GRANITE CONSTRUCTION INC - Annual Report: 2007 (Form 10-K)
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, 2007
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 $2.3
billion as of June 30, 2007, 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, 2008, 38,952,477
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 19, 2008, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 2007.
FORWARD-LOOKING
DISCLOSURE
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 more specifically described in this Report under
“Item 1A. Risk Factors.” Granite undertakes no obligation to publicly 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
We were
originally incorporated in 1922 as Granite Construction Company. In 1990,
Granite Construction Incorporated was incorporated in Delaware as the holding
company for Granite Construction Company and its wholly owned subsidiaries.
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.
Operating
Structure
Historically,
we were organized into two operating segments, the Branch Division and the Heavy
Construction Division (“HCD”). The Branch Division was comprised of branch
offices that served local markets, while HCD was composed of regional offices
and pursued major infrastructure projects throughout the nation.
In
February 2007, we announced an organizational realignment of our business
operations which is designed to accommodate growth of our vertically integrated
Branch business in the West and improve profitability of our large, complex HCD
projects. This realignment involved the reorganization of our
operating divisions geographically into “Granite West” and “Granite
East.” Granite West includes the operations of our former Branch Division
as well as the western portion of our large project business that was formerly
included in HCD. Granite West retains our successful decentralized
operating structure, with each of its branch locations aligning under one of
three operating groups: Northwest, Northern California and
Southwest. Granite East includes the eastern portion of our large
project business that had been included in HCD and is aligned to focus on
enhancing project management oversight and discipline from estimating through
execution. With the Division office in Lewisville, Texas, Granite
East also operates out of three regional offices: the Central Region,
based in Lewisville, Texas; the Southeast Region, based in Tampa, Florida;
and the Northeast Region, based in Tarrytown, New York.
During 2007,
we completed the reassignment of our large projects in the West from our former
Heavy Construction Division to our Granite West Division (with the exception of
certain projects nearing completion which remain with our Granite East
Division) and made substantial progress on other aspects of the
realignment. As a result, we are reporting Granite West and
Granite East as new reportable segments. Prior period results have
been reclassified to conform to the new organizational structure (see Note
1 of the “Notes to the Consolidated Financial
Statements”).
The
following table shows the impact on revenue and gross profit of the
three projects reassigned from our former Heavy Construction Division to
the newly created Granite West:
|
Granite
West
|
Years ended December
31,
|
|||||||||||
|
(in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
||||||
|
Branch
Division revenue
|
|
$
|
1,828,024
|
|
|
$
|
1,848,725
|
|
|
$
|
1,591,545
|
|
|
Reassigned
projects revenue
|
|
|
100,727
|
|
|
|
79,271
|
|
|
|
7,913
|
|
|
Granite
West Division revenue
|
|
|
1,928,751
|
|
|
|
1,927,996
|
|
|
|
1,599,458
|
|
|
Branch
Division gross profit
|
|
|
357,871
|
|
|
|
364,878
|
|
|
|
253,890
|
|
|
Reassigned
projects gross profit (loss)
|
|
|
12,558
|
|
|
|
(14,291
|
)
|
|
|
-
|
|
|
Granite
West Division gross profit
|
|
|
370,429
|
|
|
|
350,587
|
|
|
|
253,890
|
|
|
Granite
East
|
Years ended December
31,
|
|
||||||||||
|
(in
thousands)
|
2007
|
|
2006
|
|
2005
|
|
||||||
|
Heavy
Construction Division revenue
|
|
$
|
869,178
|
|
|
$
|
1,085,888
|
|
|
$
|
1,030,109
|
|
|
Reassigned
projects revenue
|
|
|
(100,727
|
)
|
|
|
(79,271
|
)
|
|
|
(7,913
|
)
|
|
Granite
East Division revenue
|
|
|
768,451
|
|
|
|
1,006,617
|
|
|
|
1,022,196
|
|
|
Heavy
Construction Division gross profit (loss)
|
|
|
38,382
|
|
|
|
(86,856
|
)
|
|
|
50,470
|
|
|
Reassigned
projects gross profit
|
|
|
(12,558
|
)
|
|
|
14,291
|
|
|
|
-
|
|
|
Granite
East Division gross profit (loss)
|
|
|
25,824
|
|
|
|
(72,565
|
)
|
|
|
50,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
backlog related to the three reassigned projects was $208.0 million
and $122.1 million at December 31, 2006 and 2005,
respectively.
Granite West: In 2007 and
2006, Granite West contract revenue and sales of construction
materials was $1.9 billion (70.4% and 64.9% 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 and bridges. Typical major private
sector contracts 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 currently has 15 branch offices
in the western United States with additional satellite operations. Each
branch reports under one of three operating groups: Northwest, Northern
California and Southwest. Although most Granite West projects are started
and completed within a year, the division also has the capability of
constructing larger projects and currently has five active projects,
each with total contract revenue greater than $50.0 million, including two
projects from our legacy Heavy Construction Division. In
2007, individual branch revenues ranged from $72.7 million to $236.4
million.
As part
of our strategy, our branches mine aggregates and/or operate plants that process
aggregates into construction materials for internal use and for sale to others.
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 43.0% during 2007 and has ranged
from 37.0% to 44.0% over the
last five years. The remainder is sold to unaffiliated parties and accounted for
the following:
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||
| (in thousands) | ||||||||||
|
Material
sales to unaffiliated parties
|
$
|
375,700
|
$
|
410,159
|
$
|
334,290
|
||||
|
Percent
of total revenue
|
13.7
|
%
|
13.8
|
%
|
12.7
|
%
|
||||
|
Percent
of Granite West revenue
|
19.5
|
%
|
21.3
|
%
|
20.9
|
%
|
||||
Granite East: In 2007,
revenue from Granite East was $768.5 million (28.1% of our total revenue),
compared with $1.0 billion (33.9% of our total revenue) in 2006. Granite
East operates in the eastern portion of the United States with a focus on large,
complex infrastructure projects including 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.
With
Division offices in Lewisville, Texas, Granite East also operates out of three
regional offices: the Central Region, based in Lewisville, Texas; the Southeast
Region, based in Tampa, Florida; and the Northeast Region, based in Tarrytown,
New York. These
regional offices 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 an
average contract size of greater than $100.0 million.
Both
Granite East and Granite West 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 Operation”).
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 design and construction. Revenue from design/build
projects represented 62.2% and 65.3% of Granite East revenue in 2007
and 2006, respectively. Revenue from design/build projects represented 8.1%
and 6.0% of Granite West revenue in 2007 and 2006,
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: We
purchase, develop, operate, sell and otherwise invest in real estate
through our Granite Land Company subsidiary (“GLC”), which also provides real
estate services for other Granite operations. GLC’s portfolio of
projects includes both commercial and residential development and is
geographically diversified throughout the West and Texas. In 2007, revenue
from GLC was $40.7 million (1.5% of our total revenue), compared with
$35.0 million (1.2% of our total revenue) in 2006.
Additional
information about our business segments is contained in Note
16
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 this objective:
Employee
Development - We
believe that our employees are key to the successful implementation of our
business strategies. Significant resources are employed to attract, nurture and
retain extraordinary talent and fully develop 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 and 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 reliable source of revenue and income from the sale of construction
materials to unaffiliated parties.
Selective
Bidding - We focus our resources to bid on jobs that meet our
selective bidding criteria, which include analyzing the risk of a potential job
in relation to available personnel to estimate and prepare the proposal, as
well as personnel to effectively manage and build the project, degree of
competition, experience with the type of work, relationship with the owner,
local resources and partnerships, equipment resources, size and complexity
of the job and profitability.
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.
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.
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.
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 throughout the nation where we have an established
presence. Additionally, we intend to leverage our financial capacity by
investing in a limited number of real estate development projects that we
believe will provide an acceptable return on our investment.
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 effective measures
to protect the environment and maintain good community relations. We continually
monitor our performance in this area and take our responsibilities to the
communities where we work and compliance with government agency
requirements seriously.
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 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 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 the numerous state departments of transportation as
well as local transit authorities and federal agencies (see
“Concentrations”
in Note 1 of the “Notes to the Consolidated Financial
Statements”).
Backlog
Our
backlog includes the total value of awarded contracts that have not been
completed, including our proportionate share of unconsolidated joint venture
contracts. Our backlog was approximately $2.1 billion and $2.3 billion
at December 31, 2007 and 2006,
respectively. Approximately $1.2 billion of the December 31, 2007 backlog is
expected to be completed during 2008. With the
exception of certain federal government contracts, we include a construction
project in our backlog at such time as a contract is awarded and funding is in
place. Substantially
all of the contracts in our 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”). Certain
Granite West projects are added and completed within each year and therefore not
reflected in our year-end backlog. Backlog by segment is presented in
“Backlog” under “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operation.”
Equipment and
Plants
We own
many pieces of equipment, including cranes, bulldozers, barges, backhoes,
excavators, scrapers, motor graders, loaders, trucks, pavers and rollers as well
as construction materials processing plants. In 2007 and 2006, we spent
approximately $88.4 million and
$91.0 million, respectively, for construction equipment, plants and vehicles.
Additionally, our equipment fleet increased in 2007 as a result of our
acquisitions (see Note 17 of the “Notes to the Consolidated Financial
Statements”). At December 31, 2007 and 2006, we owned the following construction
equipment, plants and vehicles:
| December 31, |
2007
|
|
|
2006
|
||||
|
Heavy
construction equipment (units)
|
3,366 |
2,641
|
||||||
|
Trucks,
truck-tractors and trailers and vehicles (units)
|
5,579 |
5,338
|
||||||
|
Aggregate
crushing plants
|
55
|
55
|
||||||
|
Asphalt
concrete plants
|
69
|
53
|
||||||
|
Portland
cement concrete batch plants
|
25
|
25
|
||||||
|
Asphalt
rubber plants
|
5
|
4
|
||||||
|
Lime
slurry plants
|
9
|
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, 2007, we employed approximately 2,100 salaried employees,
who work in management, estimating and clerical capacities, plus
2,100 hourly employees. The total number of hourly personnel employed by us
is subject to the volume of construction in progress. During 2007, the number of
hourly employees ranged from 2,100 to 5,400
and averaged approximately 4,600. Three of our wholly owned subsidiaries -
Granite Construction Company, Granite Construction Northeast,
Inc. and Wilder Construction Company (“Wilder”) 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 16.8% equity
ownership through our Employee Stock Ownership Plan, our Profit Sharing and 401k
Plan and performance-based incentive compensation arrangements at December 31,
2007. 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
usually 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 and
national 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 the market for projects in one sector contracts,
these competitors will move to the other. This greater competition can 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 and national
construction companies, which may or may not be larger than Granite. 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, 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 of performing all the work for the specified amount. The
percentage of fixed price contracts in our backlog increased to
approximately 72.0% at December 31, 2007 compared with approximately
68.0% at December 31, 2006. 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
carry additional risks such as the risk inherent in estimating quantities
and prices before the project design is completed and design error risk,
including higher construction costs due to any design errors, liability to
the contract owner for the design of the project and right-of-way and permit
acquisition costs. 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 for 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. We manage this risk by reviewing the size of the subcontract, the
financial stability of the subcontractor and other factors and, based on this
review, 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 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”).
Government and Environmental
Regulations
Our
operations are subject to compliance with regulatory requirements of federal,
state and local government agencies and authorities, including regulations
concerning workplace safety, labor relations and disadvantaged businesses.
Additionally, all of 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
emissions from in-use off-road diesel equipment to meet emission targets
proposed for each year from 2010 to 2020. The emission targets will require
California off-road diesel equipment owners to retrofit equipment with diesel
particulate filters or replace equipment with new engine technology as it
becomes available. Between
now and the year 2020, Granite will be required to implement an equipment
management strategy that includes accelerated turnover of off-road diesel
equipment and retrofitting equipment with CARB approved diesel particulate
filters. This will increase equipment related expenses in an amount
which has not yet been determined.
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.
|
·
|
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 the impact on the labor supply due to
general economic conditions as well as our ability to provide a
competitive compensation package and work
environment.
|
|
·
|
Reductions in government
funding could have a negative impact on our business. 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.
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|
·
|
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.
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|
·
|
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.
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|
·
|
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 Operation,”
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 and the results of our
operations.
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|
·
|
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.
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·
|
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.
|
|
· |
Our 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. 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 with a resulting decrease in our recorded net worth. |
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·
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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.
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·
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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 to do so and there is no assurance that we
will be able to secure and permit reserves in the
future.
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·
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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 of 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.
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|
·
|
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.
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|
·
|
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.
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·
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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.
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·
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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 and fire our asphalt concrete
processing plants and also 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.
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·
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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.
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·
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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.
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·
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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.
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·
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A significant portion of our
revenue is from government funded contracts. Approximately
70% of our consolidated revenue in 2007 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, 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.
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·
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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
10
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.
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||
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·
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Our 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 backlog will be realized or, if realized,
will result in profits. Projects may remain in our backlog for an extended
period of time. In addition, project cancellations or scope adjustments
may occur, from time to time, with respect to contracts reflected in our
backlog. Backlog reductions can adversely affect the revenue and profit we
actually receive from contracts reflected in our backlog. Future project
cancellations and scope adjustments could further reduce the dollar amount
of our backlog and the revenues and profits that we actually receive.
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|
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, 2007:
|
|
Land Area
(acres)
|
Building Square
Feet
|
Permitted Aggregate
Reserves (tons)
|
Unpermitted
Aggregate Reserves (tons)
|
|
Office
and shop space (owned and leased)
|
1,300
|
1,300,000
|
N/A
|
N/A
|
|
Owned
quarry property
|
N/A
|
N/A
|
424.0 million
|
435.0 million
|
|
Leased
quarry property
|
N/A
|
N/A
|
359.0 million
|
565.0 million
|
|
Real
estate held for development and sale
|
2,500
|
57,000
|
N/A
|
N/A
|
Approximately
83% 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.
Item 3. LEGAL
PROCEEDINGS
Silica
Litigation
Our
wholly owned subsidiary Granite Construction Company (“GCCO”) is one of
approximately 100 to 300 defendants in nine active California Superior Court
lawsuits. Of the nine lawsuits, five were filed against GCCO in 2005 and four
were filed against GCCO in 2006, in Alameda County (Riley vs. A-1 Aggregates, et
al.; 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 fifteen 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. 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 future bidding on MnDOT work by joint venture
members of MnTC. MnTC is fully cooperating with the Agencies and the
USDOJ and, on July 2, 2007, presented its 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, although informal
discussions have been continuing and we cannot rule out the possibility of a
criminal action being brought against MnTC or one of its members.
I-494
Project DBE Issues
The I-494
project was performed by a joint venture (“JV”) that consisted of GCCO and
another unrelated party. GCCO was the managing partner of the JV,
with a 60% interest. MnDOT is the contracting agency for this
federally funded project. MnDOT conducted a review of the DBE program
maintained by the JV for the I-494 project. MnDOT has initially
identified certain compliance issues in connection with the JV’s DBE program,
and as a result, has determined that the JV failed to meet the DBE utilization
criteria as represented by the JV. Although there has been no formal
administrative subpoena, nor has a civil complaint been filed in connection with
the administrative reviews, MnDOT has proposed a monetary sanction of $200,000
against the JV and specified DBE training for personnel from the members of the
JV as a condition of future bidding on MnDOT work by joint venture members of
the JV. The JV is fully cooperating with MnDOT and has the
opportunity to present its response to MnDOT’s initial
determinations. The JV is investigating MnDOT’s initial
determinations and preparing its response thereto. Therefore, we
cannot reasonably estimate the amount of any monetary sanction or what, if any,
other sanction conditions might ultimately be imposed.
US
Highway 20 Project
GCCO and
its subsidiary, Wilder 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 violations of the stormwater permit. The Oregon Department of
Environmental Quality (“DEQ”) has issued notices of violation and fine of
$90,000 to ODOT and $240,000 to YRC for these alleged violations. YRC
has filed an answer to the notice of violation and is attempting to negotiate
resolution with the DEQ. 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 or civil charges, if any, will be
brought or against whom. Therefore, we cannot estimate what, if any, criminal or
civil penalty or conditional assessment will result from this
investigation.
Other
Legal Proceedings
We are a
party to a number of other legal proceedings arising in the normal course of
business which, from time to time, include 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. 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 2007, 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
|
|
William
G. Dorey
|
63
|
President,
Chief Executive Officer and Director
|
|
Mark
E. Boitano
|
59
|
Executive
Vice President and Chief Operating Officer
|
| William E. Barton | 63 |
Senior
Vice President and Chief Financial Officer
|
| Michael F. Donnino | 53 |
Senior
Vice President and Granite East Division Manager
|
|
James
H. Roberts
|
51
|
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 the Company 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.
Mr. Barton
has been an employee of the Company since 1980 and has served as Senior Vice
President and Chief Financial Officer since 1999, and as Vice President and
Chief Financial Officer from 1990 to 1999. In 1997, he became a director of TIC
Holdings, Inc. Mr. Barton received a B.S. degree in Accounting and Finance from
San Jose State University in 1967 and an M.B.A. degree from Santa
Clara University in 1973.
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.
Item 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Our
common stock trades on the New York Stock Exchange under the ticker symbol GVA.
See “Quarterly Results” under “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operation” for a two-year summary of
quarterly dividends and high and low sales prices of our stock.
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.
As of
February 13, 2008, there were 38,952,477 shares of our common stock
outstanding held by 1,259 shareholders of record.
During
the three months ended December 31, 2007, 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,
2007:
|
Period
|
Total number of shares
purchased
|
Average price paid per
share
|
Total number of shares
purchased as part of publicly announced plans or
programs2
|
Approximate dollar value of
shares that may yet be purchased under the plans or
programs2
|
|||||||||
|
October
1, 2007 through October 31, 2007
|
-
|
-
|
-
|
$
|
200,000,000
|
||||||||
|
November
1, 2007 through November 30, 2007
|
1,672,930
|
$ |
36.13
|
1,672,930
|
$
|
139,552,782
|
|||||||
|
December
1, 2007 through December 31, 20071
|
798,836
|
$ |
40.50
|
797,500
|
$
|
107,253,170
|
|||||||
|
|
2,471,766 | $ |
37.54
|
2,470,430
|
|||||||||
1The
number of shares purchased includes 1,336 shares purchased in connection
with employee tax withholding for shares granted under our Amended and Restated
1999 Equity Incentive Plan and shares purchased under our share repurchase
program.
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 the new 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. This new program replaced a $25.0 million
share repurchase program announced in 2002.
Performance Graph
The
following graph compares the 5-year cumulative total return to shareholders
on Granite Construction Incorporated’s
common stock relative to 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., Granite Construction Inc., Insituform Technologies Inc., Jacobs
Engineering Group Inc., McDermott International Inc., Quanta Services Inc.
and Shaw Group Inc. An investment of $100 (with reinvestment of all
dividends) is assumed to have been made in our common stock and in each of
the indexes on December 31, 2002 and its relative performance is tracked through
December 31, 2007.
The
comparisons in the graph below are based on historical data and are not intended
to forecast the possible future performance of our common stock.
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||
|
Granite
Construction Incorporated
|
$ |
100
|
$ |
154.79
|
$ |
178.40
|
$ |
243.98
|
$ |
344.72
|
$ |
250.01
|
|||||||
|
S
& P 500
|
100
|
128.68
|
142.69
|
149.70
|
173.34
|
182.87
|
|||||||||||||
|
Dow
Jones US Heavy Construction
|
100
|
136.41
|
165.42
|
239.03
|
298.17
|
566.39
|
|||||||||||||
Item 6.
SELECTED FINANCIAL DATA
The
selected consolidated operations data for 2007, 2006 and 2005 and consolidated
balance sheet data as of December 31, 2007 and 2006 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 2003 and 2004 and the
consolidated balance sheet data as of December 31, 2003, 2004 and 2005 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,
|
2007
|
2006
|
2005
|
2004*
|
2003
|
|||||||||||
|
Operating
Summary
|
(In Thousands, Except Per
Share Data)
|
|||||||||||||||
|
Revenue
|
$ |
2,737,914
|
$ |
2,969,604
|
$ |
2,641,352
|
$ |
2,136,212
|
$ |
1,844,491
|
||||||
|
Gross
profit
|
410,744
|
295,720
|
319,372
|
222,021
|
226,450
|
|||||||||||
|
As
a percent of revenue
|
15.0
|
10.0
|
12.1
|
10.4
|
12.3
|
|||||||||||
|
General
and administrative expenses
|
246,202
|
204,281
|
183,392
|
157,035
|
151,879
|
|||||||||||
|
As
a percent of revenue
|
9.0
|
6.9
|
6.9
|
7.4
|
8.2
|
|||||||||||
|
Provision
for (reversal of) legal judgment
|
-
|
(4,800
|
) |
9,300
|
-
|
-
|
||||||||||
|
Goodwill
impairment charge**
|
-
|
18,011
|
-
|
-
|
-
|
|||||||||||
| Acquisition expense*** | 7,752 | - | - | - | - | |||||||||||
|
Net
income
|
112,065
|
80,509
|
83,150
|
57,007
|
60,504
|
|||||||||||
|
As
a percent of revenue
|
4.1
|
2.7
|
3.1
|
2.7
|
3.3
|
|||||||||||
|
Net
income per share:
|
||||||||||||||||
|
Basic
|
$ |
2.74
|
$ |
1.97
|
$ |
2.05
|
$ |
1.41
|
$ |
1.51
|
||||||
|
Diluted
|
2.71
|
1.94
|
2.02
|
1.39
|
1.48
|
|||||||||||
|
Weighted
average shares of common stock:
|
||||||||||||||||
|
Basic
|
40,866
|
40,874
|
40,614
|
40,390
|
40,175
|
|||||||||||
|
Diluted
|
41,389
|
41,471
|
41,249
|
41,031
|
40,808
|
|||||||||||
|
Balance
Sheet
|
||||||||||||||||
|
Total
assets
|
$ |
1,786,418
|
$ |
1,632,838
|
$ |
1,472,230
|
$ |
1,277,954
|
$ |
1,060,410
|
||||||
|
Cash,
cash equivalents and marketable securities
|
485,348
|
394,878
|
301,381
|
277,692
|
201,985
|
|||||||||||
|
Working
capital
|
397,568
|
319,762
|
367,801
|
355,927
|
274,947
|
|||||||||||
|
Current
maturities of long-term debt
|
28,696
|
28,660
|
26,888
|
15,861
|
8,182
|
|||||||||||
|
Long-term
debt
|
268,417
|
78,576
|
124,415
|
148,503
|
126,708
|
|||||||||||
|
Other
long-term liabilities
|
46,441
|
58,419
|
46,556
|
40,641
|
29,938
|
|||||||||||
|
Shareholders’
equity
|
700,199
|
694,544
|
621,560
|
550,474
|
504,891
|
|||||||||||
|
Book
value per share
|
17.75
|
16.60
|
14.91
|
13.23
|
12.16
|
|||||||||||
|
Dividends
per share
|
0.43
|
0.40
|
0.40
|
0.40
|
0.40
|
|||||||||||
|
Common
shares outstanding
|
39,451
|
41,834
|
41,682
|
41,612
|
41,528
|
|||||||||||
|
Backlog
|
$ |
2,084,545
|
$ |
2,256,587
|
$ |
2,331,540
|
$ |
2,437,994
|
$ |
1,985,788
|
||||||
*
Effective January 1, 2004, we adopted Financial Accounting Standards Board
Interpretation No. 46 (revised December 2003) “Consolidation of Variable
Interest Entities”.
**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 .
***During
the fourth quarter ended December 31, 2007, we incurred a charge of $7.8 million associated with the acquisition of
the remaining shares of Wilder Construction Company (see Note 15 of
the “Notes to the Consolidated Financial
Statements”).
Item 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
General
We are
one of the largest heavy civil contractors in the United States as well as one
of the largest construction materials production companies in the Western United
States. We are engaged in the construction of highways, dams, airport
infrastructure, mass transit facilities and other infrastructure-related
projects as well as residential and commercial site development. We have offices
in Alaska, Arizona, California, Florida, Minnesota, Nevada, New
York, Texas, Utah and Washington. Our business involves three operating
segments: Granite West, Granite East and Granite Land
Company (“GLC”) .
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 backlog, current utilization of equipment and other
resources, ability to obtain necessary surety bonds and competitive
considerations. Bidding activity, backlog and revenue resulting from the award
of new contracts may vary significantly from period to period.
The two
primary economic drivers of our business are (1) federal, state and local public
funding levels and (2) the overall health of the economy, both nationally and
locally. The level of demand for our services will have a direct correlation to
these drivers. For example, a weak economy will generally result in a reduced
demand for construction in the private sector. This reduced demand increases
competition for fewer 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 revenue growth and/or increase pressure on gross profit
margins. A weak economy also tends to produce less tax revenue, thereby
decreasing the funds available for spending on public infrastructure
improvements. There are funding sources that have been specifically earmarked
for infrastructure spending, such as gasoline taxes, which are not necessarily
directly impacted by a weak economy. However, even these funds can be
temporarily at risk as state and local governments struggle to balance their
budgets. Conversely, higher public funding and/or a robust economy will
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 and other variable
compensation, as well as other overhead costs to support our overall business.
In general, these costs will increase in response to the growth and the related
increased complexity of our business. These costs may also 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 moving 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 stock (generally five years). Depending on the mix of
cash and restricted stock, these incentives can have the effect of increasing
general and administrative expenses in very profitable years and decreasing
expenses in less profitable years.
In
February 2007, we announced an organizational realignment of our business
operations which is designed to accommodate growth of our vertically integrated
Branch business in the West and improve profitability of our large, complex
Heavy Construction Division (“HCD”) projects. This realignment involved the
reorganization of our operating divisions geographically into “Granite
West” and “Granite East.” Granite West includes the operations of our
former Branch Division as well as the western portion of our large project
business that was formerly included in HCD. Granite West retains our
successful decentralized operating structure, with each of its branch locations
aligning under one of three operating groups: Northwest, Northern California and
Southwest. Granite East includes the eastern portion of our large
project business that had been included in HCD and is aligned to focus on
enhancing project management oversight and discipline from estimating through
execution. With the Division office in Lewisville, Texas, Granite
East also operates out of three regional offices: the Central Region,
based in Lewisville, Texas; the Southeast Region, based in Tampa, Florida;
and the Northeast Region, based in Tarrytown, New York.
During 2007,
we completed the reassignment of our large projects in the West from our former
Heavy Construction Division to our Granite West Division (with the exception of
certain projects nearing completion which remain with our Granite East
Division) and made substantial progress on other aspects of the
realignment. As a result, we are reporting Granite West and
Granite East as new reportable segments. Prior period results have
been reclassified to conform to the new organizational structure (see Note
1 of the “Notes to the Consolidated Financial
Statements”).
Current
Year Overview
|
|
||||||||||
| Comparative Financial Summary | ||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
| (in thousands) | ||||||||||
|
Total
revenue
|
$
|
2,737,914 |
$
|
2,969,604
|
$
|
2,641,352
|
||||
|
Gross
profit
|
410,744
|
|
295,720
|
|
319,372
|
|
||||
|
General
and administrative expenses
|
|
246,202
|
|
204,281
|
|
183,392
|
||||
|
Provision
for (reversal of) legal judgment
|
-
|
|
(4,800
|
)
|
9,300
|
|
||||
| Goodwill impairment charge | - | 18,011 |
-
|
|||||||
|
Gain
on sales of property and equipment
|
|
10,343
|
|
10,408
|
|
|
8,235
|
|
||
|
Operating
income
|
|
174,885
|
|
88,636
|
|
134,915
|
||||
| Acquisition expense | 7,752 | - | - | |||||||
|
Net
income
|
|
112,065
|
|
|
80,509
|
|
|
83,150
|
|
|
Our
results of operations for the year ended December 31, 2007 reflect improved
results from Granite East which realized positive gross margins during the
year compared with negative gross margins for the year ended December 31, 2006
and higher gross profit from Granite West. Our operating results for
the year ended December 31, 2007 included increases in general and
administrative expenses due primarily to costs incurred to support our
acquisitions, growth strategy and higher variable compensation resulting from
improved profitability. Additionally, our net income for the year ended
December 31, 2007 reflects a one-time expense related to our acquisition
of the remaining shares of Wilder Construction Company which was
partially offset by an increase in non-operating income due primarily to the
gain on a sale of a building by a partnership in which we
hold an equity method investment which was recorded as equity in income of
affiliates in our statements of income.
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 certain 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 backlog increased from approximately
68.0% at December 31, 2006 to approximately 72.0% at December 31, 2007. All
state and federal government contracts and many of our other contracts provide
for termination of the contract for 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 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
FAS No. 144, “Impairment
of Long-Lived Assets” (“FAS 144”). 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 Statement of
Income when the carrying amount is not recoverable and exceeds fair value. In 2007, our analysis determined
that a $3.0 million portion of our real estate held for development and
sale was impaired. As a result, we recorded this amount as an impairment
charge in the quarter ended December 31, 2007.
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 $250,000 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.
Current Year
Revenue
| Total Revenue | |||||||||||||||||||
| Years ended December 31, |
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Division:
|
|||||||||||||||||||
|
Granite
West
|
$
|
1,928,751
|
70.4
|
|
$
|
1,927,996
|
64.9
|
|
$
|
1,599,458
|
60.6
|
|
|||||||
|
Granite
East
|
768,451
|
28.1
|
|
1,006,617
|
33.9
|
|
1,022,196
|
38.7
|
|
||||||||||
|
GLC
|
40,712
|
1.5
|
34,991 | 1.2 | 19,698 | 0.7 | |||||||||||||
|
Total
|
$ |
2,737,914
|
100.0
|
|
$
|
2,969,604
|
100.0
|
|
$
|
2,641,352
|
100.0
|
|
|||||||
| Granite West Revenue | |||||||||||||||||||
| Years ended December 31, |
2007
|
2006
|
2005
|
||||||||||||||||
| (in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
California:
|
|||||||||||||||||||
|
Public
sector
|
$ |
595,733
|
56.7
|
|
$ |
537,967
|
48.5
|
|
$ |
374,642
|
43.0
|
|
|||||||
|
Private
sector
|
215,770
|
20.5
|
|
300,245
|
27.0
|
|
282,752
|
32.4
|
|
||||||||||
|
Material
sales
|
239,660
|
22.8
|
|
272,039
|
24.5
|
|
214,520
|
24.6
|
|
||||||||||
|
Total
|
$ |
1,051,163
|
100.0
|
|
$ |
1,110,251
|
100.0
|
|
$ |
871,914
|
100.0
|
|
|||||||
|
West
(excluding California):
|
|||||||||||||||||||
|
Public
sector
|
$ |
563,392
|
64.2
|
|
$ |
508,559
|
62.2
|
|
$ |
445,590
|
61.2
|
|
|||||||
|
Private
sector
|
178,156
|
20.3
|
|
171,166
|
20.9
|
|
164,821
|
22.7
|
|
||||||||||
|
Material
sales
|
136,040
|
15.5
|
|
138,020
|
16.9
|
|
117,133
|
16.1
|
|
||||||||||
|
Total
|
$ |
877,588
|
100.0
|
$ |
817,745
|
100.0
|
$ |
727,544
|
100.0
|
||||||||||
| Total Granite West Revenue: | |||||||||||||||||||
|
Public
sector
|
$ |
1,159,125
|
60.1
|
$ | 1,046,526 | 54.3 | $ | 820,232 | 51.3 | ||||||||||
|
Private
sector
|
393,926
|
20.4
|
471,411 | 24.4 | 447,573 | 28.0 | |||||||||||||
|
Material
sales
|
375,700
|
19.5
|
410,059 | 21.3 | 331,653 | 20.7 | |||||||||||||
|
Total
|
$ |
1,928,751
|
100.0 | $ | 1,927,996 | 100.0 | $ | 1,599,458 | 100.0 | ||||||||||
Granite
West 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 in 2007 was most impacted by 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, primarily driven
by a higher volume of projects available to bid. We continue to see
additional competition for the available public sector work, as competitors
migrate from the increasingly scarce private sector work. 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.
|
|
|||||||||||||||||||
|
Granite
East Revenue
|
|||||||||||||||||||
| Years ended December 31, |
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Geographic Area:
|
|||||||||||||||||||
|
Midwest
|
$
|
93,896
|
12.2
|
$
|
43,480
|
4.3
|
$
|
77,104
|
7.5
|
||||||||||
| Northeast |
196,653
|
25.6
|
259,462
|
25.8
|
299,950 |
29.4
|
|||||||||||||
|
South
|
|
125,164
|
16.3
|
|
|
217,647
|
21.6
|
|
|
199,579
|
19.5
|
|
|||||||
| Southeast |
299,084
|
38.9
|
281,568
|
28.0
|
216,442
|
21.2
|
|||||||||||||
|
West
|
53,654
|
7.0
|
|
204,460
|
20.3
|
|
229,121
|
22.4
|
|
||||||||||
|
Total
|
$ |
768,451
|
100.0
|
|
$
|
1,006,617
|
100.0
|
|
$
|
1,022,196
|
100.0
|
|
|||||||
|
Revenue
by Market Sector:
|
|||||||||||||||||||
|
Public
sector
|
$
|
747,580
|
97.3
|
|
$
|
979,475
|
97.3
|
|
$
|
987,794
|
96.6
|
|
|||||||
|
Private
sector
|
20,871
|
2.7
|
|
27,042
|
2.7
|
|
31,765
|
3.1
|
|
||||||||||
|
Material
sales
|
-
|
- | 100 | - | 2,637 | 0.3 | |||||||||||||
|
Total
|
$ |
768,451
|
100.0
|
|
$
|
1,006,617
|
100.0
|
|
$
|
1,022,196
|
100.0
|
|
|||||||
|
Revenue
by Contract Type:
|
|||||||||||||||||||
|
Fixed
unit price
|
$
|
128,501
|
16.7
|
|
$
|
243,103
|
24.2
|
|
$
|
323,048
|
31.6
|
|
|||||||
|
Fixed
price, including design/build
|
639,950
|
83.3
|
|
763,395
|
75.8
|
|
696,511
|
68.1
|
|
||||||||||
|
Other
|
-
|
-
|
|
119
|
-
|
|
2,637
|
0.3
|
|
||||||||||
|
Total
|
$ |
768,451
|
100.0
|
|
$
|
1,006,617
|
100.0
|
|
$
|
1,022,196
|
100.0
|
|
|||||||
Granite
East Revenue: 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 the realignment,
Granite East retained a project in the West that was nearing completion and
the decrease in revenue in the West reflects progress on the
retained project over time. In the South and Northeast the decreases were due primarily
to certain large projects in Texas and New York nearing completion. Increases in
the Southeast resulted from revenue contributions from a large
design/build project in Mississippi that was awarded in February
2006. Increases in the Midwest 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 due primarily to a higher percentage of design/build projects in our
backlog.
The following table provides additional information
about our revenue from large projects for the years ended December 31, 2007,
2006 and 2005:
|
Large Project
Revenue
|
||||||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
| (in thousands) | ||||||||||||
|
Granite
West
|
|
$
|
160,232
|
|
|
$
|
185,474
|
|
|
$
|
72,476
|
|
|
Number of projects
*
|
|
6
|
|
|
6
|
|
|
3
|
|
|||
|
Granite
East
|
|
$
|
732,086
|
|
|
$
|
889,201
|
|
|
$
|
899,475
|
|
|
Number of projects
*
|
|
31
|
|
|
28
|
|
|
34
|
|
|||
|
Total
|
|
$
|
892,318
|
|
|
$
|
1,074,675
|
|
|
$
|
971,951
|
|
|
Number of projects
*
|
|
37
|
|
|
34
|
|
|
37
|
|
|||
*
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, 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.
Backlog
|
Total
Backlog
|
|
||||||||||||
|
December
31,
|
2007
|
2006
|
|||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Backlog
by Division:
|
|||||||||||||
|
Granite
West
|
$
|
854,142
|
41.0
|
|
$
|
1,015,674
|
45.0
|
|
|||||
|
Granite
East
|
1,230,403
|
59.0
|
|
1,240,913
|
55.0
|
|
|||||||
|
Total
|
$ |
2,084,545
|
100.0
|
|
$
|
2,256,587
|
100.0
|
|
|||||
| Granite West Backlog | |||||||||||||
| December 31, |
2007
|
2006
|
|||||||||||
| (in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
California:
|
|||||||||||||
|
Public
sector
|
$ |
352,398
|
83.9
|
|
$ |
423,542
|
84.2
|
|
|||||
|
Private
sector
|
67,479
|
16.1
|
|
79,718
|
15.8
|
|
|||||||
|
Total
|
$ |
419,877
|
100.0
|
|
$ |
503,260
|
100.0
|
|
|||||
|
West
(excluding California):
|
|||||||||||||
|
Public
sector
|
$ |
398,380
|
91.7
|
|
$ |
438,256
|
85.5
|
|
|||||
|
Private
sector
|
35,885
|
8.3
|
|
74,158
|
14.5
|
|
|||||||
|
Total
|
$ |
434,265
|
100.0
|
|
$ |
512,414
|
100.0
|
|
|||||
| Total Granite West backlog: | |||||||||||||
|
Public
sector
|
$ |
750,778
|
87.9
|
$ | 861,798 | 84.8 | |||||||
|
Private
sector
|
103,364
|
12.1
|
153,876 | 15.2 | |||||||||
|
Total
Granite West backlog
|
$ |
854,142
|
100.0 | $ | 1,015,674 | 100.0 | |||||||
Granite West Backlog:
Granite West backlog of $854.1 million
at December 31, 2007 was $161.5 million, or 15.9%, lower than
at December 31, 2006. The lower private sector backlog at December 31, 2007
compared with December 31, 2006 is primarily a result of the slowing demand for
residential construction, particularly in certain California and Nevada markets.
The lower 2007 public sector backlog in California was largely due to increased
competition for the available work as contractors migrate from the increasingly
scarce private sector work. Additionally, the lower public sector 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 Backlog
|
|||||||||||||
| December 31, |
2007
|
2006
|
|||||||||||
| (in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Backlog
by Geographic Area:
|
|||||||||||||
| Midwest | $ |
328,971
|
26.8
|
$ |
422,942
|
34.1
|
|||||||
| Northeast | 133,052 |
10.8
|
219,835
|
17.7
|
|||||||||
|
South
|
144,210
|
11.7
|
|
213,447
|
17.2
|
|
|||||||
|
Southeast
|
613,057
|
49.8
|
322,619
|
26.0
|
|||||||||
|
West
|
11,113
|
0.9
|
|
62,070
|
5.0
|
|
|||||||
|
Total
|
$ |
1,230,403
|
100.0
|
|
$
|
1,240,913
|
100.0
|
|
|||||
|
Backlog
by Market Sector:
|
|||||||||||||
|
Public
sector
|
$
|
1,213,484
|
98.6
|
|
$
|
1,205,752
|
97.2
|
|
|||||
|
Private
sector
|
16,919
|
1.4
|
|
35,161
|
2.8
|
|
|||||||
|
Total
|
$ |
1,230,403
|
100.0
|
|
$
|
1,240,913
|
100.0
|
|
|||||
|
Backlog
by Contract Type:
|
|||||||||||||
|
Fixed
unit price
|
$
|
64,580
|
5.2
|
|
$
|
171,239
|
13.8
|
|
|||||
|
Fixed
price including design/build
|
1,165,823
|
94.8
|
|
1,069,674
|
86.2
|
|
|||||||
|
Total
|
$ |
1,230,403
|
100.0
|
|
$
|
1,240,913
|
100.0
|
|
|||||
Granite East Backlog:
Granite East backlog of $1.2
billion at December 31, 2007 was $10.5 million, or 0.8%, lower than
at December 31, 2006. The higher 2007 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 backlog increase in the
Southeast was offset by lower 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. We currently expect that the total
revenue on this contract could exceed $1.5 billion of which our share
could exceed $300.0 million.
The following tables provide additional information about our large
project backlog at December 31, 2007 and 2006:
|
|
|
|
|
||
|
Large Project
Backlog
|
|
|
|
||
|
2007
|
|
2006
|
|||
| (in thousands) | |||||
|
Granite
West
|
$
|
223,952
|
|
$
|
313,522
|
|
Number
of projects**
|
5
|
|
5
|
||
|
Granite
East
|
$
|
1,189,998
|
|
$
|
1,193,919
|
|
Number of projects**
|
18
|
|
24
|
||
|
Total
|
$
|
1,413,950
|
|
$
|
1,507,441
|
|
Number
of projects**
|
23
|
|
29
|
||
** Includes only projects
with total contract value greater than $50.0 million and remaining backlog over
$1.0 million at the respective date.
|
Large Project
Backlog by Expected Profitability
|
|
|
|
|
|
|
|
|
|
|||
|
December 31,
2007
(in
thousands)
|
Number of
Projects***
|
Average Percent
Complete
|
|
|
Backlog
Amount
|
|
Percent of Large Project
Backlog
|
|
|
|||
|
Projects with forecasted
loss
|
|
|
|
|
|
|
|
|
|
|||
|
Granite
West
|
|
1
|
|
38
|
%
|
|
$
|
80,688
|
|
5.7
|
%
|
|
|
Granite
East
|
|
9
|
|
58
|
%
|
|
|
145,016
|
|
10.3
|
%
|
|
|
Total
projects with a forecasted loss
|
|
10
|
|
51
|
%
|
|
|
225,704
|
|
16.0
|
%
|
|
| Projects with forecasted profit | ||||||||||||
|
Granite
West
|
|
4
|
|
44
|
%
|
|
|
143,264
|
|
10.1
|
%
|
|
|
Granite
East
|
|
9
|
|
24
|
%
|
|
|
1,044,982
|
|
73.9
|
%
|
|
|
Total
projects with forecasted profit
|
|
13
|
|
27
|
%
|
|
|
1,188,246
|
|
84.0
|
%
|
|
|
Total
|
|
23
|
|
|
|
|
$
|
1,413,950
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
December 31,
2006
(in
thousands)
|
Number of
Projects***
|
Average Percent
Complete
|
|
|
Backlog
Amount
|
|
Percent of Large Project
Backlog
|
|
|
|||
|
Projects with forecasted
loss
|
|
|
|
|
|
|
|
|
|
|||
|
Granite
West
|
|
1
|
|
29
|
%
|
|
$
|
92,648
|
|
6.2
|
%
|
|
|
Granite
East
|
|
9
|
|
70
|
%
|
|
|
294,699
|
|
19.5
|
%
|
|
|
Total
projects with a forecasted loss
|
|
10
|
|
60
|
%
|
|
|
387,347
|
|
25.7
|
%
|
|
| Projects with forecasted profit | ||||||||||||
|
Granite
West
|
|
4
|
|
32
|
%
|
|
|
220,874
|
|
14.6
|
%
|
|
|
Granite
East
|
|
15
|
|
23
|
%
|
|
|
899,220
|
|
59.7
|
%
|
|
|
Total
projects with forecasted profit
|
|
19
|
|
25
|
%
|
|
|
1,120,094
|
|
74.3
|
%
|
|
|
Total
|
|
29
|
|
|
|
|
$
|
1,507,441
|
|
100.0
|
%
|
|
***
Includes only projects with total contract value greater
than $50.0 million and remaining backlog over $1.0
million.
Gross
Profit
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
| (in thousands) | ||||||||||
|
Granite
West
|
$
|
370,429
|
$
|
350,587
|
$
|
253,890
|
||||
|
Percent
of division revenue
|
19.2
|
%
|
18.2
|
%
|
16.0
|
%
|
||||
|
Granite
East
|
$
|
25,824
|
$
|
(72,565
|
) |
$
|
50,470
|
|||
|
Percent
of division revenue
|
3.4 |
%
|
(7.2
|
)%
|
4.9
|
%
|
||||
| GLC | $ | 15,840 | $ | 17,570 | $ | 12,271 | ||||
|
Percent
of division revenue
|
38.9 |
%
|
50.2 |
%
|
62.3 |
%
|
||||
|
Other
|
$
|
(1,349
|
) |
$
|
128
|
|
$
|
2,741
|
|
|
|
Total
gross profit
|
$
|
410,744
|
$
|
295,720
|
$
|
319,372
|
||||
|
Percent
of total revenue
|
15.0
|
%
|
10.0
|
%
|
12.1
|
%
|
||||
Gross Profit: As
more fully described under “Critical Accounting Estimates” 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 completion threshold and the deferred profit is recognized or
conversely, in periods where backlog is growing rapidly and a higher percentage
of projects are in their early stages with no associated gross margin
recognition.
Revenue
from projects less than our completion threshold, for which no margin has
been recognized, was as follows:
|
Revenue from Contracts with
Deferred Profit
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
| (in thousands) | ||||||||||
|
Granite
West
|
$
|
43,590
|
$
|
24,868
|
$
|
26,498
|
||||
|
Granite
East
|
|
131,694
|
|
16,397
|
|
49,614
|
||||
|
Total
revenue from contracts with deferred profit
|
$ | 175,284 | $ | 41,265 | $ | 76,112 | ||||
Additionally,
as we also describe under “Critical Accounting Estimates” 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 to incur them. As a result,
our gross profit as a percent of revenue can vary during periods where a large
volume of change orders or contract claims are pending resolution (reducing
gross profit percent) or, conversely, during periods where large change orders
or contract claims are agreed or settled (increasing gross profit percent).
Although this variability can occur in both Granite West and Granite East, it
can be much more pronounced in Granite East because of the larger size and
complexity of its projects.
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 impact from 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”).
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. In our review of these changes, we did not identify
any material amounts that should have been recorded in a prior
period.
GLC 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 (see Note 6 of the
“Notes to the Consolidated Financial Statements”).
General and Administrative
Expenses
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Salaries
and related expenses
|
$
|
124,804
|
$
|
102,935
|
$
|
94,901
|
||||
|
Incentive
compensation, discretionary profit sharing and other variable
compensation
|
37,745
|
33,094
|
28,294
|
|||||||
|
Other
general and administrative expenses
|
83,653
|
68,252
|
60,197
|
|||||||
|
Total
|
$
|
246,202
|
$
|
204,281
|
$
|
183,392
|
||||
|
Percent
of revenue
|
9.0
|
%
|
6.9
|
%
|
6.9
|
%
|
||||
General and Administrative
Expenses: General
and administrative expenses increased by $41.9 million, or 20.5%, to $246.2
million in 2007 from $204.3 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 in 2007 increased $15.4 million, or
22.6%, 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
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Gain
on sales of property and equipment
|
$
|
10,343
|
$
|
10,408
|
$
|
8,235
|
||||
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)
|
|
||||||||||
| Years ended December 31, |
2007
|
2006
|
2005
|
|||||||
| (in thousands) |
|
|||||||||
|
Interest
income
|
$ |
26,925
|
$ |
24,112
|
$ |
11,573
|
||||
|
Interest
expense
|
(6,367
|
) |
(4,492
|
)
|
(6,932
|
)
|
||||
| Acquisition expense | (7,752 | ) | - | - | ||||||
|
Equity
in income of affiliates
|
5,205
|
2,157
|
1,497
|
|||||||
|
Other,
net
|
5,498
|
2,604
|
1,258
|
|||||||
|
Total
|
$ |
23,509
|
$ |
24,381
|
$ |
7,396
|
||||
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
(see Note 15 of the “Notes
to the Consolidated Financial Statements”). 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
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Provision
for income taxes
|
$
|
65,470
|
$
|
38,678
|
$
|
41,413
|
||||
|
Effective
tax rate
|
33.0
|
%
|
34.2
|
%
|
29.1
|
%
|
||||
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 is not deductible for tax purposes (see Note 15 of the “Notes to the
Consolidated Financial
Statements”).
Minority Interest in Consolidated
Subsidiaries
|
|
||||||||||
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
(in
thousands)
|
|
|||||||||
|
Minority
interest in consolidated subsidiaries
|
$
|
(20,859
|
) |
$
|
6,170
|
|
$
|
(17,748
|
)
|
|
Minority Interest in Consolidated
Subsidiaries: 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.
Two of
our joint venture projects are currently forecast at a loss and will require
additional capital contributions from our minority partners if the forecasts do
not improve. Our joint venture agreements require that such capital
contributions be made if needed. Based on our most recent assessment
of our partners’ financial condition, we currently believe that one of our partners does not have the ability to
contribute its
full proportionate
share of the additional capital that will be needed if the project forecast
does not improve. Included in minority interest for the years
ended December 31, 2007 and 2006 is expense related to this potentially
uncollectible partners balance of approximately $4.6 million and $9.4 million,
respectively. Minority interest balances related to loss projects of
$2.7
million and $14.8
million at December 31, 2007 and 2006, respectively have been included in
other long-term assets in our consolidated balance sheet.
Outlook
We are
optimistic about our opportunities in 2008. The diversity and resiliency of our
business model and our employees’ capabilities will prove to be extremely
valuable this year as we confront the economic challenges facing some of our
branch businesses in the West and capitalize on the opportunities to increase
profitability on our large projects in the East.
In our
Granite East business, we expect to see continued earnings improvement through
2008. Driven by a strong backlog of work and improved execution, we are
currently forecasting Granite East to achieve 2008 gross margins in the low
teens. We have targeted several projects in each of our three Granite East
regions to pursue this year; however, we will remain very selective with regard
to the projects we bid. Our strategy for this business has not changed. We
will continue to focus on our home markets with the near-term goal to maintain a
Granite East business with revenues which allow us the best opportunity to
maximize profitability and successfully execute at the project
level.
We
anticipate 2008 to be a challenging year for Granite West due to the continued
downturn in the residential construction market, which is expected to negatively
impact several of our branches, particularly those in the Central Valley of
California and Northern Nevada. Competition in these markets is likely to remain
high at least through the end of 2008. In this type of market, our
bidding strategy is to be patient and cautious to avoid committing our capacity
to lower margin work because we believe better opportunities will be available
later in the year.
In
contrast, some of our branches are poised to have a solid year, driven by a
strong backlog, healthy markets and steady demand for our construction
materials. Overall, we anticipate that Granite West will perform well in 2008
given the expected market conditions; however, we do not expect the business to
perform near the level it has over the past two years. Our focus this year will
be on targeting those opportunities where we have a competitive
advantage.
Despite
the current challenges, the long-term outlook for Granite West remains extremely
positive. We are well-positioned in our markets with our construction
businesses, aggregate reserves, key plant facilities, and most importantly,
teams of experienced and dedicated people. Although not expected in 2008, we
look forward to the ultimate recovery of the housing market which we believe
will mark the beginning of another performance improvement cycle in Granite
West.
With
regard to our Granite Land Company, our strategy going forward is to enhance our
regional and project diversity. Despite the impairment write-down of a
residential property in California during 2007, we are very pleased with the
overall quality of our real estate investment portfolio. In 2008, our goal is to
work diligently on entitlements, construct improvements and evaluate longer term
sales to optimize the varying time for recovery in our sub-regional
markets.
On the
political front, federal and state transportation funding for 2008 is expected
to remain healthy. The fiscal 2008 federal appropriations bill package
provides $40.2 billion for the core highway program, consistent with the 2008
level authorized in the current Safe, Accountable, Flexible, Efficient,
Transportation, Equity Act: A Legacy for Users (“SAFETEA-LU”), with an
additional $1.0 billion to repair deficient bridges. In the bill,
the fiscal 2008 federal transit program will be funded at $9.5 billion.
This represents an overall increase in federal transportation funding of $2.6
billion over fiscal 2007
Looking
ahead, we were not pleased to hear that the Administration’s proposed
federal budget for fiscal 2009 proposes a cut in Federal-Aid Highway
Obligation Limits of $1.8 billion from fiscal 2008 spending levels. With the
Congressional Budget Office’s recent projections indicating a revenue shortfall
in the Highway Account of $1.1 billion less than the amount needed to meet
SAFETEA-LU’s highway funding commitments in fiscal 2009, House leadership
has identified trust fund solvency as a top priority for the 2008 congressional
session.
Transportation
funding post-SAFTEA-LU is a topic that will be highly debated over the year
ahead. In January, the National Surface Policy and Revenue Study Commission,
created by SAFETEA-LU, issued its long-awaited report. After two years of
reviewing the status of the nation's surface transportation infrastructure and
conducting field hearings across the country, the report contains several
recommendations that will likely spur debate as discussions begin about the 2009
reauthorization of the federal government’s role in transportation finance and
policy.
The
report proposes a complete overhaul of the current federal
program. Significantly, the report calls for a $0.25 to $0.40 increase in
the federal gasoline user fee to be phased in over five years, then indexed for
inflation. The report estimates that the nation will need to invest at least
$225 billion annually over the next 50 years to upgrade the existing surface
transportation systems (highways, transit and passenger rail) to a state of good
repair. This would nearly triple the annual rate of $85 billion that is being
spent at all levels of government on all modes today.
In
California, the state’s fiscal situation and the potential impact on
transportation funding has been an issue we have also been watching closely.
Fortunately, despite the current economic downturn, neither the Governor nor
legislative leaders are proposing cuts to transportation in the upcoming 2008-09
budget year. The Governor's recently announced proposed Budget includes full
funding for Proposition 42 (approximately $1.5 billion+ annually) and
approximately $4.1 billion in Proposition
1B transportation funds.
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 hot plants, as well
as liquid asphalt for production of asphaltic concrete. We manage our exposure
to these price changes by monitoring the escalation 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. Although we are exposed to price spikes in
projects that do not include such clauses, this potential impact can be
mitigated by our significant portfolio of smaller, short-duration projects that
minimizes cost escalations and provides the ability to price new business at the
higher prices.
Longer
term, we are excited about our opportunities ahead, largely driven by record
levels of public transportation funding in California, the Company’s largest
revenue-producing state, as well as improving results from our large projects
business. Demand for our construction materials is also expected to remain
healthy over the long term. We foresee bidding opportunities for large projects
to continue to be robust, which will help support our strategy in Granite East
of bidding new work selectively with considerably higher levels of
profitability.
In
summary, we are very pleased with our business performance to date, which has
occurred despite the impact of the weakening housing market. Our Granite
West business proved its durability in an uncertain economic environment during
2007 and is poised to perform well in the continued economic unrest of
2008. Our Granite East business is clearly on the road to improved profitability
and on track for continued improvement going forward. Overall, we are
very optimistic about the long-term view of our markets and are confident
that our continued investment in the development of our people is key to
increasing shareholder value over the long term.
Prior Years
Revenue: Revenue
from Granite West increased $328.5 million, or 20.5%, in the year ended
December 31, 2006 from the year ended December 31, 2005. Included in this
increase was $79.3 million which was added to Granite West results as part of
our realignment. The remaining increased revenue from both
construction and the sale of materials was driven by higher levels of public
spending, particularly in California. Increased revenue from the sale of
materials reflected an increase in average selling prices in 2006. A
portion of the increase in Granite West revenue was also attributable
to mild weather in the fourth quarter of 2006 which enabled many of our
locations to complete more work in the quarter than in the fourth quarter of
2005.
Revenue
from Granite East decreased $15.6 million, or 1.5%, in the year ended December
31, 2006 from the year ended December 31, 2005. Included in this change was a
decrease of $79.3 million for 2006 due to our realignment. Absent
this realignment effect, revenue from Granite East increased $55.8 million in
2006 from 2005 due primarily to the increase in volume from a higher
backlog at the beginning of 2006 and a large project award received in the
first quarter of 2006. Revenue generated from projects with a contract value
greater than $100 million increased to 72.9% of total Granite
East revenue in 2006 from 57.6% in 2005, and our minority partners’ share
of our consolidated joint venture revenue increased to approximately $214.6
million in 2006 from approximately $175.0 million in 2005. Geographically, the
increased revenue in the West in 2006 was primarily attributable to a
large design/build project in Utah which was awarded in late 2005. In
the Southeast, the increased revenue for 2006 was due primarily to a
large design/build project in Mississippi which was awarded in the first quarter
of 2006. Decreases in revenue in the Northeast in 2006 were due primarily to
more projects in New York reaching substantial completion during 2006 than in
2005 and a lack of new project awards during 2006. Revenue from fixed
price contracts increased from 68.4% of Granite East revenue in
2005 to 77.6% of Granite East revenue in 2006 due primarily to growth in
design/build projects in our backlog.
Backlog: Granite
West backlog at December 31, 2006 was $1,015.7 million, an increase of $165.3
million, or 19.5%, from December 31, 2005. Included in this increase was
$208.0 million which was added to Granite West backlog as part of our
realignment. Absent this realignment effect, Granite West backlog increased
$79.4 million at December 31, 2006 compared to December 31,
2005. The increase was due primarily to higher public
sector awards in California, partially offset by a decrease
in private sector backlog in California. The increase in California public
sector backlog included a $51.9 million share of a joint venture highway
reconstruction project for the California Department of Transportation
(“Caltrans”) that was awarded in the first quarter of 2006 and a $30.5 million
highway widening project for Caltrans that was awarded in the third quarter of
2006. Granite West awards in the fourth quarter of 2006 included a $26.3 million
highway reconstruction project and a $24.8 million road construction
project in Southern California. Other Granite West awards in
2006 included an $81.8 million joint venture highway reconstruction
project in Northern California, a $44.9 million road construction project near
Bakersfield, California and a $21.3 million residential site development project
in Nevada.
Backlog in Granite East at
December 31, 2006 was $1,240.9 million, a decrease of $240.3 million, or 16.2%,
from backlog at December 31, 2005. Included in this decrease was $208.0
million which was transferred from Granite East to Granite West as part of our
realignment. The remaining decreased
backlog reflected our strategy of bidding work at higher margins
and focusing on successful execution of a lower volume of
work. Granite East backlog included approximately $22.7 million
related to our 20% portion of a joint venture project to construct a
transportation hub at the World Trade Center in New York. Granite
East awards in the fourth quarter of 2006 included a $420.0
million design/build consolidated joint venture highway reconstruction
project in St. Louis, Missouri.
Gross
Profit: Gross
profit as a percent of revenue in Granite West increased to 18.2% in 2006 from
16.0% in 2005. These results reflect a gross loss of $14.3 million from
projects which were transferred from Granite East to Granite West as part of our
realignment. Absent this realignment effect, the
increase in 2006 was attributable to higher profit margins for both construction
and the sale of materials due to strong demand in both the private and public
sectors. Granite West construction gross profit as a percent of revenue
in 2006 increased to 18.6% from 14.3% in 2005. Granite West
gross profit from the sale of materials as a percent of revenue in 2006
increased to 23.6% from 22.3% in 2005.
Also,
absent the realignment effect, Granite West gross profit for 2006 included the
effects of changes in the estimates of the profitability of certain projects.
The net impact of these estimate changes for 2006 was an increase in
gross profit of approximately $3.8 million due primarily to the settlement of
outstanding issues on two projects with no associated cost, partially offset by
increases in estimated costs on several other projects. The net impact
of such estimate changes for 2005 was a decrease in gross profit
of approximately $2.5 million due primarily to unanticipated costs related to
quality issues in work originally performed by a subcontractor on one project
and changes in site conditions from our original expectations on a second
project.
Granite
East recognized a negative gross margin of 7.2% for the year
ended December 31, 2006 compared to a gross profit margin of 4.9% for
2005. These results reflect a gross loss of $14.3 million which was
transferred from Granite East to Granite West as part of our realignment. Absent
this realignment effect, the reduction in gross margin was primarily
due to additional
estimated project costs that had the effect of reducing gross profit
by approximately $145.0 million in 2006. This compares with reduced
gross margin from reductions in estimated
project profitability of approximately $31.0 million in 2005.
Additionally Granite East’s gross margin in 2006 was negatively impacted by
lower estimated profitability in the division’s backlog at the beginning of 2006
resulting from the deterioration in estimated project margins experienced during
2005.
Granite
Land Company gross profit in 2006 and 2005 was primarily related to sales
of certain real estate development projects by consolidated subsidiaries of
approximately $17.6 million and $12.3 million, respectively. The minority
partners’ share of these gross profit amounts was approximately $7.8 million and
$6.1 million, respectively.
General and Administrative
Expenses: General
and administrative expenses increased by $20.9 million, or 11.4%, from 2005 to
2006. Salaries and related expenses increased in 2006 due primarily to
additional staffing needed to support a higher volume of work. Incentive
compensation, discretionary profit sharing and other variable compensation
increased in 2006 due to higher profitability in Granite West and
higher restricted stock amortization cost. The increase in other general and
administrative expenses in 2006 related primarily to increased bidding
activity and other costs related to higher revenue volume.
Provision for Legal
Judgment: In June
2005, we recorded a provision of $9.3 million related to an unfavorable judgment
in a legal proceeding. In January 2007, we entered into an agreement to
resolve the related dispute which resulted in a partial reversal of the
provision during the year ended December 31, 2006.
Goodwill Impairment Charge:
The goodwill balance represented the excess of the purchase price
over the fair value assigned to the net assets acquired in our 2001 acquisition
of our Granite Northeast operation in New York (“GNE”), a reporting unit in
Granite East operating segment. During the fourth quarter of 2006 we performed
our annual impairment test and determined that the carrying amount of the
goodwill exceeded its implied fair value and that a full impairment of goodwill
existed. This impairment conclusion was reached due to continuing losses at GNE,
including significant unexpected losses in the quarter ended December 31,
2006.
Gain on Sales of Property and
Equipment: Gain on
sales of property and equipment for the year ended December 31, 2006 included
approximately $2.3 million from the sale of a rental property recognized in
the first quarter of 2006.
Other Income (Expense):
Interest
income increased $12.5 million, or 108.3%, in 2006 compared with 2005 due
primarily to a higher average yield on higher average balances of
interest bearing investments. Interest expense decreased $2.4 million, or 35.2%
in 2006 compared with 2005 primarily due to a lower amount of debt
outstanding during 2006. Additionally, in January 2007, we entered into an
agreement to resolve a dispute which resulted in the reversal of accrued
interest expense of approximately $337,000. Other, net in
2006 included approximately $3.2 million recognized on the sale of gold in
the second quarter. The gold is produced as a by-product of one of our aggregate
mining operations and held for investment.
Provision for Income Taxes:
Our
effective tax rate increased to 34.2% in 2006 from 29.1% in
2005 due primarily to the impact on the tax rate of minority
interest losses in several of our construction joint ventures, which are not
subject to income taxes on a standalone basis.
Minority Interest in Consolidated
Subsidiaries: We recognized net minority
interest benefit of approximately $6.2 million for the year ended
December 31, 2006 primarily due to losses on certain construction joint
venture projects.
Liquidity and Capital Resources
|
|
||||||||||
|
December
31,
|
2007
|
2006
|
2005
|
|||||||
| (in thousands) |
|
|||||||||
|
Cash
and cash equivalents excluding consolidated joint ventures
|
$
|
166,700
|
$
|
110,913
|
$
|
147,525
|
||||
| Consolidated joint venture cash and cash equivalents | 185,734 | 93,980 | 52,356 | |||||||
|
Total
consolidated cash and cash equivalents
|
$ | 352,434 | $ | 204,893 | $ | 199,881 | ||||
|
Net
cash provided by (used in):
|
||||||||||
|
Operating
activities
|
$ |
234,788
|
$ |
259,643
|
$ |
146,501
|
||||
|
Investing
activities
|
(166,744
|
) |
(183,683
|
)
|
(64,785
|
)
|
||||
|
Financing
activities
|
79,497
|
(70,948
|
)
|
(43,462
|
)
|
|||||
|
Capital
expenditures
|
118,612
|
116,238
|
102,829
|
|||||||
|
Working
capital
|
397,568
|
319,762
|
367,801
|
|||||||
Our
primary sources of liquidity are cash flows from operations and borrowings under
our credit facilities. We expect the principal use of funds for the foreseeable
future will be for acquisitions, capital expenditures, working capital, debt
service, other investments and share repurchases. We have budgeted
approximately $180.0 million for capital expenditures in 2008, which
includes amounts for construction equipment, aggregate and asphalt plants,
buildings, leasehold improvements and the purchase of land and aggregate
reserves.
Our cash
and cash equivalents and short-term and long-term marketable securities totaled
$485.3 million at December 31, 2007 and included $185.7 million of cash and cash
equivalents from our consolidated joint ventures (see Note
5 of the “Notes to the Consolidated Financial Statements”). This joint
venture cash 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. We believe that our current cash and cash equivalents, short-term
investments, cash generated from operations and amounts available under our
existing credit facilities will be sufficient to meet our expected working
capital needs, capital expenditures, financial commitments and other liquidity
requirements associated with our existing operations through the
next twelve months and beyond. If we experience a significant change in our
business such as the execution of a significant acquisition, we would likely
need to acquire additional sources of financing, which may be limited by the
terms of our existing debt covenants, or may require the amendment of our
existing debt agreements.
Cash provided by operating
activities of $234.8 million in 2007 represents a $24.9
million decrease from the amount provided by operating activities during
2006. Operating cash flow
in 2006 benefited from an increase in net billings in excess of costs and
estimated earnings resulting from large cash payments
received to mobilize projects in the early stages of construction, which have
the effect of increasing cash flow in the periods received and decreasing cash
flow in subsequent periods as cash is expended toward project
completion. Net billings in excess of costs and
estimated earnings decreased slightly in 2007. The decrease in cash flow from net
billings in excess of costs and estimated earnings in 2007 was partially offset
by cash generated from lower accounts receivable balances at December 31, 2007
(net of the effect of lower accounts payable balances), due primarily to lower
revenue – particularly in the fourth quarter. Cash
provided by operating activities in 2006 increased by $113.1 million from 2005
primarily due to slower accounts receivable growth in 2006 compared with 2005
and an increase in net billings in excess of costs and estimated earnings in
2006.
Cash used
in investing activities of $166.7 million for 2007 represents a $16.9
million decrease from the amount used in 2006 due primarily to a reduction
in the purchases of marketable securities and an increase in the maturities of
marketable securities. This decrease was partially offset by the
use of cash to fund the acquisition of certain assets of two businesses (see
Note 17 of the “Notes to the Consolidated Financial Statements”) and
cash deposited into an escrow account related to our purchase of the remaining
shares of Wilder Construction Company (see Note 15 of the “Notes to
the Consolidated Financial Statements”). Cash used
in investing activities in 2006 increased by $118.9 million from 2005 due
primarily to higher net purchases of marketable securities and net additions to
property and equipment in 2006.
Cash provided by
financing activities of $79.5 million for 2007 represents an increase of
$150.4 million from 2006 due primarily to $200.0 million in new debt
issued in December 2007 (see Note 10 of the “Notes to the Consolidated
Financial Statements”). The increase was partially offset by our
repayments of debt borrowed under our bank revolving line of credit
and repurchases of our common stock. Cash used
in financing activities in 2006 was $27.5 million higher than 2005 due primarily
to increases in net repayments of long-term debt and net distributions to
minority partners in 2006.
Contractual
Obligations
The
following table summarizes our significant contractual obligations outstanding
as of December 31, 2007:
| Contractual Obligations |
Payments due by
period
|
|||||||||||||||
| (in thousands) |
Total
|
Less than 1
year
|
1-3
years
|
3-5
years
|
More than 5
years
|
|||||||||||
|
Long
term debt (1)
|
$
|
297,113
|
$
|
28,696
|
$
|
41,063
|
$
|
18,853
|
$
|
208,501
|
||||||
|
Operating
leases (2)
|
53,275
|
8,674
|
12,931
|
9,076
|
22,594
|
|||||||||||
|
Purchase
obligations under construction contracts (3)
|
962,571
|
565,961
|
334,440
|
62,170
|
-
|
|||||||||||
|
Other
purchase obligations (4)
|
38,219
|
33,196
|
3,079
|
324
|
1,620
|
|||||||||||
|
Deferred
compensation obligations (5)
|
27,761
|
2,544
|
8,062
|
8,324
|
8,831
|
|||||||||||
|
Total
|
$
|
1,378,939
|
$
|
639,071
|
$
|
399,575
|
$
|
98,747
|
$
|
241,546
|
||||||
(1) These
obligations represent the aggregate minimum principal maturities of long-term
debt and do not include interest. See Note 10
of the “Notes to the Consolidated Financial
Statements.”
(2) These
obligations represent the minimum rental commitments and minimum royalty
requirements under all noncancellable operating leases. See Note 15 of the
“Notes to the Consolidated Financial Statements.”
(3) These
obligations represent our best estimate of future purchases of materials and
subcontract services related to our current contract backlog.
(4) These
obligations represent firm purchase commitments for equipment and other goods
and services not connected with our construction backlog which are individually
greater than $10,000 and have an expected purchase after February 28,
2008.
(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.
(6) Reserves for uncertain tax positions of
approximately $4.8 million are not included in the table above because we cannot
estimate the timing of payments related to such reserves.
We had
standby letters of credit totaling approximately $4.4 million outstanding at
December 31, 2007, all of which expire between March 2008
and February 2009. 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, 2007, approximately $2.0 billion of our backlog was
bonded and performance bonds totaling approximately $9.3 billion were
outstanding. 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.
We have a
$150.0 million bank revolving line of credit, which allows for unsecured
borrowings through June 24, 2011, with interest rate options. Interest on
outstanding borrowings under the revolving line of credit is at our choice of
selected LIBOR rates plus a margin that is recalculated quarterly. The margin
was 0.80% at December 31, 2007. The unused and available portion of this line of
credit was $145.6 million at December 31, 2007.
In
December 2007, we issued new debt in the amount of $200.0 million. These
notes are due in five equal installments beginning in 2015 and bear
interest at 6.11% per annum.
Restrictive
covenants under the terms of our debt agreements require the maintenance of
certain financial ratios and the maintenance of tangible net worth (as defined)
(see Note 10
of the “Notes to the Consolidated Financial Statements”). We were
in compliance with these covenants at December 31, 2007. Failure to comply with
these covenants could cause the amounts due under the debt agreements to become
currently payable.
In
October 2007, our Board of Directors authorized us to repurchase, at
management’s discretion, up to $200.0 million of our common stock.
Under the new repurchase program, the Company may repurchase shares from time to
time on the open market or in private transactions. The Company intends to
fund the repurchases through the use of existing sources of liquidity,
borrowings under the current credit facility or new borrowings. 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. This new
program replaced the $25.0 million share repurchase program announced
in 2002. At December 31, 2007, $107.3 million of the $200.0 million
authorization was available for repurchases
(see “Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities”). Subsequent to December 31, 2007 through February 19, 2008 we
repurchased and retired an additional 0.7 million shares for $25.0
million.
Included in the $51.7 million balance of real estate held for
development and
sale at December 31, 2007
is approximately $39.5 million related to residential housing
projects. Due to
the downturn in the residential housing market we assessed whether our
investments related to these projects were impaired. As a result of
this assessment, we recorded an impairment charge of $3.0 million in the quarter
ended December 31, 2007 related to a project in central California, which is an area that has been
particularly impacted by the slowing demand for new housing construction
(see
Note 6 of the “Notes
to the Consolidated Financial Statements”).
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, 2007,
approximately $650.0 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. During
2007, we recorded approximately $4.6 million in additional minority interest
cost related to our assessment that our partner in one construction joint
venture project would be unable to pay its full share of the project’s projected
loss. Prior to 2006, we had never incurred a loss under these joint and
several liability provisions, however; it is possible that we could record
additional losses in the future and such losses could be
significant.
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.
Quarterly Results
The
following table sets forth selected unaudited financial information for the
eight quarters in the two-year period ended December 31, 2007. This information
has been prepared on the same basis as the audited financial statements and, in
the opinion of management, contains all adjustments necessary for a
fair statement thereof.
|
QUARTERLY FINANCIAL
DATA
|
|||||||||||||
| (unaudited - in thousands, except per share data) | |||||||||||||
|
2007 Quarters
Ended
|
December
31
|
September
30
|
June 30
|
March 31
|
|||||||||
|
Revenue
|
$
|
633,065
|
$
|
846,313
|
$
|
770,876
|
$
|
487,660
|
|||||
|
Gross
profit
|
98,437
|
136,637
|
127,634
|
48,036
|
|||||||||
|
As
a percent of revenue
|
15.5
|
%
|
16.1
|
%
|
16.6
|
%
|
9.9
|
%
|
|||||
|
Net
income (loss)
|
$ |
17,168
|
$ |
53,300
|
$ |
43,846
|
$ |
(2,249
|
)
|
||||
|
As
a percent of revenue
|
2.7
|
%
|
6.3
|
%
|
5.7
|
%
|
(0.5
|
)%
|
|||||
|
Net
income (loss) per share:
|
|||||||||||||
|
Basic
|
$ |
0.43
|
$
|
1.30
|
$
|
1.07
|
$
|
(0.05
|
)
|
||||
|
Diluted
|
$ |
0.42
|
$
|
1.28
|
$
|
1.05
|
$
|
(0.05
|
)
|
||||
|
Dividends
per share
|
$
|
0.13
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
|||||
|
Market
price of common stock
|
|||||||||||||
|
High
|
$ |
57.37
|
$ |
74.62
|
$ |
70.43
|
$ |
59.90
|
|||||
|
Low
|
$ |
32.46
|
$ |
50.33
|
$ |
54.57
|
$ |
47.74
|
|||||
|
2006 Quarters
Ended
|
December
31
|
September
30
|
June 30
|
March 31
|
|||||||||
|
Revenue
|
$
|
719,927
|
$
|
941,672
|
$
|
812,037
|
$
|
495,968
|
|||||
|
Gross
profit
|
|
56,443
|
|
105,932
|
|
93,110
|
|
40,235
|
|||||
|
As
a percent of revenue
|
7.8
|
%
|
11.2
|
%
|
11.5
|
%
|
8.1
|
%
|
|||||
|
Net
income (loss)
|
$ |
2,917
|
$ |
45,725
|
$ |
33,289
|
$ |
(1,422
|
)
|
||||
|
As
a percent of revenue
|
0.4
|
%
|
4.9
|
%
|
4.1
|
%
|
(0.3
|
)%
|
|||||
|
Net
income (loss) per share:
|
|||||||||||||
|
Basic
|
$
|
0.07
|
$
|
1.12
|
$
|
0.81
|
$
|
(0.03
|
)
|
||||
|
Diluted
|
$
|
0.07
|
$
|
1.10
|
$
|
0.80
|
$
|
(0.03
|
)
|
||||
|
Dividends
per share
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
|||||
|
Market
price of common stock
|
|||||||||||||
|
High
|
$
|
63.73
|
$
|
56.14
|
$
|
51.65
|
$
|
49.75
|
|||||
|
Low
|
$
|
47.69
|
$
|
37.35
|
$
|
37.63
|
$
|
35.42
|
|||||
Net
income (loss) per share calculations are based on the weighted average common
shares outstanding for each period presented. Accordingly, the sum of the
quarterly net income (loss) per share amounts may not equal the per share amount
reported for the year.
Item 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. We are prohibited
from investing in auction rate and certain asset-backed securities. These
guidelines also limit the amount of 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 the 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, commercial paper and
municipal bonds, are generally classified as held-to-maturity and are stated at
cost, adjusted for amortization of premiums and discounts to
maturity. Additionally we have a mutual fund portfolio which is
classified as available-for-sale. Unrealized gains and losses on these mutual
fund investments are reported as a separate component of accumulated other
comprehensive income (loss).
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 material 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. Our mutual fund portfolio of $34.2 million is
exposed to equity price risks.
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, 2007 we had outstanding: (i) senior notes payable of $20.0
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 $50.0 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 and related weighted average interest rates by
year for our cash and cash equivalents, held-to-maturity investments and
significant debt obligations (in thousands):
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||||
|
Cash,
cash equivalents and held-to-maturity investments
|
$
|
396,026
|
$
|
39,301
|
$
|
15,855
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
451,182
|
||||||||
|
Weighted
average interest rate
|
4.66
|
%
|
5.13
|
%
|
5.16
|
%
|
-
|
%
|
-
|
%
|
-
|
%
|
4.72
|
%
|
||||||||
|
Liabilities
|
||||||||||||||||||||||
|
Fixed rate debt
|
||||||||||||||||||||||
|
Senior notes payable
|
$
|
15,000
|
$
|
15,000
|
$
|
15,000
|
$
|
8,333
|
$
|
8,333
|
$
|
208,334
|
$
|
270,000
|
||||||||
|
Weighted average interest rate
|
6.77
|
%
|
6.77
|
%
|
6.77
|
%
|
6.96
|
%
|
6.96
|
%
|
6.14
|
%
|
6.30
|
%
|
||||||||
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 lower 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 $270.0 million as of
December 31, 2007 and $88.0 million as of December 31, 2006.
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
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, 2007 and 2006
Consolidated
Statements of Income - Years Ended December 31, 2007, 2006 and 2005
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income - Years Ended
December 31, 2007, 2006 and 2005
Consolidated
Statements of Cash Flows - Years Ended December 31, 2007, 2006 and
2005
Notes to
the Consolidated Financial Statements
Schedule
II - Schedule of Valuation and Qualifying Accounts
Additionally,
a two-year Summary of Quarterly Financial Data (unaudited) is included
in “Quarterly Results” under “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation.”
Not
applicable.
Item 9A. CONTROLS
AND PROCEDURES
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,
2007, our disclosure controls and procedures were effective.
Changes in Internal Control Over
Financial Reporting: During the fourth quarter of 2007, 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, 2007.
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, 2007. The report, which expresses an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2007, is included in Item 15
(1) under the heading “Report of Independent Registered Public Accounting
Firm.”
Item 9B. OTHER
INFORMATION
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 19, 2008 (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.
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERANCE
For
information regarding our Directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934, we direct you to the sections 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.
Item
12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
This
information is located in the sections 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 section captioned “Certain Relationships and
Related Transactions” in the Proxy Statement. This information is
incorporated herein by reference.
You will
find this information in the subsection captioned “Principal Accountant Fees and
Services” in the Proxy Statement. This information is incorporated herein by
reference.
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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
|
F-1
|
|
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
F-2
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2007, 2006 and
2005
|
F-3
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the Years
Ended December
31, 2007, 2006 and 2005
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended December
31, 2007, 2006 and 2005
|
F-5
|
|
Notes
to the Consolidated Financial Statements
|
F-6
to F-27
|
2. Financial Statement
Schedule. The
following financial statement schedule of Granite for the years ended December
31, 2007, 2006 and 2005 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
|
S-1
|
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,
2007 and December 31, 2006, and the
results of their
operations and their
cash flows for each of the three years in the period ended December 31,
2007 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, 2007,
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 22,
2008
|
GRANITE CONSTRUCTION
INCORPORATED
|
|||||||
|
CONSOLIDATED BALANCE
SHEETS
|
|||||||
|
(in
thousands, except share and per share data)
|
|||||||
| December 31, |
2007
|
2006
|
|||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
352,434
|
$
|
204,893
|
|||
|
Short-term
marketable securities
|
77,758
|
141,037
|
|||||
|
Accounts
receivable, net
|
397,097
|
492,229
|
|||||
|
Costs
and estimated earnings in excess of billings
|
17,957
|
15,797
|
|||||
|
Inventories
|
55,557
|
41,529
|
|||||
| Real estate held for development and sale | 51,688 | 55,888 | |||||
|
Deferred
income taxes
|
43,713
|
36,776
|
|||||
|
Equity
in construction joint ventures
|
34,340
|
31,912
|
|||||
|
Other
current assets
|
96,969
|
63,144
|
|||||
|
Total
current assets
|
1,127,513
|
1,083,205
|
|||||
|
Property
and equipment, net
|
502,901
|
429,966
|
|||||
|
Long-term
marketable securities
|
55,156
|
48,948
|
|||||
|
Investments
in affiliates
|
26,475
|
21,471
|
|||||
|
Other
assets
|
74,373
|
49,248
|
|||||
|
Total
assets
|
$ |
1,786,418
|
$
|
1,632,838
|
|||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Current
maturities of long-term debt
|
$
|
28,696
|
$
|
28,660
|
|||
|
Accounts
payable
|
213,135
|
257,612
|
|||||
|
Billings
in excess of costs and estimated earnings
|
275,849
|
287,843
|
|||||
|
Accrued
expenses and other current liabilities
|
212,265
|
189,328
|
|||||
|
Total
current liabilities
|
729,945
|
763,443
|
|||||
|
Long-term
debt
|
268,417
|
78,576
|
|||||
|
Other
long-term liabilities
|
46,441
|
58,419
|
|||||
|
Deferred
income taxes
|
17,945
|
22,324
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Minority
interest in consolidated subsidiaries
|
23,471
|
15,532
|
|||||
|
Shareholders’
equity
|
|||||||
|
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 2007
and 2006; issued and outstanding 39,450,923 in 2007 and
41,833,559 in 2006
|
395
|
418
|
|||||
|
Additional
paid-in capital
|
79,007
|
78,620
|
|||||
|
Retained
earnings
|
619,699
|
612,875
|
|||||
|
Accumulated
other comprehensive income
|
1,098
|
2,631
|
|||||
|
Total
shareholders’ equity
|
700,199
|
694,544
|
|||||
|
Total
liabilities and shareholders’ equity
|
$ |
1,786,418
|
$
|
1,632,838
|
|||
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,
|
2007
|
2006
|
2005
|
|||||||
|
Revenue
|
||||||||||
|
Construction
|
$ |
2,321,502
|
$
|
2,524,454
|
$
|
2,287,364
|
||||
|
Material
sales
|
375,700
|
410,159
|
334,290
|
|||||||
|
Real
Estate
|
40,712
|
34,991 | 19,698 | |||||||
|
Total
revenue
|
2,737,914
|
2,969,604
|
2,641,352
|
|||||||
|
Cost
of revenue
|
||||||||||
|
Construction
|
2,002,064
|
2,343,134
|
2,053,253
|
|||||||
|
Material
sales
|
300,234
|
313,329
|
261,300
|
|||||||
|
Real
Estate
|
24,872 | 17,421 | 7,427 | |||||||
|
Total
cost of revenue
|
2,327,170
|
2,673,884
|
2,321,980
|
|||||||
|
Gross
Profit
|
410,744
|
295,720
|
319,372
|
|||||||
|
General
and administrative expenses
|
246,202
|
204,281
|
183,392
|
|||||||
|
Provision
for (reversal of) legal judgment
|
-
|
(4,800
|
) |
9,300
|
||||||
| Goodwill impairment charge |
-
|
18,011 | - | |||||||
|
Gain
on sales of property and equipment
|
10,343
|
10,408
|
8,235
|
|||||||
|
Operating
income
|
174,885
|
88,636
|
134,915
|
|||||||
|
Other
income (expense)
|
||||||||||
|
Interest
income
|
26,925
|
24,112
|
11,573
|
|||||||
|
Interest
expense
|
(6,367
|
) |
(4,492
|
)
|
(6,932
|
)
|
||||
|
Acquisition
expense
|
(7,752 | ) | - | - | ||||||
|
Equity
in income of affiliates
|
5,205
|
2,157
|
1,497
|
|||||||
|
Other,
net
|
5,498
|
2,604
|
1,258
|
|||||||
|
Total other income (expense)
|
23,509
|
24,381
|
7,396
|
|||||||
|
Income before provision for
income taxes and minority interest
|
198,394
|
113,017
|
142,311
|
|||||||
|
Provision
for income taxes
|
65,470
|
38,678
|
41,413
|
|||||||
|
Income before minority
interest
|
132,924
|
74,339
|
100,898
|
|||||||
|
Minority
interest in consolidated subsidiaries
|
(20,859
|
) |
6,170
|
|
(17,748
|
)
|
||||
|
Net
income
|
$ |
112,065
|
$ |
80,509
|
$ |
83,150
|
||||
|
Net income per
share
|
||||||||||
|
Basic
|
$
|
2.74
|
$
|
1.97
|
$
|
2.05
|
||||
|
Diluted
|
$
|
2.71
|
$
|
1.94
|
$
|
2.02
|
||||
|
Weighted average shares of
common stock
|
||||||||||
|
Basic
|
40,866
|
40,874
|
40,614
|
|||||||
|
Diluted
|
41,389
|
41,471
|
41,249
|
|||||||
|
Dividends per
share
|
$
|
0.43
|
$
|
0.40
|
$
|
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,
2005, 2006 and 2007
|
Outstanding
Shares
|
Common
Stock
|
Additional Paid-in
Capital
|
Retained
Earnings
|
Accumulated Other Comprehensive
Income (loss)
|
Unearned
Compensation
|
Total
|
|||||||||||||||
|
Balances,
December 31, 2004
|
41,612,319
|
$
|
416
|
$
|
76,766
|
$
|
482,635
|
$
|
1,475
|
|
$
|
(10,818
|
)
|
$
|
550,474
|
|||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
83,150
|
-
|
-
|
||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||
|
Changes
in net unrealized gains on investments
|
-
|
-
|
-
|
-
|
127
|
-
|
||||||||||||||||
|
Total
comprehensive income
|
83,277
|
|||||||||||||||||||||
|
Restricted
stock issued
|
187,563
|
2
|
5,019
|
-
|
-
|
(5,318
|
)
|
(297
|
)
|
|||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
-
|
-
|
-
|
5,957
|
5,957
|
|||||||||||||||
|
Repurchase
of common stock
|
(204,543
|
)
|
(2
|
)
|
(5,261
|
)
|
-
|
-
|
-
|
(5,263
|
)
|
|||||||||||
|
Cash
dividends on common stock
|
-
|
-
|
-
|
(16,684
|
)
|
-
|
-
|
(16,684
|
)
|
|||||||||||||
| Common stock contributed to ESOP |
85,200
|
1 |
1,993
|
- | - | - |
1,994
|
|||||||||||||||
|
Excess
tax benefit on stock-based compensation
|
- | - | 1,723 | - | - | - | 1,723 | |||||||||||||||
|
Stock
options exercised and other
|
1,471
|
-
|
379
|
-
|
-
|
-
|
379
|
|||||||||||||||
|
Balances,
December 31, 2005
|
41,682,010
|
417
|
80,619
|
549,101
|
1,602
|
(10,179
|
)
|
621,560
|
||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
80,509
|
-
|
-
|
||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||
|
Changes
in net unrealized gains on investments
|
-
|
-
|
-
|
-
|
1,029
|
-
|
||||||||||||||||
|
Total
comprehensive income
|
81,538
|
|||||||||||||||||||||
|
Reclassification
of restricted stock balance upon adoption of SFAS
123-R
|
- | - | (10,179 | ) | - | - | 10,179 | - | ||||||||||||||
|
Restricted
stock issued
|
202,730
|
2
|
(2
|
) |
-
|
-
|
-
|
|
-
|
|
||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
7,572
|
-
|
-
|
-
|
7,572
|
|||||||||||||||
|
Repurchase
of common stock
|
(159,285
|
)
|
(2
|
)
|
(7,373
|
)
|
-
|
-
|
-
|
(7,375
|
)
|
|||||||||||
|
Cash
dividends on common stock
|
- |
-
|
-
|
(16,735
|
)
|
-
|
-
|
(16,735
|
)
|
|||||||||||||
|
Common
stock contributed to ESOP
|
45,300
|
-
|
1,995
|
-
|
-
|
-
|
1,995
|
|||||||||||||||
|
Excess
tax benefit on stock-based compensation
|
- | - | 3,390 | - | - | - | 3,390 | |||||||||||||||
|
Stock
options exercised and other
|
62,804
|
1
|
2,598
|
-
|
-
|
-
|
2,599
|
|||||||||||||||
|
Balances,
December 31, 2006
|
41,833,559
|
418
|
78,620
|
612,875
|
2,631
|
-
|
|
694,544
|
||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
112,065
|
-
|
-
|
||||||||||||||||
|
Other
comprehensive income:
|
||||||||||||||||||||||
|
Changes
in net unrealized gains on investments
|
-
|
-
|
-
|
-
|
(1,533
|
) |
-
|
|||||||||||||||
|
Total
comprehensive income
|
110,532
|
|||||||||||||||||||||
|
Restricted
stock issued
|
149,409
|
2
|
(2
|
) |
-
|
-
|
-
|
-
|
||||||||||||||
| Stock issued for services | 19,712 | - | 1,134 | - | - | - | 1,134 | |||||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
6,208
|
-
|
-
|
-
|
6,208
|
|||||||||||||||
|
Repurchase
of common stock
|
(2,558,726
|
) |
(25
|
) |
(11,092
|
) |
(86,897
|
) |
-
|
-
|
(98,014
|
) | ||||||||||
|
Cash
dividends on common stock
|
- |
-
|
-
|
(17,710
|
) |
-
|
-
|
(17,710
|
) | |||||||||||||
| Excess tax benefit on stock-based compensation | - | - | 3,659 | - | - | - | 3,659 | |||||||||||||||
|
Impact
of adopting FASB Interpretation No. 48
|
- | - | - | (634 | ) | (634 | ) | |||||||||||||||
|
Stock
options exercised and other
|
6,969
|
-
|
480
|
-
|
-
|
-
|
480
|
|||||||||||||||
|
Balances,
December 31, 2007
|
39,450,923
|
$
|
395
|
$
|
79,007
|
$
|
619,699
|
$
|
1,098
|
$
|
-
|
$
|
700,199
|
|||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
(in
thousands)
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
Operating
Activities
|
||||||||||
|
Net
income
|
$
|
112,065
|
$
|
80,509
|
$
|
83,150
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Goodwill
impairment charge
|
-
|
18,011 | - | |||||||
|
Depreciation,
depletion and amortization
|
82,157
|
69,180
|
65,801
|
|||||||
|
Gain
on sales of property and equipment
|
(10,343
|
) |
(10,408
|
)
|
(8,235
|
)
|
||||
|
Change
in deferred income taxes
|
(7,822
|
) |
(29,462
|
)
|
(8,839
|
) | ||||
|
Stock-based compensation
|
7,342
|
7,572
|
5,957
|
|||||||
|
Excess
tax benefit on stock-based compensation
|
(3,659 | ) |
(3,390
|
) |
-
|
|||||
|
Common
stock contributed to ESOP
|
-
|
1,995
|
1,994
|
|||||||
|
Minority
interest in consolidated subsidiaries
|
20,859
|
(6,170
|
) |
17,748
|
||||||
|
Acquisition
expense
|
7,752 | - | - | |||||||
|
Equity
in income of affiliates
|
(5,205
|
) |
(2,157
|
)
|
(1,497
|
)
|
||||
|
Gain
on sale of equity investment
|
- | - | (1,187 | ) | ||||||
|
Changes
in assets and liabilities, net of the effects of
acquisitions:
|
||||||||||
|
Accounts
receivable, net
|
106,886
|
(18,905
|
)
|
(115,255
|
)
|
|||||
|
Inventories
|
(9,913
|
) |
(8,368
|
)
|
(1,450
|
) | ||||
|
Real
estate held for development and sale
|
5,179 |
(10,289
|
) |
(13,071
|
) | |||||
|
Equity
in construction joint ventures
|
(2,428
|
) |
(4,504
|
)
|
(6,513
|
)
|
||||
|
Other
assets
|
(12,624
|
) |
(10,073
|
)
|
(16,061
|
)
|
||||
|
Accounts
payable
|
(44,502
|
) |
24,805
|
41,025
|
||||||
|
Billings
in excess of costs and estimated earnings, net
|
(14,154
|
) |
106,823
|
|
75,206
|
|||||
|
Accrued
expenses and other liabilities
|
3,198
|
54,474
|
27,728
|
|||||||
|
Net
cash provided by operating activities
|
234,788
|
259,643
|
146,501
|
|||||||
|
Investing
Activities
|
||||||||||
|
Purchases
of marketable securities
|
(152,954
|
) |
(233,868
|
)
|
(96,877
|
)
|
||||
|
Maturities of
marketable securities
|
195,313
|
153,024
|
111,975
|
|||||||
|
Additions
to property and equipment
|
(118,612
|
) |
(116,238
|
)
|
(102,829
|
)
|
||||
|
Proceeds
from sales of property and equipment
|
17,777
|
16,398
|
25,012
|
|||||||
|
Proceeds
from sales of equity investment
|
-
|
-
|
1,759
|
|||||||
|
Acquisition
of business
|
(76,427 | ) | - | - | ||||||
|
Contributions
to affiliates
|
(6,805
|
) |
(6,982
|
) |
(5,405
|
) | ||||
|
Acquisition
of minority interest
|
(28,495 | ) | - | - | ||||||
|
Distributions
from affiliates
|
- |
1,970
|
669
|
|||||||
|
Other
investing activities
|
3,459
|
2,013
|
911
|
|||||||
|
Net
cash used in investing activities
|
(166,744
|
) |
(183,683
|
)
|
(64,785
|
)
|
||||
|
Financing
Activities
|
||||||||||
|
Proceeds
from long-term debt
|
330,260
|
56,869
|
29,100
|
|||||||
|
Repayments
of long-term debt
|
(139,598
|
) |
(92,873
|
)
|
(44,498
|
)
|
||||
|
Repurchase
of common stock
|
(98,014
|
) |
(7,375
|
)
|
(5,263
|
)
|
||||
|
Dividends
paid
|
(16,764
|
) |
(16,722
|
)
|
(16,675
|
)
|
||||
|
Contributions
from minority partners
|
33,287
|
6,171
|
946
|
|||||||
|
Distributions
to minority partners
|
(33,813
|
) |
(23,007
|
)
|
(7,451
|
)
|
||||
|
Excess
tax benefit on stock-based compensation
|
3,659 |
3,390
|
-
|
|||||||
|
Stock
options and other financing activities
|
480
|
2,599
|
379
|
|||||||
|
Net
cash provided by (used in) financing activities
|
79,497
|
(70,948
|
)
|
(43,462
|
)
|
|||||
|
Increase in
cash and cash equivalents
|
$ |
147,541
|
$ |
5,012
|
$ |
38,254
|
||||
| Cash and cash equivalents at beginning of year |
204,893
|
199,881
|
161,627
|
|||||||
| Cash and cash equivalents at end of year | $ |
352,434
|
$ |
204,893
|
$ |
199,881
|
||||
|
Supplementary
Information
|
||||||||||
|
Cash
paid during the period for:
|
||||||||||
|
Interest
|
$
|
6,508
|
$
|
5,009
|
$
|
6,801
|
||||
|
Income
taxes
|
66,503
|
79,511
|
49,551
|
|||||||
|
Non-cash
investing and financing activity:
|
||||||||||
|
Restricted
stock issued for services, net
|
$
|
11,190
|
$
|
9,774
|
$
|
5,021
|
||||
|
Dividends
accrued but not paid
|
5,129
|
4,184
|
4,170
|
|||||||
|
Financed
acquisition of assets
|
3,202
|
5,335
|
2,337
|
|||||||
|
Debt
repayments from sale of assets
|
9,237 | 13,398 | - | |||||||
|
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, 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. We have consolidated these
joint ventures where we have determined that through our participation in these
joint ventures we have a variable interest and are the primary beneficiary as
defined by Financial Accounting Standards Board Interpretation No. 46 (revised
December 2003) Consolidation of Variable
Interest Entities, (“FIN 46”). 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.”
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 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 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. During 2007, we
settled various contract issues for which the associated cost was included in
prior periods (see Note 2). Provisions are recognized in the 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.
Revenue
from the sale of materials is recognized when delivery occurs and risk of
ownership passes to the customer.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Real
Estate Transactions: 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.
Concentrations: We maintain
the majority of 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.
Revenue
earned by both Granite West and Granite East from federal, state and
local government agencies amounted to $1,907.0 million (69.6% of our total
revenue) in 2007, $2,026.0 million (68.2%) in 2006 and $1,808.0 million
(68.5%) in 2005. Revenue from the California Department of Transportation
represented $272.5 million (10.0%) in 2007, $245.2 million (8.3%)
in 2006 and $127.1 million (4.8%) in 2005. At December 31, 2007 and 2006, we had
significant amounts receivable from these agencies. 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.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Inventories:
Inventories consist primarily of quarry products valued at the lower of average
cost or market.
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. We capitalized interest costs related to certain
self-constructed assets of $4.1 million in 2007, $4.8 million in
2006 and $3.3 million in 2005. 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.
We
perform goodwill 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 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. To the extent that the carrying amount of a reporting unit’s goodwill
exceeds its implied fair value, we recognize a goodwill impairment
loss.
Other
intangible assets include covenants not to compete, permits and trade name 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
and was not material at December 31, 2007, 2006 or 2005.
Accrued Insurance Costs: 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 $250,000
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.
Stock-Based
Compensation: As more fully described in
Note
12, we provide certain stock-based compensation under our Amended and
Restated 1999 Equity Incentive Plan (the “Plan”). Prior to January 1, 2006, we
accounted for stock-based compensation under Statement of Financial Accounting
Standard No. 123. Effective January 1, 2006, we adopted FASB Statement No. 123
(revised 2004), Share-Based Payment
(“SFAS 123-R”) and Securities and Exchange Commission Staff Accounting
Bulletin No. 107 (“SAB 107”) using the modified prospective transition method.
Additionally,
during 2007 we concluded our assessment of the impact of FASB Staff Position No.
SFAS 123(R)-3, “Transition Election Related to
Accounting for Tax Effects of Share-Based Payments Awards” (“SFAS
123(R)-3”). Under the provisions of SFAS 123(R)-3, we elected to
adopt the alternative method of calculating the historical pool of windfall tax
benefits.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes: Deferred taxes are provided on a
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss carry-forwards and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities on
the financial statements and their respective
tax
bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
The
Company accounts for uncertain tax positions in accordance with Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes − an
Interpretation of FASB Statement 109 (“FIN 48”). Accordingly, the Company
reports a liability for unrecognized tax benefits resulting from uncertain tax
positions taken or expected to be taken in a tax return. The Company recognizes
interest and penalties, if any, related to unrecognized tax benefits as other
expense in the statement of income.
Computation of Earnings Per
Share: Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding,
excluding restricted common stock. Diluted earnings per share is computed
giving effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of the incremental
common shares issuable upon the exercise of stock options and upon the vesting
of restricted common stock.
Reclassifications: Certain
financial statement items have been reclassified to conform to the current
year’s format. These reclassifications had no impact on previously reported net
income, financial position or cash flows.
Recent Accounting Pronouncements:
In September 2006, the FASB issued
Statement of Financial Accounting Standard No. 157, Fair
Value Measurements (“SFAS 157”) which defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB partially deferred
the effective date of SFAS 157 for all non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually) to fiscal years beginning after November 15, 2008. We will adopt SFAS 157 during 2008, except
as it applies to those non-financial assets and non-financial liabilities for
which the effective date has been deferred. The adoption of SFAS 157 is not
expected to have a material impact on our financial position, results of
operations or cash flows.
In February 2007, the FASB issued SFAS
No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities
to choose to measure many financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS 159 is effective for us
beginning January 1, 2008. We have chosen not to elect the fair value
option.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 160 is an
amendment of Accounting Research Bulletin No. 51 and is effective for us as of
January 1, 2009. Under SFAS No. 160, the ownership interests in subsidiaries
held by parties other than the parent must be clearly identified, labeled, and
presented in the consolidated statement of financial position within equity, but
separate from the parent’s equity and the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income.
When a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value. The
gain or loss on the deconsolidation of the subsidiary is measured using the fair
value of any noncontrolling equity investment rather than the carrying amount of
that retained investment. Lastly, SFAS No. 160 requires entities provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. We are
still assessing the impact on our consolidated financial position, results of
operations and cash flows.
In December 2007, the FASB issued SFAS
No. 141-R, Business
Combinations (“SFAS No. 141-R”) which revised SFAS No. 141, Business
Combinations (“SFAS No. 141”). This pronouncement is effective for
us as of January 1, 2009. Under SFAS No.
141, organizations utilized the announcement date as the measurement date for
the purchase price of the acquired entity. SFAS No. 141-R requires measurement
at the date the acquirer obtains control of the acquiree, generally referred to
as the acquisition date. SFAS No. 141-R will have a significant impact on the
accounting for transaction costs, restructuring costs as well as the initial
recognition of contingent assets and liabilities assumed during a business
combination. Under SFAS No. 141-R, adjustments to the acquired entity’s deferred
tax assets and uncertain tax position balances occurring outside the measurement
period are recorded as a component of the income tax expense, rather than
goodwill. As the provisions of SFAS No. 141-R are applied prospectively, the
impact on us cannot be determined until the
transactions occur.
GRANITE CONSTRUCTION
INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS - (Continued)
2. Change in Accounting
Estimates
Our gross
profit in the years ended December 31, 2007, 2006 and 2005 include the
effects of changes in the estimates of the profitability of certain
projects.
Granite
East
The net
effect of these estimate changes increased gross profit for the year ended
December 31, 2007 and decreased gross profit for the years ended December 31,
2006 and 2005. The following table presents the changes in Granite
East accounting estimates for the years ended December 31, 2007, 2006 and
2005 (dollars in millions):
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
Reduction
in gross profit
|
$
|
(57.0 | ) | $ | (153.0 | ) | $ | (62.0 | ) | |
|
Increase
in gross profit
|
|
60.0
|
|
30.0
|
|
31.0
|
||||
|
Net
increase (reduction) in gross profit
|
$ |
3.0
|
$ |
(123.0
|
) | $ |
(31.0
|
) | ||
|
Number
of projects with significant downward estimate changes*
|
6
|
18
|
13
|
|||||||
|
Range
of reduction to gross profit from each project**
|
$ |
2.0
- 32.0
|
$ |
1.0
- 49.0
|
$ |
2.0
- 8.0
|
||||
|
Number
of projects with significant upward estimate changes*
|
12
|
9
|
4
|
|||||||
|
Range
of increase to gross profit from each project**
|
$ |
1.0
- 26.0
|
$ |
1.0
- 7.0
|
$ |
1.0
- 12.0
|
||||
|
* Significant is
defined as a change with a net gross margin impact of $1.0 million or
greater and represents $54.0 of the $57.0 total reduction in gross
profit.
**
The reduction in gross profit from each project is net of any
increase in the respective periods. The increase in gross profit
from each project is net of any reduction in the respective
periods.
|
||||||||||
The
downward adjustments in estimated project profitability were made in response to
unanticipated changes in project conditions occurring during the periods when
recorded and were due to a variety of factors, including changes in productivity
and quantity estimates based on experience gained in the period, site conditions
that differed materially from our expectations, design issues on design/build
projects, issues related to subcontractors, costs associated with owner
directed scope changes and owner delays, changes in cost expectations in
response to market factors for labor and certain materials and liquidated
damages.
The
following table presents additional information about the 6 projects
with significant downward estimate changes in 2007 (dollars
in millions):
|
|
Number of
Projects
|
Total Contract
Value
|
Gross Profit Reduction
Impact
|
Backlog at December 31,
2007
|
Percent of Total Granite
East Backlog at December 31, 2007
|
|||||||||||
|
Projects
between 96% and 99% complete
|
5
|
$
|
1,024.0
|
$
|
51.0
|
$
|
25.0
|
2.1
|
||||||||
|
Project
at 49% complete
|
1
|
51.0
|
3.0
|
26.0
|
2.1
|
|||||||||||
|
Total
for projects with significant downward changes
|
6
|
$
|
1,075.0
|
$
|
54.0
|
$
|
51.0
|
4.2
|
||||||||
We
recorded minority interest related to these estimate changes of approximately
$2.4 million, $24.0 million and
$3.4 million for years ended December 31, 2007, 2006 and
2005, respectively. Two of our joint venture projects are currently
forecasted at a loss and will require additional capital contributions from our
minority partners if the forecasts do not improve. Our joint venture agreements
require that such capital contributions be made if needed. Based on our most
recent assessment of our partners’ financial condition, we currently believe
that one of our partners does not have the ability to contribute all of the
additional capital that will be needed if the project forecasts do not improve.
Included in minority interest for the years ended December 31, 2007
and 2006 is expense related to potentially uncollectible partners’ balances
of approximately $4.6 million and $9.4 million,
respectively. Minority interest balances related to loss projects of
$2.7 million
and $14.8 million at December 31, 2007 and 2006, respectively have been included
in other long-term assets in our consolidated balance sheet.
F-10
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Nine of
the twelve Granite East projects that generated significant increased gross
profit from changes in estimates during the year ended December 31, 2007
were complete or substantially complete at December 31, 2007, and
the remaining three projects ranged
between 92% and 95% complete. The increased gross profit
resulted from a combination of the settlement of certain revenue issues with the
project owners and the resolution of other project uncertainties. Six of the
twelve projects that generated significant increased gross profit had
experienced significant margin deterioration in prior
periods.
Granite
West
During the
year ended December 31, 2007, Granite West recognized increases
in gross profit from the net effects of changes in the estimates of project
profitability of approximately
$23.0 million. This compares with an decrease of approximately
$18.0 million from the net effects of estimate changes during
the year ended December 31, 2006. The increased Granite
West profitability estimates during the year ended December 31, 2007
were due primarily to the settlement of outstanding issues with contract owners,
higher productivity than originally estimated and the resolution of certain
project uncertainties.
We
currently have a highway project that was transferred to Granite
West from our legacy Heavy Construction Division in connection with
our realignment that involves construction of seven miles of highway in
western Oregon. The project includes construction of at least
eight new structures over creeks, rivers and a railroad, as well as construction
of several retaining walls, culverts and drainage improvements. While
clearing and excavating the site, numerous and massive deep-seated
landslides (“Landslides”)
throughout the seven-mile project site were discovered. At December 31,
2006, we had forecast this project at a loss of approximately $20.0 million,
largely due to preliminary designs and estimates of cost associated with these
Landslides. During the quarter ended March 31, 2007, a
preliminary Landslide mitigation design was completed along with our
analysis of the impact of these Landslides on the project. As a result of this
analysis, we have determined that the potential cost would be significantly
higher than our earlier estimates and that the project would take approximately
two years longer to complete than originally anticipated. In December 2007,
after conferring with the Oregon Department of Transportation (“ODOT”) on the
most cost effective way to deal with these differing site conditions,
we agreed
upon a written change order with ODOT that included a negotiated suspension of
planned construction work aimed at minimizing on-going overhead and site direct
costs while the parties jointly pursue a value engineering approach for
determining more desirable and cost effective solutions to the Landslide
conditions and to establish a process for determining and sharing project costs
and time adjustments resulting from the value engineering
approach.
We
anticipate that we will resume construction work no earlier than May 2008.
No agreement has been reached regarding the responsibility for the Landslide
mitigation costs. Should negotiations fail, both parties have tentatively agreed
to take the issue to the standing Dispute Review Board under the dispute
resolution provisions of the contract, resulting
in a non-binding ruling that is admissible as evidence in a future court
proceeding. Upon completion
of the value engineering redesign and cost estimate, and ideally a
negotiated agreement on the final cost and schedule to complete the
project, Granite will restart construction under a signed change order issued by
ODOT. Because there is remaining uncertainty surrounding the ultimate
determination of responsibility for the Landslide mitigation costs as well
as what those costs will ultimately
be after the value engineering process is complete, we have not
recorded any adjustments to our project forecast during the year ended December
31, 2007.
Resolution of Revenue
Issues
We
believe we are entitled to additional compensation related to some of our
downward estimate changes and are actively pursuing these issues with the
contract owners. However, the amount and timing of any future recovery is highly
uncertain. While we recognize the impact of estimated costs immediately when
known, under our accounting policies we do not recognize revenue from contract
changes until we have a signed change order or executed claim settlement. We
believe that our current estimates of gross profit are achievable.
However, it is possible that the actual cost to complete will vary from our
current estimate and any future estimate changes could be
significant.
When
there are contract forecast changes having the significance of those we
experienced in the year ended December 31, 2007, 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. In our review of the changes for 2007, we did
not identify any material amounts that should have been recorded in a prior
period.
F-11
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Marketable
Securities
The
carrying amounts of marketable securities were as follows at December 31, 2007
and 2006 (in thousands):
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
|||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
||||||||||||||
|
Securities
classified as current:
|
|||||||||||||||||||
|
U.S.
Government and agency obligations
|
$
|
22,503
|
$
|
34,529
|
$
|
-
|
$
|
-
|
$
|
22,503
|
$
|
34,529
|
|||||||
|
Commercial
paper
|
6,473
|
58,493
|
-
|
-
|
6,473
|
58,493
|
|||||||||||||
|
Municipal
bonds
|
14,616
|
15,037
|
-
|
-
|
14,616
|
15,037
|
|||||||||||||
|
Mutual
funds
|
-
|
- |
34,166
|
32,978 |
34,166
|
32,978 | |||||||||||||
|
Total
current marketable securities
|
43,592
|
108,059
|
34,166
|
32,978
|
77,758
|
141,037
|
|||||||||||||
|
Securities
classified as long-term:
|
|||||||||||||||||||
|
U.S.
Government and agency obligations
|
34,255
|
37,315
|
-
|
-
|
34,255
|
37,315
|
|||||||||||||
|
Municipal
bonds
|
20,901
|
11,633
|
-
|
-
|
20,901
|
11,633
|
|||||||||||||
|
Total
long-term marketable securities
|
55,156
|
48,948
|
-
|
-
|
55,156
|
48,948
|
|||||||||||||
|
Total
marketable securities
|
$ |
98,748
|
$ |
157,007
|
$ |
34,166
|
$ |
32,978
|
$ |
132,914
|
$ |
189,985
|
|||||||
Held-to-maturity
investments are carried at amortized cost, which approximates fair value.
Unrealized holding gains and losses for all debt securities were insignificant
for the years ended December 31, 2007 and 2006. We recognized unrealized
holding losses of $2.5 million ($1.5 million after tax), and
gains of $1.7 million ($1.0 million after tax) and $0.2
million ($0.1 million after tax) related to our available-for-sale
investment in mutual funds as a component of the other comprehensive income for
the years ended December 31, 2007, 2006 and 2005, respectively.
At
December 31, 2007, scheduled maturities of held-to-maturity investments were as
follows (in thousands):
|
Within
one year
|
$
|
43,592
|
||
|
After
one year through five years
|
55,156
|
|||
|
Total
|
$
|
98,748
|
For the
years ended December 31, 2007 and 2006, changes in our marketable securities
were as follows (in thousands):
|
2007
|
2006
|
||||||||||||||||||
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
Held-to-Maturity
|
Available-for-Sale
|
Total
|
||||||||||||||
|
Purchases
|
$
|
149,264
|
$
|
3,690
|
$
|
152,954
|
$
|
228,626
|
$
|
5,242
|
$
|
233,868
|
|||||||
|
Maturities
|
(195,313
|
) |
-
|
(195,313
|
) |
(153,024
|
)
|
-
|
|
(153,024
|
)
|
||||||||
|
Amortization
and other
|
(12,210
|
) |
-
|
(12,210
|
) |
5,931
|
|
-
|
5,931
|
|
|||||||||
|
Unrealized
gains (losses)
|
-
|
(2,502
|
) |
(2,502
|
) |
-
|
1,710
|
1,710
|
|||||||||||
|
Net
Change
|
$ |
(58,259
|
) | $ |
1,188
|
$ |
(57,071
|
) | $ |
81,533
|
|
$ |
6,952
|
$ |
88,485
|
|
|||
F-12
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Accounts Receivable (in
thousands)
|
|
|||||||
|
December
31,
|
2007
|
2006
|
|||||
|
Construction
contracts:
|
|||||||
|
Completed
and in progress
|
$
|
193,561
|
$
|
231,226
|
|||
|
Retentions
|
158,389
|
191,613
|
|||||
|
Total
construction contracts
|
351,950
|
422,839
|
|||||
|
Construction
material sales
|
32,525
|
47,082
|
|||||
|
Other
|
15,011
|
24,735
|
|||||
|
Total
gross accounts receivable
|
399,486
|
494,656
|
|||||
|
Less:
allowance for doubtful accounts
|
(2,389
|
) |
(2,427
|
) | |||
|
Total net accounts receivable
|
$
|
397,097
|
$
|
492,229
|
|||
Accounts
receivable includes amounts billed and billable for public and private contracts
and do not bear interest. The balances billed but not paid by customers pursuant
to retainage provisions in construction contracts generally become due upon
completion of the contracts and acceptance by the owners. Retainage amounts of
$158.4 million at December 31, 2007 are expected to be collected as
follows: $147.2 million in 2008, $3.2 million in 2009 and $8.0 million in
2010.
5. Construction Joint
Ventures
We
participate in various construction joint venture partnerships. Generally,
each construction joint venture is formed to accomplish a specific project and
is jointly controlled by the joint venture partners. 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 is limited to our stated percentage interest in the
project. Although the venture’s contract with the project owner typically
requires joint and several liability, our agreements with our joint venture
partners provide that each partner will assume and pay its full proportionate
share of any losses resulting from a project. We have no significant
commitments beyond completion of the contract.
We have
determined that certain of these joint ventures are variable interest entities
as defined by FASB Interpretation No. 46 (“FIN 46”). Accordingly, we
have consolidated those joint ventures where we have determined that we are the
primary beneficiary. The joint ventures we have consolidated are engaged
in eight active construction projects with total contract values ranging
from $126.9 million to $466.9 million. Our proportionate share of these
consolidated joint ventures ranges from 52.5% to 99.0%.
Consistent
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,” we account for our share of the operations of
construction joint ventures in which we have determined we are not the primary
beneficiary on a pro rata basis in the consolidated statements of income and as
a single line item in the consolidated balance sheets. The joint ventures
in which we hold a significant interest but are not the primary beneficiary are
engaged in seven active
construction projects with total contract values ranging from $94.4 million to
$624.9 million. Our proportionate share of equity in these joint ventures
ranges from 20% to 40%, the most significant of which includes a 40% share
and
a 20% share, respectively, of two rapid transit projects in New
York.
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.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
combined assets, liabilities and net assets of unconsolidated joint ventures in
which we have determined we are not the primary beneficiary are as follows (in
thousands):
|
|
|||||||
|
December
31,
|
2007
|
2006
|
|||||
|
Assets:
|
|||||||
|
Total
|
$
|
272,603
|
$
|
158,178
|
|||
|
Less
other partners’
interest
|
195,394
|
103,723
|
|||||
|
Company’s
interest
|
77,209
|
54,455
|
|||||
|
Liabilities:
|
|
||||||
|
Total
|
186,784
|
79,183
|
|||||
|
Less
other partners’
interest
|
143,915
|
56,640
|
|||||
|
Company’s
interest
|
42,869
|
22,543
|
|||||
|
Company’s
interest in net assets
|
$
|
34,340
|
$
|
31,912
|
|||
The
revenue and costs of revenue of unconsolidated joint ventures in which we have
determined we are not the primary beneficiary are as follows (in thousands):
|
|
||||||||||
|
December
31,
|
2007
|
2006
|
2005
|
|||||||
|
Revenue:
|
||||||||||
|
Total
|
$
|
479,901
|
$
|
349,945
|
$
|
228,180
|
||||
|
Less
other partners’
interest
|
364,663
|
239,045
|
152,980
|
|||||||
|
Company’s
interest
|
115,238
|
110,900
|
75,200
|
|||||||
|
Cost
of revenue:
|
||||||||||
|
Total
|
446,000
|
281,622
|
213,176
|
|||||||
|
Less
other partners’
interest
|
337,785
|
192,802
|
144,022
|
|||||||
|
Company’s
interest
|
108,215
|
88,820
|
69,154
|
|||||||
|
Company’s
interest in gross profit
|
$
|
7,023
|
$
|
22,080
|
$
|
6,046
|
||||
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 is
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 our joint venture
arrangements beyond our proportionate share include a partner’s inability to
contribute additional funds to the venture in the event the project incurs a
loss, or additional costs that we could incur should a partner fail to provide
the services and resources toward project completion that had been committed to
in the joint venture agreement. At December 31, 2007, approximately $650.0
million of work representing our partners’ share of unconsolidated and line item
joint venture contracts in progress had yet to be
completed.
6. Real Estate Partnerships and
Investment in Affiliates
We
participate in real estate partnerships through our Granite Land Company
(“GLC”) subsidiary. Generally, each partnership is formed to accomplish a
specific real estate development project. We have determined that certain of
these partnerships are variable interest entities as defined by FIN 46.
Accordingly, we have consolidated those partnerships where we have determined
that we are the primary beneficiary. At December 31, 2007, the partnerships we
have consolidated were engaged in development projects with total assets ranging
from approximately $0.4 million to $26.8 million. Of the approximately $51.7
million classified as real estate held for development and sale and
an additional $14.8 million included in property and equipment on our
consolidated balance sheet at December 31, 2007, approximately $58.9
million was pledged as collateral for the obligations of consolidated real
estate partnerships. Our proportionate share of the results of these
partnerships varies depending on the ultimate profitability of the
partnerships.
F-14
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Included
in the $51.7 million
balance of real estate held for development
and sale
at December 31, 2007 is approximately $39.5 million
related to residential housing projects. Due
to the downturn in the residential housing market we assessed whether our
investments related to these projects were impaired. As a result of
this assessment, we recorded an impairment charge of $3.0 million in the quarter
ended December 31, 2007 related to a project in central
California,
which is an area that has been particularly impacted by the slowing demand for
new housing construction.
This
impairment charge was calculated as the excess of the carrying amount over the
estimated fair value (computed using probability – weighted discounted future
cash flows) and was recorded in cost of revenue in our consolidated income
statement. We will continue to assess the carrying amount of this
portfolio given the ongoing uncertainties in the housing markets. There is no
assurance that future events will not adversely effect recoverability that could
result in impairment.
We
account for our share of the operations of real estate partnerships in which we
have determined we are not the primary beneficiary using the equity method.
Additionally we have other investments in affiliates that are accounted for
using the equity method. The most significant of these investments is a 50%
interest in a limited liability company which owns and operates an asphalt
terminal in Nevada, a 48% interest in a limited liability company which develops
land in Oregon, and a 42% interest in a limited partnership which
develops land in Texas. We have made advances to the asphalt terminal limited
liability company of which $5.0 million remained outstanding at December 31,
2007.
Our
investments in affiliates comprised (in thousands):
|
December
31,
|
2007
|
2006
|
|||||
|
Equity
method investments in affiliates
|
$
|
22,304
|
$
|
17,298
|
|||
|
Cost
method investment
|
4,171
|
4,173
|
|||||
|
Total
investments in affiliates
|
$
|
26,475
|
$
|
21,471
|
|||
The
following table provides summarized financial information on a combined
100% basis for our affiliates accounted for under the equity method (in
thousands):
|
December 31,
|
2007
|
2006
|
|||||
|
Balance
sheet data:
|
|
|
|||||
|
Current
assets
|
$ |
74,922
|
$ |
20,279
|
|||
|
Long-term
assets
|
73,185
|
107,562
|
|||||
|
Total
assets
|
148,107
|
127,841
|
|||||
|
Current
liabilities
|
18,518
|
17,433
|
|||||
|
Long-term
liabilities
|
61,705
|
73,208
|
|||||
|
Total
liabilities
|
80,223
|
90,641
|
|||||
|
Net
assets
|
$ |
67,884
|
$ |
37,200
|
|||
|
Company’s
interest in affiliates’ net assets
|
$ |
22,304
|
$ |
17,298
|
|||
|
|
||||||||||
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
Earnings
data:
|
||||||||||
|
Revenue
|
$
|
56,912
|
$
|
50,353
|
$
|
30,732
|
||||
|
Gross
profit
|
32,797
|
9,580
|
8,616
|
|||||||
|
Earnings
before taxes
|
20,502
|
3,158
|
2,170
|
|||||||
|
Net
income
|
20,502
|
3,158
|
2,170
|
|||||||
|
Company’s
interest in affiliates’ net income
|
5,205
|
2,157
|
1,497
|
|||||||
F-15
GRANITE CONSTRUCTION
INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Property and Equipment
(in
thousands)
|
|
|||||||
|
December
31,
|
2007
|
2006
|
|||||
|
Land
and land improvements
|
$
|
93,862
|
$
|
56,797
|
|||
|
Quarry
property
|
135,749
|
112,654
|
|||||
|
Buildings
and leasehold improvements
|
79,663
|
72,975
|
|||||
|
Equipment
and vehicles
|
843,570
|
804,370
|
|||||
|
Office
furniture and equipment
|
28,889
|
26,006
|
|||||
|
Gross property and equipment
|
1,181,733
|
1,072,802
|
|||||
|
Less
accumulated depreciation and depletion
|
678,832
|
642,836
|
|||||
|
Net property and equipment
|
$
|
502,901
|
$
|
429,966
|
|||
Depreciation
and depletion expense for the years ended December 31, 2007, 2006 and 2005 was
$81.3 million, $70.7 million and $65.1 million, respectively. Certain property
and equipment in 2007 was added as a result of acquisitions (see Note
17).
We have
recorded liabilities associated with our legally required obligations to reclaim
owned and leased quarry property and related facilities in accordance with SFAS
143. The following is a reconciliation of these asset retirement
obligations which are primarily included in other
long-term liabilities on our consolidated balance sheet (in
thousands):
|
|
|||||||
|
December
31,
|
2007
|
2006
|
|||||
|
Beginning
balance
|
$
|
12,680
|
$
|
11,901
|
|||
|
Revisions
to estimates
|
4,742
|
216
|
|||||
|
Liabilities
incurred
|
1,800 | - | |||||
|
Liabilities
settled
|
(317
|
) |
(18
|
)
|
|||
|
Accretion
|
624
|
581
|
|||||
|
Ending
balance
|
$
|
19,529
|
$
|
12,680
|
|||
8. Intangible
Assets
The
following table indicates goodwill which is included in other assets on our
consolidated balance sheets (in thousands):
|
|
|||||||
|
December
31,
|
2007
|
2006
|
|||||
|
Granite
West
|
$
|
9,900
|
$
|
9,900
|
|||
|
Total
goodwill
|
$
|
9,900
|
$
|
9,900
|
|||
There
were no additions to goodwill during 2007 or 2006. During 2006, a goodwill
impairment charge of $18.0 million was recorded in our Granite East segment
associated with our New York-based Granite Northeast (“GNE”) reporting
unit. This impairment conclusion was reached due to continuing losses at
GNE, including significant unexpected losses in the quarter ended December 31,
2006.
We
perform goodwill impairment tests in accordance with Financial Accounting
Standard No. 142, “Goodwill and Other Intangible Assets” on an annual basis at
the end of the 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 would measure 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. To the extent that the carrying amount of a
reporting unit’s goodwill exceeds its implied fair value, we recognize a
goodwill impairment loss.
F-16
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
following other intangible assets are included in other assets on our
consolidated balance sheets (in thousands):
|
December 31,
2007
|
||||||||||
|
Gross
Value
|
Accumulated
Amortization
|
Net
Value
|
||||||||
|
Amortized
intangible assets:
|
|
|
|
|||||||
|
Permits
|
$ |
36,362
|
(1,953
|
)
|
$ |
34,409
|
||||
|
Trade
names
|
1,425
|
(972
|
)
|
453
|
||||||
|
Covenants
not to compete
|
1,661 | (410 | ) | 1,251 | ||||||
|
Other
|
1,712
|
(671
|
)
|
1,041
|
||||||
|
Total
amortized intangible assets
|
$
|
41,160
|
$
|
(4,006
|
)
|
$
|
37,154
|
|||
|
|
December 31,
2006
|
|||||||||
|
|
Gross
Value
|
Accumulated
Amortization
|
Net
Value
|
|||||||
|
Amortized
intangible assets:
|
||||||||||
|
Permits
|
$ |
2,000
|
(761
|
)
|
$ |
1,239
|
||||
|
Trade
names
|
1,425
|
(768
|
)
|
657
|
||||||
|
Covenants
not to compete
|
161 | (109 | ) | 52 | ||||||
|
Other
|
603
|
(193
|
)
|
410
|
||||||
|
Total
amortized intangible assets
|
$
|
4,189
|
$ |
(1,831
|
)
|
$ |
2,358
|
|||
During
2007, our intangible assets increased primarily due to our business
acquisitions (see Note 17). Amortization
expense related to these intangible assets for the years ended December 31,
2007, 2006 and 2005 was $2.2 million, $0.6 million, and $0.7 million,
respectively. Amortization expense expected to be recorded in the future is as
follows: $3.0 million in 2008, $2.7 million in 2009, $2.2 million
in 2010, $2.0 million in 2011, $1.8 million in 2012 and $25.4 million
thereafter.
9. Accrued Expenses and Other Current
Liabilities (in
thousands)
|
December
31,
|
2007
|
2006
|
|||||
|
Payroll
and related employee benefits
|
$
|
52,227
|
$
|
53,956
|
|||
|
Accrued
insurance
|
42,765
|
37,582
|
|||||
| Loss job reserves | 29,003 | 54,825 | |||||
| Wilder purchase liability | 27,332 | - | |||||
|
Other
|
60,938
|
42,965
|
|||||
|
Total
|
$
|
212,265
|
$
|
189,328
|
|||
Loss job
reserves consist of the estimated
costs for the uncompleted portion of projects forecasted at a loss
(see Note 2).
10. Long-Term Debt and Credit
Arrangements (in
thousands)
|
December
31,
|
2007
|
2006
|
|||||
|
Senior
notes payable
|
$
|
270,000
|
$
|
85,000
|
|||
|
Mortgages
|
26,463
|
21,436
|
|||||
|
Other
notes payable
|
650
|
800
|
|||||
|
Total debt
|
297,113
|
107,236
|
|||||
|
Less
current maturities
|
28,696
|
28,660
|
|||||
|
Total long-term debt
|
$
|
268,417
|
$
|
78,576
|
|||
The
aggregate minimum principal maturities of long-term debt for each of the five
years following December 31, 2007 are as follows (in thousands): 2008 - $28,696;
2009 - $25,897; 2010 - $15,166; 2011 - $10,451; 2012 - $8,402; and beyond 2013 -
$208,501.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Senior
notes payable in the amount of $20.0 million are due to a group of institutional
holders. The notes are due in nine equal annual installments which began
in 2002 and bear interest at 6.54% per annum. Additional senior notes
payable in the amount of $50.0 million are due to a second group of
institutional holders. The notes are due in nine equal annual
installments which began in 2005 and bear interest at 6.96% per annum. A third
set of senior notes payable in the amount of $200.0 million are due to a third
group of institutional holders. These notes are due in five equal
installments beginning in 2015 and bear interest at 6.11% per annum. Based
on the 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 $270.0
million
as of December 31, 2007 and $88.0 million as of December 31, 2006.
We have a
$150.0 million bank revolving line of credit, which allows for unsecured
borrowings through June 24, 2011, with interest rate options. Interest on
outstanding borrowings under the revolving line of credit is at our choice of
selected LIBOR rates plus a margin that is recalculated quarterly. The margin
was 0.80% at December 31, 2007. At December 31, 2007 we had no
amounts outstanding under this line of credit. We also have standby letters
of credit totaling $4.4 million that reduce the amount available under the
line of credit. The unused and available portion of this line of credit was
$145.6 million at December 31, 2007.
Mortgages
consist of notes incurred in connection with the purchase of property
connected with our GLC subsidiary. These notes are collateralized by the
property purchased and bear interest at 8.1% to 12.0% per
annum with principal and interest payable in installments through 2011. The carrying
amount of property pledged as collateral was approximately $58.9 million at
December 31, 2007.
Restrictive
covenants under the terms or our debt agreements require the maintenance of
certain levels of working capital and cash flow, financial ratios and the
maintenance of tangible net worth (as defined) of approximately $510.0 million.
We were in compliance with these covenants at December 31, 2007.
11. Employee Benefit
Plans
Employee Stock Ownership
Plan: Our
Employee Stock Ownership Plan (“ESOP”) covers all employees not included in
collective bargaining agreements, except employees of our subsidiary,
Wilder, and of our consolidated construction joint ventures. As of
December 31, 2007, the ESOP owned 5,146,261 shares of our common stock.
Dividends on shares held by the ESOP are charged to retained earnings and all
shares held by the ESOP are treated as outstanding in computing our earnings per
share.
Contributions
to the ESOP have been discretionary and
comprised shares of our stock that were purchased on the market and immediately
contributed to the plan. Compensation cost is measured as the cost to purchase
the shares (market value on the date of purchase and contribution). Contribution
expense was $2.0
million in each of the years ended December 31, 2006 and 2005. Effective
January 1, 2007, the ESOP was amended to effectively freeze the plan. Under the
amended plan, no new participants were added and no further contributions were
made for the year ended December 31, 2007.
Profit Sharing and 401(k)
Plan: The
plan is a defined contribution plan covering all employees not included in
collective bargaining agreements, except employees of our subsidiary,
Wilder, and our consolidated construction joint ventures. Each employee can
elect to have up to 15% of gross pay contributed to the 401(k) plan on a
before-tax basis. The plan allows for company matching and additional
contributions at the discretion of the Board of Directors. Our
contributions to the Profit Sharing and 401(k) Plan for the years ended December
31, 2007, 2006 and 2005 were $10.1 million, $8.1 million and $7.0 million,
respectively. Included in the contributions were 401(k) matching contributions
of $10.1 million, $5.6 million and $4.9 million, respectively. Additionally,
Wilder provides a 401(k) plan covering all of its employees and a separate
defined contribution plan covering employees not covered by other plans.
Wilder’s contributions under these plans totaled approximately $1.2 million,
$2.6 million and $2.4 million in the years ended December 31, 2007, 2006 and
2005, respectively.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other: Three
of our wholly owned subsidiaries, Granite Construction Company, Granite
Construction Northeast, Inc. (formerly Granite Halmar Construction Company,
Inc.) and Wilder, also contribute to various multi-employer pension plans
on behalf of union employees. Under the Employee Retirement Income Security Act,
a contributor to a multi-employer plan is liable, upon termination or withdrawal
from a plan, for its proportionate share of a plan’s unfunded vested liability.
We currently have no intention of withdrawing from any of the multi-employer
pension plans in which we participate. Contributions to these plans for the
years ended December 31, 2007, 2006 and 2005 were $24.3 million, $25.3 million
and $20.4 million, respectively. We also provide non-qualified deferred
compensation plans to certain of our highly compensated employees that provide
the participants the opportunity to defer payment of certain compensation as
defined in the plan and provides for matching of certain amounts deferred as
part of a retirement plan excess feature of the plan.
12. Shareholder's
Equity
Stock-based Compensation: We
provide certain stock-based compensation under our Amended and Restated 1999
Equity Incentive Plan (the “Plan”). Prior to January 1, 2006, we accounted for
stock-based compensation under Statement of Financial Accounting Standard No.
123. Effective January 1, 2006, we adopted FASB Statement No. 123 (revised
2004), Share-Based Payment (“SFAS
123-R”) and Securities and Exchange Commission Staff Accounting Bulletin No. 107
(“SAB 107”) using the modified prospective transition method.
The Plan
provides for the grant of restricted common stock, incentive and nonqualified
stock options, performance units and performance shares to employees and awards
to members of our Board of Directors in the form of stock units or stock options
(“Director Options”). A total of 4,250,000 shares of our common stock have been
reserved for issuance under the Plan of which approximately 2,245,279
remained available as of December 31 2007.
Restricted
Stock: Restricted common stock is issued for services to be rendered and
may not be sold, transferred or pledged for such period as determined by our
compensation committee. Restricted stock compensation cost is measured as the
stock’s fair value based on the market price at the date of grant. We recognize
compensation cost only on restricted shares that will ultimately vest. We
estimate the number of shares that will ultimately vest at each grant date based
on our historical experience and adjust compensation cost and the carrying
amount of unearned compensation based on changes in those estimates over time.
Prior to our adoption of SFAS 123-R, we did not estimate forfeitures at the time
of grant; rather, we recognized the effects of forfeitures in the period in
which the forfeitures occurred.
Restricted
stock compensation cost is recognized ratably over the shorter of the vesting
period (generally three to five years) or the period from grant date to the
first maturity date after the holder reaches age 62 and has completed certain
specified years of service, when all restricted shares become fully vested.
Vesting of restricted shares is not subject to any market or performance
conditions and
vesting provisions are at the discretion of the Compensation Committee of our
Board of Directors. An employee may not sell or otherwise transfer
unvested shares and, in the event that employment is terminated prior to the end
of the vesting period, any unvested shares are surrendered to us. We have no
obligation to repurchase restricted stock.
A summary
of the changes in our restricted stock during the years ended December
31, 2007, 2006 and 2005 are as follows (shares in
thousands):
|
December
31,
|
2007
|
2006
|
2005
|
||||||||||||||||
|
|
Shares
|
Weighted-average
grant-date fair value per share
|
Shares
|
Weighted-average
grant-date fair value per share
|
Shares
|
Weighted-average
grant-date fair value per share
|
|||||||||||||
|
Restricted
shares outstanding, beginning balance
|
877
|
$ |
27.06
|
1,005
|
$ |
21.44
|
1,163
|
$ |
19.58
|
||||||||||
|
Restricted
shares granted
|
227
|
57.47
|
216
|
47.94
|
214
|
26.07
|
|||||||||||||
|
Restricted
shares vested
|
(239
|
) |
25.99
|
(331
|
) |
23.55
|
(343
|
) |
18.00
|
||||||||||
|
Restricted
shares forfeited
|
(58
|
) |
31.31
|
(13
|
) |
29.22
|
(29
|
) |
21.63
|
||||||||||
|
Restricted shares outstanding, ending balance
|
807
|
$ |
35.62
|
877
|
$ |
27.06
|
1,005
|
$ |
21.44
|
||||||||||
Compensation
cost related to restricted shares was approximately $6.2 million ($4.2 million
net of tax), $7.6 million ($5.0 million net of tax) and $6.0 million ($4.2
million net of tax) for the years ended December 31, 2007, 2006 and
2005, respectively. The grant date fair value of restricted shares vested
during the years ended December 31, 2007, 2006 and 2005 was
approximately $6.2 million, $7.8 million and $6.2 million, respectively. As of
December 31, 2007 there was $15.8 million of
unrecognized compensation cost related to restricted shares which will be
recognized over a remaining weighted-average period of 3.1 years.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Options and Stock
Units: To date
we have granted options and stock units only to members of our Board of
Directors. Options granted to our Board of Directors are immediately exercisable
and expire over varying terms not to exceed 10 years. We estimate and record the
fair value of each option grant using the Black-Scholes option-pricing model.
Each stock unit can be exchanged for a share of our common stock, has no vesting
requirement and is recorded at fair value using the market price of our common
stock at the date of grant. There were 49,000 options and 19,000 stock units
outstanding at December 31, 2007. The number and financial impact of Director
Options and units are considered immaterial for further disclosure.
Share
Repurchase Authorization: In October 2007, our Board of Directors
authorized us to repurchase, at management’s discretion, up to $200.0 million of
our common stock. Under the new 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. This new program replaces a $25.0 million share
repurchase program announced in 2002. During
the fourth quarter we repurchased and retired 2.5 million shares of our common
stock for $92.7 million. At December 31, 2007, $107.3 million of the
$200.0 million authorization was available for repurchase. Additionally, we
repurchased and retired 0.7 million shares of our common stock for $25.0 million
during the period from January 1, 2008 to February 19, 2008. The purchase price
of our common stock repurchased and retired in excess of par value is allocated
between additional paid-in capital and retained earnings in accordance with
Accounting Principles Board Opinion No. 6 Status of Accounting Research
Bulletins.
13. Weighted Average Shares
Outstanding
A
reconciliation of the weighted average shares outstanding used in calculating
basic and diluted net income per share in the accompanying Consolidated
Statements of Income is as follows (in thousands):
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
Weighted
average shares outstanding:
|
||||||||||
|
Weighted
average common stock outstanding
|
41,699
|
41,803
|
41,678
|
|||||||
|
Less:
weighted average non-vested restricted stock outstanding
|
833
|
929
|
1,064
|
|||||||
|
Total
basic weighted average shares outstanding
|
40,866
|
40,874
|
40,614
|
|||||||
|
Diluted
weighted average shares outstanding:
|
||||||||||
|
Basic
weighted average shares outstanding
|
40,866
|
40,874
|
40,614
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Common
stock options and units
|
43
|
46
|
70
|
|||||||
|
Restricted
stock
|
480
|
551
|
565
|
|||||||
|
Total
weighted average shares outstanding assuming dilution
|
41,389
|
41,471
|
41,249
|
|||||||
Restricted
stock representing approximately 108,000 shares, 127,000 shares and 42,000
shares for the years ended December 31, 2007, 2006 and 2005, respectively, have
been excluded from the calculation of diluted net income per share because their
effects are anti-dilutive. We calculate dilutive shares on a quarterly
basis and average the quarterly amounts to determine the year-end
amount.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Income Taxes
Uncertain
tax positions: We adopted the provisions of FIN 48 on January 1, 2007. As
a result of the implementation of FIN 48, we recognized an increase in the
liability for uncertain tax positions of approximately $4.8 million, of which
approximately $0.6 million is accounted for as a decrease in the January 1,
2007 balance of retained earnings. Including the cumulative increase at the
beginning of 2007, we had approximately $4.8 million of total gross unrecognized
tax benefits at December 31, 2007. There were no unrecognized tax benefits that
would impact the effective tax rate in any future period at either January
1, 2007 or December 31, 2007 and we do not believe it is reasonably possible
that the total amount of our liability will significantly increase or decrease
within twelve months of December 31, 2007. We file income tax returns in the
U.S. federal and various state and local jurisdictions. We are currently under
examination by the North Carolina taxing authorities for the years 2004, 2005
and 2006. We are not currently under examination by any other taxing
authorities for any open tax years. The tax years 2003 through 2006 remain open
to examination by the major taxing authorities to which we are subject. We
record interest related to uncertain tax positions as interest and any penalties
are recorded as other expense in our statement of income. Approximately
$0.6 million in estimated interest was recognized in our consolidated balance
sheet at December 31, 2007.
Tabular
Reconciliation of Unrecognized Tax Benefits (in thousands):
| December 31, |
2007
|
|||
|
Unrecognized
Tax Benefits - Opening Balance
|
$ | 4,783 | ||
|
Gross
increases - tax positions in prior period
|
- | |||
|
Gross
decreases - tax positions in prior period
|
- | |||
|
Gross
increases - current-period tax positions
|
1,612 | |||
|
Settlements
|
- | |||
|
Lapse
of statue of limitations
|
(1,644 | ) | ||
|
Unrecognized
Tax Benefits - Ending Balance
|
$ | 4,751 |
Provision
for income taxes (in thousands):
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
Federal:
|
||||||||||
|
Current
|
$
|
61,189
|
$
|
57,416
|
$
|
42,399
|
||||
|
Deferred
|
(7,313
|
) |
(26,444
|
)
|
(7,682
|
) | ||||
|
Total
federal
|
53,876
|
30,972
|
34,717
|
|||||||
|
State:
|
||||||||||
|
Current
|
12,417
|
10,724
|
7,853
|
|||||||
|
Deferred
|
(823
|
) |
(3,018
|
)
|
(1,157
|
) | ||||
|
Total
state
|
11,594
|
7,706
|
6,696
|
|||||||
|
Total provision
for income taxes
|
$
|
65,470
|
$
|
38,678
|
$
|
41,413
|
||||
Reconciliation
of statutory to effective tax rate:
|
Years Ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
Federal
statutory tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
State
taxes, net of federal tax benefit
|
3.7
|
|
3.6
|
|
3.2
|
|
||||
|
Percentage
depletion deduction
|
(1.7
|
)
|
(3.1
|
)
|
(2.8
|
)
|
||||
| Domestic production deduction | (1.9 | ) | (1.5 | ) | (0.9 | ) | ||||
|
Minority
interest
|
(3.5
|
)
|
2.2
|
|
(4.1
|
)
|
||||
|
Other
|
1.4
|
|
(2.0
|
)
|
(1.3
|
)
|
||||
|
Effective
tax rate
|
33.0
|
%
|
34.2
|
%
|
29.1
|
%
|
||||
The
impact on the effective tax rate related to minority interest is a result
of the consolidation of construction joint ventures and other
entities which are not subject to income taxes on a stand-alone
basis.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred
tax assets and liabilities (in thousands):
|
December
31,
|
2007
|
2006
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Accounts
receivable
|
$
|
3,158
|
$
|
3,342
|
|||
|
Inventory
|
3,740
|
4,390
|
|||||
|
Insurance
|
3,784
|
1,071
|
|||||
|
Deferred
compensation
|
13,588
|
10,833
|
|||||
|
Other
accrued liabilities
|
11,431
|
12,048
|
|||||
|
Contract
recognition
|
25,201
|
22,280
|
|
||||
|
Other
|
1,478 | - | |||||
|
Net
operating loss carryforward
|
9,126
|
6,465
|
|||||
|
Valuation
allowance
|
(10,591
|
) |
(8,805
|
)
|
|||
|
Total
deferred tax assets
|
$ |
60,915
|
$ |
51,624
|
|||
|
Deferred
tax liabilities:
|
|||||||
|
Property
and equipment
|
$ |
34,441
|
$ |
34,576
|
|||
|
Unrealized
gain on marketable securities
|
706
|
1,675 | |||||
|
Other
|
-
|
921
|
|||||
|
Total
deferred tax liabilities
|
$
|
35,147
|
$
|
37,172
|
|||
The
deferred tax asset for other accrued liabilities relates to various items
including accrued vacation and accrued reclamation costs which are
deductible in future periods. The 2006 deferred tax assets and liabilities
in the table above reflect certain immaterial reclassifications between
categories.
Our
deferred tax asset for net operating loss carryforward relates to state and
local tax carryforwards for our Granite Northeast subsidiary (“GNE”),
which expire between 2021 and 2027. We have provided a valuation allowance
on the net deferred tax assets of GNE because of uncertainty regarding
their realizability due to recent losses and uncertainty regarding the impact of
any future tax law changes. The increase in the carryforward and valuation
allowance in 2007 was the result of taxable losses generated by
GNE.
15. Commitments, Contingencies and
Guarantees
Leases: Minimum
rental commitments and minimum royalty requirements under all noncancellable
operating leases, primarily quarry property, in effect at December 31, 2007 were
(in thousands):
|
Years Ending December
31,
|
||||
|
2008
|
$
|
8,674
|
||
|
2009
|
7,115
|
|||
|
2010
|
5,816
|
|||
|
2011
|
5,189
|
|||
|
2012
|
3,887
|
|||
|
Later
years (through 2056)
|
22,594
|
|||
|
Total
|
$
|
53,275
|
||
Operating
lease rental expense was $16.6 million in 2007, $14.6 million in 2006 and $9.5
million in 2005.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Litigation:
Silica
Litigation
Our
wholly owned subsidiary Granite Construction Company (“GCCO”) is one of
approximately 100 to 300 defendants in nine active California Superior Court
lawsuits. Of the nine lawsuits, five were filed against GCCO in 2005 and four
were filed against GCCO in 2006, in Alameda County (Riley vs. A-1 Aggregates, et
al.; 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 fifteen 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. 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 future bidding on MnDOT work by joint
venture members of MnTC. MnTC is fully cooperating with the Agencies
and the USDOJ and, on July 2, 2007, presented its 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, although informal discussions have been continuing and we
cannot rule out the possibility of a criminal action being brought against MnTC
or one of its members.
I-494
Project DBE Issues
The I-494
project was performed by a joint venture (“JV”) that consisted of GCCO and
another unrelated party. GCCO was the managing partner of the JV,
with a 60% interest. MnDOT is the contracting agency for this
federally funded project. MnDOT conducted a review of the DBE program
maintained by the JV for the I-494 project. MnDOT has initially
identified certain compliance issues in connection with the JV’s DBE program,
and as a result, has determined that the JV failed to meet the DBE utilization
criteria as represented by the JV. Although there has been no formal
administrative subpoena, nor has a civil complaint been filed in connection with
the administrative reviews, MnDOT has proposed a monetary sanction of $200,000
against the JV and specified DBE training for personnel from the members of the
JV as a condition of future bidding on MnDOT work by joint venture members of
the JV. The JV is fully cooperating with MnDOT and has the
opportunity to present its response to MnDOT’s initial
determinations. The JV is investigating MnDOT’s initial
determinations and preparing its response thereto. Therefore, we
cannot reasonably estimate the amount of any monetary sanction or what, if any,
other sanction conditions might ultimately be imposed.
US
Highway 20 Project
GCCO and
its subsidiary, Wilder 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 violations of the stormwater permit. The Oregon Department of
Environmental Quality (“DEQ”) has issued notices of violation and fine of
$90,000 to ODOT and $240,000 to YRC for these alleged violations. YRC
has filed an answer to the notice of violation and is attempting to negotiate
resolution with the DEQ. 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 or civil charges, if
any, will be brought or against whom. Therefore,
we cannot estimate what, if any, criminal or civil penalty or conditional
assessment will result from this investigation.
F-23
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other
Legal Proceedings
We are a
party to a number of other legal proceedings arising in the normal course of
business which, from time to time, include 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. 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.
Other:
Guarantees: As
discussed in Note 5, we participate in various construction joint venture
partnerships. All partners in these joint ventures are jointly and
severally liable for completion of the total project under the terms of the
contract with the project owner. Although our agreements
with our joint venture partners 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, 2007, approximately $650.0 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. During 2007 and 2006,
we recorded approximately $4.6
million and $9.4 million, respectively, in additional minority
interest cost related to our assessment that our partner in one
construction joint venture project would be unable to pay its full share of the
projects projected losses. Prior to 2006, we had never incurred a loss under
these joint and several liability provisions, however, it is possible that we
could record additional losses in the future and such losses could be
significant.
Wilder: At December 31, 2006 we owned
approximately 75% of the common shares of Wilder Construction Company
(“Wilder”). All of the remaining non-Granite held common shares were
redeemable by the holders upon retirement, voluntary termination, death or
permanent disability. Approximately 52% of these non-Granite shares
were held by Wilder founders or non-employees and were accounted for under
Statement of Financial Accounting Standards No. 150 “Accounting for Certain
Financial Instruments with Characteristic of Both Liabilities and Equity” and
related pronouncements (“SFAS 150”). The remaining 48% were accounted
for as stock-based compensation under SFAS 123-R. As required by both SFAS 123-R
and SFAS 150, the redemption value of these shares was included in other
long-term liabilities.
In November 2007, we received approval from the minority
shareholders of Wilder to purchase all remaining shares for approximately $28.0 million in cash, which
was approximately $7.8 million higher than the current redemption
price. The purchase price was deposited with an exchange agent for the
benefit of the minority shareholders in December 2007 and was paid to the
minority shareholders in January 2008. The excess of the amount paid for these
shares over the redemption
liability was recorded
in our statement of income for the year
ended December 31, 2007, as a one-time charge of approximately $7.8 million and the purchase liability was
reclassified from long-term to current at December 31, 2007.
F-24
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. Business Segment
Information
We
have completed a realignment of our former Branch and Heavy
Construction Divisions into two geographically based divisions – Granite West
and Granite East. Both Granite West and Granite East represent reportable
segments and the prior period segment information presented
below has been reclassified to conform to the new organizational
structure.
Granite
West is comprised of decentralized branch offices in the western United States
that perform various heavy civil construction projects with a large portion
of the work focused on new construction and improvement of streets, roads,
highways and bridges as well as site preparation for housing and commercial
development. Each branch reports under one of three operating groups:
Northwest, Northern California and Southwest. Because the operating groups have
similar economic characteristics as defined in Statement of Financial Accounting
Standards No. 131, “Disclosures about Segments of an Enterprise and Related
Information” (“SFAS 131”), we have aggregated them into the Granite West
reportable segment. Although most Granite West projects are started and
completed within a year, the division also has the capability of constructing
larger projects and at December 31, 2007 had five active
projects, each with total contract revenue greater than $50.0 million,
including two projects from our legacy Heavy Construction Division. All of
our revenue from the sale of construction materials is generated
by Granite West which mines aggregates and operates plants that process
aggregates into construction materials for internal use and for sale to
others. These activities are vertically integrated into the Granite
West business, providing both a source of profits and a competitive
advantage to our construction business.
Granite
East operates in the eastern portion of the United States with a focus on large,
complex infrastructure projects including major highways, large dams, mass
transit facilities, bridges, pipelines, canals, waterway locks and dams,
and airport infrastructure. With Division offices in Lewisville, Texas,
Granite East operates out of three regional offices: the Central Region, based
in Lewisville, Texas;
the Southeast Region, based in Tampa, Florida; and the Northeast Region, based
in Tarrytown, New York. Because the regions have similar economic
characteristics as defined in SFAS 131, we have aggregated them into the Granite
East reportable segment. Granite East construction contracts are typically
greater than two years in duration.
Additionally,
we purchase, develop, operate, sell and otherwise invest in real
estate through our GLC, which also provides real estate services for other
Granite operations. GLC’s portfolio of projects includes both commercial
and residential development and is geographically diversified throughout the
West and Texas.
The
accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies (see Note 1). We generally evaluate
performance based on operating profit or loss (excluding gain on sales of
property and equipment), and do not include income taxes, interest income,
interest expense or other income (expense). Unallocated other corporate expenses
principally comprise corporate general and administrative expenses. Segment
assets include property and equipment, and real estate held for development and
sale.
F-25
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summarized
segment information is as follows (in thousands):
| Years Ended December 31, |
Granite
West
|
Granite
East
|
GLC
|
Total
|
|||||||||
|
2007
|
|||||||||||||
|
Revenues
from external customers
|
$
|
1,923,686
|
$
|
773,516
|
$
|
40,712
|
$
|
2,737,914
|
|||||
|
Intersegment
revenue transfer
|
5,065
|
(5,065
|
) |
-
|
-
|
||||||||
|
Net
revenue
|
1,928,751
|
768,451
|
40,712
|
2,737,914
|
|||||||||
|
Depreciation,
depletion and amortization
|
68,561
|
9,889
|
44
|
78,494
|
|||||||||
|
Operating
income
|
230,191
|
766
|
12,031
|
242,988
|
|||||||||
|
Segment
assets
|
450,843
|
27,644
|
51,794
|
530,281
|
|||||||||
|
2006
|
|||||||||||||
|
Revenues
from external customers
|
$
|
1,911,072
|
$
|
1,023,541
|
$
|
34,991
|
$
|
2,969,604
|
|||||
|
Intersegment
revenue transfer
|
16,924
|
(16,924
|
)
|
-
|
-
|
||||||||
|
Net
revenue
|
1,927,996
|
1,006,617
|
34,991
|
2,969,604
|
|||||||||
|
Depreciation,
depletion and amortization
|
51,965
|
13,802
|
27
|
65,794
|
|||||||||
|
Operating (loss)
income
|
250,217
|
(123,052
|
)
|
14,927
|
142,092
|
||||||||
|
Segment
assets
|
363,970
|
41,762
|
55,994
|
461,726
|
|||||||||
|
2005
|
|
||||||||||||
|
Revenues
from external customers
|
$
|
1,568,939
|
$
|
1,052,715
|
$
|
19,698
|
$
|
2,641,352
|
|||||
|
Intersegment
revenue transfer
|
30,519
|
(30,519
|
)
|
-
|
-
|
||||||||
|
Net
revenue
|
1,599,458
|
1,022,196
|
19,698
|
2,641,352
|
|||||||||
|
Depreciation,
depletion and amortization
|
44,706
|
15,317
|
75
|
60,098
|
|||||||||
|
Operating
income
|
153,675
|
12,472
|
9,427
|
175,574
|
|||||||||
A
reconciliation of segment operating income to consolidated totals is as
follows (in thousands):
|
Years ended December
31,
|
2007
|
2006
|
2005
|
|||||||
|
Total
operating income for reportable segments
|
$
|
242,988
|
$
|
142,092
|
$
|
175,574
|
||||
|
Other
income
|
23,509
|
24,381
|
7,396
|
|||||||
|
Gain
on sales of property and equipment
|
10,343
|
10,408
|
8,235
|
|||||||
| Unallocated other corporate expenses | (78,446 | ) | (63,864 | ) | (48,894 | ) | ||||
|
Income
before provision for income taxes and minority interest
|
$
|
198,394
|
$
|
113,017
|
$
|
142,311
|
||||
Reconciliation
of segment assets to consolidated totals (in thousands):
|
|
|
|
|||||
|
December
31,
|
2007
|
2006
|
|||||
|
Total assets
for reportable segments
|
$
|
530,281
|
$
|
461,726
|
|||
|
Assets
not allocated to segments:
|
|
|
|||||
|
Cash
and cash equivalents
|
352,434
|
204,893
|
|||||
|
Marketable
securities
|
132,914
|
189,985
|
|||||
|
Deferred
income taxes
|
43,713
|
36,776
|
|||||
|
Other
current assets
|
601,920
|
644,611
|
|||||
|
Property
and equipment
|
24,308
|
24,128
|
|||||
|
Other
assets
|
100,848
|
70,719
|
|||||
|
Consolidated
total assets
|
$
|
1,786,418
|
$
|
1,632,838
|
|||
F-26
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
17. Acquisitions
Superior
Group of Companies
On April
3, 2007, we acquired certain assets of the Superior Group of Companies, a
Pacific Northwest-based construction materials producer and asphalt paving
company, for approximately $58.6 million in cash. The
acquisition agreement also provides for the payment of an additional $3.0
million for the assumption of a certain lease and related intangible assets
which has not yet been completed. The acquired
business operates under the name Granite Northwest, Inc. as a wholly owned
subsidiary of Granite Construction Incorporated and operates as the
Columbia River Branch in our Granite West segment. The purchased
assets include 16 asphalt plants and related permits, more than 50
million tons of permitted aggregate reserves (owned and leased), construction
equipment and rolling stock and all associated shops and
buildings. We have accounted for this transaction in accordance with
SFAS No. 141 and the results of the acquired business’ operations are
included in our consolidated financial statements as of April 3,
2007.
Purchase Price
Allocation
In
accordance with SFAS No. 141, the total purchase price was
allocated to the net tangible and identifiable intangible assets based on
their estimated fair values as of April 3, 2007 as set forth
below. The estimated fair value of the assets and
liabilities acquired approximates the purchase price; therefore, no
goodwill was recorded. Purchased intangibles are generally amortized on a
straight-line basis over their respective useful lives. The weighted
average useful life remaining of these intangibles at December 31, 2007 was
approximately 18 years.
|
|
|
|
|
|
|
(in
thousands)
|
|
|
||
|
Land
& buildings
|
|
$
|
6,700
|
|
|
Plant
& equipment
|
|
|
23,800
|
|
|
Inventory
|
|
|
3,900
|
|
|
Mining
rights
|
|
|
6,000
|
|
|
Permits
|
|
|
17,500
|
|
|
Other
intangible assets
|
|
|
2,000
|
|
|
Asset
retirement obligations and other liabilities
|
|
|
(1,300
|
)
|
|
Total
purchase price
|
|
$
|
58,600
|
|
Pro Forma Financial Information
(unaudited)
The
financial information in the table below summarizes the combined results of
operations of Granite and Superior, on a pro forma basis, as though the
companies had been combined as of the beginning of each of the periods
presented. The pro forma financial information is presented for informational
purposes only and is not indicative of the results of operations that would have
been achieved if the acquisition had taken place at the beginning of each of the
periods presented.
|
|
|
|
|
|||||
|
(in thousands, except per
share amounts)
|
|
|
||||||
|
December
31,
|
|
2007
|
|
|
2006
|
|
||
|
Revenue
|
|
$
|
2,744,423
|
|
|
$
|
3,062,517
|
|
|
Net
income
|
|
107,150
|
|
|
82,682
|
|
||
|
Basic
net income per share
|
|
2.62
|
|
|
2.02
|
|
||
|
Diluted
net income per share
|
|
2.59
|
|
|
1.99
|
|
||
Other
Acquisitions
In
June 2007, we also purchased certain assets and assumed certain liabilities
of an asphalt concrete manufacturer near Santa Clara, California for cash
consideration of approximately $17.8 million. This purchase was
accounted for in accordance with SFAS 141. The results of the
acquired business’s operations are included in our consolidated Granite West
results as of June 1, 2007, the date of
acquisition. The estimated fair value of the assets acquired
approximates the purchase price; therefore, no goodwill was
recorded.
F-27
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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
By: /s/ William E.
Barton
William E. Barton,
Senior Vice President and
Chief Financial
Officer
Date:
February 22, 2008
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on February 22, 2008, by the following persons in the
capacities indicated.
|
/s/ William G.
Dorey
|
|
William
G. Dorey, President, Chief Executive Officer and
Director
|
|
/s/ William E.
Barton
|
|
William
E. Barton, Senior Vice President and Chief Financial Officer, Principal
Accounting and Financial Officer
|
|
/s/ David H.
Watts
|
|
David
H. Watts, Chairman of the Board and Director
|
|
/s/ Claes G.
Bjork
|
|
Claes
G. Bjork, Director
|
|
/s/ James W.
Bradford
|
|
James
W. Bradford, Director
|
|
/s/ Gary M.
Cusumano
|
|
Gary
M. Cusumano, Director
|
|
/s/ David H.
Kelsey
|
|
David
H. Kelsey, Director
|
|
/s/ Rebecca A.
McDonald
|
|
Rebecca
A. McDonald, Director
|
|
/s/ J. Fernando
Niebla
|
|
J.
Fernando Niebla, Director
|
|
/s/ William H.
Powell
|
|
William
H. Powell, Director
|
SCHEDULE II
GRANITE CONSTRUCTION
INCORPORATED
SCHEDULE OF VALUATION AND QUALIFYING
ACCOUNTS
(in thousands)
|
Description
|
Balance at Beginning of
Year
|
Charged to
Expense
|
Deductions and Adjustments
**
|
Balance at End of
Year
|
|||||||||
|
YEAR
ENDED DECEMBER 31, 2007
|
|||||||||||||
|
Allowance
for long-term receivable
|
$ |
3,500
|
$ |
-
|
$ | - | $ | 3,500 | |||||
|
Allowance
for doubtful accounts
|
2,427 | 3,894 | (3,932 | ) | 2,389 | ||||||||
|
YEAR
ENDED DECEMBER 31, 2006
|
|||||||||||||
|
Allowance
for long-term receivable
|
$ | 3,500 | $ |
-
|
$ | - | $ | 3,500 | |||||
|
Allowance
for doubtful accounts
|
1,606 | 438 | 383 | 2,427 | |||||||||
|
YEAR
ENDED DECEMBER 31, 2005
|
|||||||||||||
|
Allowance
for long-term receivable
|
$ | - | $ | 3,500 | $ | - | $ | 3,500 | |||||
|
Allowance
for doubtful accounts
|
1,848 | 106 | (348 | ) | 1,606 | ||||||||
**
Deductions and adjustments primarily relate to accounts written
off.
S-1
INDEX TO 10-K
EXHIBITS
|
Exhibit
No.
|
Exhibit
Description
|
|
|
3.1
|
*
|
Certificate
of Incorporation of Granite Construction
Incorporated [Registration Statement on Form S-1, File No.
33-33795]
|
|
3.1.a
|
*
|
Amendment
to the Certificate of Incorporation of Granite Construction
Incorporated [Exhibit 3.1.a to 10-K for year ended December 31,
1998]
|
|
3.1.b
|
*
|
Amendment
to Certificate of Incorporation of Granite Construction Incorporated
[Exhibit 3.1.b to 10-K for year ended December 31, 2000]
|
|
3.1.c
|
*
|
Certificate
of Correction of Certificate of Incorporation of Granite Construction
Incorporated effective January 31, 2001 [Exhibit 3.1.c to 10-K for year
ended December 31, 2000]
|
|
3.1.d
|
*
|
Certificate
of Correction of Certificate of Incorporation of Granite Construction
Incorporated filed May 22, 1998, effective January 31, 2001 [Exhibit 3.1.d
to 10-K for year ended December 31, 2000]
|
|
3.1.e
|
*
|
Certificate
of Correction of Certificate of Incorporation of Granite Construction
Incorporated filed May 23, 2000, effective January 31, 2001 [Exhibit 3.1.e
to 10-K for year ended December 31, 2000]
|
|
3.1.f
|
*
|
Amendment
to the Certificate of Incorporation of Granite Construction Incorporated
effective May 25, 2001 [Exhibit 3.1 to 10-Q for quarter ended June 30,
2001]
|
|
3.1.g
|
*
|
Certificate
of Incorporation of Granite Construction Incorporated as Amended effective
May 25, 2001 [Exhibit 3.1.a to 10-Q for quarter ended June 30,
2001]
|
|
3.1.h
|
*
|
Certificate
of Amendment to Granite’s Certificate of Incorporation, filed with the
Delaware Secretary of State on May 25, 2006 [Exhibit 3.1.a to 10-Q for
quarter ended June 30, 2006]
|
|
3.1.i
|
*
|
Amendment
to Certificate of Incorporation of Granite Construction Incorporated
effective May 21, 2007 [Proxy Statement filed April 13, 2007]
|
|
3.2.a
|
*
|
Bylaws
of Granite Construction Incorporated, as amended and restated effective
February 27, 1991 [Exhibit 3.2 to 10-K for year ended December 31,
1991]
|
|
3.2.b
|
*
|
Bylaws
of Granite Construction Incorporated, as amended effective November 30,
2007 [Exhibit 3.2 to 8-K filed December 4, 2007]
|
|
|
||
|
10.2
|
*
|
Granite
Construction Incorporated Amended and Restated 1999 Equity Incentive Plan
as amended effective January 1, 2008 [Exhibit 10.1 to 8-K filed January
25, 2008]
|
|
10.3
|
*
|
Credit
Agreement dated as of June 24, 2005 [Exhibit 10.1 to 10-Q for quarter
ended June 30, 2005]
|
|
10.3.a
|
*
|
Amendment
No. 1 to the June 24, 2005 Credit Agreement dated as of June 23, 2006
[Exhibit 10.1 to 10-Q for quarter ended June 30, 2006]
|
|
10.3.a
|
*
|
Amendment
No. 2 to the June 24, 2005 Credit Agreement dated as of December 7, 2007
[Exhibit 10.1 to 8-K filed February 1, 2008]
|
|
10.4
|
*
|
Guaranty
Agreement dated as of June 24, 2005 from the Subsidiaries of Granite
Construction Incorporated as Guarantors of financial accommodations
pursuant to the terms of the Credit Agreement dated June 24, 2005 [Exhibit
10.2 to 10-Q for quarter ended June 30, 2005]
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10.5
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*
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Note
Purchase Agreement between Granite Construction Incorporated and certain
purchasers dated May 1, 2001 [Exhibit 10.3 to 10-Q for quarter ended June
30, 2001]
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|
10.5.a
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*
|
First
Amendment to Note Purchase Agreement between Granite Construction
Incorporated and certain purchasers dated June 15, 2003 [Exhibit 10.4 to
10-Q for quarter ended June 30, 2003]
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10.6
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*
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Subsidiary
Guaranty Agreement from the Subsidiaries of Granite Construction
Incorporated as Guarantors of the Guaranty of Notes and Note Agreement and
the Guaranty of Payment and Performance dated May 1, 2001 [Exhibit 10.4 to
10-Q for quarter ended June 30, 2001]
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10.7
|
*
|
Amendment
to and Restated Note Purchase Agreement between Granite Construction
Incorporated and certain purchasers dated November 1, 2001 [Exhibit 10.12
to 10-K for year ended December 31, 2001]
|
|
10.7.a
|
*
|
First
Amendment to Amended and Restated Note Purchase Agreement between Granite
Construction Incorporated and certain purchasers dated June 15, 2003
[Exhibit 10.3 to 10-Q for quarter ended June 30, 2003]
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10.8
|
*
|
Subsidiary
Guaranty Supplement from the Subsidiaries of Granite Construction
Incorporated as Guarantors of the Guaranty of Notes and Note Agreement and
the Guaranty of Payment and Performance dated November 15, 2001 [Exhibit
10.13.a to 10-K for year ended December 31, 2001]
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|
10.9
|
*
|
Note
Purchase Agreement between Granite Construction Incorporated and Certain
Purchasers dated December 12, 2007 [Exhibit 10.1 to 8-K filed January 31,
2008]
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|
|
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10.11
|
*
**
|
Executive
Retention and Severance Plan effective as of September 20, 2007 [Exhibit
99.1 to 8-K filed October 22, 2007]
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|
10.12
|
*
|
International
Swap Dealers Association, Inc. Master Agreement between BNP Paribas and
Granite Construction Incorporated dated as of February 10, 2003 [Exhibit
10.5 to 10-Q for quarter ended June 30, 2003]
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|
10.13
|
*
**
|
Form
of Amended and Restated Director and Officer Indemnification Agreement
[Exhibit 10.10 to 10-K for year ended December 31, 2002]
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|
21
|
*
|
List
of Subsidiaries of Granite Construction Incorporated [Exhibit 21 to 10-K
for year ended December 31, 2005, filed March 2, 2006]
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* Incorporated by
reference
** Compensatory plan or management
contract
† Filed herewith
†† Furnished
herewith