Watsonville’s Granite Construction experiences lower-than-expected fourth quarter

RobertsJamesGVASanta Cruz Sentinel

WATSONVILLE — Granite Construction shares slid more than 11 percent Thursday on news that the company’s fourth quarter numbers came in lower than expected.

The company has faced a nationwide construction slowdown during the economic recession and competition to bid on projects remains difficult, said James Roberts, Granite chief executive officer and president.

“Overall we finished the year strong,” Roberts said, noting the completion of several large projects and a growing backlog of large projects. During the quarter, Granite also acquired Kenny Construction, a privately owned, Northbrook, Ill.-based company with about 425 employees.

“Offsetting that positive impact are challenges we continue to face in the west as reflected in our construction and construction materials gross margins,” Roberts said Thursday on a webcast call with investors and analysts. “The traditional public sector work remains very competitive especially in California.” The numbers dropped also in part due to a wet December in the west and problems on several large projects, he said.

Earlier this month, the company agreed to pay the U.S. Justice Department $367,500 to settle a federal law suit over alleged false claims in connection with federal construction projects across the country. Granite said the issue was an inadvertent and honest mistake.”

For the quarter, total revenue was $504.8 million compared with $539.5 million. Construction segment revenue was down from a year ago as were construction materials sales. Large Project segment revenues were up.

For the year, the company reported a 3.7 percent bump in revenue but a drop of 9.3 percent in net income from 2011.

The numbers, particularly for large projects revenue was “a little below what we expected,” said Nick Coppola, an analyst with Thompson Research Group in Tennessee.

The company did not provide guidance for the year, but Roberts said the quality of the company’s backlog for large projects “is as strong today as it was 12 months ago. He said he was “encouraged” by a pick-up in the residential markets. A growing backlog of midrange projects in the $50,000-$500,000 range, however, have yet to get funding.

“That’s probably the most competitive market there is today,” Roberts said. “That’s the part of it that worries me to the most today.”

The company is going after work in new industries such as oil, gas, power, mining and federal projects.

“We are cautiously optimistic that we will see a benefit to our business in late 2013 or early 2014,” Roberts said.

The company reported a $1.7 billion contract backlog of projects throughout the country and Roberts said teams were preparing to bid this year on another $13 billion worth of new projects. For Granite, the portion of those potential projects was valued at $6 billion.

“We have excellent teams assembled and we are confident we will get our share of the work,” Roberts said.

During the quarter, the company also settled for $367,500 a federal complaint regarding inflating work costs on projects dating back more than five years.

Kenny acquisition

The Kenny Construction acquisition was going well, Roberts said, describing it as “an exciting step in our strategic diversification effort as well as in our plan to grow our large projects business.”

In the $130 million deal to acquire Kenny Construction, Kenny will operate as a wholly owned subsidiary, expanding Granite’s presence in the power, tunnel and water/underground markets.

Kenny revenues were projected to be $270 million for 2012. About 50 percent of Kenny’s revenues are associated with the power sector, 20 percent with tunneling-related work and 30 percent from water/underground and other heavy/civil related work. Kenny’s backlog was about $390 million at the end of the 2012.

The deal was finalized Dec. 31. Administrative costs for Granite came to about $4.5 million in the fourth quarter.

“This was an exciting step in our strategic diversification effort as well as in our plan to grow our large projects business,” Roberts told analysts Thursday.

Justice settlement

In other company business announced earlier this month, Granite Construction agreed to pay the U.S. Justice Department $367,500 to settle charges of filing false claims in connection with federal construction projects across the country between 2006 and 2008.

The case was initially discovered by Granite’s comprehensive compliance program and disclosed voluntarily by Granite to the Department of Justice.

The case focused on instances in which Granite sought price increases in the form of change orders and “inflated” requests for equitable adjustments as “cushions” that were not actually incurred by the company and therefore should not have been charged to the federal government, according to a press release by the Justice Department.

Stuart F. Delery, the attorney handling the case for the Department of Justice Civil Division, said the settlement was “an example of the department’s commitment to ensuring that contractors deal squarely and honestly with the government at all times.”

Granite, said it was “an inadvertent and honest mistake,” confirmed by the Department’s agreement to a settlement that included no penalties.

“Our voluntary disclosure, followed by our full cooperation with the government and prompt repayment illustrates Granite’s ethical culture and commitment to doing the right thing,” said Jacque Forchy, Granite spokeswoman.


At a glance

Granite Construction Inc.

WHAT: Granite Construction Inc. is the holding company for Granite Construction Co., one of the largest heavy civil construction contractors that serves both public and private sector clients in the U.S.
HEADQUARTERS: 585 W. Beach St., Watsonville.
BACKGROUND: Founded in 1922, the company incorporated in 1990.
LEADERSHIP: James H. Roberts, chief executive officer and president.
EMPLOYEES: Excluding Kenny Construction, the company employs about 1,400 salaried employees and 3,500 hourly employees throughout the country. About 370 employees work in Monterey Bay and Watsonville offices.
INFORMATION: 831-724-1011; www.graniteconstruction.com
STOCK PRICE: On Thursday, GVA shares dropped $4.08 to close at $31.09. In the last year, shares have traded between $21.38 and $37.74.
FINANCIALS: Fourth quarter revenues were $504.78 million compared with $539.55 million a year ago. Net income was $18.37 million or 46 cents per diluted share, compared with $24.79 million, or 48 cents per share a year ago. For 2012, revenues were $2.08 billion compared with $2 billion in 2011. Net income was $59.92 million or $1.15 diluted earnings per share, compared with $66.085 million, or $1.31 diluted earnings per share.

This article first appeared here.


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