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| GVA > SEC Filings for GVA > Form 10-Q on 31-Oct-2008 | All Recent SEC Filings |
31-Oct-2008
Quarterly Report
Forward-Looking Disclosure
From time to time, Granite makes certain comments and disclosures in reports and statements, including in this Quarterly Report on Form 10-Q, or statements made by its officers or directors that are not based on historical facts and which may be forward-looking in nature. Under the Private Securities Litigation Reform Act of 1995, a "safe harbor" may be provided to us for certain of these forward-looking statements. Words such as "outlook," "believes," "expects," "appears," "may," "will," "should," "anticipates" or the negative thereof or comparable terminology, are intended to identify such forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made by or on behalf of Granite. These forward-looking statements are estimates reflecting the best judgment of senior management and are based on our current expectations and projections concerning future events, many of which are outside of our control, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those more specifically described in our Annual Report on Form 10-K under "Item 1A. Risk Factors." Granite undertakes no obligation to publicly revise or update any forward-looking statements for any reason. As a result, the reader is cautioned not to rely on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.
Overview
We are one of the largest heavy civil contractors and producers of construction materials in the United States and are engaged in the construction and improvement of streets, roads, highways and bridges as well as dams, airport infrastructure, mass transit facilities, and other infrastructure-related projects, as well as the production of construction material through the use of our extensive aggregate reserves and plant facilities. We also operate a real estate development company on a significantly smaller scale. We have offices in Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and Washington.
Our construction contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local agencies and private parties and to a lesser extent through negotiation with private parties. Our bidding activity is affected by such factors as backlog, available personnel, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, backlog and revenue resulting from the award of new contracts may vary significantly from period to period. We have three reportable business segments: Granite West, Granite East and Granite Land Company (see Note 13 to the condensed consolidated financial statements).
The three primary economic drivers of our business are (1) the overall health of the economy, (2) federal, state and local public funding levels, both nationally and locally and (3) population growth and the resulting private development. The level of demand for our services will have a direct correlation to these drivers. For example, a stagnant or declining economy will generally result in a reduced demand for construction in the private sector. This reduced demand increases competition for private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. Greater competition can reduce our revenue growth and/or have a downward impact on gross profit margins. In addition, a stagnant or declining economy tends to produce less tax revenue, thereby decreasing a source of funds available for spending on public infrastructure improvements. There are funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, which are not as directly impacted by a stagnant or declining economy. However, even these funding sources can be temporarily at risk as state and local governments struggle to balance their budgets. Additionally, high fuel prices can have a damping effect on consumption, resulting in overall lower tax revenue. Conversely, higher public funding as well as an expanding or robust economy will generally increase demand for our services and provide opportunities for revenue growth and margin improvement.
Our general and administrative costs include salaries and related expenses, incentive compensation, discretionary profit sharing, provision for doubtful accounts and other costs to support our business. In general, these costs will increase in response to the growth and the related increased complexity of our business. These costs will vary depending on the number of projects in process in a particular area and the corresponding level of estimating activity. For example, as large projects are completed or if the level of work slows down in a particular area, we will often re-assign project employees to estimating and bidding activities until another project gets underway, temporarily allocating their salaries and related costs from cost of revenue to general and administrative expense. Additionally, our compensation strategy for selected management personnel is to rely heavily on a variable cash and restricted stock performance-based incentive element. The cash portion of these incentives is expensed when earned while the restricted stock portion is expensed over the vesting period of the restricted stock award. Depending on the mix of cash and restricted stock, these incentives can have the effect of materially altering general and administrative expenses from year to year.
Results of Operations:
Comparative Financial Summary Three Months
Ended September 30, Nine Months Ended September 30,
(in thousands) 2008 2007 2008 2007
Revenue $ 897,788 $ 846,313 $ 2,046,920 $ 2,104,849
Gross profit 144,302 136,637 352,022 312,307
General and administrative expenses 71,933 63,666 198,344 183,133
Gain on sales of property and
equipment 2,008 2,994 4,564 8,053
Operating income 74,377 75,965 158,242 137,227
Other (expense) income, net (572 ) 9,276 9,976 19,100
Minority interest in consolidated
subsidiaries (594 ) (6,504 ) (31,058 ) (13,750 )
Net income 51,738 53,300 90,479 94,897
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Our results of operations for the three and nine months ended September 30, 2008 reflect continued growth in Granite West public sector projects despite a slowing economy and a very competitive market, as well as a continuation of profitability improvement in Granite East.
Total Revenue Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
(in thousands) Amount % Amount % Amount % Amount %
Revenue by Division:
Granite West $ 749,487 83.4 $ 642,428 75.9 $ 1,506,952 73.6 $ 1,482,969 70.5
Granite East 146,932 16.4 182,647 21.6 531,826 26.0 585,324 27.8
Granite Land Company 1,369 0.2 21,238 2.5 8,142 0.4 36,556 1.7
Total $ 897,788 100.0 $ 846,313 100.0 $ 2,046,920 100.0 $ 2,104,849 100.0
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Granite West
Revenue Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
(in thousands) Amount % Amount % Amount % Amount %
California:
Public sector $ 275,768 73.4 $ 181,094 55.7 $ 507,645 65.7 $ 456,639 56.8
Private sector 26,930 7.2 67,169 20.6 86,047 11.1 163,409 20.3
Material sales 73,065 19.4 77,122 23.7 179,653 23.2 183,397 22.9
Total $ 375,763 100.0 $ 325,385 100.0 $ 773,345 100.0 $ 803,445 100.0
West (excluding
California):
Public sector $ 293,242 78.4 $ 220,885 69.7 $ 554,499 75.6 $ 433,775 63.8
Private sector 29,069 7.8 49,827 15.7 75,440 10.3 139,491 20.5
Material sales 51,413 13.8 46,331 14.6 103,668 14.1 106,258 15.7
Total $ 373,724 100.0 $ 317,043 100.0 $ 733,607 100.0 $ 679,524 100.0
Total Granite
West Revenue:
Public sector $ 569,010 75.9 $ 401,979 62.6 $ 1,062,144 70.5 $ 890,414 60.0
Private sector 55,999 7.5 116,996 18.2 161,487 10.7 302,900 20.4
Material sales 124,478 16.6 123,453 19.2 283,321 18.8 289,655 19.6
Total $ 749,487 100.0 $ 642,428 100.0 $ 1,506,952 100.0 $ 1,482,969 100.0
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Granite West Revenue: Revenue from Granite West for the three and nine months ended September 30, 2008 increased by $107.1 million, or 16.7%, and $24.0 million, or 1.6%, respectively, over the corresponding 2007 periods. The increases in public sector revenue for the quarter were primarily attributable to profitable progress toward completion of federally funded security projects and the positive effect of the resolution of significant uncertainties on certain projects. The decreases in private sector revenue for the three and the nine months ended September 30, 2008 were driven by the ongoing contraction of residential construction and credit markets. Granite West revenue from projects with a contract value greater than $50.0 million was $107.7 million and $49.8 million in the three months ended September 30, 2008 and 2007, respectively, and $206.9 million and $130.6 million in the nine months ended September 30, 2008 and 2007, respectively.
Granite East
Revenue Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 2008 2007
(in thousands) Amount % Amount % Amount % Amount %
Revenue by
Geographic Area:
Midwest $ 49,520 33.7 $ 29,620 16.2 $ 133,333 25.1 $ 72,373 12.4
Northeast 25,295 17.2 52,542 28.8 97,338 18.3 150,794 25.8
South 28,322 19.3 24,993 13.7 92,417 17.4 97,258 16.6
Southeast 41,520 28.3 65,364 35.8 164,973 31.0 223,721 38.2
West 2,275 1.5 10,128 5.5 43,765 8.2 41,178 7.0
Total $ 146,932 100.0 $ 182,647 100.0 $ 531,826 100.0 $ 585,324 100.0
Revenue by
Contract Type:
Fixed unit price $ 10,630 7.2 $ 29,229 16.0 $ 45,099 8.5 $ 101,961 17.4
Fixed price,
including
design/build 136,302 92.8 153,418 84.0 486,727 91.5 483,363 82.6
Total $ 146,932 100.0 $ 182,647 100.0 $ 531,826 100.0 $ 585,324 100.0
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Granite East Revenue: Revenue from Granite East for the three and nine months ended September 30, 2008 decreased by $35.7 million, or 19.6%, and $53.5 million, or 9.1%, respectively, compared to the corresponding 2007 periods. This decrease is reflective, in part, of our plan to slow revenue growth in the division over the last several years to focus on execution and improved profitability. Geographically, the largest decreases were experienced in the Northeast and the Southeast due primarily to certain large projects nearing completion. Increases in the Midwest and South resulted from revenue contributions from progress on a large design/build project in St. Louis, Missouri and project productivity on a bridge project in Mississippi, respectively.
The following tables illustrate our contract backlog as of the respective dates:
Total Contract Backlog September 30, 2008 June 30, 2008 September 30, 2007 (in thousands) Amount % Amount % Amount % Backlog by Division: Granite West $ 915,472 50.3 $ 1,188,948 55.5 $ 950,833 40.7 Granite East 906,116 49.7 952,700 44.5 1,385,688 59.3 Total $ 1,821,588 100.0 $ 2,141,648 100.0 $ 2,336,521 100.0 Granite West Contract Backlog September 30, 2008 June 30, 2008 September 30, 2007 (in thousands) Amount % Amount % Amount % California: Public sector $ 408,652 93.4 $ 597,257 93.5 $ 342,971 79.4 Private sector 28,922 6.6 41,548 6.5 89,004 20.6 Total $ 437,574 100.0 $ 638,805 100.0 $ 431,975 100.0 West (excluding California): Public sector $ 457,686 95.8 $ 523,629 95.2 $ 463,764 89.4 Private sector 20,212 4.2 26,514 4.8 55,094 10.6 Total $ 477,898 100.0 $ 550,143 100.0 $ 518,858 100.0 Granite West Contract Backlog: Public sector $ 866,338 94.6 $ 1,120,886 94.3 $ 806,735 84.8 Private sector 49,134 5.4 68,062 5.7 144,098 15.2 Total $ 915,472 100.0 $ 1,188,948 100.0 $ 950,833 100.0 |
Granite West Contract Backlog: Granite West backlog of $915.5 million at September 30, 2008 was $273.5 million, or 23.0%, lower than at June 30, 2008 and $35.4 million, or 3.7%, lower than at September 30, 2007. The decrease from September 30, 2007 was primarily driven by projects nearing completion in the quarter and the continued weak demand for residential construction. This decrease was partially offset by increased public sector awards in Arizona and California primarily in the first six months of 2008. The decrease in backlog from June 30, 2008 to September 30, 2008 is due primarily to the absence of significant awards in the quarter. Granite West backlog from projects with a total contract value greater than $50.0 million was $280.9 million, $369.7 million and $253.4 million at September 30, 2008, June 30, 2008 and September 30, 2007, respectively.
Granite East Contract Backlog September 30, 2008 June 30, 2008 September 30, 2007 (in thousands) Amount % Amount % Amount % Backlog by Geographic Area: Midwest $ 204,166 22.5 $ 248,888 26.1 $ 350,496 25.3 Northeast 107,575 11.9 88,686 9.3 166,453 12.0 South 135,534 15.0 114,365 12.0 166,168 12.0 Southeast 455,260 50.2 495,007 52.0 679,301 49.0 West 3,581 0.4 5,754 0.6 23,270 1.7 |
Granite East Contract Backlog: Granite East backlog of $906.1 million at September 30, 2008 was $46.6 million, or 4.9%, lower than at June 30, 2008, and $479.6 million, or 34.6%, lower than at September 30, 2007. The decrease reflects progress on construction projects. Significant new awards for the quarter include a $33.8 million federal security project in Texas and our $13.0 million share of additional work order packages related to the World Trade Center Transportation Hub project in New York.
Gross Profit (Loss) Nine Months Ended September
Three Months Ended September 30, 30,
(in thousands) 2008 2007 2008 2007
Granite West $ 133,738 $ 124,656 $ 267,057 $ 286,394
Percent of division revenue 17.8 % 19.4 % 17.7 % 19.3 %
Granite East $ 9,750 $ 2,075 $ 87,868 $ 8,478
Percent of division revenue 6.6 % 1.1 % 16.5 % 1.4 %
Granite Land Company $ 482 $ 9,571 $ (1,704) $ 17,090
Percent of division revenue 35.2 % 45.1 % -20.9 % 46.8 %
Other $ 332 $ 335 $ (1,199) $ 345
Total gross profit $ 144,302 $ 136,637 $ 352,022 $ 312,307
Percent of total revenue 16.1 % 16.1 % 17.2 % 14.8 %
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Gross Profit: We defer recognition of construction project profit until a project reaches 25% completion. In the case of large, complex design/build projects, we may continue to defer profit recognition beyond the point of 25% completion until such time as we believe we have enough information to make a reasonably dependable estimate of contract revenue and cost. This policy can have a significant impact on gross profit, particularly in periods where one or several large projects reach the point of profit recognition and the deferred profit is recognized or, conversely, in periods where backlog related to larger projects is growing rapidly and a higher percentage of projects are in their early stages with no associated gross margin recognition. Revenue from jobs with deferred contract profit for the period was as follows:
Revenue from Contracts with Deferred Profit Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2008 2007 2008 2007 Granite West $ 18,070 $ 18,382 $ 18,757 $ 21,235 Granite East 20,922 40,370 63,729 88,274 Total revenue from contracts with deferred profit $ 38,992 $ 58,752 $ 82,486 $ 109,509 |
Additionally, we do not recognize revenue from contract claims until we have a signed settlement agreement and payment is assured, and we do not recognize revenue from contract change orders until the contract owner has agreed to the change order in writing. However, we do recognize the costs related to any contract claims or pending change orders in our forecasts when we are contractually obligated to incur them. As a result, our gross profit as a percent of revenue can vary during periods when a large volume of contract claims or change orders are pending resolution (reducing gross profit) or, conversely, during periods where large contract claims or change orders are agreed to or settled (increasing gross profit).
Granite East gross profit as a percent of revenue for the three and nine months ended September 30, 2008 increased to 6.6% and 16.5%, respectively, from 1.1% and 1.4% for the three and nine months ended September 30, 2007, respectively. Gross profit in the 2008 periods was positively impacted by changes in profitability estimates which added approximately $5.9 million to gross profit in the quarter and $52.5 million in the nine month period. Gross profit decreased by $8.6 million and $21.8 million in the three and nine months ended September 30, 2007, respectively, due to project estimate changes (see Note 3 of the "Notes to the Condensed Consolidated Financial Statements").
Granite Land Company recorded a gross profit of $0.5 million for the three months ended September 30, 2008 and a gross loss of $1.7 million for the nine months ended September 30, 2008. The gross loss for the nine months is primarily due to an impairment charge of $4.5 million recorded in the prior quarter related to real estate development assets in California, partially offset by rental and royalty income during the period. Gross profit in the three and nine month periods ended September 30, 2007 included the impacts of several sales of real estate projects. As a result of the current real estate downturn and the stages of development of our current project portfolio, there has been very limited sales activity in 2008. (See Note 6 of the "Notes to the Condensed Consolidated Financial Statements").
The following table presents the components of general and administrative expenses for the respective periods:
General and Administrative Expenses Nine Months Ended
Three Months Ended September 30, September 30,
(in thousands) 2008 2007 2008 2007
Salaries and related expenses $ 31,925 $ 30,008 $ 102,520 $ 96,374
Incentive compensation, discretionary
profit sharing and other variable
compensation 14,069 13,484 29,879 30,174
Provision (recovery) for doubtful
accounts 7,531 (37 ) 8,914 1,119
Other general and administrative
expenses 18,408 20,211 57,031 55,466
Total $ 71,933 $ 63,666 $ 198,344 $ 183,133
Percent of revenue 8.0 % 7.5 % 9.7 % 8.7 %
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General and Administrative Expenses: Our general and administrative expenses for the three and nine months ended September 30, 2008 increased $8.3 million, or 13.0%, and $15.2 million, or 8.3%, over the comparable periods in 2007. The increase for the three and nine months ended September 30, 2008 was due to an increase in the allowance for doubtful accounts (primarily related to receivables from real estate developers), higher personnel related costs (primarily related to normal salary increases), and costs associated with integrating our businesses acquired in 2007.
Other (Expense) Income Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2008 2007 2008 2007 Interest income $ 5,439 $ 7,514 $ 15,087 $ 20,796 Interest expense (5,303 ) (1,884 ) (12,871 ) (4,998 ) Equity in (loss) income of affiliates (1,257 ) 4,037 (1,436 ) 4,359 . . . |
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