November 9, 2010
Granite Construction Inc. has reported a net income of $38.7 million, or $0.99 per diluted share, for the third quarter of 2010 compared with net income of $30.6 million, or $0.79 per diluted share, for the third quarter of 2009. A tax benefit contributed $8.0 million to net income in the third quarter of 2010.”During the quarter, the Construction segment continued to feel the impact of lower demand for our services in the West, funding delays due to budget uncertainties and highly competitive market conditions. We did, however, see a slight pickup in demand for our construction materials as work that had been delayed due to weather in the first half of the year carried over into the third quarter,” said James H. Roberts, president and CEO, in a written statement. “The Large Project Construction segment is executing well on its new portfolio of work, which includes the $126 million Folsom Dam project awarded in the third quarter as well as the $306 million SR 520 Eastside project in Washington, which will be booked into backlog in the fourth quarter.
“I am also pleased to say that we are making steady progress in our effort to reduce costs and strengthen the business to achieve long-term profitable growth,” Roberts continued. “As a part of the Enterprise Improvement Plan that we announced last month, we completed a comprehensive review of our business and associated cost structure. As a result of this rigorous evaluation, we have identified certain fixed assets and real estate investments that are now slated for closure or divestiture. In addition, we made the very difficult decision to reduce our salaried workforce by approximately 13 percent. While these actions will have a near-term impact on our business, they are an important part of our plan to increase our profitability and competitiveness and deliver significant improvement in our long-term financial performance.”
Third-Quarter 2010 Financial Results
- Revenue totaled $670.9 million compared with $720.3 million in 2009.
- Gross profit margin was 11 percent compared with 15 percent in 2009, driven primarily by lower margins in the Construction segment as well as the impact of Large Projects that have yet to reach the profit recognition threshold.
- Operating income for the quarter was $32.2 million compared with $46.3 million in the prior year.
- SG&A expenses for the third quarter were $47.2 million compared with $61.0 million for the same period last year, driven by ongoing efforts to reduce the company’s overall cost structure.
- Net income attributable to non-controlling interests was $4.6 million compared with $5.9 million in 2009.
- Total contract backlog at September 30, 2010, was $1.6 billion, essentially flat compared with the backlog at September 30, 2009.
- New awards during the quarter include a $125.9 million auxiliary spillway control structure in California, a $77.7 million rail project in California and $47.7 million for our share of a freeway reconstruction project in Utah.
- The effective tax rate for the third quarter was a negative 22.8 percent due to the adjustment of the year-to-date tax rate to 135.4 percent. The unusually high year-to-date rate is due primarily to the ratio of non-controlling interest of $11.9 million to pre-tax loss of $8.3 million. Non-controlling interest is generally not subject to income taxes on a stand-alone basis and is deducted from income before provision for income taxes in arriving at our effective tax rate.
- Construction revenue for the quarter totaled $410.0 million compared with $466.6 million for the same period in 2009, reflecting reductions in available work out to bid as well as a highly competitive bidding environment.
- Gross profit margin for the third quarter was 11 percent compared with 16 percent for the same period in 2009, driven by a competitive bidding environment and lower margins in backlog as compared with a year ago.
Large Project Construction
- Large Project Construction revenue for the quarter totaled $170.0 million compared with $181.2 million for the same period last year.
- Gross profit margin for the quarter decreased to 11 percent compared with 14 percent for the same period last year, reflecting an increase in revenue on projects that have yet to reach the profit recognition threshold.
- Construction Materials revenue for the quarter totaled $88.1 million compared with $71.5 million for the same period last year, as wet weather in the first part of the year led to increased demand for construction materials in the third quarter of 2010.
- Gross profit on the sale of construction materials was $12.1 million in 2010 compared with $8.4 million in 2009. The increase in gross profit is due primarily to higher sales volume for construction materials as a result of weather in the first half of 2010 that shifted demand into the third quarter.
Recent Company Actions
Granite announced on Oct. 25, 2010, the decision to cut its workforce by approximately 220 employees as a result of efforts to reduce its cost structure, enhance operating efficiencies and strengthen the business to achieve long-term profitable growth. Estimated savings resulting from the reductions and other operational improvements are expected to benefit 2011 pre-tax income by approximately $36 million to $40 million.
Additionally, as part of the Enterprise Improvement Plan, the company is planning an orderly divesture of certain fixed assets as well as its real estate investment business. This decision is consistent with the Company’s business strategy to focus on its core competencies and enhance operating efficiencies.
The combination of these actions is estimated to result in a pre-tax charge of approximately $99 million to $145 million, nearly all of which will be recognized in the fourth quarter of fiscal 2010. Of the total, approximately $89 million to $133 million is related primarily to impairments on real estate and fixed assets. The balance is associated with severance-related costs.
Full-Year 2010 Guidance
Market conditions remain very challenging, as funding uncertainties coupled with the competitive climate continue to have an impact on revenue and gross margins for the Construction and Construction Materials segments. As a result, Granite now expects revenue for the Construction segment to be between $925 million and $1.125 billion, with a corresponding gross profit margin between 9 and 10 percent. Revenue for the Construction Materials segment is expected to be between $200 million and $250 million, with a corresponding gross profit margin between 6 and 7 percent.
Revenue for the Large Project Construction segment is now expected to be between $600 million and $650 million. Correspondingly, the company is raising the gross profit margin range for the segment to between 12 and 13 percent. Net income attributable to non-controlling interests is expected to be approximately $20 million for the year, excluding the impact of restructuring charges.