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| GVA > SEC Filings for GVA > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-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: Current Economic Environment Market conditions remained challenging during the third quarter of 2009 with a highly competitive bidding environment and less work to bid. The economic downturn, the decline in the residential and commercial real estate markets, and various infrastructure funding related issues have continued to have a negative impact on our business. Comparative Financial Summary Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2009 2008 2009 2008 Total revenue $ 720,284 $ 897,788 $ 1,528,731 $ 2,046,920 Gross profit 105,172 144,302 256,430 352,022 Operating income 46,256 74,377 93,542 158,242 Other income (expense) 3,582 (572 ) 5,966 9,976 Provision for income taxes 13,300 21,473 26,316 46,681 Amount attributable to noncontrolling interests (5,940 ) (594 ) (15,725 ) (31,058 ) Net income attributable to Granite 30,598 51,738 57,467 90,479 Total Revenue Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2009 2008 2009 2008 Revenue by Segment: Granite West $ 564,089 78.3 % $ 749,487 83.4 % $ 1,109,442 72.6 % $ 1,506,952 73.6 % Granite East 155,214 21.5 146,932 16.4 417,357 27.3 531,826 26.0 Granite Land Company 981 0.2 1,369 0.2 1,932 0.1 8,142 0.4 |
Total $ 720,284 100.0 % $ 897,788 100.0 % $ 1,528,731 100.0 % $ 2,046,920 100.0 %
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Table of Contents
Granite West
Revenue Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2009 2008 2009 2008
California:
Public sector $ 187,542 79.2 % $ 275,768 73.4 % $ 397,819 75.8 % $ 507,645 65.7 %
Private sector 8,908 3.8 26,930 7.2 29,991 5.7 86,047 11.1
Construction
materials 40,477 17.0 73,065 19.4 97,214 18.5 179,653 23.2
Total $ 236,927 100.0 % $ 375,763 100.0 % $ 525,024 100.0 % $ 773,345 100.0 %
West (excluding
California):
Public sector $ 286,742 87.6 % $ 293,242 78.4 % $ 498,247 85.3 % $ 554,499 75.6 %
Private sector 9,370 2.9 29,069 7.8 24,697 4.2 75,440 10.3
Construction
materials 31,050 9.5 51,413 13.8 61,474 10.5 103,668 14.1
Total $ 327,162 100.0 % $ 373,724 100.0 % $ 584,418 100.0 % $ 733,607 100.0 %
Total Revenue:
Public sector $ 474,284 84.1 % $ 569,010 75.9 % $ 896,066 80.8 % $ 1,062,144 70.5 %
Private sector 18,278 3.2 55,999 7.5 54,688 4.9 161,487 10.7
Construction
materials 71,527 12.7 124,478 16.6 158,688 14.3 283,321 18.8
Total $ 564,089 100.0 % $ 749,487 100.0 % $ 1,109,442 100.0 % $ 1,506,952 100.0 %
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Granite West Revenue: Revenue from Granite West for the three and nine months ended September 30, 2009 decreased by $185.4 million, or 24.7%, and $397.5 million, or 26.4% respectively, compared with the same periods in 2008. The decreased revenues were primarily the result of increased competition for public sector work as residential and commercial contractors have migrated from bidding on private sector work to the available public sector work. The decline in residential development in the West has also adversely affected the demand for construction materials and private sector work such as residential and commercial site development and infrastructure projects.
Granite East Revenue Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2009 2008 2009 2008 Revenue by Geographic Area: Midwest $ 44,477 28.7 % $ 49,520 33.7 % $ 118,708 28.4 % $ 133,333 25.1 % Northeast 30,004 19.3 25,295 17.2 90,955 21.8 97,338 18.3 South 27,305 17.6 28,322 19.3 80,385 19.3 92,417 17.4 Southeast 53,186 34.3 41,520 28.3 126,553 30.3 164,973 31.0 West 242 0.1 2,275 1.5 756 0.2 43,765 8.2 Total $ 155,214 100.0 % $ 146,932 100.0 % $ 417,357 100.0 % $ 531,826 100.0 % Revenue by Market Sector: Public sector $ 154,308 99.4 % $ 143,385 97.6 % $ 414,301 99.3 % $ 515,808 97.0 % Private sector 906 0.6 3,547 2.4 3,056 0.7 16,018 3.0 Total $ 155,214 100.0 % $ 146,932 100.0 % $ 417,357 100.0 % $ 531,826 100.0 % |
Granite East Revenue: Revenue from Granite East for the three months ended September 30, 2009 increased by $8.3 million, or 5.6%, as a result of productivity improvements, resolution of outstanding issues with owners, and progress on certain large projects. Revenue for the nine months ended September 30, 2009 decreased by $114.5 million, or 21.5%, as a result of an increased number of large projects nearing completion in 2009 compared to 2008. Additionally, during the nine months ended in 2009 we had delayed notices to proceed on three projects resulting in less revenue recognized compared to the same period in 2008. Included in Granite East revenue for the nine months ended 2009 and 2008, respectively, are settlements of negotiated claims with two contract owners in the amounts of $16.0 million and $28.6 million, respectively, that positively impacted revenue.
The following table provides information about revenue from our large projects for the three and nine months ended September 30, 2009 and 2008:
Large Project Revenue Three Months Nine Months
Ended September 30, Ended September 30,
(dollars in thousands) 2009 2008 2009 2008
Granite West $ 47,904 $ 107,684 $ 117,678 $ 206,944
Number of projects* 5 7 6 8
Granite East $ 130,531 $ 131,075 $ 361,367 $ 483,702
Number of projects* 9 15 15 17
Total $ 178,435 $ 238,759 $ 479,045 $ 690,646
Number of projects* 14 22 21 25
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* 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 nine months ended September 30, 2009 decreased by $0.4 million and $6.2 million, respectively, compared with the same periods in 2008. GLC's revenues have been negatively impacted by the economic downturn with very limited sales activity in 2009. GLC projects have long lead times affording us the flexibility to stage our land entitlement and construction activities to meet market demand. We continue to monitor the economic situation and manage our expenditures on construction activities while continuing to work on the process of obtaining entitlements.
During the nine months ended 2009 and 2008, we recorded impairment charges related to our real estate held for development and sale of $1.7 million and $4.5 million, respectively. A continued decline in the residential or commercial real estate markets may decrease the expected profitability for certain development activities to the point that we would be required to recognize additional valuation impairments in the future. Also, upon renewal of currently outstanding mortgage debt, our banks may require us to provide additional funding to our real estate investment entities. If one of our partners is unable to make its required contribution or fulfill its management role, we may assume full financial and management responsibility.
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) September 30, 2009 June 30, 2009 September 30, 2008 Contract Backlog by Segment: Granite West $ 553,728 34.3 % $ 824,676 53.8 % $ 915,472 50.3 % Granite East 1,058,540 65.7 707,567 46.2 906,116 49.7 Total $ 1,612,268 100.0 % $ 1,532,243 100.0 % $ 1,821,588 100.0 % Granite West Contract Backlog (in thousands) September 30, 2009 June 30, 2009 September 30, 2008 California: Public sector $ 249,179 96.1 % $ 341,529 95.5 % $ 408,652 93.4 % Private sector 10,226 3.9 16,184 4.5 28,922 6.6 Total $ 259,405 100.0 % $ 357,713 100.0 % $ 437,574 100.0 % West (excluding California): Public sector $ 287,012 97.5 % $ 460,641 98.6 % $ 457,686 95.8 % Private sector 7,311 2.5 6,322 1.4 20,212 4.2 Total $ 294,323 100.0 % $ 466,963 100.0 % $ 477,898 100.0 % Total Contract Backlog: Public sector $ 536,191 96.8 % $ 802,170 97.3 % $ 866,338 94.6 % Private sector 17,537 3.2 22,506 2.7 49,134 5.4 Total $ 553,728 100.0 % $ 824,676 100.0 % $ 915,472 100.0 % |
Granite West Contract Backlog: Granite West contract backlog of $553.7 million at September 30, 2009 was $270.9 million, or 32.9%, lower than at June 30, 2009 and $361.7 million, or 39.5%, lower than at September 30, 2008. The decrease in contract backlog for all periods was due to a number of projects nearing completion without the offset of new awards. Also negatively affecting contract backlog is the current bidding environment, infrastructure related funding issues, fewer bidding opportunities, and the impact of the economic downturn in the real estate market on private sector work.
Granite East Contract Backlog (in thousands) September 30, 2009 June 30, 2009 September 30, 2008 Contract Backlog by Geographic Area: Midwest $ 48,521 4.6 % $ 92,201 13.0 % $ 204,166 22.5 % Northeast 463,221 43.8 226,617 32.0 107,575 11.9 South 81,868 7.7 53,920 7.7 135,534 15.0 Southeast 462,971 43.7 332,629 47.0 455,260 50.2 West 1,959 0.2 2,200 0.3 3,581 0.4 Total $ 1,058,540 100.0 % $ 707,567 100.0 % $ 906,116 100.0 % Contract Backlog by Market Sector: Public sector $ 1,056,444 99.8 % $ 704,880 99.6 % $ 900,720 99.4 % Private sector 2,096 0.2 2,687 0.4 5,396 0.6 Total $ 1,058,540 100.0 % $ 707,567 100.0 % $ 906,116 100.0 % |
Granite East Contract Backlog: Granite East contract backlog of $1.1 billion at September 30, 2009 was $351.0 million, or 49.6%, higher than at June 30, 2009, and $152.4 million, or 16.8%, higher than at September 30, 2008. These increases reflect new projects awarded in the third quarter of 2009, including our portion of the work for the expansion of Houston's light rail system as well as our participation in joint ventures for a tunnel in New York and a new highway in North Carolina. Not included in contract backlog is approximately $400.0 million associated with the Houston light rail project that will be booked into contract backlog as notices to proceed are received.
The following tables provide information about our large project contract backlog at September 30, 2009, June 30, 2009, and September 30, 2008:
Large Project Contract Backlog (dollars in thousands) September 30, 2009 June 30, 2009 September 30, 2008 Granite West $ 133,129 $ 177,086 $ 280,901 Number of projects* 4 5 6 Granite East $ 1,006,006 $ 688,004 $ 832,552 Number of projects* 13 11 14 Total $ 1,139,135 $ 865,090 $ 1,113,453 Number of projects* 17 16 20 |
*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 and loss by business segment for the respective periods:
Gross Profit Nine Months Ended September
Three Months Ended September 30, 30,
(in thousands) 2009 2008 2009 2008
Granite West $ 85,499 $ 133,904 $ 181,320 $ 266,457
Percent of segment revenue 15.2 % 17.9 % 16.3 % 17.7 %
Granite East $ 20,223 $ 9,916 $ 76,450 $ 87,269
Percent of segment revenue 13.0 % 6.7 % 18.3 % 16.4 %
Granite Land Company $ (550 ) $ 482 $ (1,340 ) $ (1,704 )
Percent of segment revenue -56.1 % 35.2 % -69.4 % -20.9 %
Total gross profit $ 105,172 $ 144,302 $ 256,430 $ 352,022
Percent of total revenue 14.6 % 16.1 % 16.8 % 17.2 %
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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 September 30, Nine Months Ended September 30, (in thousands) 2009 2008 2009 2008 Granite West $ 13,018 $ 18,070 $ 14,804 $ 18,757 Granite East 20,817 20,922 31,883 63,729 Total revenue from contracts with deferred profit $ 33,835 $ 38,992 $ 46,687 $ 82,486 |
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.
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.
Granite West gross profit: Granite West gross profit as a percent of revenue for the three and nine months ended September 30, 2009 decreased to 15.2% and 16.3%, respectively, from 17.9% and 17.7%, respectively, for the same periods in 2008. Construction gross profit as a percent of construction revenue for the three and nine months ended September 30, 2009 decreased to 15.9% and 17.7%, respectively, from 18.9% for the same periods in 2008. These decreases were due to lower gross profit margin on projects bid in a more competitive environment, partially offset by the positive effect of project forecast changes. Construction materials gross profit as a percent of construction materials revenue for the three and nine months ended September 30, 2009 decreased to 9.8% and 8.0%, respectively, from 12.4% and 12.5%, respectively, for the same periods in 2008. Profit margins on our construction material sales have been negatively impacted by the decline in residential construction activity by our private sector customers resulting in reduced sales and production volume and increased unit costs.
Granite East gross profit: Granite East gross profit as a percent of revenue for the three and nine months ended September 30, 2009 increased to 13.0% and 18.3%, respectively, from 6.7% and 16.4%, respectively, for the same periods in 2008. These increases were primarily related to the resolution of project uncertainties on projects nearing completion as well as improved project productivity. In the first nine months of 2009 and 2008, gross profits were favorably impacted by the negotiated settlements of claims with two contract . . .
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