1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1999 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _____________ Commission File No. 0-18350 GRANITE CONSTRUCTION INCORPORATED State of Incorporation: I.R.S. Employer Identification Delaware Number: 77-0239383 Corporate Administration: 585 West Beach Street Watsonville, California 95076 (831) 724-1011 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 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 9, 1999. Class Outstanding ----------------------------- ----------------- Common Stock, $0.01 par value 27,026,008 shares 2 GRANITE CONSTRUCTION INCORPORATED INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998.................................................4 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1999 and 1998..........................5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998.................................6 Notes to the Condensed Consolidated Financial Statements...........................................7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............11-17 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......18 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................20 Item 2. Changes in Securities............................................20 Item 3. Defaults upon Senior Securities..................................20 Item 4. Submission of Matters to a Vote of Security Holders..............................................20 Item 5. Other Information................................................20 Item 6. Exhibits and Reports on Form 8-K.................................21 Exhibit Index....................................................23 2 3 PART I. FINANCIAL INFORMATION 3 4 GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ========================================================================================================== SEPTEMBER 30, December 31, 1999 1998 - ---------------------------------------------------------------------------------------------------------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 37,918 $ 62,470 Short-term investments 35,171 58,954 Accounts receivable 237,197 174,748 Costs and estimated earnings in excess of billings 25,938 14,677 Inventories 14,451 12,773 Deferred income taxes 15,397 15,397 Equity in joint ventures 26,525 20,020 Other current assets 9,081 11,769 - ---------------------------------------------------------------------------------------------------------- Total current assets 401,678 370,808 - ---------------------------------------------------------------------------------------------------------- Property and equipment 236,056 205,737 - ---------------------------------------------------------------------------------------------------------- Other assets 46,035 50,026 - ---------------------------------------------------------------------------------------------------------- $ 683,769 $ 626,571 ========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 10,985 $ 10,787 Accounts payable 93,091 88,194 Billings in excess of costs and estimated earnings 67,034 50,619 Accrued expenses and other current liabilities 103,695 78,760 - ---------------------------------------------------------------------------------------------------------- Total current liabilities 274,805 228,360 - ---------------------------------------------------------------------------------------------------------- Long-term debt 64,892 69,137 - ---------------------------------------------------------------------------------------------------------- Deferred income taxes 27,792 27,792 - ---------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding - - Common stock, $0.01 par value, authorized 50,000,000 shares; 1999- issued and outstanding 27,162,318 shares; 1998- issued and outstanding 27,648,961 shares 272 277 Additional paid-in capital 49,037 45,080 Retained earnings 276,774 262,517 -------------------------------- 326,083 307,874 Unearned compensation (9,803) (6,592) -------------------------------- 316,280 301,282 - ---------------------------------------------------------------------------------------------------------- $ 683,769 $ 626,571 ========================================================================================================== The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE DATA) ===================================================================================================================== THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Revenue $ 418,703 $ 411,986 $ 962,799 $ 888,100 Cost of revenue 360,194 357,783 834,792 772,343 ---------------------------------------------------------------------- GROSS PROFIT 58,509 54,203 128,007 115,757 General and administrative expenses 25,621 23,002 70,035 61,089 ---------------------------------------------------------------------- OPERATING PROFIT 32,888 31,201 57,972 54,668 - --------------------------------------------------------------------------------------------------------------------- Other income (expense) Interest income 1,920 2,468 5,740 7,326 Interest expense (1,969) (2,206) (5,875) (6,375) Gain on sales of property and equipment 446 275 4,254 1,152 Other, net 616 1,360 478 2,016 ---------------------------------------------------------------------- 1,013 1,897 4,597 4,119 - --------------------------------------------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES 33,901 33,098 62,569 58,787 Provision for income taxes 13,052 12,577 24,089 22,339 - --------------------------------------------------------------------------------------------------------------------- NET INCOME $ 20,849 $ 20,521 $ 38,480 $ 36,448 ===================================================================================================================== Net income per share Basic $ 0.80 $ 0.77 $ 1.47 $ 1.37 Diluted $ 0.77 $ 0.75 $ 1.42 $ 1.33 Weighted average shares of common stock Basic 26,057 26,597 26,220 26,611 Diluted 27,007 27,530 27,143 27,314 Dividends per share $ 0.07 $ 0.06 $ 0.33 $ 0.24 ===================================================================================================================== The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS) =============================================================================================================== NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 - --------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 38,480 $ 36,448 Add (deduct) noncash items included in net income: Depreciation, depletion and amortization 31,631 28,702 Gain on sales of property and equipment (4,254) (1,152) Deferred income taxes - (1,185) Decrease in unearned compensation 3,218 2,514 Common stock contributed to ESOP 2,146 859 Equity in loss (gain) of affiliates 1,303 (1,339) Cash provided by (used in): Accounts and notes receivable (64,837) (62,620) Inventories (1,678) (4,243) Equity in construction joint ventures (6,505) (6,980) Other assets 682 (8,395) Accounts payable 4,897 18,212 Billings in excess of costs and estimated earnings, net 7,144 3,848 Accrued expenses 24,693 43,917 ----------------------------- Net cash provided by operating activities 36,920 48,586 - --------------------------------------------------------------------------------------------------------------- Investing Activities Additions to property and equipment (64,154) (45,283) Proceeds from sales of property and equipment 8,431 3,839 Purchases of short-term investments (63,421) (48,703) Maturities of short-term investments 87,204 36,505 Other 4,819 865 ----------------------------- Net cash used in investing activities (27,121) (52,777) - --------------------------------------------------------------------------------------------------------------- Financing Activities Additions to long-term debt - 60,000 Repayments of long-term debt (5,747) (46,344) Employee stock options exercised 71 423 Repurchase of common stock (19,930) (1,607) Dividends paid (8,745) (6,067) ----------------------------- Net cash (used in) provided by financing activities (34,351) 6,405 - --------------------------------------------------------------------------------------------------------------- Increase (Decrease) in cash and cash equivalents (24,552) 2,214 Cash and cash equivalents at beginning of period 62,470 54,359 ----------------------------- Cash and cash equivalents at end of period $ 37,918 $ 56,573 =============================================================================================================== Supplementary Information Cash paid during the period for: Interest $ 3,020 $ 4,218 Income taxes 10,335 14,382 Noncash investing and financing activity: Restricted stock issued for services $ 6,429 $ 3,795 Dividends accrued but not paid 1,901 1,657 Financed acquisition of property and equipment 1,700 - =============================================================================================================== The accompanying notes are an integral part of these condensed consolidated financial statements. 6 7 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. BASIS OF PRESENTATION: The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position at September 30, 1999 and the results of operations and cash flows for the periods presented. The December 31, 1998 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Interim results are subject to significant seasonal variations and the results of operations for the nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. 2. INVENTORIES: Inventories consist primarily of quarry products valued at the lower of average cost or market. 3. PROPERTY AND EQUIPMENT: --------------------------------------------------------------------------------- SEPTEMBER 30, December 31, 1999 1998 (UNAUDITED) --------------------------------------------------------------------------------- Land $ 31,709 $ 30,195 Quarry property 42,046 35,862 Buildings and leasehold improvements 21,076 20,595 Equipment and vehicles 489,456 443,095 Office furniture and equipment 4,534 4,835 ------------------------------ 588,821 534,582 Less accumulated depreciation, depletion and amortization 352,765 328,845 --------------------------------------------------------------------------------- $ 236,056 $ 205,737 ================================================================================= 7 8 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 4. EARNINGS PER SHARE: In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted earnings per share is provided as follows: ---------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ---------------------------------------------------------------------------------------------------------------------- NUMERATOR - BASIC AND DILUTED EARNINGS PER SHARE Net income $ 20,849 $ 20,521 $ 38,480 $ 36,448 ====================================================================================================================== DENOMINATOR - BASIC EARNINGS PER SHARE Common stock outstanding 27,173 27,622 27,322 27,618 Less restricted stock outstanding 1,116 1,025 1,102 1,007 ------------------------------------------------------------- TOTAL 26,057 26,597 26,220 26,611 ------------------------------------------------------------- Basic earnings per share $ 0.80 $ 0.77 $ 1.47 $ 1.37 ====================================================================================================================== DENOMINATOR - DILUTED EARNINGS PER SHARE Denominator - Basic Earnings per Share 26,057 26,597 26,220 26,611 Effect of Dilutive Securities: Common stock options 40 72 42 68 Warrants 221 217 226 148 Restricted stock 689 644 655 487 ------------------------------------------------------------- TOTAL 27,007 27,530 27,143 27,314 Diluted earnings per share $ 0.77 $ 0.75 $ 1.42 $ 1.33 ====================================================================================================================== 5. CONTINGENCIES: The Company is currently a party to various claims and legal proceedings, none of which is considered by management to be material to the Company's financial position. 6. RECLASSIFICATIONS: Certain prior year financial statement items have been reclassified to conform to the current year's presentation. 7. SUBSEQUENT EVENTS: Subsequent to September 30, 1999 and through November 9, 1999, the Company repurchased 250,000 shares of its common stock for a total purchase price of $4.6 million. 8 9 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 8. BUSINESS SEGMENT INFORMATION: The Company has two reportable segments: the Branch Division and the Heavy Construction Division (HCD). The Branch Division is comprised of branch offices that serve local markets, while HCD pursues major infrastructure projects throughout the nation. HCD generally has large heavy civil projects with contract amounts in excess of $15 million and contract durations greater than two years, while the Branch Division projects are typically smaller in size and shorter in duration. HCD has been the primary participant in the Company's construction joint ventures. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating profit or loss which does not include income taxes, interest income, interest expense or other income (expense). Information about Profit and Assets: THREE MONTHS ENDED SEPTEMBER 30, HCD BRANCH TOTAL ----------------------------------------------------------------------------------------- 1999 Revenues from external customers $ 97,656 $ 321,047 $ 418,703 Intersegment revenue transfer (6,411) 6,411 - ----------------------------------------------- Net revenue 91,245 327,458 418,703 Depreciation and amortization 3,985 14,774 18,759 Operating profit 7,842 34,768 42,610 ----------------------------------------------------------------------------------------- 1998 Revenues from external customers $ 86,358 $ 325,628 $ 411,986 Intersegment revenue transfer (6,892) 6,892 - ----------------------------------------------- Net revenue 79,466 332,520 411,986 Depreciation and amortization 3,826 13,244 17,070 Operating profit 2,847 37,137 39,984 ----------------------------------------------------------------------------------------- 9 10 GRANITE CONSTRUCTION INCORPORATED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 8. BUSINESS SEGMENT INFORMATION, CONTINUED: Information about Profit and Assets, continued: ------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, HCD BRANCH TOTAL ------------------------------------------------------------------------------------------- 1999 Revenues from external customers $ 278,110 $ 684,689 $ 962,799 Intersegment revenue transfer (17,061) 17,061 - ------------------------------------------------- Net revenue 261,049 701,750 962,799 Depreciation and amortization 6,045 22,450 28,495 Operating profit 22,546 60,442 82,988 Property and equipment 28,921 190,372 219,293 ------------------------------------------------------------------------------------------- 1998 Revenues from external customers $ 228,717 $ 659,383 $ 888,100 Intersegment revenue transfer (20,454) 20,454 - ------------------------------------------------- Net revenue 208,263 679,837 888,100 Depreciation and amortization 5,522 20,114 25,636 Operating profit 9,953 69,631 79,584 Property and equipment 26,830 171,897 198,727 ------------------------------------------------------------------------------------------- Reconciliation of Segment Operating Profit to the Company's Consolidated Totals: ----------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 ----------------------------------------------------------------------------- Total profit for reportable segments $ 42,610 $ 39,984 Other income 1,013 1,897 Unallocated other corporate expenses (9,722) (8,783) ----------------------------------------------------------------------------- Income before provision for income taxes $ 33,901 $ 33,098 ============================================================================= ----------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 ----------------------------------------------------------------------------- Total profit for reportable segments $ 82,988 $ 79,584 Other income 4,597 4,119 Unallocated other corporate expenses (25,016) (24,916) ----------------------------------------------------------------------------- Income before provision for income taxes $ 62,569 $ 58,787 ============================================================================= 10 11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING DISCLOSURE: This report contains forward-looking statements such as the costs of planned year 2000 modifications and expected dates of year 2000 plan completion, the most reasonably likely worst case year 2000 scenario, and the impact of legislation, availability of highway funds and economic conditions on the Company's future results. Additionally, forward-looking statements include statements that can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or comparable terminology, or by discussions of strategy. All such forward-looking statements are subject to risks and uncertainties that could cause actual results of operations and financial condition and other events to differ materially from those expressed or implied in such forward-looking statements. Specific risk factors include, without limitation, changes in the composition of applicable federal and state legislation appropriation committees; federal and state appropriation changes for infrastructure spending; the general state of the economy; competition and pricing pressures; and state referendums and initiatives. Forward-looking statements regarding the year 2000 issue carry risk factors which include, without limitation, the availability and cost of personnel trained in these areas; the ability to locate and correct all relevant computer codes; changes in consulting fees and costs to remediate or replace hardware and software; changes in non-incremental costs resulting from redeployment of internal resources; timely responses to and corrections by third parties such as significant customers and suppliers; and similar uncertainties. RESULTS OF OPERATIONS Revenue for the quarter ended September 30 was $418.7 million, bringing the nine month total to $962.8 million, an increase of $6.7 million, or 1.6%, and $74.7 million, or 8.4% respectively, over the same periods last year. The increase in revenue for the quarter reflects a 14.8% increase in revenue from the Company's Heavy Construction Division which was partially offset by a 1.5% decrease in revenue from the Company's Branch Division. The increase for the nine months is due to an increase in volume in both Divisions. For the nine months ended September 30, 1999, revenue from public sector contracts increased $6.9 million to $622.8 million, or 64.7% of total revenue, from $615.9 million, or 69.4% of total revenue in 1998. Revenue from private sector contracts of $218.9 million, or 22.7% of total revenue, increased $50.8 million from the nine months ended September 30, 1998 level of $168.1 million. 11 12 ------------------------------------------------------------------------------------------------------- REVENUE BY MARKET SECTOR (IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, VARIANCE 1999 1998 AMOUNT PERCENT ------------------------------------------------------------------------------------------------------- CONTRACTS Federal $ 25,173 $ 36,476 $ (11,303) (31.0) State 410,252 387,698 22,554 5.8 Local 187,403 191,719 (4,316) (2.3) ----------------------------------------------------------------- Total public sector 622,828 615,893 6,935 1.1 Private sector 218,878 168,130 50,748 30.2 Aggregate sales 121,093 104,077 17,016 16.3 ----------------------------------------------------------------- $ 962,799 $ 888,100 $ 74,699 8.4 ======================================================================================================= Backlog at September 30, 1999 was $971.2 million, a $75.3 million increase from September 30, 1998 and a $69.6 million increase from December 31, 1998. New awards for the quarter totaled $420.5 million and included a $32.9 million tollway contract in Texas and a $48.9 million highway contract in North Carolina. The private sector backlog increased to 17.1% of total backlog from 12.2% at December 31, 1998 and 14.9% at September 30, 1998. The increase in private sector backlog primarily reflects a toll road project in Texas, as well as the stronger market for housing and commercial site development. ---------------------------------------------------------------------------------------------------- BACKLOG BY MARKET SECTOR (IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, VARIANCE 1999 1998 AMOUNT PERCENT ---------------------------------------------------------------------------------------------------- CONTRACTS Federal $ 21,722 $ 22,550 $ (828) (3.7) State 604,205 635,833 (31,628) (5.0) Local 178,986 133,138 45,848 34.4 ----------------------------------------------------------------- Total public sector 804,913 791,521 13,392 1.7 Private sector 166,261 110,071 56,190 51.0 ---------------------------------------------------------------------------------------------------- $ 971,174 $ 901,592 $ 69,582 7.7 ==================================================================================================== Gross profit for the quarter ended September 30, 1999 was $58.5 million, or 14.0% of revenue, as compared to $54.2 million, or 13.2% of revenue, for 1998. Gross profit as a percent of revenue was 13.3% for the nine months ended September 30, 1999 and 13.0% for 1998. The third quarter 1999 gross margin reflected our ability to successfully execute the work from a strong backlog and continued strong margins on the Company's turn business work. 12 13 General and administrative expenses for the three months ended September 30, 1999 increased $2.6 million to $25.6 million or 6.1% of revenue from $23.0 million or 5.6% of revenue in the corresponding period in 1998. For the nine months, general and administrative expenses increased $8.9 million in 1999 over the same period in 1998 and increased as a percentage of revenue to 7.3% from 6.9% last year. The increase in both the three and nine month periods is primarily due to increased salaries and wages, burden and other costs associated with increased volume of work and increased profitability. Additionally, the increase in the nine month period reflects the absence of a bad debt recovery received in second quarter 1998. The Heavy Construction Division's contribution to operating income increased in the three month and nine month periods ended September 30, 1999 over the same periods in 1998 due primarily to an absence of the unusually wet weather conditions that impacted the 1998 periods and increased volume related to the current favorable market conditions. The Branch Division's contribution to operating income for the three months ended September 30, 1999 decreased from 1998 due to slightly lower revenue and higher general and administrative expenses to support expected growth. For the nine month period, the Branch Division's contribution to operating income decreased due primarily to the absence of the El Nino related emergency work that carried higher than normal margins and the absence of a bad debt recovery received in the second quarter of 1998. Other income decreased $0.9 million in the three months ended September 30, 1999 over the corresponding period in 1998 due primarily to a lower contribution from the Company's equity method investments. Net income for the quarter ended September 30, 1999 was $20.8 million, or $0.77 per diluted share, an increase of $0.3 million or $0.02 per diluted share from the quarter ended September 30, 1998. For the nine months, net income was $38.5 million, or $1.42 per diluted share, a $2.0 million or $0.09 per diluted share increase from the prior year. OUTLOOK We are entering our fourth quarter with strong revenue and margin momentum and are in a good position to improve on our record-breaking performance in 1998. We have a solid backlog and given ample time to build the work, i.e. the absence of significant rainfall before the end of November and other factors, we believe we are on track for another great year. Looking at our private business, the California economy continues to produce a lively private sector market. We are still seeing a steady stream of residential site development projects coming in for review and possible bid or negotiation. According to the Center for Continuing Study of the California Economy, housing construction is slowly rebounding. New residential permits reached 125,000 in 1998 and are on pace to reach 150,000 units this year with further growth expected in 2000 and beyond, the group reported. 13 14 Looking at the public side of our business, we have observed that the increased TEA-21 funds have yet to create significant new business opportunities. Perhaps the TEA-21 money took the various state departments of transportation by surprise and they had not planned appropriately for the additional expenditures. Our view is that the market will begin to see the impact from the additional TEA-21 dollars in 2000. If that is the case, any large projects that the Company might book next year, especially in the second half, would not likely have an impact on our bottom line until 2001. Moreover, California continues to wrestle with the "contracting out" issue. As you may recall from previous communications, the state transportation department is prohibited from using private engineering companies to help design the additional highways and bridges the state could let out for bid with the additional monies it receives as a result of TEA-21. The private engineering companies had hoped to place an initiative on the March 2000 ballot to allow for contracting out, but it now appears that the initiative will be pushed back to the November, 2000 ballot. The industry also suffered a minor setback on SCA 3, the constitutional amendment that would place an initiative on the November, 2000 ballot to amend the state constitution to allow renewal of expiring half-cent sales taxes for transportation purposes with a simple majority for a period of 20 years. The bill failed to garner the two-thirds majority needed for passage in the Assembly. Granite is part of a broad-based coalition that is seeking to generate the additional support needed to gain a two-thirds majority so that the bill can be brought to the Assembly floor for a vote next Spring and consequently placed on the ballot in November. Basically, as a general statement, we have observed that the political environment is friendly and the engineering and construction community is more politically active. Bidding activity is also very active. The year 2000 should render eight to ten large design-build projects for possible award during the year. Our Heavy Construction Division (HCD) is setting its design-build sites on a monorail project in Las Vegas, two large bridge projects in Florida, a light-rail project in Minneapolis and several large highway projects in California, Texas and Massachusetts. HCD also anticipates very robust bidding activity in its core markets of Texas, Florida and the Southeast. The Company's Branch Division also anticipates a strong bidding environment next year, given the strength of the private sector and the flow of TEA-21 dollars. Demand for construction materials is expected to stay strong in 2000 and the division will continue to look for acquisition opportunities to either expand to areas contiguous to its existing network or fill-in an existing market. 14 15 In summary, our expectations for 2000 are for backlog to build, and based on our initial forecast, revenue and earnings to be flat in 2000. This is however, a conservative view, as there are a number of variables that are unknown to us at this time, including timing of project awards, weather and general economic conditions. As some of these variables become known, we will get a better sense of how our year portends, and we will communicate this information with our shareholders in a fair and timely manner. We are very proud of our bidding and building teams as they have ramped up to take advantage of an excellent market. We are excited about our business, and plan to take the momentum we've generated in 1999 into the new millennium to create yet another very successful year. LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------------------------------------------------- DOLLARS IN THOUSANDS 1999 1998 - ----------------------------------------------------------------------------------- Cash and cash equivalents, September 30 $ 37,918 $ 56,573 Net cash provided by (used in): Operating activities 36,920 48,586 Investing activities (27,121) (52,777) Financing activities (34,351) 6,405 - ----------------------------------------------------------------------------------- Cash provided by operating activities of $36.9 million for the nine months ended September 30, 1999 represents a $11.7 million decrease from the 1998 amount for the same period. Changes in cash provided from operations reflect seasonal variations based on the amount and progress of work being performed. Cash used by investing activities in 1999 decreased $25.7 million due to a higher level of short-term investment maturities partially offset by increased property and equipment purchases. Cash used by financing activities in 1999 primarily reflects the repurchase of the Company's common stock on the open market and the absence of the long-term debt additions relating to the issuance of the Senior Notes in 1998. Subsequent to September 30, 1999 and through November 9, 1999, the Company repurchased 250,000 shares of its common stock for a total purchase price of $4.6 million. The Company's current borrowing capacity under its revolving line of credit is $75 million of which $61.7 was available on September 30, 1999. The Company believes that its current cash balances combined with cash flows from operations and cash available under its revolving credit agreements will be sufficient to meet its operating needs, anticipated capital expenditure plans and other financial commitments at least through 2000. 15 16 IMPACT OF THE YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The issue arises if date-sensitive software recognizes a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company's information technology systems consist primarily of hardware and software purchased from outside parties. The vendor for the Company's enterprise-wide software has informed the Company that the version of its software that the Company is currently utilizing is Year 2000 ready and the Company has completed its testing to verify that this is the case and the testing plan and results have been reviewed by a third party. The Company is in the process of addressing the Year 2000 readiness of other software and hardware, including embedded chips, being used in its business. The Company is utilizing a seven step process in addressing readiness of these other systems: (1) awareness; (2) inventory of all systems and documentation; (3) assessment to identify any areas of noncompliance; (4) remediation/renovation of any noncompliant systems; (5) verification of compliance through testing and/or vendor certification; (6) implementation of any necessary changes revealed during verifications; and (7) monitoring of the results of implementation. The Company expects to have completed this process for its non-enterprise software and hardware in the fourth quarter of 1999. The Company has identified and has made inquiries of its significant suppliers and large public and private sector customers to determine the extent to which the Company is vulnerable to those third parties' failure to solve their own Year 2000 issues. The Company expects that the process of continued review and inquiry of these significant suppliers and customers will be ongoing through the end of 1999. However, there can be no guarantee that the systems of other companies or public agencies with which the Company does business will be timely converted, or that failure to convert by another company or public agency would not have a material adverse effect on the Company. The Company's most reasonably likely worst case Year 2000 scenario would be an interruption in work or cash flow resulting from unanticipated problems encountered with the information systems of the Company, or of any of the significant third parties with whom the Company does business. The Company believes that the risk of significant business interruption due to unanticipated problems with its own systems is low based on the progress of the Year 2000 project to date. If unforeseen internal disruptions occur, the Company believes that its existing disaster recovery program, which includes the manual processing of certain key transactions, would significantly mitigate the impact. The Company's highest risk relates to significant suppliers or customers failing to remediate their Year 2000 issues in a timely manner. Relating to its suppliers, the Company has identified and will continue to identify alternative suppliers. The Company's suppliers are generally locally or regionally based, which tends to lessen the Company's exposure from the lack of readiness of any single supplier. The risk relating to the Company's customers 16 17 relates primarily to any delay in receipt of payment due to a customer's unresolved Year 2000 issue. The Company's existing financial resources will help to mitigate such an impact and the Company will continue to assess this risk as it receives communications about the Year 2000 status of its customers. The Company estimates that costs to address the Year 2000 issue will total approximately $865,000, including costs already incurred. These estimated costs include consulting fees and costs to remediate or replace hardware and software as well as non-incremental costs resulting from redeployment of internal resources. To date, approximately $845,000 has been incurred and expensed related to the Year 2000 issue. The Company's Year 2000 costs will be funded from its operating cash flows. The Company does not expect its Year 2000 efforts to have any significant impact on other information technology projects. 17 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's exposure to market risk since December 31, 1998. 18 19 PART II. OTHER INFORMATION 19 20 ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None 20 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit 27 - Financial Data Schedule b) Reports on Form 8-K None 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GRANITE CONSTRUCTION INCORPORATED Date: November 12, 1999 By: /s/ William E. Barton ------------------- ------------------------------------------ William E. Barton Senior Vice President and Chief Financial Officer 22 23 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE - ------- ----------- ---- 27 Financial Data Schedule .............................. 24 23