UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-12911
Granite Construction Incorporated
(Exact name of registrant as specified in its charter)
| Delaware | 77-0239383 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
| | |
| 585 West Beach Street | |
| Watsonville, California | 95076 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (831) 724-1011
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
| Common Stock, $0.01 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined by Rule 12b-2 of the Exchange Act). Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $1.1 billion as of June 30, 2008, based upon the average of the bid and asked prices per share of the registrant’s Common Stock as reported on the New York Stock Exchange on such date. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
At February 13, 2009, 38,246,833 shares of Common Stock, par value $0.01, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Shareholders of Granite Construction Incorporated to be held on May 15, 2009, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2008.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that are not based on historical facts and which may be forward-looking in nature. Under the Private Securities Litigation Reform Act of 1995, a “safe harbor” may be provided to us for certain of these forward-looking statements. Words such as “outlook,” “believes,” “expects,” “appears,” “may,” “will,” “should,” “anticipates” or the negative thereof or comparable terminology, are intended to identify these forward-looking statements. These forward-looking statements are estimates reflecting the best judgment of our senior management and are based on our current expectations and projections concerning future events, many of which are outside of our control, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those risks described in this Report under “Item 1A. Risk Factors.” Except as required by law, we undertake no obligation to revise or update any forward-looking statements for any reason. As a result, the reader is cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report.
Introduction
Granite Construction Company was originally incorporated in 1922. In 1990, Granite Construction Incorporated was formed as the holding company for Granite Construction Company and its wholly owned subsidiaries and was incorporated in Delaware. Unless otherwise indicated, the terms “we,” “us,” “our,” “Company” and “Granite” refer to Granite Construction Incorporated and its consolidated subsidiaries.
We are one of the largest heavy civil construction contractors in the United States. We operate nationwide, serving both public and private sector clients. Within the public sector, we primarily concentrate on infrastructure projects, including the construction of roads, highways, bridges, dams, canals, mass transit facilities and airport infrastructure. Within the private sector, we perform site preparation and infrastructure services for residential development, commercial and industrial buildings, plants and other facilities. Our diversification in both the public and private sectors and our mix of project types and sizes have contributed to our profitability in various economic environments.
We own and lease substantial aggregate reserves and own a number of construction materials processing plants. We also have one of the largest contractor-owned heavy construction equipment fleets in the United States. We believe that the ownership of these assets enables us to compete more effectively by ensuring availability of these resources at a favorable cost.
In 2000, we diversified into real estate investment and development, investing our own capital in carefully selected real estate projects throughout the western United States and Texas. Our objective is to establish strategic alliances with real estate developers that have significant market expertise.
Operating Structure
Our construction business is organized into two divisions, Granite West and Granite East. Included in our Granite West division is our vertically integrated construction materials business. The Company also operates, on a significantly smaller scale, a real estate development and services business, Granite Land Company (“GLC”).
Granite West: In 2008 and 2007, Granite West contract revenue and sales of construction materials was $2.0 billion and $1.9 billion (73.7% and 70.4% of our total revenue), respectively. Granite West has both public and private sector clients. Typical public sector projects include both new construction and improvement of streets, roads, highways, bridges and airports. Major private sector contracts typically include site preparation for housing and commercial development, including excavation, grading and street paving and installation of curbs, gutters, sidewalks and underground utilities.
Granite West’s operating structure is decentralized, with 14 branch offices in the western United States, several with additional satellite operations. In 2008, individual branch revenues ranged from $43.0 million to $258.6 million. Although most Granite West projects are started and completed within a year, the division also has the capability of constructing larger projects and as of December 31, 2008 had eight active large projects, each with total contract revenue greater than $50.0 million.
Granite West mines aggregates and/or operates plants that process aggregates into construction materials for internal use and for sale to unaffiliated parties. These activities are vertically integrated into Granite West, providing both a source of profits and a competitive advantage to our construction business through the readily available supply of materials. We have significant aggregate reserves that we have acquired by ownership in fee or through long-term leases. The amount of aggregate products produced that were used in our construction projects was approximately 48.8% of our total production during 2008 and has ranged from 36.9% to 48.8% over the last five years. The remainder is sold to unaffiliated parties and represented $353.1 million, $375.7 million and $410.1 million in revenue (13.2%, 13.7% and 13.8% of total revenue and 17.9%, 19.5% and 21.3% of Granite West revenue) for the years ended December 31, 2008, 2007 and 2006, respectively.
Granite East: In 2008, revenue from Granite East was $695.0 million (26.0% of our total revenue), compared with $768.5 million (28.1% of our total revenue) in 2007. Granite East’s focus is on large, complex infrastructure projects and includes major highways, large dams, mass transit facilities, bridges, pipelines, canals, waterway locks and dams, and airport infrastructure. It also performs activities such as demolition, clearing, large-scale earthwork and grading, dewatering, drainage improvements, structural concrete, rail signalization, and concrete and asphalt paving. Granite East also has the ability, if needed, to process locally sourced aggregates into construction materials using owned or rented portable crushing, concrete and asphalt processing plants.
Granite East operates out of three regional offices that provide management and administrative support and are the primary hubs for estimating efforts. Granite East construction contracts are typically greater than two years in duration with contract values ranging from $12.0 million to $487.6 million at December 31, 2008.
Both Granite West and Granite East participate in joint ventures with other large construction companies. Joint ventures are used for large, technically complex projects, including design/build projects, where it is desirable to share risk and resources. Joint venture partners typically provide independently prepared estimates, shared financing and equipment and often also bring local knowledge and expertise (see “Joint Ventures; Off-Balance-Sheet Arrangements” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”).
Design/build is increasingly being used as a method of project delivery. Unlike traditional projects where owners first hire a design firm or design a project themselves and then put the project out to bid for construction, design/build projects provide the owner with a single point of responsibility and a single contact for both final design and construction. Revenue from design/build projects represented 66.4% and 62.2% of Granite East revenue in 2008 and 2007, respectively and 14.1% and 8.1% of Granite West revenue in 2008 and 2007, respectively. Although these projects carry additional risk as compared to traditional bid/build projects, the profit potential can also be higher. We frequently bid design/build projects as a part of a joint venture team.
Granite Land Company: GLC purchases, develops, operates, sells and otherwise invests in real estate developments as well as provides real estate services for other Granite operations. GLC’s current portfolio consists of residential, retail and office site development projects for sale to home and commercial property developers or held for rental income in Washington, California, Texas and Oregon. In 2008, revenue from GLC was $9.0 million (0.3% of our total revenue), compared with $40.7 million (1.5% of our total revenue) in 2007.
Additional information about our business segments is contained in Note 20 of the “Notes to the Consolidated Financial Statements.”
Business Strategy
Our fundamental objective is to increase long-term shareholder value by focusing on consistent profitability from controlled revenue growth. Shareholder value is measured by the appreciation of the value of our common stock over a period of years as well as a return from dividends. Further, it is a specific measure of our financial success to achieve a return on net assets greater than the cost of capital, creating “Granite Value Added.” We believe that the following are key factors in our ability to achieve these objectives:
Controlled Expansion - We intend to continue our expansion by selectively adding branches or branch satellite locations in the western United States, exploring opportunities to establish branch-like businesses in other areas of the country through acquisitions, and selectively pursuing major infrastructure projects where we have an established presence.
Decentralized Profit Centers - We approach each selected market with a local focus through our decentralized structure. Each of our Granite West branch offices and Granite East regional offices are individual profit centers. This structure encourages entrepreneurial activity while allowing the offices to benefit from certain centralized administrative functions.
Diversification - To mitigate the risks inherent in construction and general economic factors, we pursue projects: (i) in both the public and private sectors, (ii) for a wide range of customers within each sector (from the federal government to small municipalities and from large corporations to individual homeowners), (iii) in diverse geographic markets, (iv) that are design/build, lump sum and fixed unit price and (v) of various sizes, durations and complexity.
Employee Development - We believe that our employees are key to the successful implementation of our business strategies. Significant resources are employed to attract, develop and retain extraordinary talent and fully promote each employee’s capabilities.
Infrastructure Construction Focus - We concentrate our core competencies on this segment of the construction industry, which includes the building of roads, highways, bridges, dams, tunnels, mass transit facilities, railroad infrastructure and underground utilities as well as site preparation. This focus allows us to most effectively utilize our specialized strengths, which include grading, paving and concrete structures.
Ownership of Aggregate Materials and Construction Equipment - We own and lease aggregate reserves and own processing plants that are vertically integrated into our construction operations and we own a large fleet of carefully maintained heavy construction equipment. By ensuring availability of these resources and providing quality products, we believe we have bidding advantages in many of our markets, as well as a source of revenue and income from the sale of construction materials to unaffiliated parties.
Profit-based Incentives - We incentivize our profit center managers with a substantial variable cash and restricted stock incentive element based primarily on the annual profit performance of their respective profit centers.
Selective Bidding - We focus our resources on bidding jobs that meet our selective bidding criteria, which include analyzing the risk of a potential job in relation to: (i) available personnel to estimate and prepare the proposal, (ii) personnel to effectively manage and build the project, (iii) competitive environment, (iv) experience with the type of work, (v) experience with the owner, (vi) local resources and partnerships, (vii) equipment resources, (viii) size and complexity of the job and (ix) profitability.
Operating principles that support these objectives are as follows:
Accident Prevention - We believe that preventing accidents is both a moral obligation and good business. By identifying and concentrating resources to address jobsite hazards, we continually strive to reduce our incident rates and the costs associated with accidents.
Environmental Responsibility - We believe it benefits everyone to maintain environmentally responsible operations. We are committed to protect the environment, maintain good community relations and ensure compliance with government agency requirements. We continually monitor our performance in this area.
Quality and High Ethical Standards - We emphasize the importance of performing high quality work and maintaining high ethical standards through an established code of conduct and an effective corporate compliance program.
Customers
We have customers in both the public and private sectors. The largest volume customer of Granite West is the California Department of Transportation (“Caltrans”). In 2008, contracts with Caltrans represented 9.6% of our total revenue (13.1% of Granite West revenue), and total public sector revenue generated in California represented 27.7% of our total revenue. In 2007, contracts with Caltrans represented 10.0% of our total revenue, and total public sector revenue generated in California represented 23.5% of our total revenue. Other Granite West customers include certain federal agencies, departments of transportation of other states, county and city public works departments, school districts and developers and owners of industrial, commercial and residential sites. Granite East’s customers are predominantly in the public sector and currently include numerous state departments of transportation, local transit authorities, and federal agencies.
Contract Backlog
Our contract backlog is comprised of the remaining unearned revenue of awarded contracts that have not been completed, including 100% of our consolidated joint ventures and our proportionate share of unconsolidated joint venture contracts. Our contract backlog was approximately $1.7 billion and $2.1 billion at December 31, 2008 and 2007, respectively. Approximately $1.2 billion of the December 31, 2008 contract backlog is expected to be completed during 2009. We include a construction project in our contract backlog at such time as a contract is awarded and funding is in place, with the exception of certain federal government contracts for which funding is appropriated on a periodic basis. Substantially all of the contracts in our contract backlog may be canceled or modified at the election of the customer; however, we have not been materially adversely affected by contract cancellations or modifications in the past (see “Contract Provisions and Subcontracting”). Most Granite West projects are added and completed within each year and therefore not reflected in our year-end contract backlog. Contract backlog by segment is presented in “Contract Backlog” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Equipment and Plants
We own many pieces of equipment, including loaders, bulldozers, excavators, rollers, motor graders, pavers, scrapers, cranes, trucks, backhoes and barges as well as construction materials processing plants. In 2008 and 2007, we spent approximately $54.8 million and $88.4 million, respectively, for construction equipment, plants and vehicles. At December 31, 2008 and 2007, we owned the following construction equipment, plants and vehicles:
December 31, | | | 2008 | | | 2007 | | |
Heavy construction equipment (units) | | | 3,523 | | | | | |
Trucks, truck-tractors and trailers and vehicles (units) | | | 5,467 | | | | | |
Aggregate crushing plants | | | 54 | | | | | |
| | | 68 | | | | | |
Portland cement concrete batch plants | | | 24 | | | | | |
| | | 5 | | | | | |
| | | 9 | | | | | |
We believe that ownership of equipment is generally preferable to leasing because ownership ensures the equipment is available as needed and normally results in lower equipment costs. We keep our equipment as fully utilized as possible by pooling certain equipment for use by both Granite West and Granite East. We regularly lease or rent equipment on a short-term basis to supplement existing equipment and respond to construction activity peaks.
Employees
On December 31, 2008, we employed approximately 2,000 salaried employees, who work in management, estimating and clerical capacities, plus approximately 1,500 hourly employees. The total number of hourly personnel employed by us is subject to the volume of construction in progress and is seasonal. During 2008, the number of hourly employees ranged from approximately 1,500 to 4,600 and averaged approximately 3,500. Two of our wholly owned subsidiaries - Granite Construction Company and Granite Construction Northeast, Inc. - are parties to craft collective bargaining agreements in many areas in which they work.
We believe our employees are our most valuable resource and that our workforce possesses a strong dedication to and pride in our company. Among salaried and non-union hourly employees, this dedication is reinforced by 15.8% equity ownership through our Employee Stock Ownership Plan, our Profit Sharing and 401(k) Plan and performance-based incentive compensation arrangements at December 31, 2008. Our managerial and supervisory personnel have an average of approximately 10 years of service with us.
Competition
Factors influencing our competitiveness include price, reputation for quality, the availability of aggregate materials, machinery and equipment, financial strength, knowledge of local markets and conditions, and project management and estimating abilities. Although some of our competitors are larger than us and may possess greater resources, we believe that we compete favorably on the basis of the foregoing factors. Historically, the construction business has not required large amounts of capital, particularly for the smaller size construction work pursued by Granite West, which can result in relative ease of market entry for companies possessing acceptable qualifications. Granite West competitors range from small local construction companies to large regional, national and global construction companies. While the market areas of these competitors overlap with several of the markets served by our branches, few compete in all of our market areas. Many of our Granite West competitors have the ability to perform work in either the private or public sectors. When opportunities for work in one sector are reduced, competitors tend to look for opportunities in the other sector. This migration has the potential to reduce revenue growth and/or increase pressure on gross profit margins. In addition, we own and/or have long-term leases on aggregate resources that provide an extra measure of competitive advantage in certain markets. Granite East normally competes with large regional, national and global construction companies. Although the construction business is highly competitive, we believe we are well positioned to compete effectively in the markets in which we operate.
Contract Provisions and Subcontracting
Our contracts with our customers are primarily either “fixed unit price” or “fixed price.” Under fixed unit price contracts, we are committed to provide materials or services required by a project at fixed unit prices (for example, dollars per cubic yard of concrete poured or cubic yard of earth excavated). While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, errors in our estimates or other factors, is borne by us unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk of performing all the work for the specified amount. The percentage of fixed price contracts in our contract backlog decreased to approximately 68.7% at December 31, 2008 compared with approximately 72.0% at December 31, 2007. Our contracts are generally obtained through competitive bidding in response to advertisements by federal, state and local government agencies and private parties. Less frequently, contracts may be obtained through direct negotiations with private owners. Our contract risk mitigation process includes identifying risks and opportunities during the bidding process, review of bids fitting certain criteria by various levels of management and, in some cases, by the executive committee of our Board of Directors.
There are a number of factors that can create variability in contract performance and results as compared to a project’s original bid. The most significant of these include the completeness and accuracy of the original bid, costs associated with added scope changes, extended overhead due to owner and weather delays, subcontractor performance issues, changes in productivity expectations, site conditions that differ from those assumed in the original bid (to the extent contract remedies are unavailable), the availability and skill level of workers in the geographic location of the project and a change in the availability and proximity of equipment or materials. All of these factors can impose inefficiencies on contract performance, which can drive up costs and lower profits. Conversely, if any of these or other factors are more positive than the assumptions in our bid, project profitability can improve. However, the ability to realize improvements on project profitability is more limited than the risk of lower profitability. Design/build projects typically incur additional costs such as right-of-way and permit acquisition costs and carry additional risks such as design error risk and the risk associated with estimating quantities and prices before the project design is completed. Design errors may result in higher than anticipated construction costs and additional liability to the contract owner. Although we manage this additional risk by adding contingencies to our bid amounts, obtaining errors and omissions insurance and obtaining indemnifications from our design consultants where possible, there is no guarantee that these risk management strategies will always be successful.
All of our state and federal government contracts and most of our other contracts provide for termination of the contract at the convenience of the contract owner, with provisions to pay us for work performed through the date of termination. We have not been materially adversely affected by these provisions in the past. Many of our contracts contain provisions that require us to pay liquidated damages if specified completion schedule requirements are not met and these amounts can be significant.
We act as prime contractor on most of the construction projects we undertake. We accomplish the majority of our projects with our own resources and subcontract specialized activities such as electrical and mechanical work. As prime contractor, we are responsible for the performance of the entire contract, including subcontract work. Thus, we may be subject to increased costs associated with the failure of one or more subcontractors to perform as anticipated. Based on our analysis of their construction and financial capabilities, among other criteria, we determine whether to require that the subcontractor furnish a bond or other type of security that guarantees their performance. Disadvantaged business enterprise regulations require us to use our best efforts to subcontract a specified portion of contract work done for governmental agencies to certain types of disadvantaged subcontractors. As with all of our subcontractors, some may not be able to obtain surety bonds or other types of performance security.
Insurance and Bonding
We maintain general and excess liability, construction equipment and workers’ compensation insurance; all in amounts consistent with industry practices.
In connection with our business, we generally are required to provide various types of surety bonds that provide an additional measure of security for our performance under certain public and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, past performance, management expertise and external factors, including the capacity of the overall surety market. Surety companies consider such factors in light of the amount of our contract backlog that we have currently bonded and their current underwriting standards, which may change from time to time. The capacity of the surety market is subject to market-based fluctuations driven primarily by the level of surety industry losses and the degree of surety market consolidation. When the surety market capacity shrinks it results in higher premiums and increased difficulty obtaining bonding, in particular for larger, more complex projects throughout the market. In order to help mitigate this risk, we employ a co-surety structure involving three sureties. Although we do not believe that fluctuations in surety market capacity has significantly impacted our ability to grow our business, there is no assurance that it will not significantly impact our ability to obtain new contracts in the future (see “Item 1A. Risk Factors”).
Environmental Regulations
Our operations are subject to various federal, state and local laws and regulations relating to the environment, including those relating to discharges to air, water and land, the handling and disposal of solid and hazardous waste, the handling of underground storage tanks and the cleanup of properties affected by hazardous substances. Certain environmental laws impose substantial penalties for non-compliance and others, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, impose strict, retroactive, joint and several liability upon persons responsible for releases of hazardous substances. We continually evaluate whether we must take additional steps at our locations to ensure compliance with environmental laws. While compliance with applicable regulatory requirements has not materially adversely affected our operations in the past, there can be no assurance that these requirements will not change and that compliance will not adversely affect our operations in the future. In addition, our aggregate materials operations require operating permits granted by governmental agencies. We believe that tighter regulations for the protection of the environment and other factors will make it increasingly difficult to obtain new permits and renewal of existing permits may be subject to more restrictive conditions than currently exist.
In July 2007, the California Air Resources Board (“CARB”) approved a regulation that will require California equipment owners/operators to reduce diesel particulate and nitrogen oxide emissions from in-use off-road diesel equipment to meet progressively more restrictive emission targets proposed for each year from 2010 to 2020. In December 2008, CARB approved a similar regulation for in-use on-road diesel equipment that includes more restrictive emission targets from 2010 to 2022. The emission targets will require California off-road and on-road diesel equipment owners to retrofit equipment with diesel emission control devices or replace equipment with new engine technology as it becomes available. Between now and the year 2022, Granite will be required to implement an equipment management strategy that includes accelerated turnover of off-road and on-road diesel equipment and retrofitting equipment with CARB approved emission control devices. This will increase equipment related expenses.
As is the case with other companies in our industry, some of our aggregate products contain varying amounts of crystalline silica, a common mineral. Also, some of our construction and material processing operations release, as dust, crystalline silica that is in the materials being handled. Excessive, prolonged inhalation of very small-sized particles of crystalline silica has allegedly been associated with respiratory disease (including silicosis). The Mine Safety and Health Administration and the Occupational Safety and Health Administration have established occupational thresholds for crystalline silica exposure as respirable dust. We monitor to verify that our dust control procedures are keeping occupational exposures at or below the requisite thresholds and to verify that respiratory protective equipment is made available when required. We also communicate, through safety information sheets and other means, what we believe to be appropriate warnings and cautions to employees and customers about the risks associated with excessive, prolonged inhalation of mineral dust in general and crystalline silica in particular.
Website Access
Our website address is www.graniteconstruction.com. On our website we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The information on our website is not incorporated into, and is not part of, this report. These reports, and any amendments to them, are also available at the website of the SEC, www.sec.gov.
Set forth below and elsewhere in this Report and in other documents we file with the SEC are various risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in the Report or otherwise adversely affect our business.
| · | Uncertainty regarding the impact of the current economic downturn and governmental initiatives to stimulate the economy. A protracted financial crisis may affect government funding that we rely upon for our core infrastructure focus, including state DOT’s such as Caltrans. A substantial majority of our revenues are derived from contracts that are funded by federal, state, and local government agencies. Our ability to obtain future public sector work at reasonable margins is highly dependent on the amount of work that is available to bid, which is largely a function of the level of government funding available. It may also affect our customer base, subcontractors and suppliers and could materially affect our contract backlog, operating results, cash flows and our ability to implement our strategic plan. Many of our risk factors identified below could be negatively impacted should the current financial crisis be prolonged. |
| Our commercial and residential site development work may be affected by economic downturns. The availability of private sector work can be adversely affected by economic downturns in the residential housing market, demand for commercial property or the availability of credit. To the extent these events occur, our operating results will be adversely affected. |
| Granite Land Company is greatly affected by the performance of the real estate industry. Our real estate development activities are subject to numerous factors beyond our control including local real estate market conditions; substantial existing and potential competition; general national, regional and local economic conditions; fluctuations in interest rates and mortgage availability and changes in demographic conditions. If our outlook for a project’s forecasted profitability deteriorates, we may find it necessary to curtail our development activities and evaluate our real estate assets for possible impairment. Our evaluation includes a variety of estimates and assumptions and future changes in these estimates and assumptions could impact future impairment analyses. If our real estate assets are determined to be impaired, the impairment would result in a charge to income from operations in the year of the impairment. |
| · | Our success depends on attracting and retaining qualified personnel in a competitive environment. The single largest factor in our ability to profitably execute our work is our ability to attract, develop and retain qualified personnel particularly as we grow. Our success in attracting qualified people is dependent on the resources available in individual geographic areas and changes in the labor supply as a result of general economic conditions as well as our ability to provide a competitive compensation package and work environment. |
| Our fixed price and fixed unit price contracts subject us to the risk of increased project cost. As more fully described under “Contract Provisions and Subcontracting” above, the profitability of our fixed price and fixed unit price contracts can be adversely affected by a number of factors that can cause our actual costs to materially exceed the costs estimated at the time of our original bid. |
| Our Design/build contracts subject us to the risk of design errors and omissions. Design/build is increasingly being used as a method of project delivery, providing the owner with a single point of responsibility for both design and construction. We generally pass design responsibility on to the architectural and engineering firms that we engage to perform these services on our behalf. However, in the event of a design error or omission causing damages, there is risk that the firm or the errors and omissions insurance would not be able to absorb the liability. In this case we may be responsible, resulting in a material adverse effect on our financial position, results of operations and cash flows. |
| Accounting for our revenues and costs involves significant estimates. As further described in “Critical Accounting Estimates” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” accounting for our contract related revenues and costs, as well as other cost items, requires management to make a variety of significant estimates and assumptions. Although we believe we have sufficient experience and processes to enable us to formulate appropriate assumptions and produce reasonably dependable estimates, these assumptions and estimates may change significantly in the future, and these changes could result in the reversal of previously recognized revenue and profit and have a material adverse effect on our financial position, results of operations, and cash flows. |
| | |
| Many of our contracts have penalties for late completion. In some instances, including many of our fixed price contracts, we guarantee that we will complete a project by a scheduled date. If we subsequently fail to complete the project as scheduled we may be held responsible for cost impacts resulting from any delay, generally in the form of contractually agreed-upon liquidated damages. To the extent that these events occur, the total costs of the project could exceed our original estimates and we could experience reduced profits or, in some cases, a loss for that project. |
| Weather can significantly impact our quarterly revenues and profitability. Our ability to perform work is significantly impacted by weather conditions such as precipitation and temperature. Changes in weather conditions can create significant variability in our quarterly revenues and profitability, particularly in the first and fourth quarters of the year. Additionally, delays and other weather impacts may increase a project’s cost and decrease its profitability. |
| We work in a highly competitive marketplace. As more fully described under “Competition” above, we have multiple competitors in all of the areas in which we work. During economic down cycles or times of lower government funding for public works projects, competition for the fewer available projects intensifies and this increased competition may result in a decrease in our ability to be competitive at acceptable margins. |
| An inability to secure and permit aggregate reserves could negatively impact our future operations and results. Tighter regulations for the protection of the environment and the finite nature of property containing suitable aggregate reserves are making it increasingly challenging and costly to secure and permit aggregate reserves. Although we have thus far been able to secure and permit reserves to support our business, it is likely to become increasingly difficult and costly to do so and there is no assurance that we will be able to secure and permit reserves in the future. |
| We are subject to environmental and other regulation. As more fully described under “Government and Environmental Regulations” above, we are subject to a number of federal, state and local laws and regulations relating to the environment, workplace safety and a variety of socioeconomic requirements, the noncompliance with which can result in substantial penalties, termination or suspension of government contracts as well as civil and criminal liability. While compliance with these laws and regulations has not materially adversely affected our operations in the past, there can be no assurance that these requirements will not change and that compliance will not adversely affect our operations in the future. |
| Strikes or work stoppages could have a negative impact on our operations and results. We are party to collective bargaining agreements covering a portion of our craft workforce. Although our results and operations have not been significantly impacted by strikes or work stoppages in the past, such labor actions could have a significant impact on our operations if they occur in the future. |
| Unavailability of insurance coverage could have a negative impact on our operations and results. We maintain insurance coverage as part of our overall risk management strategy and pursuant to requirements to maintain specific coverage that are contained in our financing agreements and in most of our construction contracts. Although we have been able to obtain insurance coverage to meet our requirements in the past, there is no assurance that such insurance coverage will be available in the future. |
| An inability to obtain bonding would have a negative impact on our operations and results. As more fully described in “Insurance and Bonding” above, we generally are required to provide surety bonds securing our performance under the majority of our public and private sector contracts. Our inability to obtain surety bonds in the future would significantly impact our ability to obtain new contracts, which would have a material adverse effect on our business. |
| Our joint venture contracts with project owners subject us to joint and several liability. If a joint venture partner fails to perform we could be liable for completion of the entire contract and, if the contract were unprofitable, this could result in a material adverse effect on our financial position, results of operations and cash flows. |
| We use certain commodity products that are subject to significant price fluctuations. Diesel fuel, liquid asphalt and other petroleum-based products are used to fuel and lubricate our equipment, fire our asphalt concrete processing plants and constitute a significant part of the asphalt paving materials that are used in many of our construction projects and sold to outside parties. Although we are partially protected by asphalt or fuel price escalation clauses in some of our contracts, many contracts provide no such protection. We also use cement, steel and other commodities in our construction projects that can be subject to significant price fluctuations. We have not been significantly adversely affected by price fluctuations in the past; however, there is no guarantee that we will not be in the future. |
| As a part of our growth strategy we expect to make future acquisitions and acquisitions involve many risks. These risks include difficulties integrating the operations and personnel of the acquired companies, diversion of management’s attention from our ongoing operations, potential difficulties and increased costs associated with completion of any assumed construction projects, insufficient revenues to offset increased expenses associated with acquisitions and the potential loss of key employees or customers of the acquired companies. Acquisitions may also cause us to increase our liabilities, record goodwill or other non-amortizable intangible assets that will be subject to subsequent impairment testing and potential impairment charges and incur amortization expenses related to certain other intangible assets. Failure to manage and successfully integrate acquisitions could harm our business and operating results significantly. |
| Failure of our subcontractors to perform as anticipated could have a negative impact on our results. As further described under “Contract Provisions and Subcontracting” above, we subcontract a portion of many of our contracts to specialty subcontractors and we are ultimately responsible for the successful completion of their work. Although we seek to require bonding or other forms of guarantees, we are not always successful in obtaining those bonds or guarantees from our higher risk subcontractors, and there is no guarantee that we will not incur a material loss due to subcontractor performance issues. |
| We may be unable to identify qualified Disadvantaged Business Enterprise (“DBE”) contractors to perform as subcontractors. Certain of our government agency projects contain minimum DBE participation clauses. If we subsequently fail to complete these projects with the minimum DBE participation we may be held responsible for damages due to breach of contract including restrictions on our ability to bid on future projects and monetary damages. To the extent that these events occur, the total costs of the project could exceed our original estimates and we could experience reduced profits or, in some cases, a loss for that project. |
| Government funded contracts generally have strict regulatory requirements. Approximately 78.3% of our consolidated revenue in 2008 was derived from contracts funded by federal, state and local government agencies and authorities. These government contracts are subject to specific procurement regulations, contract provisions and a variety of socioeconomic requirements relating to their formation, administration, performance and accounting. Many of these contracts include express or implied certifications of compliance with applicable laws and contract provisions. As a result of our government contracting, claims for civil or criminal fraud may be brought by the government for violations of these regulations, requirements or statutes. We may also be subject to qui tam (“Whistle Blower”) litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for up to treble damages. Further, if we fail to comply with any of these regulations, requirements or statutes, our existing government contracts could be terminated and we could be suspended from government contracting or subcontracting, including federally funded projects at the state level. If our government contracts are terminated for any reason, or if we are suspended from government work, we could suffer a significant reduction in expected revenue. |
| Our long-term debt and credit arrangements contain restrictive covenants and failure to meet these covenants could significantly harm our financial condition. Our long-term debt and credit arrangements and related restrictive covenants are more fully described in Note 12 of the “Notes to the Consolidated Financial Statements” included in this report. In most cases, failure to meet the restrictive covenants would result in an immediate repayment of all amounts due and cancellation of open lines of credit. Additionally, failure to meet restrictive covenants related to our debt and credit agreements would trigger cross-default provisions that would cause us to also be in default of our surety agreements. Although we have not had difficulty meeting these covenants in the past, failure to do so in the future could have material adverse effects on our business and financial condition. |
| | |
| Our contract backlog is subject to unexpected adjustments and cancellations and could be an uncertain indicator of our future earnings. We cannot guarantee that the revenues projected in our contract backlog will be realized or, if realized, will be profitable. Projects reflected in our contract backlog may be affected by project cancellations, scope adjustments, time extensions or other changes. Such changes may impact the revenue and profit we ultimately realize on these projects. |
The foregoing list is not exhaustive. There can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact us. These developments could have material adverse effects on our business, financial condition and results of operations. For these reasons, the reader is cautioned not to place undue reliance on our forward-looking statements.
None.
The following table provides our estimate of certain information about our properties as of December 31, 2008:
| | Land Area (acres) | Building Square Feet | Permitted Aggregate Reserves (tons) | Unpermitted Aggregate Reserves (tons) |
Office and shop space (owned and leased) | | | | |
| | | | |
| | | | |
Real estate held for development and sale and use | | | | |
Approximately 80% of the office and shop space is used by Granite West at their various locations throughout the western United States and the remainder is primarily used by Granite East. The quarry property is located at Granite West locations throughout the western United States. We consider our available and future aggregate reserves adequate to meet our expected operating needs. We pursue a plan of acquiring new sources of aggregate reserves to replenish those depleted and to support future growth.
Silica Litigation
Our wholly owned subsidiary Granite Construction Company (“GCCO”) is one of approximately 100 to 300 defendants in eight active California Superior Court lawsuits. Of the eight lawsuits, five were filed against GCCO in 2005 and three were filed against GCCO in 2006, in Alameda County ( Molina vs. A-1 Aggregates, et al.; Dominguez vs. A-1 Aggregates, et al.; Cleveland vs. A. Teichert & Son.; Guido vs. A. Teichert & Son, Inc.; Williams vs. A. Teichert & Son, Inc.; Horne vs. Teichert & Son, Inc.; Kammer vs.A-1 Aggregates, et al.; and Solis vs. The 3M Company et al.). Each lawsuit was brought by a single plaintiff who is seeking money damages by way of various causes of action, including strict product and market share liability, and alleges personal injuries caused by exposure to silica products and related materials during the plaintiffs’ use or association with sand blasting or grinding concrete. The plaintiff in each lawsuit has categorized the defendants as equipment defendants, respirator defendants, premises defendants and sand defendants. We have been identified as a sand defendant, meaning a party that manufactured, supplied or distributed silica-containing products. Our preliminary investigation revealed that we have not knowingly sold or distributed abrasive silica sand for sandblasting, and therefore, we believe the probability of these lawsuits resulting in an incurrence of a material liability is remote. We have been dismissed from sixteen other similar lawsuits.
Hiawatha Project DBE Issues
The Hiawatha Light Rail Transit (“HLRT”) project was performed by Minnesota Transit Constructors (“MnTC”), a joint venture that consisted of GCCO and other unrelated companies. GCCO was the managing partner of the joint venture, with a 56.5% interest. The Minnesota Department of Transportation (“MnDOT”) is the contracting agency for this federally funded project. The Metropolitan Council is the local agency conduit for providing federal funds to MnDOT for the HLRT project. MnDOT and the U.S. Department of Transportation Office of Inspector General (“OIG”) each conducted a review of the Disadvantaged Business Enterprise (“DBE”) program maintained by MnTC for the HLRT project. In addition, the U.S. Department of Justice (“USDOJ”) is conducting an investigation into compliance issues with respect to MnTC’s DBE Program for the HLRT project. MnDOT and the OIG (collectively, the “Agencies”) have initially identified certain compliance issues in connection with MnTC’s DBE Program and, as a result, have determined that MnTC failed to meet the DBE utilization criteria as represented by MnTC. Although there has been no formal administrative subpoena issued, nor has a civil complaint been filed in connection with the administrative reviews or the investigation, MnDOT has proposed a monetary sanction of $4.3 million against MnTC and specified DBE training for personnel from the members of the MnTC joint venture as a condition of awarding future projects to joint venture members of MnTC on MnDOT and Metropolitan Council work. MnTC is fully cooperating with the Agencies and the USDOJ and, on July 2, 2007, presented its detailed written response to the initial determinations of the Agencies as well as the investigation by the USDOJ. We have yet to receive a formal reply from the Agencies or the USDOJ, those entities instead preferring to engage in informal discussions in attempt to resolve the matter. We cannot, however, rule out the possibility of a civil or criminal actions being brought against MnTC or one or more of its members which could result in civil and criminal penalties.
US Highway 20 Project
GCCO and our wholly-owned subsidiary, Granite Northwest, Inc. are the members of a joint venture known as Yaquina River Constructors (“YRC”) which is currently constructing a new road alignment of US Highway 20 near Eddyville, Oregon under contract with the Oregon Department of Transportation (“ODOT”). The project involves constructing seven miles of new road through steep and forested terrain in the Coast Range Mountains. During the fall and winter of 2006, extraordinary rain events produced runoff that overwhelmed erosion control measures installed at the project and resulted in discharges to surface water in alleged violation of the stormwater permit. The Oregon Department of Justice is conducting a criminal investigation in connection with stormwater runoff from the project. YRC and its members are fully cooperating in the investigation, but YRC does not know whether criminal charge civil lawsuits, if any, will be brought or against whom, as a result of the investigation. Therefore, we cannot estimate what, if any, criminal or civil penalty or conditional assessment may result from this investigation.
City of San Diego Fire Debris Cleanup
In the aftermath of the 2007 San Diego County wildfires, GCCO bid for and was awarded a fixed unit price, variable quantity contract with the City of San Diego to perform specified debris cleanup work. GCCO began work in November 2007 and completed the work in April 2008.
In August 2008, the City announced that it would conduct an independent audit of the project. In December 2008, the City’s audit report was released with findings that while some GCCO billings contained minor mistakes, rates paid to GCCO appear to be generally reasonable. GCCO has reimbursed the City the undisputed overbilled amount of less than $3,000. The former San Diego City Attorney, after conducting a separate investigation of GCCO’s work on the project, filed a civil lawsuit in California Superior Court, County of San Diego on October 17, 2008 against GCCO and the one other contractor that had been awarded a similar cleanup contract with the City. In the complaint, the City alleges both contractors knowingly presented to the City false claims for payment in violation of the California False Claims Act. The City seeks trebled damages in an amount to be determined, and a civil penalty in the amount of $10,000 for each false claim made. After the November 2008 election in which a new City Attorney was elected, GCCO and the new City Attorney agreed to suspend the lawsuit to allow the City Attorney time to complete its investigation. GCCO believes the allegations in the City’s complaint to be without factual or legal basis and, therefore, the City’s entitlement to relief sought under the California False Claims Act is remote. GCCO will vigorously defend itself against the allegations raised.
City of Sacramento West El Camino Project
In August 2003, the City of Sacramento and GCCO entered into a contract for the construction of a public work improvement referred to as the West El Camino Widening and Bridge Replacement Project. During the course of the project, GCCO excavated significantly more material than the City engineer’s estimated quantity for that contract bid item. GCCO filed a complaint in the California Superior Court County of Sacramento against the City in November 2006 seeking payment for the excess quantities. In its defense to GCCO’s lawsuit, and on July 23, 2008 the City filed a cross-complaint against GCCO seeking relief pursuant to the California False Claims Act and asserting various other fraud and misrepresentation based causes of action. The City’s cross-complaint sought $10,000 for each false claim, restitution and disgorgement of all earnings, punitive damages, attorney fees, costs and interest. On January 23, 2009 this matter was resolved by settlement agreement in which neither party admitted fault, but paid GCCO a portion of the amount GCCO claimed for the excess quantities.
Other Legal Proceedings/Government Inquiries
We are a party to a number of other legal proceedings arising in the normal course of business. From time to time, we also receive inquiries from public agencies seeking information concerning our compliance with government construction contracting requirements and related laws and regulations. We believe that the nature and number of these proceedings and compliance inquiries are typical for a construction firm of our size and scope. Our litigation typically involves claims regarding public liability or contract related issues. While management currently believes, after consultation with counsel, that the ultimate outcome of such proceedings and compliance inquiries which are currently pending, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations or cash flows, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations, cash flows and/or financial position for the period in which the ruling occurs. While any one of our pending legal proceedings is subject to early resolution as a result of our ongoing efforts to settle, whether or when any legal proceeding will resolve through settlement is neither predictable nor guaranteed.
During the fourth quarter of 2008, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.
Executive Officers of the Registrant
Our executive officers are as follows:
| Name | Age | Position |
| | President, Chief Executive Officer and Director |
| | Executive Vice President and Chief Operating Officer |
| | Senior Vice President and Chief Financial Officer |
| | Senior Vice President and Granite East Division Manager |
| | Senior Vice President and Granite West Division Manager |
Granite Construction Incorporated was incorporated in Delaware in January 1990 as the holding company for Granite Construction Company, which was incorporated in California in 1922. All dates of service for our executive officers include the periods in which they served for Granite Construction Company.
Mr. Dorey has been an employee of Granite since 1968 and has served in various capacities, including President and Chief Executive Officer since January 2004, President and Chief Operating Officer from February 2003 to December 2003, Executive Vice President and Chief Operating Officer from 1998 to February 2003, Senior Vice President and Manager, Branch Division from 1987 to 1998, and Vice President and Assistant Manager, Branch Division from 1983 to 1987. Mr. Dorey has also served as a member of our Board of Directors since January 2004 and as a director of TIC Holdings, Inc. from 1997 to 2002. He received a B.S. degree in Construction Engineering from Arizona State University in 1967.
Mr. Boitano has been an employee of Granite since 1977 and has served in various capacities, including Chief Operating Officer since January 2004 and Executive Vice President since February 2003. He also served as Branch Division Manager from 1998 to January 2004, and Senior Vice President from 1998 to February 2003. Mr. Boitano received a B.S. degree in Civil Engineering from Santa Clara University in 1971 and an M.B.A. degree from California State University, Fresno in 1977.
Ms. Stewart has been a Senior Vice President of Granite since February, 2008. In June of 2008 she was appointed Chief Financial Officer. Prior to joining Granite, Ms. Stewart was at Nash Finch Company as Senior Vice President and Chief Financial Officer from 2004 to 2007, and as a Vice President and Corporate Controller from 2000 to 2004. She has served on the Board of Trustees of the College of St. Benedict since 1995. Ms. Stewart became a Certified Public Accountant in 1987, received a B.A. in Accounting from the College of St. Benedict in 1987 and an M.B.A. in Business Administration from the Wharton School at the University of Pennsylvania in 1997.
Mr. Donnino joined Granite in 1977 and has served as Senior Vice President since January 2005, Manager of Granite East since February 2007, and Heavy Construction Division Manager from January 2005 to February 2007. He served as Vice President and Heavy Construction Division Assistant Manager during 2004, Texas Regional Manager from 2000 to 2003 and Dallas Estimating Office Area Manager from 1991 to 2000. Mr. Donnino received a B.S.C.E. in Structural, Water and Soils Engineering from the University of Minnesota in 1976.
Mr. Roberts joined Granite in 1981 and has served in various capacities, including Senior Vice President since May 2004, Granite West Manager since February 2007, Branch Division Manager from May 2004 to February 2007, Vice President and Assistant Branch Division Manager from 1999 to 2004, and Regional Manager of Nevada and Utah Operations from 1995 to 1999. He received a B.S.C.E. in 1979 and an M.S.C.E. in 1980 from the University of California, Berkeley, and an M.B.A. from the University of Southern California in 1981.
Our common stock trades on the New York Stock Exchange under the ticker symbol GVA.
As of February 13, 2009, there were 38,246,833 shares of our common stock outstanding held by 1,457 shareholders of record.
We have paid quarterly cash dividends since the second quarter of 1990, and we expect to continue to pay quarterly cash dividends. However, declaration and payment of dividends is within the sole discretion of our Board of Directors, subject to limitations imposed by Delaware law and compliance with our credit agreements, and will depend on our earnings, capital requirements, financial condition and other such factors as the Board of Directors deems relevant.
| Market Price and Dividends of Common Stock | | | | | | |
| | December 31, | | | September 30, | | | June 30, | | | March 31, | |
| High | | $ | 50.00 | | | $ | 42.24 | | | $ | 37.79 | | | $ | 39.84 | |
| Low | | $ | 21.20 | | | $ | 30.22 | | | $ | 29.19 | | | $ | 26.64 | |
| Dividends per share | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.13 | |
| | | | | | | | | | | | | | | | | |
| 2007 Quarters Ended | | December 31, | | September 30, | | | | June 30, | | | | March 31, | |
| High | | $ | 57.37 | | | $ | 74.62 | | | $ | 70.43 | | | $ | 59.90 | |
| Low | | $ | 32.46 | | | $ | 50.33 | | | $ | 54.57 | | | $ | 47.74 | |
| Dividends per share | | $ | 0.13 | | | $ | 0.10 | | | $ | 0.10 | | | $ | 0.10 | |
During the three months ended December 31, 2008, we did not sell any of our equity securities that were not registered under the Securities Act of 1933, as amended. The following table sets forth information regarding the repurchase of shares of our common stock during the three months ended December 31, 2008:
| Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value of shares that may yet be purchased under the plans or programs2 | |
| October 1, 2008 through October 31, 2008 | | | - | | | - | | | - | | $ | 64,065,401 | |
| November 1, 2008 through November 30, 2008 | | | - | | | - | | | - | | $ | 64,065,401 | |
December 1, 2008 through December 31, 20081 | | | 262 | | $ | 42.89 | | | - | | $ | 64,065,401 | |
| Total | | | 262 | | $ | 42.89 | | | - | | | | |
1The number of shares purchased is in connection with employee tax withholding for shares granted under our Amended and Restated 1999 Equity Incentive Plan.
2In October 2007, our Board of Directors authorized us to repurchase, at management’s discretion, up to $200.0 million of our common stock. Under this repurchase program, the Company may repurchase shares from time to time on the open market or in private transactions. The specific timing and amount of repurchases will vary based on market conditions, securities law limitations and other factors. The share repurchase program may be suspended or discontinued at any time without prior notice.
Performance Graph
The graph below compares Granite Construction Incorporated’s cumulative 5-year total shareholder return on common stock with the cumulative total returns of the S&P 500 index and the Dow Jones US Heavy Construction index. The Dow Jones US Heavy Construction index includes the following companies: EMCOR Group Inc., Fluor Corp., Foster Wheeler Ltd., Granite Construction Inc., Insituform Technologies Inc., Jacobs Engineering Group Inc., KBR Inc., McDermott International Inc., Quanta Services Inc. and Shaw Group Inc. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2003 to December 31, 2008.
| | | 2003 | | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | |
| Granite Construction Incorporated | | $ | 100.00 | | | $ | 115.25 | | | $ | 157.62 | | | $ | 222.70 | | | $ | 161.51 | | | $ | 199.03 | |
| S&P 500 | | | 100.00 | | | | 110.88 | | | | 116.33 | | | | 134.70 | | | | 142.10 | | | | 89.53 | |
| Dow Jones US Heavy Construction | | | 100.00 | | | | 121.26 | | | | 175.23 | | | | 218.58 | | | | 415.21 | | | | 186.34 | |
The selected consolidated operations data for 2008, 2007 and 2006 and consolidated balance sheet data as of December 31, 2008 and 2007 set forth below have been derived from our audited consolidated financial statements included herein, and are qualified by reference to those consolidated financial statements. The selected consolidated operations data for 2005 and 2004 and the consolidated balance sheet data as of December 31, 2006, 2005 and 2004 have been derived from our audited consolidated financial statements not included herein. These historical results are not necessarily indicative of the results of operations to be expected for any future period.
| Selected Consolidated Financial Data | |
| Years Ended December 31, | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | | 2004 | |
| Operating Summary | (In Thousands, Except Per Share Data) | |
| | $ | 2,674,244 | | | $ | 2,737,914 | | | $ | 2,969,604 | | | $ | 2,641,352 | | | $ | 2,136,212 | |
| | | 468,720 | | | | 410,744 | | | | 295,720 | | | | 319,372 | | | | 222,021 | |
| | | 17.5 | | | | 15.0 | | | | 10.0 | | | | 12.1 | | | | 10.4 | |
General and administrative expenses | | | 257,532 | | | | 246,202 | | | | 199,481 | | | | 192,692 | | | | 157,035 | |
| | | 9.6 | | | | 9.0 | | | | 6.7 | | | | 7.3 | | | | 7.4 | |
Goodwill impairment charge* | | | - | | | | - | | | | 18,011 | | | | - | | | | - | |
| | | 122,404 | | | | 112,065 | | | | 80,509 | | | | 83,150 | | | | 57,007 | |
| | | 4.6 | | | | 4.1 | | | | 2.7 | | | | 3.1 | | | | 2.7 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 3.25 | | | $ | 2.74 | | | $ | 1.97 | | | $ | 2.05 | | | $ | 1.41 | |
| | | 3.21 | | | | 2.71 | | | | 1.94 | | | | 2.02 | | | | 1.39 | |
Weighted average shares of common stock: | | | | | | | | | | | | | | | | | | | | |
| | | 37,606 | | | | 40,866 | | | | 40,874 | | | | 40,614 | | | | 40,390 | |
| | | 38,106 | | | | 41,389 | | | | 41,471 | | | | 41,249 | | | | 41,031 | |
Consolidated Balance Sheet | | | | | | | | | | | | | | | | | | | | |
| | $ | 1,743,455 | | | $ | 1,786,418 | | | $ | 1,632,838 | | | $ | 1,472,230 | | | $ | 1,277,954 | |
Cash, cash equivalents and marketable securities | | | 520,402 | | | | 485,348 | | | | 394,878 | | | | 301,381 | | | | 277,692 | |
| | | 475,942 | | | | 397,568 | | | | 319,762 | | | | 367,801 | | | | 355,927 | |
Current maturities of long-term debt | | | 39,692 | | | | 28,696 | | | | 28,660 | | | | 26,888 | | | | 15,861 | |
| | | 250,687 | | | | 268,417 | | | | 78,576 | | | | 124,415 | | | | 148,503 | |
Other long-term liabilities | | | 43,604 | | | | 46,441 | | | | 58,419 | | | | 46,556 | | | | 40,641 | |
| | | 767,509 | | | | 700,199 | | | | 694,544 | | | | 621,560 | | | | 550,474 | |
| | | 20.06 | | | | 17.75 | | | | 16.60 | | | | 14.91 | | | | 13.23 | |
| | | 0.52 | | | | 0.43 | | | | 0.40 | | | | 0.40 | | | | 0.40 | |
Common shares outstanding | | | 38,267 | | | | 39,451 | | | | 41,834 | | | | 41,682 | | | | 41,612 | |
| | $ | 1,699,396 | | | $ | 2,084,545 | | | $ | 2,256,587 | | | $ | 2,331,540 | | | $ | 2,437,994 | |
*During the year ended December 31, 2006, we recorded a goodwill impairment charge of approximately $18.0 million related to our Granite Northeast operation in New York .
General
We are one of the largest heavy civil contractors and producers of construction materials in the United States. We are engaged in the construction and improvement of streets, roads, highways and bridges as well as dams, airport infrastructure, mass transit facilities and other infrastructure-related projects. We produce construction materials through the use of our extensive aggregate reserves and plant facilities. We also operate a real estate development company on a significantly smaller scale. We have offices in Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and Washington.
Our contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local agencies and private parties and to a lesser extent through negotiation with private parties. Our bidding activity is affected by such factors as contract backlog, available personnel, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, contract backlog and revenue resulting from the award of new contracts may vary significantly from period to period. We have three operating segments: Granite West, Granite East and Granite Land Company.
The three primary economic drivers of our business are (1) the overall health of the economy, (2) federal, state and local public funding levels, both nationally and locally and (3) population growth with the resulting private development. The level of demand for our services will have a direct correlation to these drivers. For example, a stagnant or declining economy will generally result in a reduced demand for construction in the private sector. This reduced demand increases competition for private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. Greater competition can reduce our revenue growth and/or have a downward impact on gross profit margins. In addition, a stagnant or declining economy tends to produce less tax revenue, thereby decreasing a source of funds available for spending on public infrastructure improvements. There are funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, which are not as directly impacted by a stagnant or declining economy. However, even these funding sources can be temporarily at risk as state and local governments struggle to balance their budgets. Additionally, high fuel prices can have a dampening effect on consumption, resulting in overall lower tax revenue. Conversely, higher public funding as well as an expanding or robust economy will generally increase demand for our services and provide opportunities for revenue growth and margin improvement.
Our general and administrative costs include salaries and related expenses, incentive compensation, discretionary profit sharing, provision for doubtful accounts and other costs to support our business. In general, these costs will increase in response to the growth and the related increased complexity of our business. These costs will vary depending on the number of projects in process in a particular area and the corresponding level of estimating activity. For example, as large projects are completed or if the level of work slows down in a particular area, we will often re-assign project employees to estimating and bidding activities until another project gets underway, temporarily allocating their salaries and related costs from cost of revenue to general and administrative expense. Additionally, our compensation strategy for selected management personnel is to rely heavily on a variable cash and restricted stock performance-based incentive element. The cash portion of these incentives is expensed when earned while the restricted stock portion is expensed over the vesting period of the restricted stock award (generally three to five years). Depending on the mix of cash and restricted stock, these incentives can have the effect of materially altering general and administrative expenses from year to year.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience; however, actual amounts could differ from those estimates.
Certain of our accounting policies and estimates require higher degrees of judgment than others in their application. These include the recognition of revenue and earnings from construction contracts, the valuation of real estate held for development and sale and other long-lived assets, and insurance estimates. We evaluate all of our estimates and judgments on an on-going basis.
Revenue Recognition for Construction Contracts
Our contracts with our customers are primarily either “fixed unit price” or “fixed price.” Under fixed unit price contracts, we are committed to provide materials or services required by a project at fixed unit prices (for example, dollars per cubic yard of concrete poured or cubic yards of earth excavated). While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the customer, any increase in our unit cost over the expected unit cost in the bid, whether due to inflation, inefficiency, faulty estimates or other factors, is borne by us unless otherwise provided in the contract. Fixed price contracts are priced on a lump-sum basis under which we bear the risk that we may not be able to perform all the work profitably for the specified contract amount. The percentage of fixed price contracts in our contract backlog decreased from approximately 72.0% at December 31, 2007 to approximately 68.7% at December 31, 2008. All state and federal government contracts and many of our other contracts provide for termination of the contract at the convenience of the party contracting with us, with provisions to pay us for work performed through the date of termination.
We use the percentage of completion accounting method for construction contracts in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue and earnings on construction contracts, including construction joint ventures, are recognized using the percentage of completion method in the ratio of costs incurred to estimated final costs. Revenue in an amount equal to cost incurred is recognized prior to contracts reaching 25% completion. The related profit is deferred until the period in which such percentage completion is attained. It is our judgment that until a project reaches 25% completion, there is insufficient information to determine what the estimated profit on the project will be with a reasonable level of assurance. In the case of large, complex design/build projects we may continue to defer profit recognition beyond the point of 25% completion based on an evaluation of specific project risks. The factors considered in this evaluation of risk associated with each design/build project include the stage of design completion, the stage of construction completion, status of outstanding purchase orders and subcontracts, certainty of quantities, certainty of schedule and the relationship with the owner.
Revenue from contract claims is recognized when we have a signed settlement agreement and payment is assured. Revenue from contract change orders, which occur in most large projects, is recognized when the owner has agreed to the change order in writing. Provisions are recognized in the consolidated statements of income for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. Contract cost consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs). Depreciation is provided using accelerated methods for construction equipment. Contract cost is recorded as incurred and revisions in contract revenue and cost estimates are reflected when known. The completion threshold for the start of contract profit recognition is applied to all percentage of completion projects unless and until we project a loss on the project, in which case the estimated loss is immediately recognized.
The accuracy of our revenue and profit recognition in a given period is almost solely dependent on the accuracy of our estimates of the cost to complete each project. Our cost estimates for all of our significant projects use a highly detailed “bottom up” approach and we believe our experience allows us to provide materially reliable estimates. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include the completeness and accuracy of the original bid, costs associated with added scope changes, extended overhead due primarily to owner and weather delays, subcontractor performance issues, changes in productivity expectations, site conditions that differ from those assumed in the original bid (to the extent contract remedies are unavailable), the availability and skill level of workers in the geographic location of the project and a change in the availability and proximity of equipment and materials. The foregoing factors as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit between periods and these fluctuations may be significant. Substantial changes in cost estimates, particularly in our larger, more complex projects have had, and can in future periods have, a significant effect on our profitability.
Valuation of Real Estate Held for Development and Sale and other Long Lived Assets
Real estate held for development and sale and other long-lived assets, which include property, equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess impairment of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-Lived Assets. Circumstances which could trigger an impairment review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; or current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the cash flows expected to result from the use and eventual disposal of the asset. An impairment loss is recognized in the consolidated statements of income when the carrying amount is not recoverable and exceeds fair value. In 2008 and 2007 our analyses determined that portions of our real estate held for development and sale were impaired. As a result, we recorded impairment charges for the years ended 2008 and 2007 in the amount of $4.5 million and a $3.0 million, respectively.
The process of estimating future cash flows related to an asset involves significant judgment, including future cash inflows related to the use or eventual sale of the asset and future cash outflows related to the development or use of the asset. Although we believe the estimates and assumptions we used in testing for impairment are reasonable and supportable, significant changes in any one of our assumptions could produce a significantly different result.
Insurance Estimates
We carry insurance policies to cover various risks, primarily general liability and workers compensation, under which we are liable to reimburse the insurance company for a portion of each claim paid. The amounts that we are liable for generally range from the first $0.5 million to $1.0 million per occurrence. We accrue for the estimated ultimate liability for incurred losses, both reported and unreported, using actuarial methods based on historic trends modified, if necessary, by recent events. Changes in our loss assumptions caused by changes in actual experience would result in a change in our assessment of the ultimate liability that could have a material effect on our operating results and financial position.
Results of Operations
| Comparative Financial Summary | | | | | | | |
Years ended December 31, | | 2008 | | 2007 | | 2006 | |
(in thousands) | | | |
| | | 2,674,244 | | | | | | | |
| | | 468,720 | | | | | | | |
| | | 216,691 | | | | | | | |
| | | 16,739 | | | | | | | |
Provision for income taxes | | | 67,692 | | | | | | | |
Minority interest in consolidated subsidiaries | | | (43,334 | ) | | | ) | | | |
| | | 122,404 | | | | | | | |
Our results of operations for the year ended December 31, 2008 reflect a 14.1% improvement in gross profit over 2007. This was driven by improvements in Granite East, partially offset by slightly lower margins in Granite West. Granite Land Company experienced a gross loss during the period versus a gross profit in 2007. The increase in minority interest reflects the increased profitability of joint venture work and an increase in the volume or size of our joint venture work.
Revenue
| Total Revenue | | | | | | | |
| Years ended December 31, | | 2008 | | 2007 | | 2006 | |
| (in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
| | | | | | | | | | | | | | | | | | | |
| | | 1,970,196 | | | 73.7 | | | | | | | | | | | | | |
| | | 695,035 | | | 26.0 | | | | | | | | | | | | | |
| | | 9,013 | | | 0.3 | | | | | | | | | | | | | |
| | | 2,674,244 | | | 100.0 | | | | | | | | | | | | | |
| Granite West Revenue | | | | | | | |
Years ended December 31, | | 2008 | | 2007 | | 2006 | |
| (in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
| | | | | | | | | | | | | | | | | | | |
| | | 697,551 | | | 67.8 | | | | | | | | | | | | | |
| | | 106,489 | | | 10.4 | | | | | | | | | | | | | |
| | | 224,736 | | | 21.8 | | | | | | | | | | | | | |
| | | 1,028,776 | | | 100.0 | | | | | | | | | | | | | |
West (excluding California): | | | | | | | | | | | | | | | | | | | |
| | | 721,922 | | | 76.7 | | | | | | | | | | | | | |
| | | 91,119 | | | 9.7 | | | | | | | | | | | | | |
| | | 128,379 | | | 13.6 | | | | | | | | | | | | | |
| | | 941,420 | | | 100.0 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | 1,419,473 | | | 72.0 | | | | | | | | | | | | | |
| | | 197,608 | | | 10.0 | | | | | | | | | | | | | |
| | | 353,115 | | | 18.0 | | | | | | | | | | | | | |
| | | 1,970,196 | | | 100.0 | | | | | | | | | | | | | |
Granite West Revenue: Revenue from Granite West for the year ended December 31, 2008 increased by $41.4 million, or 2.1%, compared with the year ended December 31, 2007. The increase in public sector revenue was primarily attributable to profitable progress toward completion of federally funded security projects and the positive effect of the resolution of significant uncertainties on certain projects. The decreases in private sector and materials revenue were driven by the ongoing contraction of credit markets and residential construction in all geographic areas in which Granite West operates. We continue to see additional competition for the available public sector work, as competitors migrate from increasingly scarce private sector work.
| Granite East Revenue | | | | | | | | | | | | | |
Years ended December 31, | | 2008 | | 2007 | | 2006 | |
(in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
Revenue by Geographic Area: | | | | | | | | | | | | | | | | | | | |
| | | 175,763 | | | 25.3 | | | | | | | | | | | | | |
| | | 125,024 | | | 18.0 | | | | | | | | | | | | | |
| | | 128,454 | | | 18.5 | | | | | | | | | | | | | |
| | | 221,167 | | | 31.8 | | | | | | | | | | | | | |
| | | 44,627 | | | 6.4 | | | | | | | | | | | | | |
| | | 695,035 | | | 100.0 | | | | | | | | | | | | | |
Revenue by Market Sector: | | | | | | | | | | | | | | | | | | | |
| | | 675,188 | | | 97.1 | | | | | | | | | | | | | |
| | | 19,847 | | | 2.9 | | | | | | | | | | | | | |
| | | - | | | - | | | | | | | | | | | | | |
| | | 695,035 | | | 100.0 | | | | | | | | | | | | | |
Revenue by Contract Type: | | | | | | | | | | | | | | | | | | | |
| | | 56,543 | | | 8.1 | | | | | | | | | | | | | |
Fixed price, including design/build | | | 638,492 | | | 91.9 | | | | | | | | | | | | | |
| | | - | | | - | | | | | | | | | | | | | |
| | | 695,035 | | | 100.0 | | | | | | | | | | | | | |
Granite East Revenue: Revenue from Granite East for the year ended December 31, 2008 decreased by $73.4 million, or 9.6%, compared with the year ended December 31, 2007. This decrease is reflective, in part, of our plan to slow revenue growth in the division over the last several years to focus on execution and improved profitability. Geographically, the largest decreases were experienced in the Southeast and Northeast due primarily to certain large projects nearing completion. Increases in the Midwest and South resulted from revenue contributions from progress on a large design/build project in St. Louis, Missouri and project productivity on a bridge project in Mississippi, respectively.
The following table provides additional information about revenue from our large projects for the years ended December 31, 2008, 2007 and 2006:
| Large Project Revenue | | | | | | | | |
| Years ended December 31, | | 2008 | | 2007 | | 2006 | |
| | | | | | | | | | |
| | | 245,514 | | | | | | | |
| | | 8 | | | | | | | |
| | | 621,215 | | | | | | | |
| | | 19 | | | | | | | |
| | | 866,729 | | | | | | | |
| | | 27 | | | | | | | |
* Includes only projects with a total contract value greater than $50.0 million and over $1.0 million of revenue in the respective periods.
Granite Land Company Revenue: Revenue from GLC for the year ended December 31, 2008 decreased by $31.7 million, or 77.9%, compared to the year ended December 31, 2007. GLC’s revenue is dependent on the timing of real estate sales transactions, which are relatively few in number and can cause variability in the timing of revenue and profit recognition. The current real estate downturn and associated tightening of credit markets has had a direct impact on the anticipated timing of several GLC development projects.
Contract Backlog
| Total Contract Backlog | | | |
| December 31, | | 2008 | | 2007 | |
| (in thousands) | | Amount | | Percent | | Amount | | Percent | |
Contract Backlog by Division: | | | | | | | | | | | | | |
| | | 788,872 | | | 46.4 | | | | | | | |
| | | 910,524 | | | 53.6 | | | | | | | |
| | | 1,699,396 | | | 100.0 | | | | | | | |
| Granite West Contract Backlog | | | | | |
December 31, | | 2008 | | 2007 | |
(in thousands) | | Amount | | Percent | | Amount | | Percent | |
| | | | | | | | | | | | | |
| | | 430,421 | | | 94.8 | | | | | | | |
| | | 23,841 | | | 5.2 | | | | | | | |
| | | 454,262 | | | 100.0 | | | | | | | |
West (excluding California): | | | | | | | | | | | | | |
| | | 319,271 | | | 95.4 | | | | | | | |
| | | 15,339 | | | 4.6 | | | | | | | |
| | | 334,610 | | | 100.0 | | | | | | | |
Total Granite West contract backlog: | | | | | | | | | | | | | |
| | | 749,692 | | | 95.0 | | | | | | | |
| | | 39,180 | | | 5.0 | | | | | | | |
| | | 788,872 | | | 100.0 | | | | | | | |
Granite West Contract Backlog: Granite West contract backlog of $788.9 million at December 31, 2008 was $65.3 million, or 7.6%, lower than at December 31, 2007. The reduction in contract backlog was primarily a result of the ongoing contraction of residential construction and credit markets. The reduced residential demand has also increased competition on public sector work, as competitors migrate from the increasingly scarce private sector work. Granite West project awards in the fourth quarter 2008 included a $44.0 million highway rehabilitation project in California and a $42.7 million highway reconstruction project near the California-Nevada border.
| Granite East Contract Backlog | | | | | | | | | |
December 31, | | 2008 | | 2007 | |
(in thousands) | | Amount | | Percent | | Amount | | Percent | |
Contract Backlog by Geographic Area: | | | | | | | | | | | | | |
| | | 163,795 | | | 18.0 | | | | | | | |
| | | 250,232 | | | 27.5 | | | | | | | |
| | | 91,720 | | | 10.0 | | | | | | | |
| | | 402,062 | | | 44.2 | | | | | | | |
| | | 2,715 | | | 0.3 | | | | | | | |
| | | 910,524 | | | 100.0 | | | | | | | |
| Contract Backlog by Market Sector: | | | | | | | | | | | | | |
| Public sector | | $ | 906,470 | | | 99.6 | | $ | 1,213,484 | | | 98.6 | |
| Private sector | | | 4,054 | | | 0.4 | | | 16,919 | | | 1.4 | |
| Total | | $ | 910,524 | | | 100.0 | | $ | 1,230,403 | | | 100.0 | |
| Contract Backlog by Contract Type: | | | | | | | | | | | | | |
| Fixed unit price | | $ | 14,086 | | | 1.5 | | $ | 64,580 | | | 5.2 | |
| Fixed price including design/build | | | 896,438 | | | 98.5 | | | 1,165,823 | | | 94.8 | |
| Total | | $ | 910,524 | | | 100.0 | | $ | 1,230,403 | | | 100.0 | |
Granite East Contract Backlog: Granite East contract backlog of $910.5 million at December 31, 2008 was $319.9 million, or 26.0%, lower than at December 31, 2007. The decrease reflects progress on construction projects. While we continued to focus on selective bidding opportunities with higher bid margins, project awards during the year ended December 31, 2008 included a $33.8 million freeway project in Texas and a $161.4 million transit project in New York. We are a member of a joint venture team that is currently in pricing negotiations with Houston Metro for the design and construction of the proposed expansion of the Houston Rapid Transit system, and received $37.9 million in awards from Houston Metro for preliminary work associated with this project. Also, we received $67.8 million in additional awards related to our 20% share of a joint venture project to construct a transportation hub at the World Trade Center in New York. As of December 2008, the total joint venture contract value stands at approximately $1.0 billion. However, we currently expect total revenue for this contract to exceed $2.5 billion of which our share could exceed $500.0 million, the majority of which should be awarded by year end 2009.
The following tables provide additional information about our large project contract backlog at December 31, 2008 and 2007:
| Large Project Contract Backlog | | | |
| 2008 | 2007 | |
(dollars in thousands) | | | | |
| Granite West | | $ | 243,818 | | $ | 223,952 | |
| Number of projects** | | | 6 | | | 5 | |
| Granite East | | $ | 868,638 | | $ | 1,189,998 | |
| Number of projects** | | | 14 | | | 18 | |
| Total | | $ | 1,112,456 | | $ | 1,413,950 | |
| Number of projects** | | | 20 | | | 23 | |
**Includes only projects with total contract value greater than $50.0 million and remaining contract backlog over $1.0 million at the respective dates.
| Large Project Contract Backlog by Expected Profitability | | | | | | | | |
December 31, 2008 (dollars in thousands) | | Number of Projects*** | Average Percent Complete | | Remaining Contract Backlog | | Percent | |
Projects with forecasted loss | | | | | | | | | |
| | 1 | | 44% | | | | 104,428 | | 9.4% | |
| | 6 | | 65% | | | | 66,670 | | 6.0% | |
| | 7 | | 52% | | | | 171,098 | | 15.4% | |
Projects with forecasted profit | | | | | | | | | | | |
| | 5 | | 43% | | | | 139,390 | | 12.5% | |
| | 8 | | 36% | | | | 801,968 | | 72.1% | |
| | 13 | | 37% | | | | 941,358 | | 84.6% | |
| | 20 | | | | | | 1,112,456 | | 100.0% | |
December 31, 2007 (dollars in thousands) | | Number of Projects*** | Average Percent Complete | | Remaining Contract Backlog | | Percent | |
Projects with forecasted loss | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Projects with forecasted profit | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
***Includes only projects with total contract value greater than $50.0 million and remaining contract backlog over $1.0 million.
Gross Profit (Loss)
The following table presents gross profit (loss) by business segment for the respective periods:
| Gross Profit (Loss) | | | | | | | | | | | |
Years ended December 31, | | 2008 | | | 2007 | | | 2006 | | | |
(in thousands) | | | | | |
| | | 348,259 | | | | | | | | | | | |
Percent of division revenue | | | 17.7 | | % | | | | % | | | | % | |
| | | 120,866 | | | | | | | | | | | |
Percent of division revenue | | | 17.4 | | % | | | | % | | | | % | |
| | | (1,523 | ) | | | | | | | | | | |
Percent of division revenue | | | (16.9 | | % | | | | % | | | | % | |
| | | 1,118 | | | | | | | | | | | |
| | | 468,720 | | | | | | | | | | | |
| | | 17.5 | | % | | | | % | | | | % | |
Gross Profit (Loss): We recognize revenue only equal to cost, deferring profit recognition, until a project reaches 25% completion. In the case of large, complex design/build projects, we may continue to defer profit recognition beyond the point of 25% completion until such time as we believe we have enough information to make a reasonably dependable estimate of contract revenue and cost. Because we have a large number of projects at various stages of completion in Granite West, this policy generally has a lesser impact on Granite West’s gross profit on a quarterly or annual basis. However, Granite East has fewer projects in process at any given time and those projects tend to be much larger than Granite West projects. As a result, Granite East gross profit as a percent of revenue can vary significantly in periods where one or several very large projects reach our percentage of completion threshold and the deferred profit is recognized or conversely, in periods where contract backlog is growing rapidly and a higher percentage of projects are in their early stages with no associated gross profit recognition.
Revenue from projects that have not yet reached our profit recognition threshold is as follows:
| Revenue from Contracts with Deferred Profit | | | | | | | | | | | |
Years ended December 31, | | 2008 | | | 2007 | | | 2006 | | | |
(in thousands) | | | | | |
| | | 24,148 | | | | | | | | | | | |
| | | 1,674 | | | | | | | | | | | |
Total revenue from contracts with deferred profit | | | 25,822 | | | | | | | | | | | |
We do not recognize revenue from contract claims until we have a signed agreement and payment is assured and we do not recognize revenue from contract change orders until the contract owner has agreed to the change order in writing. However, we do recognize the costs related to any contract claims or pending change orders in our forecasts when we are contractually obligated. As a result, our gross profit as a percent of revenue can vary depending on the magnitude and timing of settlement of claims and change orders.
Granite West gross profit as a percent of revenue for 2008 decreased to 17.7% from 19.2% for 2007. The decrease was primarily due to significantly lower gross profit margins on the sale of construction materials. Construction materials gross profit as a percent of materials sales for 2008 decreased to 11.9% from 20.1% for 2007. Construction materials margins have been negatively impacted by lower demand from the private sector for our higher margin products, higher costs of certain raw materials such as diesel fuel and liquid asphalt, and a write-down of inventory due to production in excess of estimated foreseeable forecast. Additionally, margins have been negatively impacted by the fixed costs of our plants not running at normal capacity. These decreases were partially offset by the positive effect of project forecast changes of $64.3 million for the year ended December 31, 2008 compared with $23.0 million for the year ended December 31, 2007 (see Note 2 of the “Notes to the Consolidated Financial Statements”).
Granite East gross profit as a percent of revenue for 2008 increased to 17.4% from 3.4% for 2007. The improved gross profit margin in 2008 was driven by favorable project forecast changes, projects reaching the state of completion allowing profit recognition, and the settlement of a significant claim associated with a large design/build project nearing completion in southern California. Currently, there is only one project in Granite East for which the profit recognition threshold has not been reached. The positive effect of project forecast changes was $54.7 million for the year ended December 31, 2008 compared with $3.0 million for the year ended December 31, 2007 (see Note 2 of the “Notes to the Consolidated Financial Statements”).
When we experience significant contract forecast changes, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as a change in estimate for the current period. In our review of these changes, we did not identify any material amounts that should have been recorded in a prior period.
Included in GLC’s cost of revenue for 2008 and 2007 were impairment charges of $4.5 million and $3.0 million, respectively, on residential development projects in California. GLC’s gross loss in 2008 of $1.5 million and gross profit in 2007 of $15.8 million, included approximately $0.6 million and $8.8 million, respectively, related to our minority partners’ share.
General and Administrative Expenses
The following table presents the components of general and administrative expenses for the respective periods:
| General and Administrative Expenses | | | | | | | | |
Years ended December 31, | | 2008 | | 2007 | | 2006 | | |
(in thousands) | | | | |
Salaries and related expenses | | | 131,811 | | | | | | | | |
Incentive compensation, discretionary profit sharing and other variable compensation | | | 37,707 | | | | | | | | |
| Provision for doubtful accounts | | | 10,958 | | | 3,894 | | | 438 | | |
Other general and administrative expenses | | | 77,056 | | | | | | | | |
| | | 257,532 | | | | | | | | |
| | | 9.6 | | | | | | | | |
General and Administrative Expenses: General and administrative expenses increased by $11.3 million, or 4.6%, to $257.5 million in 2008 from $246.2 million in 2007. This was due to a number of factors: an increase in the allowance for doubtful accounts primarily related to Granite West private sector receivables from real estate developers, approximately $3.0 million in severance costs associated with our voluntary opt-out program and other reductions in force, as well as the full year effect of, and integration costs associated with, businesses acquired in 2007. Other general and administrative expenses include information technology, occupancy, office supplies, depreciation, travel and entertainment, outside services, marketing, training and other miscellaneous expenses, none of which individually exceeded 10% of total general and administrative expenses.
Gain on Sales of Property and Equipment
| Gain on Sales of Property and Equipment | | | | | | | |
Years ended December 31, | | 2008 | | 2007 | | 2006 | |
(in thousands) | | | |
Gain on sales of property and equipment | | | 5,503 | | | | | | | |
Gain on Sales of Property and Equipment: Gain on sales of property and equipment decreased by $4.8 million, or 46.8%, for the year ended December 31, 2008 compared with 2007. Sales of property and equipment can vary year to year based on timing of completion of large jobs and related sales of excess equipment.
Other Income (Expense)
The following table presents the components of other income (expense) for the respective periods:
| Other Income (Expense) | | | | | | | |
Years ended December 31, | | 2008 | | 2007 | | 2006 | |
| (in thousands) | | | |
| | | 18,445 | | | | | | | |
| | | (16,001 | ) | | | | | | |
| | | - | | | | | | | |
Equity in (loss) income of affiliates | | | (1,058 | ) | | | | | | |
| | | 15,353 | | | | | | | |
| | | 16,739 | | | | | | | |
Other Income (Expense): Interest income decreased $8.5 million, or 31.5%, in 2008 compared with 2007 due to the decline in short term interest rates on our invested balances. Interest expense increased in 2008 compared to 2007 due primarily to an increase in the average debt outstanding during the period. Acquisition expense in 2007 was associated with the purchase of all remaining shares of Wilder Construction Company (“Wilder”). We recorded equity in the loss of affiliates of $1.1 million during 2008 due primarily to losses associated with our investment in an asphalt terminal in Nevada. In 2007 we recorded a gain of approximately $3.9 million on the sale of a building by a partnership in which we had an equity method investment. The increase in other income, net during 2008 was primarily related to a gain of $14.4 million on the sale of an investment in our affiliate, gains on the sale of aggregate by-products of $9.3 million, and a gain of $1.2 million related to a GLC extinguishment of debt. This increase was partially offset by a $10.9 million loss on the sale of available-for-sale securities; we sold these securities as a result of changes in our investment policy and to maximize the associated tax benefit.
Provision for Income Taxes
| Provision for Income Taxes | | | | | | | | |
| Years ended December 31, | | 2008 | | 2007 | | 2006 | | |
| (in thousands) | | | | |
| Provision for income taxes | | $ | 67,692 | | $ | 65,470 | | $ | 38,678 | | |
| Effective tax rate | | | 29.0 | % | | 33.0 | % | | 34.2 | % | |
Provision for Income Taxes: Our effective tax rate decreased to 29.0% in 2008 from 33.0% in 2007. The decrease was primarily due to increases in the estimated income attributed to minority partners’ share in our consolidated construction joint ventures and other entities which are not subject to income taxes on a stand alone basis.
Minority Interest in Consolidated Subsidiaries
| Minority Interest in Consolidated Subsidiaries | | | | | | | |
Years ended December 31, | | 2008 | | 2007 | | 2006 | |
(in thousands) | | | |
Minority interest in consolidated subsidiaries | | | (43,334 | ) | | | | | | |
Minority Interest in Consolidated Subsidiaries: Our minority interest in consolidated subsidiaries represents the minority owners’ share of the income or loss of our consolidated construction joint ventures and real estate development entities.
The increase in the minority interest in consolidated subsidiaries for the year ended December 31, 2008 compared to the prior year was largely attributable to the continued progression and the effect of changes in estimates related to certain consolidated joint venture projects for Granite East, including minority interest of approximately $17.7 million for settlement related to the resolution of revenue issues on a large project in southern California. In addition, the increase reflects the increased profitability of joint venture work, an increase in the volume of joint venture contracts and the size of our joint venture projects.
Prior Years
Revenue: Revenue from Granite West for the year ended December 31, 2007 increased by $0.8 million, or 0.1%, compared with the year ended December 31, 2006. Our California revenue decreased $59.1 million, or 5.3%, in 2007 primarily due to the continued slowing of residential construction which led to decreases in both private sector construction revenue and revenue from the sale of construction materials. These decreases were partially offset by increased California public sector revenue of $57.8 million, or 10.7%, primarily driven by a higher volume of projects available to bid. Our revenue from the West (excluding California) in 2007 included approximately $89.0 million generated as a result of our acquisition of certain assets of the Superior Group of Companies on April 3, 2007. Other than Northern Nevada, our locations outside of California have generally been less impacted by the slowing of residential construction.
Revenue from Granite East for the year ended December 31, 2007 decreased by $238.2 million, or 23.7%, compared with the year ended December 31, 2006. Geographically, the largest decreases were experienced in the West, South and Northeast. Under a realignment effected in 2007, Granite East retained a project in the West that was nearing completion and the decrease in revenue of $150.8 million, or 73.8%, in the West reflects progress on the retained project over time. In the South and Northeast the decreases of $92.5 million, or 42.5%, and $62.8 million, or 24.2%, respectively, were due primarily to certain large projects in Texas and New York nearing completion. Increases in the Southeast of $17.5 million, or 6.2%, resulted from revenue contributions from a large design/build project in Mississippi that was awarded in February 2006. Increases in the Midwest of $50.4 million, or 116.0 %, resulted from revenue contributions from a large design/build project in Missouri that was awarded in the fourth quarter of 2006. The percent of our revenue from fixed price contracts increased in 2007 to 83.3% due primarily to a higher percentage of design/build projects in our contract backlog.
Revenue from GLC for the year ended December 31, 2007 increased by $5.7 million, or 16.4%, compared with the year ended December 31, 2006. GLC’s revenue is dependent on the timing of real estate sales transactions, which are relatively few in number and can cause variability in the timing of revenue and profit recognition.
Contract Backlog: Granite West contract backlog of $854.1 million at December 31, 2007 was $161.5 million, or 15.9%, lower than at December 31, 2006. The decrease of $50.5 million, or 32.8%, in private sector contract backlog at December 31, 2007 compared with December 31, 2006 was primarily a result of the slowing demand for residential construction, particularly in certain California and Nevada markets. The decrease of $71.1 million, or 16.8%, in 2007 public sector contract backlog in California was largely due to increased competition for the available work as contractors migrated from the increasingly scarce private sector work. Additionally, the lower public sector contract backlog reflects progress on a $234.2 million joint venture highway reconstruction project in Utah that was awarded at the end of 2005. Granite West project awards in the fourth quarter 2007 included a $24.4 million highway reconstruction project near the California-Nevada border.
Granite East contract backlog of $1.2 billion at December 31, 2007 was $10.5 million, or 0.8%, lower than at December 31, 2006. The increase of $290.4, or 90.0%, in 2007 contract backlog in the Southeast was largely driven by the award in March 2007 of a $464.0 million joint venture design/build highway project in Maryland. The contract backlog increase in the Southeast was offset by lower contract backlog in the other Granite East geographic areas as we continued our strategy of bidding at higher margins in our home markets. Additional project awards during the year ended December 31, 2007 included a $37.0 million freeway project in Texas, a $93.0 million turnpike project in Florida and approximately $76.7 million in additional awards related to our 20% share of a joint venture project to construct a transportation hub at the World Trade Center in New York.
Gross Profit (Loss): Granite West gross profit as a percent of revenue for 2007 increased to 19.2% from 18.2% for 2006. The increase was largely due to the positive effect of project forecast changes in 2007 of approximately $23.0 million due to the settlement of outstanding issues with contract owners, higher productivity than originally estimated and the resolution of certain project uncertainties. Additionally, in 2006 Granite West was negatively impacted by approximately $18.0 million in net project forecast changes – primarily from the estimated loss recorded on our highway project in western Oregon (see Note 2 of the “Notes to the Consolidated Financial Statements”). Construction materials gross profit as a percent of materials sales for 2007 decreased to 20.1% from 23.6% for 2006 primarily due to a change in product mix resulting from the reduced demand for certain products typically utilized in residential construction.
Granite East gross profit as a percent of revenue for 2007 increased to 3.4% from a negative gross margin of 7.2% for 2006. The improved gross profit margin in 2007 was driven by a significantly lower negative forecast estimate changes. The net impact of project forecast estimate changes for 2007 was an increase in gross profit of approximately $3.0 million compared with a decrease of approximately $123.0 million for 2006 (see Note 2 of the “Notes to the Consolidated Financial Statements”).
GLC’s gross profit in 2007 and 2006 of $15.8 million and $17.6 million, respectively, included approximately $8.8 million and $7.8 million, respectively, related to our minority partners’ share. Included in GLC’s cost of revenue for 2007 was $3.0 million resulting from the partial impairment of a residential development project in California.
General and Administrative Expenses: General and administrative expenses increased by $46.7 million, or 23.4%, to $246.2 million in 2007 from $199.5 million in 2006. Salaries and related expenses in 2007 increased $21.9 million, or 21.2%, compared to 2006 primarily due to increased personnel and associated costs to support the addition of our new business in the state of Washington and our overall growth strategy - particularly in Granite West. Incentive compensation, discretionary profit sharing and other variable compensation in 2007 increased $4.7 million, or 14.1%, when compared to 2006 due to higher income and greater participation in our incentive compensation plans. Other general and administrative expenses, including the provision for doubtful accounts, in 2007 increased $20.2 million, or 31.8%, compared to 2006 due primarily to the addition of our new business in the state of Washington, increased costs related to technology upgrades and higher reserves for doubtful accounts. Other general and administrative expenses include information technology, occupancy, office supplies, depreciation, travel and entertainment, outside services, marketing, training and other miscellaneous expenses, none of which individually exceeded 10% of total general and administrative expenses.
Gain on Sales of Property and Equipment: Gain on sales of property and equipment for the year ended December 31, 2007 was comparable to the prior year.
Other Income (Expense): Interest income increased $2.8 million, or 11.7%, in 2007 compared with 2006 due to higher balances of interest bearing investments. Interest expense increased in 2007 compared to 2006 due primarily to an increase in average debt outstanding under our revolving line of credit. Equity in income of affiliates for 2007 included a gain of approximately $3.9 million on a sale of a building by a partnership in which we hold an equity method investment. In December of 2007, we purchased all remaining shares of Wilder, which resulted in a charge of approximately $7.8 million. The increase in other (net) during 2007 was primarily related to capital gains of $2.9 million from certain mutual fund investments.
Provision for Income Taxes: Our effective tax rate decreased to 33.0% in 2007 from 34.2% in 2006. The decrease was primarily driven by higher minority interest in income of consolidated joint ventures and other entities which are not subject to income taxes on a stand-alone basis. The impact of higher minority interest was partially offset by the effect of the $7.8 million charge taken related to the purchase of the remaining Wilder shares which was not deductible for tax purposes.
Minority Interest in Consolidated Subsidiaries: In 2007 our minority interest in consolidated subsidiaries represents the minority owners’ share of the income or loss of our consolidated subsidiaries - primarily Wilder, certain real estate development entities and various consolidated construction joint ventures. In 2006 we recognized a net minority interest benefit of approximately $6.2 million due to our partners’ share of losses on certain joint venture construction projects.
Outlook
We anticipate 2009 to be a challenging year as a product of the uncertainty surrounding the economic environment and its impact on many of our customers. However, we expect the diversity and resiliency of our business model will continue to be extremely valuable as we confront these challenging economic times.
In the West, while there is enough work to bid in the public sector, we expect competition to remain very strong throughout 2009. Our focus this year will be on targeting those opportunities where we have a competitive advantage. We are well positioned in our markets with our strong financial position, versatile construction capability, aggregate reserves, key plant facilities and, most importantly teams of experienced and dedicated people.
The outlook for our Granite East business continues to be positive. We will be pursuing several large projects this year. Funding for these projects is coming from various sources. Our strategy for this business has not changed and we remain very selective with regard to the projects we bid. We will continue to focus on projects where we can utilize our construction expertise, mitigate risk and deliver acceptable margins.
With regard to our Granite Land Company, our strategy in 2009 is to be flexible and patient in managing our investments. Several of our projects have long lead times, which afford us the ability to stage the timing of sales transactions. We will continue to work on entitlements, construct improvements when prudent and take an opportunistic view of potential new investments. The expected profitability for certain development activities could continue to deteriorate to a point that could cause us to recognize impairments if there is a continued decline in the residential and commercial real estate markets in which we are operating.
On the political front, there are many uncertainties surrounding federal and state transportation funding for 2009. The American Recovery and Reinvestment Act recently signed into law provides funds for the construction of public infrastructure and facilities. Specific to transportation, the Act provides: $27.5 billion for highways as well as $8.4 billion for transit, $8 billion for high-speed rail, $1.1 billion for the Airport Improvement Program, and $1.5 billion awarded in the form of competitive discretionary grants across the spectrum of surface transportation projects.
While infrastructure funding from the stimulus bill should give our markets a short-term boost, our longer-term focus will continue to be on the reauthorization of the Federal Highway Bill, the current version of which will expire in September. Granite, along with other industry leaders and industry associations are actively engaging Congress to develop a long-term strategy to increase and stabilize transportation infrastructure funding levels.
In California we expect the recently passed budget compromise will stabilize California’s fiscal situation. California’s constitutional officers and legislative leaders are hopeful that the fiscal plan will allow California to sell proposition 1-B bonds into the marketplace and fund a full scale transportation program. The compromise provides full funding of proposition 42 as well as increased design build and public private partnership authority for transportation projects in the state.
While we are encouraged by the recent passage of the Federal stimulus bill and budget agreement in California, it is too early for us to know to what degree these will impact our business.
With regard to raw materials costs, we are subject to energy and petroleum related price volatility as it relates to our use of diesel fuel for our rolling stock equipment, natural gas, propane and diesel fuel to heat our plants, as well as liquid asphalt for production of asphaltic concrete. In 2008, we experienced significant price volatility in all of these commodities and there is substantial uncertainty surrounding price trends for 2009. We continue to manage our exposure to these price changes by monitoring the costs of these commodities and pricing them into our projects and contracts accordingly. Some of our contracts include clauses for liquid asphalt and fuel escalation and de-escalation that provide protection in the event that oil product prices change significantly. We are exploring opportunities to better manage our exposure to commodity price volatility and take advantage of economies of scale through centralized purchasing where appropriate.
In summary, although we are cautious about our outlook for 2009, we remain optimistic about the longer-term opportunities ahead for our business. Our Granite West business is poised to take advantage of its entrepreneurial business model in 2009. Our Granite East business is expected to continue to deliver positive results in 2009. We continue to focus on cost cutting and improvement initiatives to develop more efficient business processes. Overall, we are very optimistic about the long-term view of our markets and are confident that our continued strategic investment into our construction materials business and the development of our people is important to increasing long-term shareholder value.
Liquidity and Capital Resources
We believe our cash and cash equivalents, short-term investments, cash generated from operations and amounts available under our existing committed credit facility will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments, cash dividend payments, and other liquidity requirements associated with our existing operations through the next twelve months. If we experience a significant change in our business operating results or make a significant acquisition, we may need to acquire additional sources of financing, which, if available, may be limited by the terms of our existing debt covenants, or may require the amendment of our existing debt agreements.
| December 31, | | 2008 | | 2007 | |
| (in thousands) | | | |
Cash and cash equivalents excluding consolidated joint ventures | | | 339,842 | | | | |
Consolidated joint venture cash and cash equivalents | | | 121,001 | | | | |
| Total consolidated cash and cash equivalents | | | 460,843 | | | 352,434 | |
| Short-term and long-term marketable securities | | | 59,559 | | | 132,914 | |
| Total cash, cash equivalents and marketable securities | | $ | 520,402 | | $ | 485,348 | |
| Working Capital | | $ | 475,942 | | $ | 397,568 | |
Our primary sources of liquidity are cash flows from operations and borrowings under our credit facilities. Our cash and cash equivalents are comprised of deposits and money market funds held with established national banks, and fixed income securities having remaining maturities of three months or less from the date of purchase. Cash and cash equivalents held by our consolidated joint ventures is for the working capital needs of each joint venture’s project. The decision to distribute cash must generally be made jointly by all of the partners and therefore these funds are not available for the working capital needs of Granite. Our marketable securities include United States government obligations, municipal bonds and to a lesser extent, mutual funds. Primarily in response to deteriorating credit markets, we have generally not reinvested the proceeds of maturing securities and have retained these funds in cash and cash equivalents.
Due to the current fiscal situation in California, we have received notification that progress payments on certain projects may be delayed. If these payments are delayed we will be given the option to continue or suspend work. If we continue to work we will be paid interest on the delayed payment amounts. While the California budget has just recently passed, it may take some time before the affected funding sources are reestablished.
Cash Flows
| Years Ended December 31, | | 2008 | | 2007 | | | 2006 | |
(in thousands) | | | | | | | | |
| Net cash provided by (used in): | | | | | | | | |
| Operating activities | | $ | 257,336 | | $ | 234,788 | | $ | 259,643 | |
| Investing activities | | | (18,257 | ) | | (166,744 | ) | | (183,683 | ) |
| Financing activities | | | (130,670 | ) | | 79,497 | | | (70,948 | ) |
| Capital Expenditures | | | 94,135 | | | 118,612 | | | 116,238 | |
Cash provided by operating activities of $257.3 million in 2008 represents a $22.5 million increase from the amount provided by operating activities during 2007. This increase was primarily due to proceeds from the release of escrow funds to purchase the remaining shares of our Wilder subsidiary and an increase in minority interest in consolidated subsidiaries due to higher profitability on construction joint ventures (including the effects of a large settlement of claims on a large project in southern California). This increase was partially offset by a change in the amount of billings in excess of costs and estimated earnings, net, primarily due to progress on projects that had received large mobilization payments in the prior year and cash payments for the remaining minority interest of our Wilder subsidiary in 2008.
Cash used in investing activities of $18.3 million for 2008 represents a $148.5 million decrease from the amount used in 2007 due primarily to the effect of the Wilder minority share purchase in 2007 and a decrease in the amount of cash used for business acquisitions in 2008.
Cash used in financing activities of $130.7 million for 2008 represents a change of $210.2 million from 2007. This change was largely attributable to the issuance of $200.0 million in private placement debt in 2007 and the related payoff of our revolving lines of credit. The remainder of the change was primarily due to decreased purchases of common shares in 2008, the financing cash flow portion of the Wilder minority share purchase and a decrease in contributions from our minority partners.
Capital Expenditures
During the year ended December 31, 2008, we had capital expenditures of $94.1 million compared to $118.6 million during the year ended December 31, 2007. We currently anticipate spending between $65.0 million and $140.0 million for capital expenditures in 2009, which includes amounts for construction equipment, aggregate and asphalt production facilities, buildings, leasehold improvements, development of real estate projects and aggregate reserves. The timing and amount of such expenditures can vary based on the progress of planned capital projects, the type and size of construction projects, changes in business outlook and other factors.
Debt and Contractual Obligations
The following table summarizes our significant obligations outstanding as of December 31, 2008:
| | | Payments due by period | |
| (in thousands) | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | |
| | | 290,379 | | $ | 39,692 | | $ | 33,835 | | $ | 16,705 | | $ | 200,147 | |
| Operating Leases (2) | | | 48,168 | | | 9,900 | | | 12,137 | | | 5,457 | | | 20,674 | |
Purchase obligations under construction contracts (3) | | | - | | | - | | | - | | | - | | | - | |
Other purchase obligations (4) | | | 62,437 | | | 45,539 | | | 10,951 | | | 3,409 | | | 2,538 | |
Deferred compensation obligations (5) | | | 25,155 | | | 2,037 | | | 14,446 | | | 4,322 | | | 4,350 | |
| | | 426,139 | | $ | 97,168 | | $ | 71,369 | | $ | 29,893 | | $ | 227,709 | |
Note: Asset retirement obligations associated with our owned and leased quarry properties (see Note 9 of the “Notes to the Consolidated Financial Statements”) have been excluded from the above table as they are not contractual obligations.
(1) These obligations represent the aggregate minimum principal maturities of long-term debt and do not include interest.
(2) These obligations represent the minimum rental commitments and minimum royalty requirements under all noncancellable operating leases. See Note 18 of the “Notes to the Consolidated Financial Statements”.
(3) In the ordinary course of business, we enter into purchase commitments for purchases of materials and subcontract services related to our current contract backlog. These purchase commitments, are generally settled in less than one year.
(4) These obligations represent firm purchase commitments for equipment and other goods and services not connected with our construction contract backlog which are individually greater than $10,000.
(5) The timing of expected payment of deferred compensation is based on estimated dates of retirement. Actual dates of retirement could be different and would cause the timing of payments to change.
In addition to the above, as of December 31, 2008, we had approximately $3.9 million in liabilities for uncertain tax positions. These reserves are not included in the table above because we cannot estimate the timing of payments related to such reserves.
Bank Line of Credit and Letters of Credit
We have a $150.0 million bank revolving line of credit, which allows for unsecured borrowings through June 24, 2011. Borrowings under the line of credit bear interest at LIBOR plus an applicable margin based upon certain financial ratios calculated quarterly. The margin was 0.70% at December 31, 2008. The unused and available portion of this line of credit was $145.6 million at December 31, 2008.
We had standby letters of credit totaling approximately $4.4 million outstanding at December 31, 2008, all of which will expire between February 2009 and March 2010. We are generally required by the beneficiaries of these standby letters of credit to replace them upon expiration. Additionally, we generally are required to provide various types of surety bonds that provide an additional measure of security under certain public and private sector contracts. At December 31, 2008, approximately $1.6 billion of our contract backlog was bonded. A total of $11.0 billion in performance bonds were outstanding as of December 31, 2008, which includes bonds for construction projects, both in process and completed contracts awaiting final acceptance by the owner. Generally, performance bonds do not have stated expiration dates; rather, we are generally released from the bonds when each contract is accepted by the owner. The ability to maintain bonding capacity to support our current and future level of contracting requires that we maintain cash and working capital balances satisfactory to our sureties.
Restrictive covenants under the terms of our senior notes and revolving line of credit require the maintenance of certain financial ratios and the maintenance of tangible net worth (as defined). We were in compliance with these covenants at December 31, 2008. Failure to comply with these covenants could cause the amounts due under the debt agreements to become currently payable.
Share Purchase Authorization
In 2007, our Board of Directors authorized us to purchase, at management’s discretion, up to $200.0 million of our common stock. During the year ended December 31, 2008, we purchased 1.4 million common shares for a total of $43.2 million under this share purchase program. From the inception of this share purchase program in 2007 through December 31, 2008, we have purchased a total of 3.8 million common shares for an aggregate cost of $135.9 million. All shares were retired upon acquisition. At December 31, 2008, $64.1 million of the $200.0 million authorization was available for future common share purchases.
Joint Ventures; Off-Balance-Sheet Arrangements
We participate in various construction joint venture partnerships in order to share expertise, risk and resources for certain highly complex projects. Generally, each construction joint venture is formed to accomplish a specific project and is jointly controlled by the joint venture partners. We select our joint venture partners based on our analysis of their construction and financial capabilities, expertise in the type of work to be performed and past working relationships with us, among other criteria. The joint venture agreements typically provide that our interests in any profits and assets, and our respective share in any losses and liabilities that may result from the performance of the contract are limited to our stated percentage interest in the project.
Under each joint venture agreement, one partner is designated as the sponsor. The sponsoring partner typically provides all administrative, accounting and most of the project management support for the project and generally receives a fee from the joint venture for these services. We have been designated as the sponsoring partner in certain of our current joint venture projects and are a non-sponsoring partner in others.
We also participate in various “line item” joint venture agreements under which each partner is responsible for performing certain discrete items of the total scope of contracted work. The revenue for these discrete items is defined in the contract with the project owner and each venture partner bears the profitability risk associated with its own work. All partners in a line item joint venture are jointly and severally liable for the completion of the total project under the terms of the contract with the project owner. There is not a single set of books and records for a line item joint venture. Each partner accounts for its items of work individually as it would for any self-performed contract. We account for our portion of these contracts as project revenues and costs in our accounting system and include receivables and payables associated with our work in our consolidated financial statements.
The venture’s contract with the project owner typically requires joint and several liability among the joint venture partners. Although our agreements with our joint venture partners for both construction joint ventures and line item joint ventures provide that each party will assume and pay its share of any losses resulting from a project, if one of our partners was unable to pay its share we would be fully liable under our contract with the project owner. Circumstances that could lead to a loss under these guarantee arrangements include a partner’s inability to contribute additional funds to the venture in the event that the project incurred a loss or additional costs that we could incur should the partner fail to provide the services and resources toward project completion that had been committed to in the joint venture agreement. At December 31, 2008, approximately $482.9 million of work, representing either our partners’ proportionate share of unconsolidated construction joint ventures or work that our partners are directly responsible for in line item joint ventures, had yet to be completed.
Recent Accounting Pronouncements
See Note 1 of the “Notes to the Consolidated Financial Statements” for a description of recent accounting pronouncements, including the expected dates of adoption and effects on our financial position, results of operations and cash flows.
We maintain an investment portfolio of various holdings, types and maturities. We place our cash investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. These guidelines prohibit investments in auction rate and asset-backed securities. They also limit the amount of our credit exposure to any one issue, issuer or type of instrument. The portfolio is limited to an average maturity of no more than one year from date of purchase. On an ongoing basis we monitor credit ratings, financial condition and other factors that could impact the carrying amount of our investment portfolio.
Marketable securities, consisting of U.S. government obligations, agencies and municipal bonds, are generally classified as held-to-maturity and are stated at cost, adjusted for amortization of premiums and discounts to maturity.
We are exposed to financial market risks due largely to changes in interest rates, which we have managed primarily by managing the maturities in our investment portfolio. We currently do not have any business transactions in foreign currencies.
The fair value of our short-term held-to-maturity investment portfolio and related income would not be significantly impacted by changes in interest rates since the investment maturities are short and the interest rates are primarily fixed. The fair value of our long-term held-to-maturity investment portfolio may be impacted by changes in interest rates.
In a declining interest rate environment, as short term investments mature, reinvestment occurs at less favorable market rates. Given the short term nature of certain investments, anticipated declining interest rates will negatively impact our investment income.
At December 31, 2008 we had outstanding: (i) senior notes payable of $13.3 million which carry a fixed interest rate of 6.54% per annum with principal payments due in nine equal annual installments that began in 2002; (ii) senior notes payable of $41.7 million which carry a fixed interest rate of 6.96% per annum with principal payments due in nine equal annual installments that began in 2005 and (iii) senior notes payable of $200.0 million, which carry a fixed rate interest of 6.11% per annum with principal payments due in five equal annual installments beginning in 2015.
The table below presents principal amounts due by year and related weighted average interest rates for our cash and cash equivalents, held-to-maturity investments and significant debt obligations as of December 31, 2008 (in thousands):
| | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | Thereafter | | Total | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Cash, cash equivalents and held-to-maturity investments | | | | | | | | | | | | | | | | | | | | | 519,366 | | |
Weighted average interest rate | | | | | | | | | | | | | | | | | | | | | 1.13 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 8,334 | | | 200,000 | | | 255,000 | | |
Weighted average interest rate | | | | | | | | | | | | | | | 6.96 | | | 6.11 | | | 6.27 | | |
The estimated fair value of our cash, cash equivalents and short-term held-to-maturity investments approximate the principal amounts reflected above based on the generally short maturities of these financial instruments. The estimated fair value of our long-term held-to-maturity investments approximates the principal amounts above due to the relatively minor difference between the effective yields of these investments and rates currently available on similar instruments. Rates currently available to us for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Based on the fixed borrowing rates currently available to us for bank loans with similar terms and average maturities, the fair value of the senior notes payable was approximately $200.9 million as of December 31, 2008 and $270.0 million as of December 31, 2007.
The following consolidated financial statements of Granite and the independent registered public accounting firm’s report are incorporated by reference from Part IV, Item 15(1) and (2):
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - At December 31, 2008 and 2007
Consolidated Statements of Income - Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Shareholders’ Equity and Comprehensive Income - Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows - Years Ended December 31, 2008, 2007 and 2006
Notes to the Consolidated Financial Statements
Quarterly Financial Data (unaudited)
Schedule II - Schedule of Valuation and Qualifying Accounts
Not applicable.
Evaluation of Disclosure Controls and Procedures: We carried out an evaluation, under the supervision of and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2008, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting: During the fourth quarter of 2008, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation our management concluded that our internal control over financial reporting was effective as of December 31, 2008.
Independent Registered Public Accounting Firm Attestation Report: PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2008. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, is included in Item 15 under the heading “Report of Independent Registered Public Accounting Firm.”
Not applicable.
Certain information required by Part III is omitted from this report. We will file our definitive proxy statement for our Annual Meeting of Shareholders to be held on May 15, 2009 (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information included therein is incorporated herein by reference.
For information regarding our Directors and compliance with Section 16(a) of the Securities Exchange Act of 1934, we direct you to the subsections entitled “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” respectively, in the Proxy Statement. For information regarding our Audit/Compliance Committee’s financial expert and our Committees of the Board, we direct you to the section captioned “Committees of the Board” in the Proxy Statement. For information regarding our Nomination Policy, we direct you to the section captioned “Board of Directors’ Nomination Policy” in the Proxy Statement. For information regarding our Code of Conduct, we direct you to the section captioned “Code of Conduct” in the Proxy Statement. This information is incorporated herein by reference. Information regarding our executive officers is contained in the section entitled “Executive Officers of the Registrant,” in Part I of this report.
For information regarding our Executive Compensation, we direct you to the section captioned “Executive & Director Compensation and Other Matters” in the Proxy Statement. This information is incorporated herein by reference.
This information is located in the subsections captioned “Stock Ownership of Beneficial Owners and Certain Management” and “Equity Compensation Plan Information” in the Proxy Statement. This information is incorporated herein by reference.
You will find this information in the subsections captioned “Transactions with Related Persons” and “Director Independence” in the Proxy Statement. This information is incorporated herein by reference.
You will find this information in the subsection captioned “Principal Accounting Fees and Services” in the Proxy Statement. This information is incorporated herein by reference.
The following documents are filed as part of this Report:
1. Financial Statements. The following consolidated financial statements and related documents are filed as part of this report:
| Schedule | Page |
Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets at December 31, 2008 and 2007 | |
Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and 2006 | |
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended December 31, 2008, 2007 and 2006 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006 | |
Notes to the Consolidated Financial Statements | |
| Quarterly Financial Data | F-40 |
2. Financial Statement Schedule. The following financial statement schedule of Granite for the years ended December 31, 2008, 2007 and 2006 is filed as part of this report and should be read in conjunction with the consolidated financial statements of Granite.
| Schedule | Page |
Schedule II - Schedule of Valuation and Qualifying Accounts | |
Schedules not listed above have been omitted because the required information is either not material, not applicable or is shown in the consolidated financial statements or notes thereto.
3. Exhibits. The Exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Granite Construction Incorporated:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(1) present fairly, in all material respects, the financial position of Granite Construction Incorporated and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
San Jose, California
February 26, 2009
| GRANITE CONSTRUCTION INCORPORATED | | |
| CONSOLIDATED BALANCE SHEETS | | |
(in thousands, except share and per share data) | |
| December 31, | | 2008 | | 2007 | | |
| |
| | | | | | | | |
Cash and cash equivalents | | | 460,843 | | | | | |
Short-term marketable securities | | | 38,320 | | | | | |
| | | 314,733 | | | | | |
Costs and estimated earnings in excess of billings | | | 13,295 | | | | | |
| | | 55,223 | | | | | |
Real estate held for development and sale | | | 75,089 | | | | | |
| | | 43,637 | | | | | |
Equity in construction joint ventures | | | 44,681 | | | | | |
| | | 56,742 | | | | | |
| | | 1,102,563 | | | | | |
Property and equipment, net | | | 517,678 | | | | | |
Long-term marketable securities | | | 21,239 | | | | | |
Investments in affiliates | | | 19,996 | | | | | |
| | | 81,979 | | | | | |
| | | 1,743,455 | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | | | | | | |
Current maturities of long-term debt | | | 39,692 | | | | | |
| | | 174,626 | | | | | |
Billings in excess of costs and estimated earnings | | | 227,364 | | | | | |
Accrued expenses and other current liabilities | | | 184,939 | | | | | |
Total current liabilities | | | 626,621 | | | | | |
| | | 250,687 | | | | | |
Other long-term liabilities | | | 43,604 | | | | | |
| | | 18,261 | | | | | |
Commitments and contingencies | | | | | | | | |
Minority interest in consolidated subsidiaries | | | 36,773 | | | | | |
| | | | | | | | |
Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding | | | - | | | | | |
Common stock, $0.01 par value, authorized 150,000,000 shares in 2008 and 2007; issued and outstanding 38,266,791 shares as of December 31, 2008 and 39,450,923 shares as of December 31, 2007 | | | 383 | | | | | |
Additional paid-in capital | | | 85,035 | | | | | |
| | | 682,237 | | | | | |
Accumulated other comprehensive (loss) income | | | (146 | ) | | | | |
Total shareholders’ equity | | | 767,509 | | | | | |
Total liabilities and shareholders’ equity | | | 1,743,455 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
| GRANITE CONSTRUCTION INCORPORATED | | |
| CONSOLIDATED STATEMENTS OF INCOME | | |
(in thousands, except per share data) | | |
| Years Ended December 31, | | 2008 | | | 2007 | | | 2006 | | |
| | | | | | | | | | |
| | $ | 2,312,116 | | | $ | 2,321,502 | | | $ | 2,524,454 | | |
| | | 353,115 | | | | 375,700 | | | | 410,159 | | |
| | | 9,013 | | | | 40,712 | | | | 34,991 | | |
| | | 2,674,244 | | | | 2,737,914 | | | | 2,969,604 | | |
| | | | | | | | | | | | | |
| | | 1,883,742 | | | | 2,002,064 | | | | 2,343,134 | | |
| | | 311,246 | | | | 300,234 | | | | 313,329 | | |
| | | 10,536 | | | | 24,872 | | | | 17,421 | | |
| | | 2,205,524 | | | | 2,327,170 | | | | 2,673,884 | | |
| | | 468,720 | | | | 410,744 | | | | 295,720 | | |
General and administrative expenses | | | 257,532 | | | | 246,202 | | | | 199,481 | | |
Goodwill impairment charge | | | - | | | | - | | | | 18,011 | | |
Gain on sales of property and equipment | | | 5,503 | | | | 10,343 | | | | 10,408 | | |
| | | 216,691 | | | | 174,885 | | | | 88,636 | | |
| | | | | | | | | | | | | |
| | | 18,445 | | | | 26,925 | | | | 24,112 | | |
| | | (16,001 | ) | | | (6,367 | ) | | | (4,492 | ) | |
| | | - | | | | (7,752 | ) | | | - | | |
Equity in (loss) income of affiliates | | | (1,058 | ) | | | 5,205 | | | | 2,157 | | |
| | | 15,353 | | | | 5,498 | | | | 2,604 | | |
| | | 16,739 | | | | 23,509 | | | | 24,381 | | |
Income before provision for income taxes and minority interest | | | 233,430 | | | | 198,394 | | | | 113,017 | | |
Provision for income taxes | | | 67,692 | | | | 65,470 | | | | 38,678 | | |
Income before minority interest | | | 165,738 | | | | 132,924 | | | | 74,339 | | |
Minority interest in consolidated subsidiaries | | | (43,334 | ) | | | (20,859 | ) | | | 6,170 | | |
| | $ | 122,404 | | | $ | 112,065 | | | $ | 80,509 | | |
| | | | | | | | | | | | | | |
Net income per common share | | | | | | | | | | | | | |
| | $ | 3.25 | | | $ | 2.74 | | | $ | 1.97 | | |
| | $ | 3.21 | | | $ | 2.71 | | | $ | 1.94 | | |
| | | | | | | | | | | | | | |
Weighted average shares of common stock | | | | | | | | | | | | | |
| | | 37,606 | | | | 40,866 | | | | 40,874 | | |
| | | 38,106 | | | | 41,389 | | | | 41,471 | | |
| | | | | | | | | | | | | | |
Dividends per common share | | $ | 0.52 | | | $ | 0.43 | | | $ | 0.40 | | |
The accompanying notes are an integral part of these consolidated financial statements.
| GRANITE CONSTRUCTION INCORPORATED | | |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME | | |
(in thousands, except share data) | |
Years Ended December 31, 2006, 2007 and 2008 | | Outstanding Shares | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (loss) | | Unearned Compensation | | Total | | |
Balances, December 31, 2005 | | | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | |
Comprehensive income (see Note 16): | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Changes in net unrealized gains (losses) on investments | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | 81,538 | | |
Reclassification of restricted stock balance upon adoption of SFAS 123-R | | | | | | - | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Amortized restricted stock | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of common stock | | | | | | | | | | | | | | | | | | | | | | | |
Cash dividends on common stock | | | | | | | | | | | | | | | | | | | | | | | |
Common stock contributed to ESOP | | | | | | | | | | | | | | | | | | | | | | | |
Excess tax benefit on stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised and other | | | | | | | | | | | | | | | | | | | | | | | |
Balances, December 31, 2006 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Changes in net unrealized gains (losses) on investments | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for services | | | | | | | | | | | | | | | | | | | | | | | |
Amortized restricted stock | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of common stock | | | | | | | | | | | | | | | | | | | | | | | |
Cash dividends on common stock | | | | | | | | | | | | | | | | | | | | | | | |
Excess tax benefit on stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | |
Impact of adopting FASB Interpretation No. 48 | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised and other | | | | | | | | | | | | | | | | | | | | | | | |
Balances, December 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | - | | | - | | | - | | | 122,404 | | | - | | | - | | | | | |
Changes in net unrealized gains (losses) on investments | | | - | | | - | | | - | | | - | | | (1,244 | ) | | - | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | 121,160 | | |
| | | 232,096 | | | 2 | | | (2 | ) | | - | | | - | | | - | | | - | | |
Stock issued for services | | | 14,998 | | | - | | | 461 | | | - | | | - | | | - | | | 461 | | |
Amortized restricted stock | | | - | | | - | | | 7,002 | | | - | | | - | | | - | | | 7,002 | | |
Repurchase of common stock | | | (1,440,869 | | | (14 | ) | | (5,561 | ) | | (39,965 | ) | | - | | | - | | | (45,540 | ) | |
Cash dividends on common stock | | | - | | | - | | | - | | | (19,901 | ) | | - | | | - | | | (19,901 | ) | |
| Excess tax benefit on stock-based compensation | | | - | | | - | | | 851 | | | - | | | - | | | - | | | 851 | | |
| Non-qualified deferred compensation plan stock units | | | - | | | - | | | 3,237 | | | - | | | - | | | - | | | 3,237 | | |
| | | 9,643 | | | - | | | 40 | | | - | | | - | | | - | | | 40 | | |
Balances, December 31, 2008 | | | 38,266,791 | | | 383 | | $ | 85,035 | | $ | 682,237 | | $ | (146 | ) | $ | - | | $ | 767,509 | | |
The accompanying notes are an integral part of these consolidated financial statements.
| GRANITE CONSTRUCTION INCORPORATED | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | | |
| (in thousands) |
| |
| Years Ended December 31, | | 2008 | | 2007 | | 2006 | | |
| | | | | | | | |
| | | 122,404 | | | | | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | |
Impairment of real estate held for development and sale | | | 4,500 | | | 3,000 | | | - | | |
Goodwill impairment charge | | | - | | | | | | | | |
| Inventory reserve adjustment | | | 12,848 | | | 478 | | | 2,244 | | |
Depreciation, depletion and amortization | | | 87,311 | | | | | | | | |
| Provision for doubtful accounts | | | 10,958 | | | 3,894 | | | 438 | | |
Gain on sales of property and equipment | | | (5,503 | ) | | | | | | | |
Change in deferred income taxes | | | 1,190 | | | | | | | | |
| | | 7,463 | | | | | | | | |
Excess tax benefit on stock-based compensation | | | (851 | ) | | | | | | | |
Common stock contributed to ESOP | | | - | | | | | | | | |
Minority interest in consolidated subsidiaries | | | 43,334 | | | | | | | | |
| | | - | | | | | | | | |
Equity in loss (income) of affiliates | | | 1,058 | | | | | | | | |
Acquisition of minority interest | | | (16,617 | ) | | | | | | | |
| Gain on sale of investment in affiliate | | | (14,416 | ) | | - | | | - | | |
| Loss on sale of marketable securities | | | 10,939 | | | - | | | - | | |
| Gain on early extinguishment of debt | | | (1,150 | ) | | - | | | - | | |
Changes in assets and liabilities, net of the effects of acquisitions: | | | | | | | | | | | |
| | | 100,533 | | | | | | | | |
| | | (10,812 | ) | | | | | | | |
Real estate held for development and sale | | | (15,225 | ) | | | | | | | |
Equity in construction joint ventures | | | (10,341 | ) | | | | | | | |
| | | 40,870 | | | | | | | | |
| | | (38,956 | ) | | | | | | | |
Accrued expenses and other liabilities | | | (28,378 | ) | | | | | | | |
| Billings in excess of costs and estimated earnings, net | | | (43,823 | ) | | (14,154 | ) | | 106,823 | | |
Net cash provided by operating activities | | | 257,336 | | | | | | | | |
| | | | | | | | | | | |
Purchases of marketable securities | | | (71,630 | ) | | | | | | | |
Maturities of marketable securities | | | 108,090 | | | | | | | | |
| Purchase of company owned life insurance | | | (8,000 | ) | | - | | | - | | |
Proceeds from sale of marketable securities | | | 22,499 | | | - | | | - | | |
| Release of funds for acquisition of minority interest | | | 28,332 | | | - | | | - | | |
Additions to property and equipment | | | (94,135 | ) | | | | | | | |
Proceeds from sales of property and equipment | | | 14,539 | | | | | | | | |
| | | (14,022 | ) | | | | | | | |
Contributions to affiliates | | | (8,053 | ) | | | | | | | |
| Distributions from affiliates | | | 3,895 | | | - | | | 1,970 | | |
Acquisition of minority interest | | | - | | | | | | | | |
Other investing activities, net | | | 228 | | | | | | | | |
Net cash used in investing activities | | | (18,257 | ) | | | | | | | |
| | | | | | | | | | | |
Proceeds from long-term debt | | | 3,725 | | | | | | | | |
Long-term debt principal payments | | | (17,092 | ) | | | | | | | |
Repurchase of common stock | | | (45,540 | ) | | | | | | | |
| | | (20,055 | ) | | | | | | | |
Contributions from minority partners | | | 5,026 | | | | | | | | |
Distributions to minority partners | | | (45,909 | ) | | | | | | | |
| Acquisition of minority interest | | | (11,716 | ) | | - | | | - | | |
Excess tax benefit on stock-based compensation | | | 851 | | | | | | | | |
Other financing activities | | | 40 | | | | | | | | |
Net cash (used in) provided by financing activities | | | (130,670 | ) | | | | | | | |
Increase in cash and cash equivalents | | | 108,409 | | | | | | | |
Cash and cash equivalents at beginning of year | | | 352,434 | | | | | | | |
Cash and cash equivalents at end of year | | | 460,843 | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
| GRANITE CONSTRUCTION INCORPORATED | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) | | |
| (in thousands) |
| Years Ended December 31, | | | 2008 | | | 2007 | | | 2006 | |
Supplementary Information | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | |
| | | 12,700 | | | | | | | |
| | | 68,492 | | | | | | | |
Non-cash investing and financing activity: | | | | | | | | | | |
Restricted stock issued for services, net | | | 6,961 | | | | | | | |
| Restricted stock units issued | | | 3,237 | | | - | | | - | |
| | | 4,975 | | | | | | | |
Assets acquired through issuances of debt | | | - | | | | | | | |
| Debt payments from sale of assets | | | 2,652 | | | 9,237 | | | 13,398 | |
Settlement of debt from release of assets | | | 5,250 | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business: Granite Construction Incorporated is a heavy civil contractor and a construction materials producer. We are engaged in the construction of highways, dams, airport infrastructure, mass transit facilities, real estate site development and other infrastructure related projects with offices in Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and Washington. Unless otherwise indicated, the terms “we,” “us,” “our,” and “Granite” refer to Granite Construction Incorporated and its consolidated subsidiaries.
Principles of Consolidation: The consolidated financial statements include the accounts of Granite Construction Incorporated and its wholly owned and majority owned subsidiaries. All material inter-company transactions and accounts have been eliminated. We use the equity method of accounting for affiliated companies where we have the ability to exercise significant influence, but not control. Additionally, we participate in joint ventures with other construction companies and various real estate ventures. We have consolidated these ventures where we have determined that through our participation we have a variable interest and are the primary beneficiary as defined by Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities, (“FIN 46(R)”). Where we have determined we are not the primary beneficiary, we account for our share of the operations of jointly controlled construction joint ventures on a pro rata basis in the consolidated statements of income and as a single line item in the consolidated balance sheets in accordance with Emerging Issues Task Force Issue 00-01, Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures, (“EITF 00-01”). Those real estate entities where we have determined we are not the primary beneficiary but do exercise significant influence are accounted for under the equity method of accounting, as a single line item in both the consolidated statements of income and in the consolidated balance sheets, in accordance with generally accepted accounting principles.
Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition: We use the percentage of completion accounting method for construction contracts in accordance with American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue and earnings on construction contracts, including construction joint ventures, are recognized on the percentage of completion method in the ratio of costs incurred to estimated final costs. Revenue in an amount equal to cost incurred is recognized prior to contracts reaching 25% completion. The related profit is deferred until the period in which such percentage completion is attained. It is our judgment that until a project reaches 25% completion, there is insufficient information to determine what the estimated profit on the project will be with a reasonable level of assurance. In the case of large, complex design/build projects we may continue to defer profit recognition beyond the point of 25% completion based on evaluation of specific project risks. The factors considered in this evaluation of risk associated with each design/build project include the stage of design completion, the stage of construction completion, status of outstanding purchase orders and subcontracts, certainty of quantities, certainty of schedule and the relationship with the owner.
Revenue from contract claims is recognized when we have a signed settlement agreement and payment is assured. Revenue from contract change orders, which occur in most large projects, is recognized when the owner has agreed to the change order in writing. Provisions are recognized in the consolidated statements of income for the full amount of estimated losses on uncompleted contracts whenever evidence indicates that the estimated total cost of a contract exceeds its estimated total revenue. Contract cost consists of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs). Depreciation is provided using accelerated methods for construction equipment. Contract cost is recorded as incurred and revisions in contract revenue and cost estimates are reflected when known. The completion threshold for the start of contract profit recognition is applied to all percentage of completion projects unless and until we project a loss on the project, in which case the estimated loss is immediately recognized.
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The accuracy of our revenue and profit recognition in a given period is almost solely dependent on the accuracy of our estimates of the cost to complete each project. Our cost estimates for all of our significant projects use a highly detailed “bottom up” approach and we believe our experience allows us to provide materially reliable estimates. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include the completeness and accuracy of the original bid, costs associated with added scope changes, extended overhead due primarily to owner and weather delays, subcontractor performance issues, changes in productivity expectations, site conditions that differ from those assumed in the original bid (to the extent contract remedies are unavailable), the availability and skill level of workers in the geographic location of the project and a change in the availability and proximity of equipment and materials. Incorporated in our forecasts are our best estimates of the financial impact of these project uncertainties prior to their resolution which may vary significantly from the actual amounts realized. The foregoing factors as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit between periods and these fluctuations may be significant. Substantial changes in cost estimates, particularly in our larger, more complex projects have had and can in future periods have a significant effect on our profitability.
Revenue from the sale of materials is recognized when delivery occurs and risk of ownership passes to the customer.
In recognizing revenue from real estate transactions, we follow the provisions in Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate (“SFAS 66”). The specific timing of a sale is measured against various criteria in SFAS 66 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, we defer recognition and account for the continued operations of the property by applying the deposit, finance, installment or cost recovery methods, as appropriate. When a sale occurs within one of our real estate developments and we have not completed all infrastructure development related to the total project, we follow SFAS 66 and Statement of Financials Accounting Standards No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to determine the appropriate cost of sales and the timing of recognition of the sale. In the calculation of cost of sales, we use estimates and forecasts to determine total costs at completion of the development project.
Balance Sheet Classifications: We include in current assets and liabilities amounts receivable and payable under construction contracts (principally retentions) that may extend beyond one year. Additionally, we include the cost of property purchased for development and sale in current assets. A one-year time period is used as the basis for classifying all other current assets and liabilities.
Cash and Cash Equivalents: Cash equivalents are securities having remaining maturities of three months or less from the date of purchase.
Marketable Securities: We determine the classification of our marketable securities at the time of purchase and reevaluate these determinations at each balance sheet date. Debt securities are classified as held-to-maturity when we have the positive intent and ability to hold the securities to maturity. Held-to-maturity investments are stated at amortized cost. Debt securities for which we do not have the positive intent or ability to hold to maturity are classified as available-for-sale, along with any investments in equity securities. Securities available-for-sale are carried at fair value with the unrealized gains and losses, net of income taxes, reported as a separate component of other comprehensive income until realized. We have no investments that qualify as trading.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income. Realized gains and losses are included in other income, net. The cost of securities sold is based on the specific identification method.
Financial Instruments: The carrying value of marketable securities approximates their fair value as determined by market quotes. Rates currently available to us for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. The carrying value of receivables and other amounts arising out of normal contract activities, including retentions, which may be settled beyond one year, is estimated to approximate fair value.
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair Value of Financial Assets and Liabilities: As of January 1, 2008 we adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 introduces a framework for measuring fair value and expands required disclosure about fair value measurements of certain assets and liabilities.
SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We utilize the active market approach to measure fair value for our financial assets and liabilities.
Concentrations: We maintain the majority of our cash balances and all of our marketable securities with several financial institutions. We invest with high credit quality financial institutions and, by policy, limit the amount of credit exposure to any financial institution. Additionally, a significant portion of our labor force is subject to collective bargaining agreements.
We perform ongoing credit evaluations of our customers and generally do not require collateral, although the law provides us the ability to file mechanics’ liens on real property improved for private customers in the event of non-payment by such customers. We maintain an allowance for potential credit losses and such losses have been within management’s expectations. We have no foreign operations.
Inventories: Inventories consist primarily of quarry products valued at the lower of average cost or market. We reserve inventory based on estimated quantities of materials on hand in excess of estimated foreseeable forecasts.
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property and Equipment: Property and equipment are stated at cost. Depreciation for construction and other equipment is primarily provided using accelerated methods over lives ranging from three to seven years and the straight-line method over lives from three to twenty years for the remaining depreciable assets. We believe that accelerated methods best approximate the service provided by the construction and other equipment. Depletion of quarry property is based on the usage of depletable reserves. We frequently sell property and equipment that has reached the end of its useful life or no longer meets our needs, including depleted quarry property. Such property is held in property and equipment until sold. The cost and accumulated depreciation or depletion of property sold or retired is removed from the accounts and gains or losses, if any, are reflected in earnings for the period. Maintenance and repairs are charged to operations as incurred.
Real Estate Held for Development and Sale and other Long-Lived Assets: Real estate held for development and sale and other long-lived assets held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If we determine that such circumstances exist, we assess, and if necessary will record an impairment loss when the asset’s carrying value exceeds its estimated fair value.
The carrying amounts of all real estate development assets and other long-lived assets are evaluated for recoverability in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-Lived Assets (“SFAS 144”). A real estate development asset is considered impaired when its carrying amount is greater than the undiscounted future net cash flows the asset is expected to generate. The carrying value of impaired real estate development assets is generally determined based on the sum of the discounted cash flows expected to result from the eventual disposal of the asset. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to sales prices, costs, holding periods or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we used in testing for impairment are reasonable, changes in any one of our assumptions could produce a significantly different result.
Goodwill and Other Intangible Assets: We perform goodwill impairment tests in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). We perform these impairment tests annually during our fourth quarter and more frequently when events and circumstances occur that indicate a possible impairment of goodwill. In determining whether there is an impairment of goodwill, we calculate the estimated fair value of the reporting unit in which the goodwill is recorded using a discounted future cash flow method. We then compare the resulting fair value to the net book value of the reporting unit, including goodwill. If the net book value of a reporting unit exceeds its fair value, we measure and record the amount of the impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.
Other intangible assets include covenants not to compete, permits, trade names and customer lists which are being amortized on a straight-line basis over terms from three to thirty years.
Reclamation Costs: We account for the costs related to legal obligations to reclaim aggregate mining sites and other facilities in accordance with Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). Accordingly, we record our estimated reclamation liability when incurred, capitalize the estimated liability as part of the related asset’s carrying amount and allocate it to expense over the asset’s useful life.
Warranties: Many of our construction contracts contain warranty provisions covering defects in equipment, materials, design or workmanship that generally run from six months to one year after our customer accepts the project. Because of the nature of our projects, including contract owner inspections of the work both during construction and prior to acceptance, we have not experienced material warranty costs for these short-term warranties and therefore, do not believe an accrual for these costs is necessary. Certain construction contracts carry longer warranty periods, ranging from two to ten years for which we have accrued an estimate of warranty cost. The warranty cost is estimated based on our experience with the type of work and any known risks relative to the project
