Granite Construction Inc (GVA) 2010 Q3 法說會逐字稿

Operator today. At this time I would like to welcome everyone to the third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you Ms. Underdown, you may begin your conference

Good morning and thank you for joining our third quarter conference call. I'm here today with Jim Roberts, President and Chief Executive Officer; Laurel Krzeminski, Vice President and Chief Financial Officer; and Mike Donnino, our Senior Vice President and Group Operations Manager .

Before we get started I would like to remind you that this conference call will contain forward-looking statements that should be considered in conjunction with the cautionary statements contained in our earnings release and in the Company's most recent SEC filings. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. Granite assumes no obligation to update any of these forward-looking statements or other information. Please see our filings with the SEC, including our most recent annual report on Form 10K for a discussion of the specific risk factors. With that I will turn the call over to Jim Roberts, Granite's President and CEO.

Thank you, Jackie, and good morning, everyone. During today's call I will discuss the Enterprise Improvement Plan and specifically the actions we are taking to structure the business for long-term profitable growth. Laurel will then take you through the third quarter results and provide an update for the full year . Finally, we will wrap up by looking ahead to next year 2011.

But before we begin I'd like to introduce our new Chief Financial Officer Laurel Krzeminski. I hope everyone had the opportunity to see this morning's news release announcing her appointment. This is an exciting and very well-deserved promotion for Laurel. She has been serving as our Interim Chief Financial Officer and has done a fantastic job for us. She is committed to our focus on long-term profitability and maintaining a strong balance sheet. I'm sure you all are going to really enjoy getting to know her. Congratulations, Laurel.

Okay, let's get started. The economic climate and its impact on the construction industry is a reality of which we are acutely aware of. Over the past two years our construction and construction materials segments in the West have been faced with reduced demand and intense competition as work in the private sector has all but disappeared. On the other hand, we remain extremely encouraged by the opportunities to grow our large project segment across the United States. Given this mixed bag, our strategy is to play both offense and defense to ensure that we structure the business to take advantage of the opportunities, as well as make the tough decisions that will help get us through this downturn.

With that being said, let me spend a few minutes commenting on the publicly announced actions we took on October 25. After completing a thorough analysis of our cost structure and our asset portfolio, we have decided to divest of our real estate investment business, as well as certain fixed assets. This decision is consistent with our business strategy to focus on our core competencies, enhance operating efficiencies and strengthen our balance sheet. Although we are planning an expedited divestiture from certain assets, we intend to maximize the value of the portfolio as much as possible.

We also made the decision to reduce our workforce by 13%, or approximately 220 positions. This action included streamlining and consolidating administrative and support (inaudible) to improve efficiency. We also reduced our field operations personnel in specific locations in an effort to better align the business with its near-term opportunities. While necessary the decision to reduce our workforce was incredibly difficult because of the personal impact it has on all of our people. We are a leader in our industry, thanks to the commitment and contributions of our people and their dedication to the Company's core values. One of my primary goals as CEO is to preserve the values and the culture of Granite, and I firmly believe that the decisions we have made will help ensure our future success.

As I've said previously, we are also taking the offense. We are positioning the business to leverage large project opportunities and diversify our revenue base. We continue to focus considerable effort toward developing opportunities related to renewable and traditional power, heavy and light rail and federal government work. We are awaiting word on several outstanding bids relative to these markets and we continue to have a full pipeline of projects to bid on over the next several years. With regard to Guam, progress that was made during the quarter with the Department of Navy's releasing the record of decision. The Record of Decision is a required document that allows for the award of construction contracts and the execution of the relocation of US forces to begin. We have submitted three proposals to date. We were unsuccessful on one and we expect to hear the results of the other two by the end of the year. We currently expect to bid on at least $700 million in Guam-related projects next year.

With respect to some of our ongoing projects, the Queens Borough tunnel is progressing well. The tunnel boring machines have arrived and are on site. Tunneling is expected to begin in the first quarter and we anticipate that the project will reach profit recognition in 2011. Now some of you know the Houston Metro light rail project has made news recently due to a contractual issue between the owner, Metro, and the Federal Transit Authority, or better known as the FTA. As a result, the FTA will not award a full funding grant agreement until the issue is resolved. We expect the balance of the contract to be booked into backlog once Metro receives the agreement from the FTA, which is anticipated by mid-next-year. We continue to build out the work, including the recently increased notice to proceed, which now totals $311 million . While the funding delay has affected our schedule, we are working with the owner to mitigate the effects of these delays.

We are essentially complete with our work on the I-64 project in St. Louis, and, weather-permitting, we expect to open the Intercounty Connector project in Maryland before Christmas. These have both been successful projects for Granite, led by exceptional teams. I will now turn the call over to Laurel to review the third quarter

Thank you, Jim, and good morning, everyone. Let me take a moment to say that I'm excited about this opportunity and I look forward to meeting many of you over the coming months. Looking at the third quarter, total Company revenues were down 7% to $671 million from $720 million a year ago, driven mainly by lower margins in the construction segment, as well as the impact of large projects that have yet to reach the profit recognition threshold. Total gross profit margin was 11% for the quarter compared with 15% last year. This margin compression was due primarily to lower margins and our beginning backlog of work compared with a year ago. Also contributing to margin pressure was $65 million in revenue from projects that have not yet reached our profit recognition threshold, as compared to $34 million a year ago.

As a result of our ongoing effort to reduce our cost structure, selling, general and administrative expenses decreased 23% to $47 million in the third quarter, compared with $61 million a year ago. Reductions in salaries and related expenses, incentive compensation and discretionary spending were the primary drivers of the reduction in third quarter SG&A. We have made significant progress this year to reduce our overhead and become a more efficient and effective organization. While we are seeing some benefit in our results to date, we expect the majority of the benefit to impact 2011, as the actions related to the Enterprise Improvement Plan become effective.

For the quarter, net income per diluted share was $0.99 compared with prior year's net income per diluted share of $0.79. Included in third quarter earnings is a tax benefit of $8 million. As you will see in the 10-Q, which will be filed later today, the effective tax rate for the third quarter was a negative 22.8% due to the adjustment of the year-to-date tax rate to 135.4%. This unusually high rate is due primarily to the ratio of non-controlling interest of $11.9 million to pre-tax year-to-date loss of $8.3 million. Non-controlling interests are generally not subject to income taxes on a stand-alone basis and are deducted from income before provision for income taxes in arriving at our effective tax rate.

Turning to operating segment results for the third quarter. Construction segment revenue for the quarter decreased 12% to $410 million from $467 million a year ago. Gross profit margin for the third quarter was 11% compared with 16% last year. Margins in beginning backlog were substantially lower than a year ago. Construction segment backlog at the end of the third quarter was $497 million compared with $439 million last year. Large project construction revenues declined 6% to $170 million compared with $181 million a year ago. Contributing to the decrease in revenue was the completion of the I-64 project in St. Louis and a slowdown of work on the US-20 project in Oregon, as we work with the owner to address site condition issues.

Gross profit margin was 11% compared with 14% a year ago as several new projects are generating revenue but have yet to reach our profit recognition threshold. Large project construction backlog at September 30 was $1.14 billion compared with $1.17 billion last year. Not included in backlog is $306 million associated with a highway project in Washington that was awarded in October and an additional $23 million associated with the Houston Metro light rail project.

Revenues for the construction materials segment increased 22% to $88 million in the third quarter of 2010 compared with $72 million in the third quarter of 2009, driven by an increase in sales for certain asphalt products. The gross profit on material sales was $12 million compared with $8 million a year ago. The increase in gross profit is due primarily to higher sales volume as a result of weather in the first half of 2010 that shifted demand into the third quarter.

As a final note on the third quarter, with the continued challenging environment, we remain conservative in our use of cash and are committed to maintaining a strong financial position through this downturn. It's been a challenging quarter and with the Enterprise Improvement Plan activity, we are constantly monitoring our liquidity. We have good relationships with our bank and we're already engaged in discussion with the banks to address any concerns they may have as lenders.

Now moving to the restructuring charge associated with our plan. The Company anticipates recognizing restructuring and impairment charges between $99 million and $145 million, of which approximately $10 million to $12 million is associated with severance-related costs. We expect the majority of the charges to be incurred in the fourth quarter of this year. Of the total, approximately $89 million to $133 million is related to non-cash impairment charges associated with that the divestiture or closure of certain materials-related fixed assets and our real estate investment business. Also included in the total is non-controlling interest related to the impairment on our real estate investments, which is expected to be between $19 million and $23 million.

Turning to guidance for fiscal 2010, we currently expect revenue for the construction segment to be in the range of $925 million to $1.125 billion with a corresponding gross profit margin in the range of 9% to 10%. We expect revenues in the large project segment to be in the range of $600 million to $650 million with a corresponding gross profit margin in the range of 12% to 13%. Construction materials revenue is expected to be in the range of $200 million $250 million, with gross profit margins in the range of 6% to 7%. Net income attributable to non-controlling interest for the total Company is expected to be approximately $20 million for the year, excluding the impact of restructuring charges. Now I will turn the call back to Jim for some additional comments.

Thank you, Laurel. Before we take questions, I'd like to spend a few minutes looking ahead to 2011. As we noted earlier, the actions we're taking to reduce our cost structure will benefit 2011 and beyond. In addition, we will feel the positive impact of some large projects reaching the profit recognition threshold, particularly the Queens Borough tunnel, the Houston Metro light rail project and the World Trade Center. The pipeline of large project bidding opportunities remains very full. While these projects tend to be less competitive than the smaller projects due to their size and complexity, there are still plenty of bidders pursuing this work. As I've said earlier, this is an area of our business that has a lot of growth potential, although it is incumbent upon us to remain selective about which jobs we bid and diligent at how we assess and price risk. Our goal is not to build backlog overnight, but to build high-quality backlog that will provide the best return for our shareholders.

Surprisingly, their maybe a hint of optimism for the upcoming construction season in California. As many of you know, over the last several years, the state's fiscal situation and continuous budget stalemates have restricted the timing of Prop 1B bond sales ,which in turn have slowed down the pace of lettings for bond-funded projects. A recent estimate by the California Transportation Commission, the governing body for the state's construction projects, indicates that $6 billion in Prop 1B bond monies remains to be allocated to projects that must be bid and commence construction by December 31 of 2012. This could have a significant impact on our California business, however we are only cautiously optimistic that the state will complete the necessary bond sales and get these projects out to bid. From a macroeconomic view the private (inaudible) market remains extremely weak, particularly in the West. While there have been some positive indicators in certain markets, we are not optimistic that the private sector market will provide any significant increase in demand for our construction or construction materials businesses next year.

While it is too early to assess the impact that last week's election will have on our industry, and the fate of the highway bill, in particular, we are optimistic that this will be one of the few nonpartisan issues that the legislature will come together on. The President appears focused on the issue, as evidenced by his recent public statement, and is expected to submit a proposal to Congress sometime in February. The incoming Chair of the House Transportation and Infrastructure Committee, John Mica, has identified this legislation as one of his top priorities and has suggested that the bill must be completed before August of next year. Senator Barbara Boxer will return as Chair of the Senate Environment and Public Works Committee, and has already been working with ranking member James Inhofe on a bipartisan highway bill. With pressure building to enact a multi-year highway bill, the first six months of next year provides a window of opportunity for Congress to take action on this important issue.

In closing, I'd like to reiterate our strategy to be both decisive in the actions we need to take to address today's challenges, as well as proactive in our approach to positioning the business for future growth. In many respects, we are getting back to basics and focusing our energy on those things that we do well and are within our control. Our markets will not improve overnight, but by operating as efficiently and effectively as possible, we will come out of this period much stronger than we went in. With that we will be happy to answer your questions.

(Operator Instructions)

We will pause for just a moment to compile the Q&A roster. Your first question is from the line of Bob Labick with CJS Securities.

Good morning, and congratulations to Laurel on her new position.

Thank you.

Good morning, Bob.

Morning. Just want to talk first about the cost savings expected next year. Could you give us a little more details on where the expected savings are in SG&A or cost of goods, and also, how much of this would you expect to flow to the bottom line next year? And how much would you expect to reinvest towards your first five growth initiatives.

Let me address the beginning part of that. First of all, I think that the overall cost savings that we've actually stated in the press release are a combination of both SG&A and cost of goods sold. We were estimating that of the $36 million to $40 million that we put out the press release, Bob, about 75% of that will flow to the SG&A. And with that being the case, it should float to the bottom line as well.

Okay, great. And then switching over to those diversified growth initiatives you touched on in your opening comments, could you give us an update there? And specifically noticed recently in the press there was a federal approval for $6 billion solar site in Southern California. Were you guys involved in any of the bidding there? How are solar site preps looking for you? And how is diversified growth looking right now?

Okay, the solar market -- renewable market and the power market, Bob, we're lumping those together as we consider to be power. And we've actually reallocated some of our resources from some of our vertical integrated business model in our slower areas to be focused 100% on the renewable energy market. I can't really comment directly on the $6 billion if we bid on that, but we are bidding on solar work every day and we are anticipating 2011 to be a big year in the renewable energy market for us, and that should be really a big player towards the diversification. So that's the number one play in renewable energy.

The federal government contracting, we continue to pursue a lot of that work, as well. We are seeing, again, the release of the Guam work, we've got the waterfront enclave job up in the Washington area that we recently received. So we've got people focused on that, as well.

I think you also asked the question, Bob, are we taking some of these savings and reinvesting them in some of these diversification issues? And the answer is we intend to over time, but today we are organically approaching each of these really new markets today with our people that we already have on board.

And, Bob, we did not bid on the project down in Southern California, but there's others that we're tracking.

Okay, great. Super. I'll let others ask questions. Thanks very much

Thanks, Bob

Your next question is from Rich Wesolowski with Sedoti.

Thank you, good morning.

Good morning, Rich.

Good morning, Rich.

Jim, on the June quarter call, I believe, you had discussing seeing a lower number of competitors on average for smaller jobs in the West. Has that continued?

Yes, Rich, I would say that the number of competitors is down still, but I would not suggest that, that means it is any less competitive. What I've seen is that the people that are bidding work, the small work, they're very, very aggressive in pursuing backlog. So numbers are down but the relative competition is not.

Are the margins in your construction segment that you put up here for September and forecast for December representative of that hyper competitive environment?

Yes I think that's right in alignment with where we see the environment today.

Okay, and then secondly, what are your recent conversations with the Western DOTs and the local authorities with whom you work tell you about the volume of work to be let in 2011 out there versus 2010?

Yes, I think that from what I mentioned, California has an opportunity to really grow their program in 2011, so that's certainly something we're looking forward too, and we'll see if those Prop 1B bond sales actually occur. So that's number one. I think the other states that we have looked at so far are fairly static with what we've seen this year. I don't see any major changes in the other states.

So California potentially up, everything else flat?

That's what I would suggest at this time, yes.

Okay, and then one final one. Would you remind us how much of the Houston Metro contract is in your 3Q backlog?

I'm going to let Mike Donnino answer that, Rich.

Rich, we've recently got an increased notice to proceed on the overall project, up to about $311 million, which I think we mentioned in the opening comments. Our share of that is 34%, but it's mostly put into that last piece -- it won't be put into backlog until October -- I'm sorry, until November.

That will be a fourth quarter event

Okay, so the -- up until the third quarter then, you had just the initial piece that you had put in?

Well we've been getting -- Rich, we've been getting incremental notices to proceed throughout the year . So -- and not too many of them were substantial, but it's been growing a little bit each

Okay, thank you.

Your next question is from the line of Jack Kasprzak with BB&T.

Hey, Jack

Hi.

Good morning, Jack

Good morning, Jim In the quarter interest expense -- reported interest expense was only about half $0.5 million, quarterly it's been $3 million, $4-ish million, why was it down in the quarter?

Jack, this is Laurel. We have a decrease in our look-back interest associated with our federal and state tax, it was about $2.5 million.

So is that just confined to this quarter and next quarter will be back on a more normal run rate?

Yes

Okay. And the construction materials gross profit guidance that you gave is about half of where we started the year in terms of that guidance. What accounts for the reduction? Is it more pressure or volume that you thought would be there that didn't materialize?

Jack, I think the biggest part of it is the overall volume. As Laurel mentioned, we're actually seeing some pretty good results on the asphalt side, but the aggregate side is down significantly. I think that's what's driving the overall lack of margin in that segment.

Weaker aggregate volumes specifically, what about aggregate's pricing? I'm thinking -- recently you guys have said it's more or less flat, is that still the case?

It's pretty much static, actually there is a slight uptick in the third quarter, but probably not significant enough to mean that the market has changed, but I would say it's fairly flat.

Okay. I think that does it for me, thanks very much

Thanks, Jack

Your next question is from the line of Joe Ritchie with Goldman Sachs.

Good morning.

Good morning, Joe.

Good morning, Joe.

I guess my first question is really on your comment that you made last quarter regarding your level of profit recognition in your large construction division. I think you said that 30% of your 2010 revenues were coming through at 0% profit, does that still hold true?

Actually it's about 22% now, when we gave you that number last quarter it was about $200 million forecast without profit recognition and that was including existing and some new work, we didn't get all the new work we anticipated. At this point we've got about $140 million in forecast revenue for this year without profit recognition.

Okay, great. And that $140 million could increase if you book some large projects over the next, call it three to six months and you hit profit recognition in the latter half of next year?

Well that's for 2010, so if we get anything now, Joe, we wouldn't have a lot of revenue, probably not a lot of work yet

And the other important part about that is, even if we got work today, depending on the size of it, it may or may not get earnings recognition in 2011. If it's a very large project, chances are you wouldn't complete 25% the first year either.

Okay, fair enough. Going back to the comments that you made earlier on SG&A and it being approximately 75% of the total amount of savings for next year. So can we then assume if you're going at about a run rate of about $200 million this year, that next year we can assume SG&A is going to be about $170 million, is that a fair assumption? Or will that number then also grow with potential revenue growth for next year, as well?

Well, I would say that it is not our intention to have the number grow, no matter what our revenue growth is next year. So I would keep that expectation static in terms of the overall SG&A. And I would also suggest to you that you might want to look closer into the run rate in the third or fourth quarter than the overall year's results. I think that's more indicative of our -- of where our basis is today.

Okay, all right, great. And I guess one final question. In terms of -- you mentioned on the Houston Metro project that there were some delays on the project and notice to proceed so far has only been about $300 million, your portion is about one-third of that. And in terms of getting additional work released on that project, does that mean that you still have potential for another $300 million that you could get released that is your portion on that project for 2011? Is that right?

Yes, Joe, this is Mike again. The potential is there for that. The contract amount is $1.377 billion, but there are -- there will be changes to that, additions and deductions. So -- but I think your assumption of about $400 million, our piece, is probably pretty close.

Okay, great, Thanks for answering my questions.

Thank you, Joe

Your next question is from the line of Kathryn Thompson with Thompson Research Group.

Hi, thank you for taking my questions today. Just real quick, on the cost reductions, what's the timeline for the headcount reduction and how much of the costs you outlined do you think are permanent?

Good morning, Kathryn, this is Jim. I think the intention is that as we streamline our business that all of those reductions will be permanent. And that we're doing some changing in the way we administer the back office services and some other things in the Company, so we do not anticipate those jobs coming back online in the near future.

Okay, great. And we've been hearing that the Guam-related projects are going to be stretched out over a longer period of time than originally expected. Do you have a sense of what amount potentially will be bid for Guam and what does this mean for GVA?

We're still looking at the overall $4 billion package on what we call the DB/MACC. And next year we've been told by the Naval Facilities Command that there will be another $700 million of our work out to bid, of which we think, Kathryn, that the majority of that work is in our type of work. So about 60% to 70% of that $700 million is the type of work that Granite would pursue. So that's as much as we know as to the timing, but the overall package is about $4 billion, and next year is an additional $700 million.

Okay, also moving -- you typically give more a little bit more of an update on the pipeline for larger projects. Could you do that for this call too?

You bet. Overall the pipeline has not changed considerably relative to the size. It's still, overall, were pursuing $9 billion to $10 billion worth of work. We've got a really -- what I would call a nice portfolio of opportunities across the country.

There is work in California, up in Washington, Utah, several states -- North Carolina, Texas, New York. The pipeline is full and we are actually starting to turn away some work based on some of the decisions that we want to make, as I mentioned earlier, about managing the risk and the type of work that we bid. So we're staying very focused on the work that creates the most value for us and still see a great deal of work to bid.

Okay. And understanding -- I know you talked a little bit about the construction backlog and there were some lower-margin projects that are still in this backlog. How long, in your opinion, will it take to work these off?

Well, on the construction side, typically those projects are a year or less in length.

Sure.

So I would suggest that any work that we have at margin percentages today will be cleaned up probably by the end of 2011. And the real decisive issue on the construction side is what are the margins going into the work that we're bidding today and next year. So all the backlog will most likely be eaten up by this time next year in the construction segment, but we'll put backlog on at the same time.

Yes, and I guess that's leading to the follow-up with that. Is are our margins today -- going into the backlogs today in the construction segment.

They're very similar to what we've been seeing, Kathryn. We don't see a change in the margins, they're similar, they're competitive and they're at the same level of which we've been reporting recently.

So you --?

Does that answer your question?

I believe that answers my question, I'll follow-up after the call. Thank you very much

Okay, Kathryn, thank you

Our next question is from line of Fritz Von Cox with Sage Asset Management.

Hi, I just wanted a couple of clean-up things. One the tax benefit in the quarter, you called out I think $8 million. Is that -- if we were to adjust for that to get to the clean earnings in the quarter, would we not, because it's the tax item, you don't tax effect it? You just divide $8 million by the shares and that's your per share impact? Is that correct?

You could do that, yes.

Okay, but it doesn't get tax-affected, right? Okay. And on -- just so I understand what's going on in California, are you saying that it's the case that additional stuff -- additional work is not being let out because of incremental budget problems, is that -- did I understand that currently?

I think what we tried to say and let everybody understand was the California budget environment. When it was in a stalemate and no budget had been passed, literally they put project awards on hold. That has passed, since the budget did come into play now, and they are bidding work again, but it did slow down the awards in the third quarter.

Got you, okay. Thank you

You bet.

Next question is from the line of the Avi Fisher with BMO Capital Markets

Hey, good morning

Good morning, Avi.

Good morning.

Thank you for getting out of the real estate business

We're not out yet, we have a very orderly divesture program. We're not out yet, Avi.

Got you. Just wanted to quickly clarify those costs, if I'm doing my math right, it's $10 million to $12 million in severance costs, $19 million to $23 million in real estate impairment and then $70 million to $110 million in closure of materials?

No, let's back up that sum. We probably should clarify what we said there.

The $19 million to $20 million, Avi, is related to non-controlling interest on the real estate invest impairment.

Okay.

Okay lets go -- just to make sure that we properly -- make sure that everyone understands what we did there The overall size of the impairment is estimated to be between $99 million and $145 million. Of that, $10 million to $12 million will be severance costs. And of that the remaining $89 million $133 million, the amount of non-controlling interest is -- what's the overall amount?

$19 million to $23 million.

$19 million to $23 million. So that's non-controlling interest, that's not Granite effective, that is our partnerships on most of the real estate investments.

And that difference is for both real estate and other fixed assets.

And other fixed assets. So the overall $89 million to $133 million includes real estate investments and certain fixed assets.

Are there branch closures or aggregate plant closures involved in that?

So there's, Avi, there is a combination. So the majority of the dollars are associated with the real estate investment portfolio.

Okay.

Some of it is attached to all sorts of certain fixed assets, some smaller materials facilities, some buildings, idle land and other things, and leases that we have in place that we think are overvalued today.

Okay, I appreciate the clarification there. A bigger picture, historically -- well, just to clarify, with Rich Wesolowski, he asked whether -- if I heard right, guidance that you gave on materials and small projects for the rest of 2010, did you say that you could carry that forward to 2011? That those would be also -- you have similar expectations to what you have for 2011?

No, I don't think we said that. What's asked -- I think Kathryn asked it, was -- so on the construction side, is that the type of environment you're seeing today and going forward? And the answer was yes. I do see the construction business being consistent to what we have seen in the past, and I think it's far too early to discuss what's happening in the materials business or other parts of our business for 2011.

Okay. In general, historically, when you think about the small projects business, it's tended to be a higher margin than the -- if we look at branch versus HCD, branch typically had a higher margin business then HCD, or near parity. And now we're looking at large projects, even with about $140 million of unmargined revenue, significantly higher margins than the small projects. I can guess that what's changed has been volume and price competition. But what's going on in the large project business to drive the high margins? And are these trends sustainable or just related to the timing of project cycles?

Well, I think, Avi, we've made it, I think, fairly clear over the last several years that our intention on large project side of our business is to consistently over time be in the mid-teens for gross margins, and I think we're doing that. And I think that's where that mark-up belongs. That larger work has a higher level of risk associated with it. And it deserves those kinds of returns attached to it, and that's -- as we bid that work, that is our expectation over the long-term and we're still at those levels today. Mike, you want to add to that? Mike?

No, I think you're absolutely right, Jim. It depends on the opportunity and the type of work and the type of risk ,but overall, the portfolio, that's our target and I think that's what, like Jim says, the risk deserves in those type projects.

Okay. In terms of the Houston, you mentioned some comments that were impacting the scheduled there. Does -- when I think of schedule impact, I think higher costs, are there any cost related to that? Or is that just --?

No, not at this time. The -- with the issues they've had with FTA, they have not released funding at the levels we had originally planned on. In other words we're not -- although we've been peeking at $15 million to $18 million a month down there, we had scheduled to do much more than that in the middle of the job, which is for now and next year. And so we had the typical delay-type language in this contract and we're working with the owner to try to mitigate that in terms of time and also delay costs.

Okay. And then you mentioned the $140 million forecast revenues in 2010 at 0% margin. Obviously that hits some margin threshold in 2011, when should we expect that? Is it a one-half event?

Well, I think, Jim -- this is Mike. I think Jim mentioned it earlier, that's an ongoing deal, we're always going to have a portion of that, so it's more of a relative thing. And that's really hard to predict because it depends on the jobs that we get the rest of this year and the first quarter with regard to 2011, and then as we get further into 2011 it will start to affecting 2012.

Well then specifically can you clarify when Western Wake and QBT and --?

Yes, I think we said in the opening that -- and we have been saying that Western Wake is -- should recognize in the fourth quarter this year.

Okay

And then QBT, the second World Trade Center project and Houston Metro next year.

And -- well can you narrow that down a little, I guess?

In terms of timing you mean?

Yes.

Well we're just -- in QBT we're just starting tunneling, so we'll rollout, say, mid-year. The HRT I think is going to take well into the year because we have to see what the size of the contract ends up being exactly and what kind of funding stream we get, so I would say that's third or fourth quarter. And the World Trade Center, again I think is middle-of-the-year type of thing. We're about 10% complete there now.

Alright, I appreciate the clarity. Look forward to seeing you guys soon

Thanks, Avi.

Your next question is a line from Chase Jacobson with Stern Agee.

Hi, good morning

Good morning, Chase.

Good morning.

So it looks like the new legislators are going to be more focused on private funding and are more open to PPPs. Given Granite's strong balance sheet and your -- being one of the largest players in the space in the US, can you just talk a little bit about what your willingness is to participate in those types of projects? Whether it's from the construction side or even being part of the funding team?

Well, Chase, I'll put it this way, and it's pretty consistent to what we've been saying over the years. We certainly are not overly excited about putting too much of any kind of a GAAP financing or financing mechanism on our balance sheet, first of all. We are interested in PPPs, we do have people in our and on our staff that are pursuing PPPs, we are on teams that will pursue those type of jobs, and we will pursue GAAP finance type jobs, but we will do it by bringing the financing to the table through typically a third-party mechanism. And we will typically, if we get into larger projects that require significant financing, we would probably stay out of the financing position and prefer to be the contractor for the team.

Okay. And then on your strategy for markets outside of transportation, you mentioned that you plan to do most of it organically, at least for now. Can you just talk a little bit about what your capacity is there? And maybe how much more you can do organically without having to make an acquisition to expand your presence outside of transportation?

Sure, Chase. I think if you go back and look at our revenue, that our revenue has reduced over the last three or four years. We certainly believe that by diversifying into the federal, the rail and different power segments that we can bring our revenue back up to where we were prior to the downturn. So we're using that as a segment to suggest that if transportation arena stayed somewhat static, we would get back to previous levels of the last three years through the diversification, which is approximately let's say 20% to 25% of our business.

Okay. And then just one quick question on the savings from the workforce reduction, and I apologize if I missed this, I guess the press release today has $36 million to $40 million in annual savings and the release a couple weeks ago had $20 million to $24 million. Is that just from -- including other divestitures as well in this number today?

No, the actual savings, I think are just compiled a little tighter today because we had a little more time to work the numbers, and the $36 million to $40 million is the number relative to our cost savings for 2011.

Okay.

Including both SG&A and cost of goods.

Right, it is not just an SG&A number. That's a good point, Jackie. It is not just SG&A. It is also includes some of the cost of goods sold where we've reduced our cost to produce. And as I mentioned earlier, I would suggest to you about 70% to 75% of that $36 million to $40 million will fall to the SG&A reduction

Okay, so that $20 million to the $24 million was really just more of an SGA figure?

No, that was just related to the reduction in force, so it was just the costs associated with that

We made other structural changes that allow us to reduce our cost basis for next year in addition to just the severance of 220 employees

And we have additional savings in discretionary spending and things like that, as well, so.

So this is a better compilation of all the savings that we're projecting for next year, Chase.

Okay, got it, thanks.

You bet.

Your next question is from the line of Todd Vencil with Davenport & Co.

Thanks very much, good morning.

Good morning, Todd.

So do you guys have any sort of offers in hand on some of the divestitures you're going to make, or are you just starting to go out and look for those now?

No, we've really compiled some significant lists, we've done a lot of work behind the scenes analyzing which assets do not meet our financial criteria and we're just beginning to figure out the methodology in which to divest of them.

Got it. Jim, you said some of these assets, I think early in the call, are going to be subject to an expedited divestiture. What's an expedited divestiture and what does that mean in this context?

Well, I think that overall it means that, first of all, if I said that it would probably be relative to the real estate investment portfolio, which we've considered a three-year orderly exit or divestiture of those investments. So that would be expedited over what we had originally planned.

Got it. And then, not to beat a dead horse, but just to break down this charge that you're talking about, you mentioned the $19 million to $23 million that is applicable, I guess, to noncontrolling interests?

On the real estate investments.

Right, and Laurel, congratulations by the way.

Thank you.

So that would be kind of a credit, right? Because you're putting part of the charge or the loss to your partners, am I thinking about that right?

Yes.

Okay, so is the $99 million to $145 million net of that or gross?

Gross.

So we're going to see a charge of $99 million to $145 million up above the pre-tax line of the balance sheet and then we're going to get a $19 million to $23 million credit below that?

Right, but remember the $99 million to $145 million includes the reduction in force as well as the divestiture of some of the other fixed assets that we discussed.

Sure.

It's a combination of all those.

I'm sorry, go ahead.

Sorry, it's a combination of all those activities.

Okay, so when you guys talk about $20 million of non-controlling interest in your guidance for the year, is that -- I assume it doesn't have that in $19 million to $23 million credit that we just talked about?

Correct.

Got it. Okay, and final question. You talked about $6 billion of Prop 1B money that needs to get bid, and you said bid and started by the end of next year, right?

Right, that's what the California Transportation Commission has publicly stated.

Is that calendar 2011 or fiscal?

They said through December 31 of 2012.

Oh, 2012, okay, I'm sorry.

Right, $6 billion through December 31 of 2012, between now and then.

And what's the -- what's been the run rate the last couple years of the overall California highway budget for construction?

Somewhere around $4 billion a year, I believe.

So we're going to add to a $4 billion a year thing, we're going to have -- or at least we have this pot of money that needs to get spent that $6 billion over two years?

Right, and, remember, some of that $4 billion that have Prop 1B monies in it, so I don't know if I -- I don't have the numbers in front of me to break out what portion of the $4 billion included Prop 1B funds in it.

Got it.

And it's all dependant on them selling the bonds.

Right, and getting into the bond market is a really important item, they are -- they are literally, from what I understand, Todd, they are looking at the end of November as an opportunity to get it back into the market.

So the $6 billion hasn't been raised yet it's just approved to be raised?

That's correct.

Got it.

So that's why I mentioned in my discussion that we're cautiously optimistic, because they've got to get the bond sales in place first.

I got it, okay. Thanks guys.

You bet, Todd.

Your next question is from the line of David Cohen with Midwood Capital.

Hi. Just looking at your full-year guidance and effectively backing into the fourth quarter. I come out with a pretty wide range of gross profit, at the low end, $40 million, and I'm wondering if that's a level that's actually -- what probability might want to assign at a level like that? Because I know you brought down SG&A consistently but, assuming it doesn't come down to $40 million, you are in a negative -- you have an operating loss for the quarter. So I'm trying to understand the probability around such a scenario for the fourth quarter?

Wow, David you've got -- I think you're way ahead of some of the calculations there. And typically we don't dive into any of the individual details in the quarter, but I'll tell you what, if you want to give us a call offline we would be happy to discuss some of your assumptions with you, but I'm not so sure I understand how you got to that number so I'd have a hard time answering that today.

Well, I mean you gave revenue and gross profit -- gross margin ranges for all your the businesses and we only have one quarter left, so I'll certainly follow up on the phone but I think it's -- I'm not making any assumptions, I'm only using what was provided in the press release. But I'll follow up, thanks

The carryover from the projects that have yet to hit proper recognition are impacting gross margin for the large project segment, so that's dragging on the margins for 2010. Going back to the number Laurel talked about, $141 million of large project revenue in 2010 is being booked at 0% margin, so that's all going to help gross margin in 2011. So what we're seeing in the construction business with the lower margin work is just a reflection of the current environment.

Right, I appreciate that, okay. Well I'll follow-up, thanks.

Okay, David, thank you.

Your next question is from the line of Michael Corelli with Barry Vogel & Associates.

Hi, good morning.

Good morning, Michael.

Just had a question about the assets that will be marketed for sale when you -- by the time you're done writing down those assets, what would be the book value of those assets that you're going to be marketing?

I think it's too premature really to be talking about that right now. We have a plan and we're in the process of executing it, so we'll have -- it will become more apparent in the fourth quarter.

And, again, I think that's going to depend on really determining appraised values and we've got a bunch of work to do in the interim to get our plan completed, Michael.

Okay. And then I just had a question about the tax rate, because I was a little confused by it. I know you talked about the impact of the minority interests, but if I look at your year-to-date earnings, you show pre-tax loss of $8.3 million and a tax credit of $11.2 million. So if you can just explain to me how that minority interest impacted that and how we should maybe be looking at the taxes in the fourth quarter?

Okay. Yes, minority interest is really the most significant permanent difference that we have. And so we're -- you'll see in our 10-Q that we're going to file later today, that we've stated in our taxes there that we are anticipating a marginal pre-tax income, and so when you get down to that low of a rate, the -- any insignificant change in our forecast has a really significant impact on the tax rate. And it's just really the function of comparing minority interest to what your pre-tax income is.

So, happy to have a discussion with you offline if you want to get into more details, but minority interests really is our most significant permanent difference. Now our statutory rate is about 30% to 35%, and so we're expecting the end of the year after restructuring charges to have a rate of somewhere around between 30% and 40%. So I think if you want to look at going forward, I would say we probably will be back to a normal tax rate, which has been in the high 20s.

Okay.

Does that help?

So part of this $8 million was a catch-up because the profitability wasn't as high as you thought it would be this year?

Right.

Okay, thank you.

Okay.

Thanks, Michael.

There are no further questions. Jim, do you have any closing remarks?

Yes, thank you. Before we conclude, I would like to acknowledge our employees from coast to coast. This has been a challenging time for our Company and our employees. On behalf of myself and our Management teams around the country, I want you to know how much we appreciate the work you do and the commitment that all of you make to Granite. So thank you, everybody, for your time today. We appreciate your interest in Granite. If you have additional questions, please do not hesitate to call us.

This concludes today's conference call, you may now disconnect.