 | $(2.3) | $(1.2) |
| Net income (loss) attributable to Granite | $1.9 | $4.9 | $(9.8) | $(4.1) |
| Diluted EPS | $0.05 | $0.13 | $(0.26) | $(0.11) |
- Revenue and segment mix: Q2 revenue rose 11.3% year over year, chiefly from Large Project Construction, whose revenue increased 40.9%. Construction revenue fell 5.9%. For the first half, revenue increased 14.6%; Large Project Construction rose 30.8%, while Construction rose 2.8%.
- Margins and earnings: Q2 gross margin improved slightly, but first-half margin declined. Construction margins weakened amid competition and difficult market conditions. Large Project Construction gross profit increased in Q2 on project progress and favorable estimate revisions; first-half segment margin nevertheless declined to 12.9% from 14.6%. Construction Materials recorded a first-half gross loss of $1.0 million, versus $1.2 million gross profit a year earlier.
- Other income and unusual items: Q2 other expense was $7.7 million, including a $2.8 million noncash impairment of a power-generation-equipment investment. First-half other income included a $5.3 million gain on gold, a by-product of aggregate production. Q2 and first-half large-project estimate revisions increased gross profit by $9.3 million and $13.7 million, respectively; construction estimate revisions reduced gross profit by $1.6 million and $0.8 million, respectively.
- Cash flow: First-half operating cash flow was negative $34.6 million, compared with negative $16.7 million in 2011, reflecting a larger net loss and less favorable working-capital changes. Investing activities provided $45.4 million, mainly reflecting security maturities and sales; financing used $29.8 million. Cash and equivalents declined $19.0 million to $238.0 million. Capital expenditures were $19.9 million, versus $27.5 million a year earlier.
- Liquidity and debt: Cash, equivalents and marketable securities totaled $327.0 million at June 30, including $67.7 million held by consolidated construction joint ventures that generally is not available for Granite’s working capital. Granite reported $89.1 million of marketable securities. Corporate debt was approximately $209.3 million, and consolidated real-estate non-recourse debt was approximately $21.0 million. The $100 million secured revolver had no borrowings outstanding and $4.2 million of standby letters of credit; it expires June 22, 2013. Granite reported compliance with its corporate debt covenants.
- Balance sheet: Total assets were $1.508 billion and equity was $809.1 million at June 30, 2012. Current assets were $915.2 million and current liabilities $442.7 million.
- Backlog: Contract backlog was $1.950 billion at June 30, down from $2.107 billion a year earlier and $2.083 billion at March 31. Construction backlog rose 12.1% from March, while Large Project Construction backlog fell 14.2%, primarily due to work completed and few significant awards during the quarter.
Outlook, risks and contingencies
- Management expected challenging conditions to persist through 2012: strong competition pressured Construction margins, public funding constraints affected project timing and volume, and weak commercial and residential development weighed on materials demand. Granite cited the recently enacted 27-month federal surface transportation authorization, MAP-21, as a source of greater funding certainty and program stability.
- Granite planned to pursue traditional markets while expanding into rail, power, water, industrial and federal opportunities. Management believed available cash, securities and operating cash generation would cover expected needs for the next 12 months; it did not expect to need the revolver for working capital. 2012 capital expenditures were expected not to exceed $45 million.
- Further restructuring charges of up to $8 million could be recorded during the remainder of 2012 and beyond, depending on consolidation plans, market conditions and acceptable asset-sale terms. Granite continued its plan to divest its real-estate investment business by the end of 2013, subject to market conditions.
- One consolidated real-estate entity was in default on debt following a change in its venture partner’s financial condition. The debt is non-recourse to Granite and does not trigger cross-defaults on Granite’s obligations; the entity was discussing revised terms with its lender.
- Legal matters include negotiations over a civil penalty in the US Highway 20 stormwater matter and a continuing government investigation concerning disadvantaged-business-enterprise contracting on the Grand Avenue project. Granite said it was cooperating; it could not rule out civil, criminal or administrative action in the latter matter. Management did not expect the disclosed proceedings, individually or in aggregate, to materially harm the company, but acknowledged litigation uncertainty.
- In May 2012, Granite’s joint venture and Oregon DOT settled the US Highway 20 project dispute. The settlement ended further work after limited final activities, released claims between the parties and included payments and release of earned amounts; Granite said it had no material effect on its financial position or results.
Most important facts for investors to verify
- Whether the $1.950 billion backlog converts to revenue and earnings as expected, particularly after the quarter’s decline in Large Project Construction backlog.
- Whether construction margins stabilize and whether the favorable large-project estimate revisions are sustainable; monitor project productivity and cost-to-complete estimates.
- Whether operating cash flow improves as working-capital needs fluctuate, and how much reported liquidity is accessible after excluding joint-venture cash.
- Progress on real-estate divestitures, potential restructuring charges, and resolution of the consolidated real-estate entity’s debt default.
- Developments in the Grand Avenue investigation and Highway 20 civil-penalty negotiations, as well as the timing and impact of any legal outcomes.
- The effects of public infrastructure funding, MAP-21 implementation, competition and weak private development demand on awards, materials sales and margins.