Granite Construction Inc (GVA) 2004 Q4 法說會逐字稿

Thank you for standing by and welcome to today’s Granite Construction fourth quarter 2004 earnings results conference call and webcast. Today’s call is being recorded. All lines are in a listen-only mode at this time. A question-and-answer session will follow the presentation.

Now, I’d like to turn the conference over to Jacque Underdown, Director of Investor Relations.

Ms. Underdown, please go ahead.

Good morning. Welcome to the call. The earnings release that we will be referring to today is on our website at GraniteConstruction.com, as well as the webcast of this call, which will be made available for approximately one year.

During our q-and-a session, we do ask that callers please limit themselves to one question. If you have additional questions, please rejoin the queue so that others may have a turn.

And I would like to remind all listeners that certain matters discussed in this conference call may contain forward-looking statements reflecting management’s beliefs and assumptions regarding future events based on the best available information. Listeners are, therefore, cautioned not to put undue reliance on forward-looking statements, as they are not a guarantee of future performance and remain subject to a number of uncertainties and other factors that could cause actual results to differ materially from such forward-looking statements. A more detailed description of these uncertainties and risk factors are provided in our most recent Form 10-K and Form 10-Q and other filings with the Securities and Exchange Commission, which I encourage each of you to review.

Here with me today is Bill Dorey, President and CEO; Bill Barton, Senior Vice President and Chief Financial Officer. And with us today by phone is Dave Watts, Chairman of the Board, and Mike Donnino, Senior Vice President and Manager of our Heavy Construction Division.

With that, I will turn the call over to Bill Dorey.

Good morning, everyone. Agenda for today’s call will include a general overview of our markets and our 2004 performance, insight into our operating divisions and a qualitative look at our 2005. And I’ll be providing that information. Then Bill Barton will provide detailed financial information and Dave Watts will provide you with some insight into the politics that affect our business, as well as-- particularly as it relates to public funding. And then we’ll have a question-and-answer period.

So let’s start with the Branch division and talk about Branch markets and Branch performance.

Branch market was surprisingly strong in 2004. We had a really good, strong fourth quarter, a very good year. In fact, we posted the second highest operating income from the Branches in their history. We seem to have a lot of momentum as we enter into 2005. Our private market remains quite strong. It’s soaking up capacity in the marketplace, providing opportunities for us and opportunities, frankly, for our competitors, which is good for our market. It’s driving our materials business. And we were very pleased with our overall performance and particularly with the performance in California, despite the issues that we are facing relative to the California State budget issues.

We certainly did exceed our expectations. We’re proud of that and I am proud of the folks that made that happen.

I’d like to talk a little bit about HCD and their market and their performance, as well. Our HCD market, I think, is quite strong yet; it continues to be quite strong. We have a full pipeline of projects yet to bid and I think that will allow us to be reasonably selective in the work that we bid going forward.

We are seeing, however, some of the very large projects slipping and my sense is that that’s a product of the uncertainty around the Federal Transportation Bill. We don’t think this is a trend and we certainly don’t think this is a problem for Granite, because we have such a large backlog currently. We’re in kind of an interesting position. We don’t need a lot of new work right now. Our current portfolio of backlog in HCD will provide us with almost 100% of what we expect to do in 2005 and close to 50%, maybe as high as 60%, of what we expect to do in 2006. So our goal is not currently to aggressively pursue top-line growth. Our goal is, as we’ve said, to focus on improving performance on the work that we have.

Having said that, I would like to make sure that we are clear about growing revenue. We certainly would cautiously pursue new revenue if we could get that new revenue with better-than-average margins.

Looking back on our 2004 HCD performance, as we said in our press release, I think the only way to characterize our performance would be that we were extremely disappointed. We got off to a bad start in our first quarter and we continued to experience deterioration on projects throughout the year. We simply did not recover. We thought we had recognized the bad news in our backlog at the end of the second quarter and at the end of the third quarter. But we continued to be plagued by projects that were deteriorating and the fact that we were suggesting that we had captured all the bad news proved just simply not to be true. We also had further write-downs in the fourth quarter, which contributed to our poor fourth quarter performance.

Obviously, we’re not satisfied. So I thought it would appropriate to share with you some of the things that we’ve been doing.

As I suggested, we are not pursuing top-line growth. We have been bidding our work with higher margins and this has been, really, occurring for at least the last 12 months. But in our HCD environment, it takes a while for that to show up in our results. And we’re expecting and hoping that we’ll see the benefit of that in 2005.

We’ve added a second assistant division manager. We’ve appointed two new regional managers. We’ve added support staff and instituted some procedures to surface problems sooner. We are focusing and working the jobs hard to deliver bid-day margins.

And we are also focused and have increased the horsepower in our efforts to resolve issues and claims. And I think it’s important-- we’ve said this before, but maybe it’s worth repeating, that if we are successful in resolving job site issues and claims in our favor, that that additional revenue that’s a product of those resolutions would drop directly to the bottom line, because we have-- in our system, we book and recognize the costs associated with issues and claims as they occur.

But maybe most importantly, we’ve tried to ensure that all of our estimates and all of our forecasts, which are estimates of our cost to complete our work, are achievable. And if that’s true, we should have captured the bad news on our ongoing work in our 2004 business. I am, however, reluctant to go on record and suggest that we won’t have bad news going forward. I can simply say that we have been working diligently to build the capabilities and management structure to perform on our work in 2005.

Looking forward, let’s start with the Branches. I think, really, it’s too early, obviously, in the year for us to provide guidance in either division. But we are entering the year in our Branches with a record level of backlog. The Branch managers and division management in that Branch system are optimistic about the prospects for the year. We have been focusing on private work and local agency work. This has been somewhat of a strategic change for us. It’s been a product of the fact that the State has been struggling with funding issues, particularly in California. And it’s caused us to look for work elsewhere. We’ve been pretty successful in refocusing. We’re really pleased with the work that our people have done in that regard.

We do expect that our materials business will perform well in 2005. And we expect our markets to generally stay strong. We are, however, as I suggested, still continuing to contend with California budget issues, particularly as it relates to Caltrans.

Expectations for 2005 in our HCD business revolve almost exclusively around our ability to deliver on our backlog. And rather than speculate as to what may occur there, I think I’ve suggested that we’ve been-- some of the things that we’ve been doing to try to make that happen. I would like to suggest that we have just simply been working this performance issue hard and I believe that we’re making progress.

And lastly, just from the point of driving that point home, I think I can speak for pretty much everybody in the company that we appreciate how important delivering on our 2005 HCD business is. And I think every employee, frankly, in the organization appreciates that.

So, Bill, I’d like to hand this off to you and provide our audience with some detailed financials.

Thank you, Bill.

And good morning to all. My focus today will be on the fourth quarter, comparing 2004 to 2003. As I have in the last few quarters, I also want to remind you that we have a new accounting pronouncement called FIN 46 Consolidation of Variable Interest Entities, which was effective prospectively on 1/1/04. And what it’s about is consolidation of certain joint ventures that were previously proportionately consolidated.

That income is not materially impacted, but there are some changes to such accounts as revenue and some balance sheet accounts. More information can be found in the K when it comes out or you can go back to the current Qs.

So using the press release tables as a guide, first starting with the income statement, total company revenue increased for the quarter to 541 million, or by 48 billion, including the adjustments for consolidated joint ventures, which was 25 million. Branch revenue increased by 15 million to 319; reflects increases in both public agency and private sectors.

The housing market continues to remain strong. The California State Government continues its fiscal crisis, with transportation funds continuing to be rated to help balance the budget, which I still hear is about 8 billion for the year. As a result, the strong private market is partially offset by lower revenue derived from the State.

HCD increased 33 million to 221 million, again, that includes that 25 million consolidated joint venture increase, and it’s derived from a higher backlog at the beginning of the period.

The other thing that’s not in the press release that we can share with you at this time is Plant revenue to third-party sales. For 2004, it’s 62.6 million, versus 63.5 million a year ago; the margin, 10.8 million, versus 12.6 million a year ago. Gross profit margin percentage is 17.2% in 2004, 19.9% in 2003.

Moving down to gross profit for the quarter, breaking it out by the segments, HCD gross profit was 7.5 million in 2004. It’s 14.1 million in 2003. The Branch gross profit is 52.5 million, versus 47.8 million.

The gross profit margin is 16.4% in 2004, 15.7% in 2003. The Branch division gross profit is up 9.8%, or 4.7 million, which adds up to that 52.5 million we talked about. This gross profit margin’s slightly higher, principally affected by an increase in margin on construction work and obviously the higher volume.

The HCD gross profit margin percentage decreased from 7.5% in 2003 to 3.4%. The quarter was impacted negatively due to profit forecasts on several projects that were revised downward as a result of increased estimated costs to complete.

Moving to the next category, we normally share with you those earnings that are deferred as a result of the 25% threshold to begin the recognition of profits. And I’m comparing one year to the next, and it’s a differential that will either increase the profit or decrease the profit. The total Branch division for 2004 is 15.7 million; for 2003, it was 11.4 million, which reflects an increase of 4.3. Then if you are to add a 10% gross profit on it, that’s worth about $400,000.

If you look at the Heavy Construction division without the FIN 46 adjustment, it’s 49.4 million, an increase of 6.7 million from a year ago. Again, using the 10% as a guideline, that’s about $670,000 in deferred earnings, a total for the two divisions about 1.1 million.

G&A increased 11.5% to 40.6 million. As a percent of revenue, it has remained relatively flat. However, if you adjust for the consolidation of the joint ventures volume, it increased .4% to 7.9% as a percent of revenue. Major increases were in salaries and fees and services, which included audit and tax fees associated with the Sarbanes-Oxley 404 implementation process.

Moving down to operating income, as I have already provided the attributions, the numbers, essentially, with-- the segment’s operating income with HCD is essentially break-even for 2004, compared to 7.3 million a year ago.

Operating income with the Branch, 31.3 million in 2004, 27.4 million in 2003. Operating income as a percent for the Branch business, 9.8% in 2004; 9% last year.

Gain on sales of property and equipment, essentially the same year-over-year, so I have no other comment to that.

And in moving down to other income for the quarter, there is two areas that have increased that I’ll talk about. Interest income is up $2 million. Essentially, it reflects look-back interest on taxes, which is the reverse of what we did last year where we had to pay additional taxes, or actually had to pay additional interest on taxes. And then we also had an increase in notes receivable that increased the amount of accrued interest in that category.

Other than that, which is primarily what was reflected in the press release, to add a little more color to it, there were two areas primarily, one the limited partnership real estate sale and it had to do with our Granite Regional Park in Sacramento; it’s the sale of a building. And just to remind you, the partnership that-- we received annual returns in support of our limited partnership.

The other significant sale was the second of three tranches of stock sales to TIC, The Industrial Company, to unwind our investment there. The last sale is expected to be in 2006.

When you get down to it, at the bottom line, looking at diluted earnings per share at 47 cents for 2004, 34 cents in 2003, an increase of 13 cents, certainly based on our guidance, we have done extremely better than we had anticipated. And certainly it goes to the benefit of the Branch division having a very strong market and better weather than we had thought we would have at the beginning of the quarter.

Looking at the effective tax rate, which has changed significantly, the 25% rate is the result of bringing the year to 30% and the primary difference that’s reflected in that is the consolidated joint ventures, or FIN 46. And it’s just to say that generally our construction joint ventures are not subject to income taxes on the stand-alone basis. So as that variable changes over time, it certainly will affect our effective rate.

Turning to the revenue and backlog, by market segment and geographic area for the quarter, which is in the press release, really, kind of a couple of things really support what I have said, as well as what Bill had said previously. If you look at the revenue by market sector, where you can see that the local agencies are up 29% for the quarter, private sector is up 21%, while State agencies have dropped 6%, primarily the State of California.

Looking down at the backlog, just a couple of comments there, the total public is increased from 1.8 billion to 2.2 billion. That is a 390.9 increase, or 22%. Once you back out the 280 million 457 that’s associated with the consolidated joint ventures, it’s more like a 6% increase. It’s still moving up, regardless of what is happening in California. And the second part of it is our private sector work continues to remain strong. It is up 36% year-over-year.

Looking down at the backlog by geographic area, again looking at California, as you can see, it’s more than doubled here. However, once have backed out the consolidated joint ventures amount, which would bring it down to 184.8 million increase, which is a 71% increase, substantially large increase over last year, as well.

The last category of the backlog that I-- in breaking out the backlog by HCD and Branch, the HCD backlog, which it does include the $280 million FIN 46 volume increase, is 1.876 billion. The Branch is 561.9 million, for a total of 2.438 billion, substantially up over a year ago, which I think is a good sign, as Bill said earlier, for 2005.

The last thing I’ll talk about, and of course, I’ll be more than happy to answer your questions when we get into the q-and-a period, it’s just a note on the balance sheet. Again, it’s being affected by the consolidation of joint ventures. A couple of numbers that I think would be of interest, cash and cash equivalents is impacted by this adjustment by a 67.3 million increase; accounts receivable at 36.4 million. And your overall current assets, with an adjustment to the investment in equity, is around 91 million. So you can see the size of the adjustment that’s the result of the consolidating our joint ventures.

And with that, I’d like to turn this over to Dave Watts.

Thank you, Bill.

Good morning, everyone. I’ll be brief and talk to you about the political landscape, both Federal and the State of California, our largest state market. Both governments are fighting budget problems, as you well know.

We have probably more optimism going for the Federal Bill, what is called in the House the Transportation Equity Act, and a synonym has been created called TEA-LU. This is a six-year measure totaling 284 billion, which is exactly the number the President has put in, also over six years. The only difference between the House bill and the President’s bill is a re-opener language the House threw in there that drew a veto threat last year by the President if they had passed it. The re-opener allows the conferees to re-open the bill at a later date to modify funding levels. Obviously, the President wants to put a lid on the authorized funding.

However, in the Senate, you’ve got a difference. And they’re expected to put a five-year 318 billion. So that’s considerably more per year authorized than both the President’s and the House.

Despite these differences, we are optimistic that both the Senate and the House do not want to keep extending the existing legislation any longer. They are really drawing a line in the sand that they have to get a bill this year. So people are expecting that this bill will go through and be in Conference some time early in the year.

In California, I wish I could be more optimistic. Governor Schwarzenegger has proposed a budget which provides no additional funding for Transportation and, in fact, suspends the Prop 42 sales taxes on fuel for the third year in a row. The STIP-- the Surface Transportation Improvement Program has no money. There are no projects proposed. And then they also-- this amounts to a 1.3 billion loan in Transportation funding to the General Fund.

We’re hearing good things from the Governor on a longer-term basis, that he wants to close this loophole in the Prop 42 funds, and that’s to put a constitutional stop from this suspension area. And he’s got a program which is called Project Go California. We will see more about that. The industry, along with Labor Unions and general business, is going to be working hard to at least get some money from Prop 42 funds this year. But the problem is a big one and not likely to be cured very well for the next couple of years in California.

That’s my report. And I’ll turn it over to Bill Dorey, who can start the q-and-a.

Okay, Bill. And I’ll turn it back to our moderator.

And that concludes our remarks; and we’d be pleased to take questions.

[Operator instructions]. Our first question comes from Bob Labick with CJS Securities.

I wanted to ask for a little more color on the aggregate sales. I guess year-over-year sales were down slightly. Is that a result of you using more aggregates internally because of the strong Branch--

Bob, that was primarily in the fourth quarter.

Right.

I think overall for the year, the aggregates are up slightly, 51 million versus 48 million. Oh, that’s gross profit. Excuse me-- 254 versus 252 million.

Right. But the fourth quarter was down slightly. Was that-- do you use more internally? Or was it--

I think that may have been more weather-related than anything. As you’ll recall, right as the fourth quarter began, we got those horrendous rains in California. And California is where most of our aggregate business occurs. And we probably just didn’t have the time, frankly, that we had the year before to drive that revenue.

Could you just update us on expectations for ’05? And how demand in the pricing has been for your aggregate?

I think as I said, Bob, we’re reluctant this early in the year to try to provide any quantitative guidance. But what drives-- certainly there’s a lot of things that drive our materials business. But if you had to pick one, it would be the private subdivision development marketplace, because it’s using a lot of concrete in slabs and foundations and things like that, certainly. It’s a very important piece of the driving mechanism which makes that business work. And we don’t see any slowdown in that building/housing marketplace at all. And so that’s a very good sign. So qualitatively, I think we can-- we’re expecting that our business will remain strong, as strong, probably stronger. It’s hard to say.

I will [inaudible] one question per person.

We will next go to Richard Rossi with Morgan Joseph.

These problem projects that you have in HCD, first, I’m sure you’d love to quantify the write-offs in the fourth quarter. And after you give us that number, are these the same projects that were a problem earlier in the year? Or are they other projects? Is it a whole different mix? Is it mostly in New York?

Okay. There’s a whole series of questions there. Yes and no. I mean, we had-- first off, the write-downs were relatively small in nature, compared to the problems that we experienced in the first quarter, Rich. We didn’t have the huge magnitude-- huge, large numbers. We had-- I’m going to tell you there were probably in the neighborhood of four jobs that contributed to our inability to post the quarter that we had expected. And a couple of those jobs continue to be work that has haunted us, to some degree, through the year. And a couple of them were not jobs that we had been writing down through the year. But I will say that in almost all instances, the jobs are nearing the end. So those particular projects, it’s very unlikely that they will cause us difficulty in 2005.

Mike, is that a fair characterization?

Yes, it is. Probably 80% of those are either completed or very close. And I think there’s two or three that have another quarter or two before they’re done.

Okay. I’ll get back in the queue and develop more questions.

And Rich, just to-- I think it’s just-- for all the listeners, certainly as the work gets closer to being concluded, you would think that our ability to estimate what our final cost in revenue will be becomes easier. So as we get near the end, the volatility in this process diminishes.

We’ll next go to John Rogers at DA Davidson.

Bill, again, I know on-- just on the HCD side, if you could, help us a little bit to understand. Is there any sort of central commonality between these problem projects, I mean, either by region, by type of project? Was it in the bidding process or execution or the type of work-- something that we could be watching for?

That’s a really good question, actually. And we’ve been actually looking for a theme ourselves, because if we could pinpoint a theme, it would make the process of dealing with that issue easier.

And Mike, you chime in any time you like.

It was a whole host of issues, frankly. And if I had to pick one theme, I would suggest that it’s a product of our growing-- and I’ve said this before-- growing that business so fast that we just didn’t keep up with it.

So it’s a culture? Or--

No. I wouldn’t say it’s that. We certainly have hired a lot of people to try to keep up with the growth. And I suppose you could attribute it to that, if you like. I’m not sure I would be willing to do that-- that directly. But we grew the business really fast. And as a product of that growth, we didn’t perform as well as we thought we would, expect to in the future, should have, all of those things.

But if you go through the list of projects that we’ve had trouble with this year, there’s not a common theme as to what is causing those issues. I mean, I could probably spend an hour on that-- to answer that question. But there is not a common theme.

Mike, you want to add some color to that?

I think you’ve said it very well, Bill. It’s not in any one particular region. Some of them are JV projects, some of them aren’t. Some of them are sponsored projects, some of them aren’t. But I think we have, in the last year, done a good job of trying to get our support staff and our regional oversight up to where it needs to be to manage this amount of work we’re doing.

And I’d like to add to that-- and this is not only for our investor audience, but for the employees that are listening, as well. When we have a year like we had in 2004, one of the primary goals is to try to, for lack of a better term, I’ll say stop the bleeding. And the key way to do that, the key tool that we have is to prepare forecasts on the work that we have ongoing that are achievable, that-- in fact, going forward in our 2005, as we work through our backlog in 2005, the forecasts that we’ve prepared-- in this case, it’s the end of 2004, are achievable. And if we have been successful in forecasting this work so that the work that we will do going forward-- that our costs and our anticipated revenue are achievable, then we, in theory, at least, should have captured-- once again, I’ll just use the catch phrase-- the bad news in our 2004 business.

As I said in my opening remarks, I’m not prepared to say that that’s-- that we’ve done that in every instance. We’ve worked really, really hard to try to make that be the case. But certainly in the last three quarters, at least, four quarters, we’ve had surprises. And I wouldn’t want to suggest that we won’t have more. But we’ve tried to set the stage so that that won’t occur.

Okay. Great. Thank you.

The next question comes from Rich Wesolowski with Sidoti & Company.

I was wondering if you could tell me how many jobs of substantial size you guys are working on right now in HCD.

Ask that again. I’m not quite sure I understand.

Bill, he wants to know how many projects we have.

We have about 50 that are on the books. I’d say 42 or so of those are-- you’d call ongoing.

Okay. Would you expect that number to significantly increase as we move through the year?

No.

Moving to the Branches, I believe the last call we spoke about some litigation concerning a bond initiative you guys thought was going to come through and give the California Transportation budget a shot in the arm by repaying some of those Proposition 42 funds. Did that not happen?

I think you’re probably referring to the Indian Gaming.

Yes.

Dave, could you comment on that?

Yes. The initiatives that were placed on the ballot were defeated and that could have unwound all of that compact that the Governor has made with, I think, six or seven tribes. However, there’s some lawsuits which have tied those compacts up and he has not been able to move forward with bonding, basically a revenue bond around the revenue anticipated from the casino operations. So there has been no revenue to the Transportation account from that yet. He’s still hopeful, but with litigation, who knows when it’s going to happen?

Okay. Just putting it into perspective, how big of an issue in the grand scheme of your stuff you keep up with in California is that single Prop 42 issue?

Well, each year it represents at least a billion two. And of course, sales tax, as a percentage of fuel-- when the fuel price went up over the last year and a half, that rose substantially and it probably was well above even the earlier estimates of that revenue. So that would have meant probably between, let’s say, a billion and a billion and a half each year into the California’s Transportation budget. That was significant.

Okay. Thank you.

Next question comes from Brian Rafn with Morgan Dempsey Capital Management.

Question for you, with the policy focused to deliver the backlog, does that preclude anything relative to bidding on a very attractive either margin or size-- very high complex design build work? The second part of that would be have you historically had any year where you were positioned with having funded 100% of your capacity for ’05 and then subsequent next year, in ’06, 60 to 65%?

And then relative to the design build, this whole project in the Texas corridor-- and I get the sense that, from what I’ve read, it’s kind of a revolutionary design segregating highways, running rail and utilities along it. Is this a prototype design in design build for the future? Or is this just something that’s specific to the transit needs and topography of Texas?

Okay. Let me take a stab at that. I think there were three questions.

And Mike, chime in, particularly with the Texas corridor.

I think, as I said in my opening remarks, our primary focus, and I know this is true, is to deliver on the backlog we have. We certainly aren’t in the business of working off our backlogs and then not having any more. So it’s an ongoing process to replace backlog, continue to position the business for the future. We will need work, some new work, to supplement our portfolio for 2006 and certainly in 2007. And now is the time to begin to position our portfolio for those years.

From the standpoint of have we ever been in a position where we had enough work at the beginning of a year to keep us going through the current year without any new work, I think it depends on what we expected to do. Keep in mind, we-- over the last several years, we’ve had a goal, frankly, of growing this business. So, because our expectations and our goal was to do that, certainly in the last three or four years, we’ve not been in this position.

So, frankly, I think it’s somewhat of a unique spot. I think it’s a pretty comfortable spot. I think it’s a very healthy spot from a standpoint of not needing a lot of new work. There’s not a lot of pressure to go book new work. And I kind of like that feeling, frankly. I think our whole HCD business is kind of pleased to be in that spot.

Mike, you want to add to that and maybe talk about the Texas corridor?

Okay. I think Bill mentioned it earlier in the call that some of the larger projects we’ve been looking at seem to have been delayed a little bit. I think that’s true. If you look at what we’ve bid in the last two years, it’s kind of in the neighborhood of $5 billion a year. And I think 2005 will probably be-- it could approach that, but it’ll probably be a little less.

So the opportunities are still out there. I think we’re able to be a little more selective on which ones we’re looking at, particularly in certain regions.

As far as the Trans Texas Corridor, of course that’s a multibillion dollar proposal that’s out there. And it’s going to be literally decades before it’s completed. It’s interesting in that fact that it’s private money that is going to bring that to fruition if it happens and not state money. So that’s-- we look at that almost as a new market. I mean, when they start constructing that, we hope to be a part of that process. And I think other states are looking at what’s happening in Texas and trying to figure out ways to do the same thing.

Could you kind of put a date, bidding-wise, for that type of thing? Is that an ’06, ’07, ’08? What kind of a time frame?

I think what I’ve seen on the Trans Texas Corridor proposal that is out there is that the first parts of that would be maybe 2006. But of course, the team that was awarded that project, it’ll be up to them to figure out how to build it and to let the contracts. And they will obviously build a significant portion of that themselves. But we think that they’ll be letting out portions, as well.

And our next question comes from Todd Bensil [ph] with WB&T [ph] Research.

Can you quantify the two items that you mentioned that were in the other income line, the investment income and the planned sale of stock?

Yes. The real estate deal was about 3 million and the stock sale was about 3.3 million in terms of gain.

Okay. And that was just taxed at the 25% rate?

It would be taxed at the ongoing tax rate, yes.

With regard to that, given the moving parts with the joint ventures, what do you anticipate the tax rate for next year is going to be?

That’s probably another one of those good questions that’s been made more difficult because a lot of it is going to be driven by the volume of consolidated joint ventures we perform next year. And certainly that will-- and also, some of the things that have, I think, evolved in terms of how it’s calculated for book purposes, it’s going to be one that we’ll look at every quarter and be updated every quarter. My only guidance at this point would be to use that as kind of-- you know, 30 to 32%. And that’s more of a guideline than actually what may happen with the actual volume next year.

Okay. And then, you know, in the HCD business, I just want to get an update. We’ve talked about previously where you guys think margins ought to be and let’s focus on operating margins here, if we can. I guess my question is given your continued thoughts and work on this business, where do you think the natural level of margin that’s in the backlog currently, let’s say, really is? And you seem to indicate that we’re going to get back there over the course of ’05, so how fast do you think we’ll get back there?

Well, the question is what’s “back there”? And I think that’s the key issue. One of the things that I have said, I started saying this a couple years back, was that we thought we could earn traditional margins. But quite honestly, if you go back and you look at our history over about a ten-year period, particularly when you include the last four years, traditional margins are not acceptable. Frankly, they’re not enough, given the size and complexity and risk involved in this work.

So our goals-- I don’t know whether I could characterize it as an expectation or a goal, but I’m going to just call it an expectation. Our expectation is to do a lot better than we’ve been doing. We have confidence that we can do that, but I’d be reluctant to try to guide you to some particular place.

I think as this year unfolds we may be more willing to provide some more guidance in that regard. But at this point, I’m very reluctant to try to point at some number and suggest that we can get there this year or next year.

We said in our release that we would do better. I think you could argue that it would be, frankly, hard to do a lot worse, so we thought that was a fair statement. And we do expect to do better.

One more thing and then I’ll come back in the queue. You mentioned that you’ve increased the horsepower in your efforts to resolve the issues and claims. And I understand what the issues and claims are. Can you talk to us about how you’ve actually increased that horsepower? You know, I mean, have you taken steps to increase your legal staff? Or what kind of form does that take?

Well, we’re talking about increasing our legal staff. We have not hired another in-house attorney to try to put the horsepower to this equation. But we’ve dedicated more effort in the staff that we have to the recovery efforts in HCD.

I would just add that we’ve added outside legal help, as well as consulting where we think it’s appropriate to help gather data and so forth.

Our next question is from Richard Rossi of Morgan Joseph.

The income you’re generating from other than your operating sources, gains on sales, all of those items -- interest income, equity income and other net-- you know, it’s a substantial number. And if I calculated correctly, it probably accounts for a little more than a third of this year’s pre-tax income. Should we be looking for something of that size of your total pre-tax in the future? Some of these items, like TIC, you said the next sale is in ’06, so that’s absent in ’05. Wondering how large equipment sales might be, whether there are enough other buildings in that real estate operation so that you can look forward to a sale of some or one of them in the coming year. Could we have some kind of general guidance there? It’s just a large number, we can’t ignore it.

It’s-- certainly some of the other income or investments where we’re getting a return on has continued over time to add value. Some of them were specific to-- for instance, in 2003, we had SR 91 that was the investment that was over eight years old that we finally got a large return on. Certainly I would expect that there is going to be-- we’re going to continue to have other income like Granite Regional Park. It is an investment that probably has a lifetime before it finally-- maybe over ten years. So we would expect every year to [inaudible] some return, some of it maybe just our participation in the lease amounts. And from time to time, some of the buildings-- and there’s, I think, a total of four, including the one that was just sold, will be sold to investment concerns. So we would see some benefits there.

It’s just very difficult and somewhat challenging to be able to predict when that particular investment is going to come to fruition. So from that standpoint, we will continue to see that happen sporadically.

And to give you a constant in terms of guidance, especially on equipment-- the gain on sales of equipment, that is probably one that’s just-- it’s plus or minus and it’s probably a level that we’ll continue to have every year.

And the other part of it, we do have the Granite Land Company and certainly they are overseeing some of our investments. They certainly have developed their own business going forward that will participate. But some of that will not appear on the below line, it’ll probably be part of their business.

I guess I’m kind of--

I know you can’t make-- I know it’s not something that’s easily projected. I recognize that. When you give us earnings guidance going forward, in general, I mean, do you speculate on what you may get out of these items? Or do you just include what you know is in the bag on these items?

I think we basically predict what we know that is going to happen. Some of these aren’t necessarily predictable when they will close. And so it could have been in the first quarter of ’05, versus 2004. And so sometimes it just is challenging in that way. But to the extent that we can predict it, we certainly are including that in our guidance.

Okay. One other item and that is Sarbanes-Oxley. How much did it cost you this year? And going forward, do you see similar costs?

Well, Rich, yes. It’s been an interesting process. I think everybody’s been learning, both the external auditor, in our case, PWC [ph], as well as ourselves. I think the price or the bill for that is-- best effort this year, just for basically talking about third-party costs, certainly internally, but also has the cost that we have to bear, as well, there’s probably in excessive of $1 million for 2004. And we would anticipate as we move forward and pay the cost of the [inaudible] increase with PWC, as well as the additional costs as we add people. And we will be adding some staff to support our work in that area from some-- some days working in general accounting, as well as somebody that is working also with internal audit. So it has additional costs. And I would assume that could be $1 million a year.

Okay. I’ll get back in queue.

We’ll next go to Michael Dittus [ph] with Bear Stearns.

Bill, could you go over a little bit and give us maybe a rough idea in 2004 what cash flow was after cap spending and dividends and what kind of free cash you think you generated and maybe an estimate of kind of those metrics in 2005?

And to finish that thought, for Bill Dorey, how much cash do you need on the balance sheet for bonding and those types of purposes? And what do you plan to do with some of the excess capital that you may, hopefully, be generating over the next probably 18 months?

Okay. That’s another good question. Some of this information I have is preliminary, so I’m just going to be talking in a broad sense. You’re asking for the cash flows?

Yes. Just a sense of-- with all of the changes you guys point forth for the year, just a rough idea, we don’t need to be too specific.

Okay. We’re probably going to see, from operating activity, something around 79 million. And then for-- we’ll I’m talking about 2004. And certainly this last year in terms of additions of property and equipment, we had about 90 million in terms of CapEx. Part of that, though, I should point out, wasn’t part of our budget, but was added in the later part of the fourth quarter as we basically purchased mining rights in Sacramento, as well as converting a lease in our Reno area to a purchase, which also extended our [inaudible] to the Reno branch. So that makes up the difference between the budget and the final CapEx.

Anyway, those are kind of the two categories that I have available to me at this time.

Going forward-- the question is what will we do with cash going forward? And I think in our regular course of business, obviously, we have the normal CapEx, tractors and loaders and trucks and stuff like that. But we-- and I think maybe we’ve talked about this on prior calls, but we find ourselves in kind of a situation where we have aggregate reserves that we have depleted in some of our ongoing operations. And we are obligated, really, to replace those aggregate deposits. And we have been doing that-- I think Bill’s example in Sacramento and in Reno. In one instance in Sacramento, it was really adding to our reserve and in Reno, it was purchasing a reserve that we had a lease arrangement with. And we have a number of those kinds of-- call them obligations or opportunities, however you like, and some of our cash will be used there.

And then we have, in addition to that, several-- and we’ve been talking about this over the last couple years, I think-- several Greenfield opportunities that we are pursuing which would add to our capacity-- our materials business capacity.

And I think just maybe in a nutshell, for the most part, every time we get a buck, we try to invest it in some kind of aggregate reserve or plant facility. We think in the long pole, that’s a really good place to put our money.

So I’m not sure I’d say we have a lot of excess cash, because we’ve got a lot of ideas in that regard as to where to spend it.

And then to answer the question toward bonding requirements, that-- typically, we have an increased demand for cash liquidity from our bonding companies that we estimate, but they never tell us specifically. That’s in the minimum area of about 150 million. So that’ll give you kind of a sense of kind of the demand for cash, between what Bill has said, and myself.

Sure. And can you give a sense of what-- how much more dollars you are putting in towards aggregate properties, leasehold rights and equipment since, maybe, mid-2003? Like what’s the delta, given the demand for machines and the demand for rockets that are--

The actual expenditures in that time?

Or just, you know, is it up 10%, up 30%? Is that going to be an issue to pass along and get put forth in your new project bidding or in whatever you’ve already put into the backlog and how it may impact--

Well, I’m not sure I can answer that question precisely. I don’t have that at the tip of my fingers.

Just a sense.

But it’s been a fairly significant delta because generally, unless we’re out buying an aggregate reserve someplace-- I’m going to guess here, so don’t hold me to this. But our normal aggregate plant, equipment-- or the normal plant equipment in our typical budget is probably in the-- 10% to 20% of our budget. The rest of it’s going to construction rolling stock and that sort of thing. And I think in the last year that's at least doubled, probably. And I expect that it will at least stay at that level for a couple of years. That’s a very crude guess, I think. But if you wanted to-- if you really felt you needed that, we could probably come up with it.

But you think that, with your size and scope, is that going to be a better competitive advantage for you, versus some of the smaller, less capitalized companies going forward?

I can tell you, this aggregate game, I mean, for those of you who follow this, the aggregate companies, this aggregate game is very capital-intense. It’s a wonderful business and we love it and we’re really happy that we have it. And we’re trying to grow it. But it takes quite a bit of capital to get in it. And that’s one of the things that is driving, I think, the improved performance that you see in our materials business over the last several years is the realization by us and by our competitors that if you’re going to be in this game, you’d better be getting adequate returns on your revenue, which are significantly higher than are necessary in this construction business, because the investment is so much higher.

And those who are able to-- have the wherewithal, like I think we do, in terms of a strong financial statement and the human capital on staff that are able to pursue these opportunities-- I think we’re in a good position to be able to stay the course-- and the amount of time that it takes to take something from finding an aggregate to the time that we’ve got to permit it and begin the operations-- so I think that we certainly-- and pursing that is adding value to the company.

And we’ll next go to John Rogers with DA Davidson.

I just wanted to clarify some comments earlier. When you talked about having about 42 active HCD projects-- and I think, Bill, you said 80% of the projects were in good shape, if I remember that correctly. What portion of the projects that you’re still working on are going to be either at substantially reduced or break-even margins and you just have to finish them off now?

I don’t remember saying that precisely, but it’s not too far off, actually.

But, Mike, I’d like to pitch this one to you.

I’m not sure I-- could you restate the question?

Well, I guess what I’m really wondering is at what point in ’05 are any of the projects that you’ve had to write down or reduce your margin expectations and reverse out any profits or bring the expectations down on your percentage of completion, at what point do those projects all roll off? And I know you’re going to have surprises, inevitably, in this business going forward, but just so we can keep track of how it’s going in terms of improving the margins.

Well, as we said earlier-- I think I was the one, actually, that made the comment you’re talking about. I said about 80% of those ones that we had to write down are either substantially complete or close, is what I said. And I think that’s accurate. But what you said is right, as well. I mean, the other jobs in the backlog are subject to surprises like anything else we build. So we forecast those quarterly and we adjust them as we see them at the time.

I’d say although we do have several of those projects that are complete or rolling off the log, we also have several new projects that you all are aware of that we got in 2004 that are just starting. So I mean, they-- and that’s kind of the way it always is. That’s why when someone asks if our number of projects is going to increase a lot I said no because we do have jobs finishing up in-- several jobs finished up in 2004. But I expect that we will also get some in 2005. But I don’t see the overall number changing a lot.

Okay. But, Mike, in terms of that-- I don’t know what you want to call them-- the substandard projects or the weak ones, how long before you roll through those that you know you have right now?

That’s difficult to answer. I mean, I’d say most of them this year, but some of them probably into 2006. And I’m characterizing that by a job making substantially less than what we bid--

Yes.

-- if I understood your question correctly.

And we’ll go back to Richard Rossi, Morgan Joseph.

Just on your backlog, as I recall, the Las Vegas Monorail keeps on showing up in the NR as a problem area. And it all certainly sounds like it’s away from what you did, but still, you are a partner there. Did you book the-- did you win and book the second portion of that back sometime this year? Because I think it’s running into financing problems, if I’m not mistaken.

That was never booked in our backlog.

Okay. So that’s not part of it. Okay. That’s it, thanks a lot.

It appears that is our last question for today. I would like to turn to conference back to Bill Dorey for additional or closing remarks.

Thank you all very much for calling in this morning. We appreciate your interest in the company.

If I might just take a minute and address our employees, I appreciate the work that everyone did in 2004. Certainly, we had sort of mixed results in our 2004 business. It was a tough year in some regards and a breakthrough year, I think, frankly, in others. And everyone did a great job to get us through it. I think if you were listening this morning and just trying to sense what our views of 2005 are, clearly, we’re excited about some parts of our business. I think we’re a little-- we’re trying to be careful in other parts as to what we say. But we have good opportunities this year. And I know that our team will pull together and make the most of the opportunities that we have. And we appreciate the dedication that everyone brings to the workplace every day.

So, once again, thanks for tuning in and we’ll be around today to answer other questions if people have them. Thank you.