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| GVA > SEC Filings for GVA > Form 10-Q on 30-Jul-2009 | All Recent SEC Filings |
30-Jul-2009
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. We 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. We produce construction materials 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 three operating segments: Granite West, Granite East and Granite Land Company ("GLC"). Our offices are located in Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and Washington.
Our contracts are obtained primarily through competitive bidding in response to advertisements by both public agencies and private parties and to a lesser extent on a negotiated basis as a result of direct solicitation by private parties. Our bidding activity is affected by such factors as contract backlog, available personnel, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, contract backlog and revenue resulting from the award of new contracts may vary significantly from period to period.
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 with 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 dampening 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 (generally three to five years).
Results of Operations: Comparative Financial Summary Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2009 2008 2009 2008 Total revenue $ 461,075 $ 694,332 808,447 1,149,132 Gross profit 83,245 109,026 151,258 207,720 Operating income 30,384 45,421 47,286 83,865 Other income, net 470 1,247 2,384 10,548 Provision for income taxes 8,187 13,081 13,016 25,208 Amount attributable to noncontrolling interest (4,718 ) (7,969 ) (9,785 ) (30,464 ) Net income attributable to Granite 17,949 25,618 26,869 38,741 Total Revenue Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2009 2008 2009 2008 Revenue by Segment: Granite West $ 348,304 75.6 % $ 517,463 74.5 % $ 545,353 67.5 % $ 757,465 65.9 % Granite East 112,237 24.3 170,769 24.6 262,143 32.4 384,894 33.5 Granite Land Company 534 0.1 6,100 0.9 951 0.1 6,773 0.6 |
Total $ 461,075 100.0 % $ 694,332 100.0 % $ 808,447 100.0 % $ 1,149,132 100.0 %
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Table of Contents
Granite West
Revenue Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2009 2008 2009 2008
California:
Public sector $ 134,851 74.2 % $ 159,208 61.4 % $ 210,277 73.0 % $ 231,878 58.3 %
Private sector 10,826 5.9 29,153 11.2 21,083 7.3 59,117 14.9
Material sales 36,174 19.9 71,149 27.4 56,737 19.7 106,588 26.8
Total $ 181,851 100.0 % $ 259,510 100.0 % $ 288,097 100.0 % $ 397,583 100.0 %
West (excluding
California):
Public sector $ 134,766 81.0 % $ 190,086 73.7 % $ 211,505 82.2 % $ 261,256 72.6 %
Private sector 10,546 6.3 31,727 12.3 15,327 6.0 46,371 12.9
Material sales 21,141 12.7 36,140 14.0 30,424 11.8 52,255 14.5
Total $ 166,453 100.0 % $ 257,953 100.0 % $ 257,256 100.0 % $ 359,882 100.0 %
Total Revenue:
Public sector $ 269,617 77.4 % $ 349,294 67.5 % $ 421,782 77.3 % 493,134 65.1 %
Private sector 21,372 6.1 60,880 11.8 36,410 6.7 105,488 13.9
Material sales 57,315 16.5 107,289 20.7 87,161 16.0 158,843 21.0
Total $ 348,304 100.0 % $ 517,463 100.0 % $ 545,353 100.0 % $ 757,465 100.0 %
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Granite West Revenue: Revenue from Granite West for the three and six months ended June 30, 2009 decreased by $169.2 million, or 32.7%, and $212.1 million, or 28.0%, respectively, compared with the same periods in 2008. These decreases were primarily attributable to the contraction of residential construction and credit markets which had a direct impact on private sector revenue and the sale of construction materials. Additionally, there was an indirect impact on public sector revenue as competitors have migrated from the increasingly scarce private sector work and created more competition for bidders on public sector projects.
Granite East Revenue Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2009 2008 2009 2008 Revenue by Geographic Area: Midwest $ 41,337 36.8 % $ 43,457 25.4 % $ 74,231 28.3 % $ 83,814 21.7 % Northeast 22,525 20.1 35,624 20.9 60,950 23.3 72,043 18.7 South 12,055 10.7 34,510 20.2 53,080 20.2 64,095 16.7 Southeast 36,126 32.2 52,443 30.7 73,368 28.0 123,452 32.1 West 194 0.2 4,735 2.8 514 0.2 41,490 10.8 Total $ 112,237 100.0 % $ 170,769 100.0 % $ 262,143 100.0 % $ 384,894 100.0 % Revenue by Market Sector: Public sector $ 111,527 99.4 % $ 163,161 95.5 % $ 259,993 99.2 % $ 372,423 96.8 % Private sector 710 0.6 7,608 4.5 2,150 0.8 12,471 3.2 Total $ 112,237 100.0 % $ 170,769 100.0 % $ 262,143 100.0 % $ 384,894 100.0 % |
Granite East Revenue: Revenue from Granite East for the three and six months ended June 30, 2009 decreased by $58.5 million, or 34.3%, and by $122.8 million, or 31.9%, respectively, compared with the same periods in 2008. These decreases were due primarily to our continued focus on improved execution and profitability, and large projects nearing completion. This was partially offset by the recognition of settlements related to outstanding issues on two separate projects, one in the first quarter of 2009 in the Northeast, and the other in the first quarter of 2008 in the West.
The following table provides information about revenue from our large projects for the three and six months ended June 30, 2009 and 2008:
Large Project Revenue Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2009 2008 2009 2008 Granite West $ 37,413 $ 69,114 $ 69,774 $ 99,260 Number of projects* 4 6 6 7 Granite East $ 110,494 $ 147,898 $ 230,836 $ 352,627 Number of projects* 11 15 13 17 Total $ 147,907 $ 217,012 $ 300,610 $ 451,887 Number of projects* 15 21 19 24 |
* Includes only projects with a total contract value greater than $50.0 million and over $1.0 million of revenue in the respective periods.
Granite Land Company Revenue: Revenue from GLC for the three and six months ended June 30, 2009 decreased by $5.6 million and $5.8 million, respectively, compared with the same periods in 2008. GLC's revenue is dependent on the timing of real estate sales transactions, which are relatively few in number and can cause variability in the timing of revenue and profit recognition. The current real estate downturn and associated tightening of credit markets has had a direct impact on the anticipated timing of several GLC development projects.
Contract Backlog
Our contract backlog is comprised of the remaining unearned revenue of awarded contracts that have not been completed, including 100% of our consolidated joint ventures and our proportionate share of unconsolidated joint venture contracts. We include a construction project in our contract backlog at such time as a contract is awarded and funding is in place, with the exception of certain federal government contracts for which funding is appropriated on a periodic basis. Substantially all of the contracts in our contract backlog may be canceled or modified at the election of the customer; however, we have not been materially adversely affected by contract cancellations or modifications in the past.
The following tables illustrate our contract backlog as of the respective dates:
Total Contract Backlog (in thousands) June 30, 2009 March 31, 2009 June 30, 2008 Contract Backlog by Segment: Granite West $ 824,676 53.8 % $ 743,219 47.3 % $ 1,188,948 55.5 % Granite East 707,567 46.2 826,855 52.7 952,700 44.5 Total $ 1,532,243 100.0 % $ 1,570,074 100.0 % $ 2,141,648 100.0 % Granite West Contract Backlog (in thousands) June 30, 2009 March 31, 2009 June 30, 2008 California: Public sector $ 341,529 95.5 % $ 395,608 95.3 % $ 597,257 93.5 % Private sector 16,184 4.5 19,579 4.7 41,548 6.5 Total $ 357,713 100.0 % $ 415,187 100.0 % $ 638,805 100.0 % West (excluding California): Public sector $ 460,641 98.6 % $ 320,065 97.6 % $ 523,629 95.2 % Private sector 6,322 1.4 7,967 2.4 26,514 4.8 Total $ 466,963 100.0 % $ 328,032 100.0 % $ 550,143 100.0 % Total Contract Backlog: Public sector $ 802,170 97.3 % $ 715,673 96.3 % $ 1,120,886 94.3 % Private sector 22,506 2.7 27,546 3.7 68,062 5.7 Total $ 824,676 100.0 % $ 743,219 100.0 % $ 1,188,948 100.0 % |
Granite West Contract Backlog: Granite West contract backlog of $824.7 million at June 30, 2009 was $81.5 million, or 11.0%, higher than at March 31, 2009 and $364.3 million, or 30.6%, lower than at June 30, 2008. The decrease from June 30, 2008 was primarily driven by projects nearing completion and the continued weak demand for residential construction. Additionally, there was an indirect impact on public sector contract backlog, as competitors migrated from the increasingly scarce private sector work, creating more competition for bidders on public sector projects. The increase in contract backlog from March 31, 2009 to June 30, 2009 was primarily attributable to new public sector awards in Utah, Washington and Alaska. This was offset by a lower volume of public sector work in California due to increased competition. Additions to Granite West contract backlog in the second quarter of 2009 included the awards of a $20.4 million road reconstruction project, and a $15.2 million taxiway reconstruction project, both in Utah.
Granite East Contract Backlog (in thousands) June 30, 2009 March 31, 2009 June 30, 2008 Contract Backlog by Geographic Area: Midwest $ 92,201 13.0 % $ 131,896 15.9 % $ 248,888 26.1 % Northeast 226,617 32.0 254,297 30.8 88,686 9.3 South 53,920 7.7 71,698 8.7 114,365 12.0 Southeast 332,629 47.0 366,568 44.3 495,007 52.0 West 2,200 0.3 2,396 0.3 5,754 0.6 Total $ 707,567 100.0 % $ 826,855 100.0 % $ 952,700 100.0 % Contract Backlog by Market Sector: Public sector $ 704,880 99.6 % $ 823,859 99.6 % $ 944,127 99.1 % Private sector 2,687 0.4 2,996 0.4 8,573 0.9 Total $ 707,567 100.0 % $ 826,855 100.0 % $ 952,700 100.0 % |
Granite East Contract Backlog: Granite East contract backlog of $707.6 million at June 30, 2009 was $119.3 million, or 14.4%, lower than at March 31, 2009, and $245.1 million, or 25.7%, lower than at June 30, 2008. These decreases reflect progress on large construction projects and delays in the start of several large projects pending funding availability. In April 2009, a joint venture of which we are a party entered into a contract for the expansion of the Houston's light rail system. The total contract value is $1.3 billion, of which our portion is 33.7%. In July 2009, we received the first notice to proceed in the amount of $121.0 million, of which our share is 33.7%. Our share will be added to contract backlog in the third quarter of 2009.
The following tables provide information about our large project contract backlog at June 30, 2009, March 31, 2009, and June 30, 2008:
Large Project Contract Backlog (dollars in thousands) June 30, 2009 March 31, 2009 June 30, 2008 Granite West $ 177,086 $ 219,489 $ 369,673 Number of projects* 5 5 7 Granite East $ 688,004 $ 796,347 $ 911,570 Number of projects* 11 14 15 Total $ 865,090 $ 1,015,836 $ 1,281,243 Number of projects* 16 19 22 |
*Includes only projects with total contract value greater than $50.0 million and remaining contract backlog over $1.0 million at the respective dates.
The following table presents gross profit by business segment for the respective periods:
Gross Profit Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2009 2008 2009 2008 Granite West $ 62,882 $ 92,924 $ 95,821 $ 132,553 Percent of segment revenue 18.1 % 18.0 % 17.6 % 17.5 % Granite East $ 21,363 $ 18,757 $ 56,227 $ 77,353 Percent of segment revenue 19.0 % 11.0 % 21.4 % 20.1 % Granite Land Company $ (1,000 ) $ (2,655 ) $ (790 ) $ (2,186 ) Percent of segment revenue -187.3 % -43.5 % -83.1 % -32.3 % Total gross profit $ 83,245 $ 109,026 $ 151,258 $ 207,720 Percent of total revenue 18.1 % 15.7 % 18.7 % 18.1 % |
Gross Profit: We recognize revenue only equal to cost, deferring profit recognition, 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. Because we have a large number of projects at various stages of completion in Granite West, this policy generally has a lesser impact on Granite West's gross profit on a quarterly or annual basis. However, Granite East has fewer projects in process at any given time and those projects tend to be much larger than Granite West projects. As a result, Granite East gross profit as a percent of revenue can vary significantly in periods where one or several very large projects reach our percentage of completion threshold and the deferred profit is recognized or, conversely, in periods where contract backlog is growing rapidly and a higher percentage of projects are in their early stages with no associated gross profit recognition.
Revenue from projects that have not yet reached our profit recognition threshold is as follows:
Revenue from Contracts with Deferred Profit Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2009 2008 2009 2008 Granite West $ 15,413 $ 55,938 $ 16,064 $ 60,672 Granite East 6,416 26,667 11,066 49,861 Total revenue from contracts with deferred profit $ 21,829 $ 82,605 $ 27,130 $ 110,533 |
We do not recognize revenue from contract claims until we have a signed settlement agreement and payment is assured. 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. As a result, our gross profit as a percent of revenue can vary depending on the magnitude and timing of settlement claims and change orders.
Granite West gross profit as a percent of revenue remained relatively unchanged for the three and six months ended June 30, 2009 at 18.1% and 17.6%, respectively, compared to 18.0% and 17.5%, respectively, for the same periods in 2008. Construction gross profit as a percent of construction revenue for the three months ended 2009 remained relatively unchanged from the same period in 2008 at 18.8% and 18.5%, respectively, and increased to 19.6% for the six months ended 2009 from 18.9% for the same period in 2008. This increase was primarily the result of the recognition of deferred profit on a large design/build project that reached the point of profit recognition during the first quarter of 2009. Materials gross profit as a percent of materials revenue for the three and six months ended June 30, 2009 decreased to 14.0% and 6.5%, respectively, from 16.3% and 12.6%, respectively, for the same periods in 2008. Profit margins on our construction materials sales continue to be negatively impacted by lower demand from the private sector for our higher margin products and decreased production volume which resulted in increased cost per unit.
Granite East gross profit as a percent of revenue for the three and six months ended June 30, 2009 increased to 19.0% and 21.4%, respectively, from 11.0% and 20.1%, respectively, for the same periods in 2008. The increases are primarily related to the resolution of project uncertainties on projects nearing completion, and improved productivity. In the first six months of both 2009 and 2008 the results were favorably impacted by the negotiated settlements of claims with contract owners of $16.0 million and $28.6 million, respectively.
When we experience significant contract forecast changes, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as a change in estimate for the current period. In our review of these changes, we did not identify any material amounts that should have been recorded in a prior period.
GLC recorded gross losses of $1.0 million and $0.8 million for the three and six months ended June 30, 2009, respectively, compared to gross losses of $2.7 million and $2.2 million for the same periods in 2008. Gross losses for the three months ended June 30, 2009 and 2008 include impairment charges of $1.0 million and $4.5 million, respectively. Gross losses in both periods were caused by the real estate downturn and the stages of development of our project portfolio, which led to very limited sales activity in 2009 and 2008. (See Note 8 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 Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2009 2008 2009 2008 Salaries and related expenses $ 32,518 $ 35,171 $ 66,795 $ 70,594 Incentive compensation, discretionary profit sharing and other variable compensation 6,623 10,435 12,146 15,810 Other general and administrative expenses 16,528 20,154 30,360 40,007 Total $ 55,669 $ 65,760 $ 109,301 $ 126,411 Percent of revenue 12.1 % 9.5 % 13.5 % 11.0 % |
General and Administrative Expenses: Our general and administrative expenses for . . .
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