Page 6 - Q1 2022 RNR

Financial Reporting Fiscal 2022 1st Quarter - R N R Construction, Inc. - 5 -
As is seen with R N R”s WIP, significant work is complete, and many projects will start in the 2nd quarter, although the Google contract is still not issued but imminent, and with significant increases by change order. This work will start 2 May 2022.
Labor costs for this quarter settled at 30.35% of revenue and unusually very high, but this is due to R N R performing more of the work, rather than subcontracting the work out and a lack of revenue. Subcontractors make up 23.03% of revenue which is significantly lower than historically. Labor costs will be pressured this year, during the transition to new work, and a labor work fueling wage demands.
Other direct costs are high and include onetime tenant improvements on 8585 Thys Court (the warehouse next door). We discovered this month that County records were incorrect and the property was on an inaccessible and unknown septic system. These improvements entirely conclude this month and are the installation is now near fully occupied and functional.
R N R is feeling the full force of rising fuel costs. The price of fuel has almost doubled since Q1 2021. Retail gas prices in California for Q1 of 2021 averaged $3.26. Fast forward to Q1 2022, gas prices reached $5.65! and March 11, 2022 was the highest recorded average regular gasoline price in the country!! High gas prices along with equipment maintenance and repairs have contributed to out of the ordinary equipment costs. The component of fuel more than doubled in Equipment costs between Q1 2021 to 2022. In addition, rental equipment represented a three-fold increase in Q1 2022 from Q1 2021 because of the concurrent quantity of operating contracts including Contracts 164,162,160,155, and 139. Rental of equipment will subside significantly in FY2022.
Drawing the reader’s attention to the market, without doubt, demand for R N R exceeds by far its estimating capability. In addition, the market is in full advance forward and significant work is expected. On the flip side, it is believed that gross inflation in our environment exceeds 15% easily. Suppliers and especially specialized suppliers are in an environment successfully raising prices faster than any lifetime prior, and if the supplies are available, price increases remain very high and obligatory at purchase. This is a significant headwind to 2022 results if contracts or investment do not protect for rising prices. At issue, is the worse inventory of supplies and products in memory, requiring significant advance planning, prepayment and price acceptance. Management does not expect any of these trends to subside until late 2023, or mid 2024, and the Federal Reserve has never reduced inflation from the current levels in history. They will start this coming month and pause when the economy teethers or reverse with the collapse of equity and credit markets. The bloody tug of war between policy makers and economy makers has started : will wall street or main street suffer ?.
Finally, turning the attention to shareholder distributions, large tax payments from massive work completed under the completed contract tax election were required. As well, the reader has been extensively explained the significant debt elimination in the related real estate operation.