Granite Construction Incorporated — Q3 2011 Form 10-Q
Business context and reporting period
Granite is a U.S. heavy civil contractor and construction materials producer, with Construction, Large Project Construction, Construction Materials and Real Estate segments. This unaudited filing covers the quarter and nine months ended September 30, 2011; interim results are seasonal and may not indicate full-year results. The company is pursuing an orderly divestiture of its real estate investment business, subject to market conditions.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $728.6 million, up 8.6% | $1,470.0 million, up 9.2% |
| Gross profit / margin | $93.9 million / 12.9% (prior year 11.4%) | $168.8 million / 11.5% (prior year 9.8%) |
| Operating income (loss) | $60.4 million (prior year $32.2 million) | $59.1 million (prior-year loss of $10.8 million) |
| Net income attributable to Granite | $36.5 million; diluted EPS $0.93 (prior year $38.7 million; $0.99) | $32.4 million; diluted EPS $0.83 (prior-year loss of $9.0 million; loss per share $0.24) |
Construction and Large Project Construction drove revenue and gross-profit improvement. Q3 SG&A fell 17.1% to $39.1 million; nine-month SG&A fell 21.2% to $121.3 million, largely reflecting workforce and cost reductions. Construction Materials and Real Estate revenue remained pressured by weak private development markets. Q3 results also benefited from recognition of $12.2 million of deferred profit on two large projects, including noncontrolling interests.
Operating cash flow was $2.0 million for nine months, versus $10.6 million a year earlier. Working-capital uses—particularly receivables and costs/earnings in excess of billings—offset higher net income. Investing cash use was $8.4 million and financing cash use was $52.6 million. Capital expenditures were $34.7 million; management anticipated up to $45.0 million for full-year 2011.
At September 30, cash and cash equivalents were $193.1 million and marketable securities were $136.9 million, totaling $330.0 million; this total includes $65.4 million held by consolidated joint ventures and generally unavailable for Granite’s general working capital. Cash and securities were $395.7 million at December 31, 2010. Debt comprised approximately $216.9 million of senior debt and $44.4 million of non-recourse real-estate debt. The $100 million revolving facility had no borrowings and $3.2 million of letters of credit outstanding. The company said available liquidity should cover expected needs for the next 12 months. Current assets were $991.0 million and current liabilities $516.8 million.
Changes versus prior periods
- Nine-month revenue rose 9.2%, and the company returned to operating and attributable net profitability versus losses in the first nine months of 2010.
- Q3 attributable net income and diluted EPS were below the prior-year quarter despite higher revenue and operating income.
- Backlog was $1.844 billion at September 30, up 12.5% year over year but down 12.5% from June 30. Large Project Construction backlog was $1.281 billion; Construction backlog was $562.7 million.
- Cash and securities declined $65.7 million from year-end 2010; property and equipment and real-estate inventory also declined year over year.
Outlook, risks and unusual items
Management expected challenging conditions to persist through the remainder of 2011 and into 2012, citing intense bidding competition, constrained public-agency funding, weak commercial and residential demand, and financing limits. It was pursuing rail, energy and federal opportunities while reducing costs. Federal transportation funding remained uncertain, with relevant authorization and appropriations deadlines approaching.
Management expected $2 million to $11 million of restructuring charges in 2011 and beyond, depending partly on asset-sale negotiations. Project-estimate revisions included a net $1.6 million increase in Construction gross profit and a net $7.9 million increase in Large Project Construction gross profit for the nine-month period, partly offset by adverse project revisions. No revisions were made in 2011 to disputed work on the U.S. Highway 20 project.
The Highway 20 project has experienced ground movement and bridge damage; corrective work and responsibility for its cost remain unresolved. Granite said substantial corrective costs borne by its joint venture could materially harm future results and cash flows. The company also disclosed ongoing DOJ investigations or inquiries tied to Highway 20 stormwater matters and DBE issues on another project; outcomes and potential penalties are uncertain. Two consolidated and two unconsolidated real-estate entities were in payment default at quarter-end; one consolidated entity’s default was later cured. These loans are non-recourse to Granite, but the remaining entities were negotiating with lenders. Joint-venture obligations, contract cost estimates, government funding, and possible suspension or debarment are additional risks. Granite reported compliance with its own senior-note and credit-facility covenants.
Most important facts for investors to verify
- Progress and financial responsibility for U.S. Highway 20 remediation, including potential future costs.
- Backlog conversion, new awards and the effect of public funding and competition on margins.
- Working-capital trends and operating cash generation, especially receivables and unbilled contract balances.
- Status of real-estate debt defaults, planned divestitures and potential restructuring charges.
- Developments in the disclosed DOJ matters and any consequences for government contracting eligibility.