GRANITE CONSTRUCTION INC - Annual Report: 2008 (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, 2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission
file number 1-12911
Granite
Construction Incorporated
(Exact
name of registrant as specified in its charter)
|
Delaware
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77-0239383
|
|
(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification Number)
|
|
585
West Beach Street
|
|
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Watsonville,
California
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95076
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|
(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s telephone
number, including area code: (831)
724-1011
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which
registered
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Common
Stock, $0.01 par value
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New
York Stock Exchange
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Securities registered
pursuant to Section 12(g) of the Act: None
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes x
No o
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes o
No x
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x
No o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company (as defined by Rule
12b-2 of the Exchange Act). Large accelerated filer x
Accelerated filer o
Non-accelerated filer o Smaller reporting
company o
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o
No x
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant was approximately $1.1
billion as of June 30, 2008, based upon the average of the bid and
asked prices per share of the registrant’s Common Stock as reported on the New
York Stock Exchange on such date. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
At
February 13, 2009, 38,246,833
shares of Common Stock, par
value $0.01, of the registrant were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of Granite
Construction Incorporated to be held on May 15,
2009, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 2008.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains statements that are not based on historical
facts and which may be forward-looking in nature. Under the Private Securities
Litigation Reform Act of 1995, a “safe harbor” may be provided to us for certain
of these forward-looking statements. Words such as
“outlook,” “believes,” “expects,” “appears,” “may,” “will,” “should,” “anticipates”
or the negative thereof or comparable terminology, are intended to identify
these forward-looking statements. These forward-looking statements are estimates
reflecting the best judgment of our senior management and are based on our
current expectations and projections concerning future events, many of which are
outside of our control, and involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by the
forward-looking statements. Factors that might cause or contribute to
such differences include, but are not limited to, those risks described in this
Report under “Item 1A. Risk Factors.” Except as required by law, we undertake no
obligation to revise or update any forward-looking statements for any reason. As
a result, the reader is cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
Report.
Introduction
Granite
Construction Company was originally incorporated in 1922. In 1990, Granite
Construction Incorporated was formed as the holding company for Granite
Construction Company and its wholly owned subsidiaries and
was incorporated in Delaware. Unless otherwise indicated, the terms “we,”
“us,” “our,” “Company” and “Granite” refer to Granite Construction
Incorporated and its consolidated subsidiaries.
We are
one of the largest heavy civil construction contractors in the United States. We
operate nationwide, serving both public and private sector clients. Within the
public sector, we primarily concentrate on infrastructure projects, including
the construction of roads, highways, bridges, dams, canals, mass transit
facilities and airport infrastructure. Within the private sector, we perform
site preparation and infrastructure services for residential development,
commercial and industrial buildings, plants and other facilities. Our
diversification in both the public and private sectors and our mix of project
types and sizes have contributed to our profitability in various economic
environments.
We own
and lease substantial aggregate reserves and own a number of construction
materials processing plants. We also have one of the largest contractor-owned
heavy construction equipment fleets in the United States. We believe that the
ownership of these assets enables us to compete more effectively by ensuring
availability of these resources at a favorable cost.
In 2000, we diversified into real estate investment and
development, investing our own capital in carefully selected real estate
projects throughout the western United States and Texas. Our objective is to
establish strategic alliances with real estate developers that have significant
market expertise.
Operating
Structure
Our
construction business is organized into two divisions, Granite West and Granite
East. Included in our Granite West division is our vertically integrated
construction materials business. The Company also operates, on a significantly
smaller scale, a real estate development and services business, Granite Land
Company (“GLC”).
Granite
West: In 2008 and 2007, Granite
West contract revenue and sales of construction materials was $2.0 billion
and $1.9 billion (73.7% and 70.4% of our total revenue), respectively.
Granite West has both public and private sector clients. Typical
public sector projects include both new construction and improvement of
streets, roads, highways, bridges and airports. Major private sector contracts
typically include site preparation for housing and commercial development,
including excavation, grading and street paving and installation of curbs,
gutters, sidewalks and underground utilities.
Granite
West’s operating structure is decentralized, with
14
branch offices in the western United States, several with additional
satellite operations. In 2008, individual branch revenues ranged
from $43.0 million to $258.6 million. Although most Granite West
projects are started and completed within a year, the division also has the
capability of constructing larger projects and as of December 31, 2008 had eight
active large projects, each with total contract revenue greater than
$50.0 million.
Granite
West mines aggregates and/or operates plants that process aggregates into
construction materials for internal use and for sale to unaffiliated parties.
These activities are vertically integrated into Granite West, providing
both a source of profits and a competitive advantage to our construction
business through the readily available supply of materials. We have significant
aggregate reserves that we have acquired by ownership in fee or through
long-term leases. The amount of aggregate products produced that were used
in our construction projects was approximately 48.8% of our total production
during 2008 and has ranged from 36.9% to 48.8% over the last five years.
The remainder is sold to unaffiliated parties and represented $353.1 million,
$375.7 million and $410.1 million in revenue (13.2%, 13.7% and
13.8% of total revenue and 17.9%, 19.5% and 21.3% of Granite
West revenue) for the years ended December 31, 2008, 2007 and 2006,
respectively.
Granite
East: In 2008, revenue from Granite East was $695.0 million
(26.0% of our total revenue), compared with $768.5 million (28.1% of our total
revenue) in 2007. Granite East’s focus is on large, complex
infrastructure projects and includes major highways, large dams, mass transit
facilities, bridges, pipelines, canals, waterway locks and dams, and
airport infrastructure. It also performs activities such as demolition,
clearing, large-scale earthwork and grading, dewatering, drainage improvements,
structural concrete, rail signalization, and concrete and asphalt
paving. Granite East also has the ability, if needed, to process
locally sourced aggregates into construction materials using owned or rented
portable crushing, concrete and asphalt processing plants.
Granite East operates out
of three regional offices that provide management and administrative support and
are the primary hubs for estimating efforts. Granite East construction contracts
are typically greater than two years in duration with contract
values ranging from $12.0 million to $487.6 million at December 31,
2008.
Both
Granite West and Granite East participate in joint ventures with other
large construction companies. Joint ventures are used for large, technically
complex projects, including design/build projects, where it is desirable to
share risk and resources. Joint venture partners typically provide independently
prepared estimates, shared financing and equipment and often also
bring local knowledge and expertise (see “Joint Ventures; Off-Balance-Sheet
Arrangements” under “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations”).
Design/build
is increasingly being used as a method of project delivery. Unlike
traditional projects where owners first hire a design firm or design a project
themselves and then put the project out to bid for construction, design/build
projects provide the owner with a single point of responsibility and a single
contact for both final design and construction. Revenue from design/build
projects represented 66.4% and 62.2% of Granite East revenue in 2008
and 2007, respectively and 14.1% and 8.1% of Granite West
revenue in 2008 and 2007, respectively. Although these projects
carry additional risk as compared to traditional bid/build projects, the
profit potential can also be higher. We frequently bid design/build
projects as a part of a joint venture team.
Granite
Land Company: GLC purchases, develops, operates, sells and
otherwise invests in real estate developments as well as provides real estate
services for other Granite operations. GLC’s current portfolio
consists of residential, retail and office site development projects
for sale to home and commercial property developers or held for rental income in
Washington, California, Texas and Oregon. In 2008, revenue from GLC
was $9.0 million (0.3% of our total revenue), compared with $40.7
million (1.5% of our total revenue) in 2007.
Additional
information about our business segments is contained in Note 20 of the
“Notes to the Consolidated Financial Statements.”
Business
Strategy
Our
fundamental objective is to increase long-term shareholder value by focusing on
consistent profitability from controlled revenue growth. Shareholder value is
measured by the appreciation of the value of our common stock over a period of
years as well as a return from dividends. Further, it is a specific measure of
our financial success to achieve a return on net assets greater than the cost of
capital, creating “Granite Value Added.” We believe that the following are key
factors in our ability to achieve these objectives:
Controlled
Expansion - We intend to continue our
expansion by selectively adding branches or branch satellite locations in the
western United States, exploring opportunities to establish branch-like
businesses in other areas of the country through acquisitions, and selectively
pursuing major infrastructure projects where we have an established
presence.
Decentralized
Profit Centers - We approach each selected
market with a local focus through our decentralized structure. Each of
our Granite West branch offices and Granite
East regional offices are individual profit centers. This
structure encourages entrepreneurial activity while allowing the offices to
benefit from certain centralized administrative
functions.
Diversification -
To mitigate the risks inherent in construction
and general economic factors, we pursue projects: (i) in both the public and
private sectors, (ii) for a wide range of customers within each sector (from the
federal government to small municipalities and from large corporations to
individual homeowners), (iii) in diverse geographic markets, (iv) that are
design/build, lump sum and fixed unit price and (v) of various sizes, durations
and complexity.
Employee
Development - We believe that our employees are key to the successful
implementation of our business strategies. Significant resources are employed to
attract, develop and retain extraordinary talent and fully promote each
employee’s capabilities.
Infrastructure
Construction Focus - We concentrate our core competencies on this
segment of the construction industry, which includes the building of roads,
highways, bridges, dams, tunnels, mass transit facilities, railroad
infrastructure and underground utilities as well as site preparation. This
focus allows us to most effectively utilize our specialized strengths,
which include grading, paving and concrete
structures.
Ownership
of Aggregate Materials and Construction Equipment - We own and lease
aggregate reserves and own processing plants that are vertically integrated into
our construction operations and we own a large fleet of carefully maintained
heavy construction equipment. By ensuring availability of these resources and
providing quality products, we believe we have bidding advantages in many of our
markets, as well as a source of revenue and income from the sale of construction
materials to unaffiliated parties.
Profit-based
Incentives - We incentivize our
profit center managers with a substantial variable cash and restricted stock
incentive element based primarily on the annual profit performance of their
respective profit centers.
Selective
Bidding - We focus our resources on bidding jobs that meet our
selective bidding criteria, which include analyzing the risk of a potential job
in relation to: (i) available personnel to estimate and prepare the
proposal, (ii) personnel to effectively manage and build the project,
(iii) competitive environment, (iv) experience with the type of work,
(v) experience with the owner, (vi) local resources and partnerships,
(vii) equipment resources, (viii) size and complexity of the
job and (ix) profitability.
Operating principles that
support these objectives are as follows:
Accident
Prevention - We believe that preventing accidents is both a
moral obligation and good business. By identifying and concentrating resources
to address jobsite hazards, we continually strive to reduce our incident rates
and the costs associated with accidents.
Environmental
Responsibility - We believe it benefits everyone to maintain
environmentally responsible operations. We are committed to protect the
environment, maintain good community relations and ensure compliance with
government agency requirements. We continually monitor our performance in this
area.
Quality
and High Ethical Standards - We emphasize the importance of
performing high quality work and maintaining high ethical standards through an
established code of conduct and an effective corporate compliance
program.
Customers
We have
customers in both the public and private sectors. The largest volume
customer of Granite West is the California Department of Transportation
(“Caltrans”). In
2008, contracts with Caltrans represented 9.6% of our total revenue (13.1% of
Granite West revenue), and total public sector revenue generated in California
represented 27.7% of our total revenue. In 2007,
contracts with Caltrans represented 10.0% of our total revenue, and total public
sector revenue generated in California represented 23.5% of our total
revenue. Other Granite West customers include
certain federal agencies, departments of transportation of other states,
county and city public works departments, school districts and developers and
owners of industrial, commercial and residential sites. Granite East’s customers
are predominantly in the public sector and currently include numerous state
departments of transportation, local transit authorities, and federal
agencies.
Contract
Backlog
Our
contract backlog is comprised of the remaining unearned revenue of awarded
contracts that have not been completed, including 100% of our consolidated joint
ventures and our proportionate share of unconsolidated joint venture contracts.
Our contract backlog was approximately $1.7 billion and $2.1 billion
at December 31, 2008 and 2007, respectively. Approximately $1.2
billion of the December 31, 2008 contract backlog is expected to be
completed during 2009. We include a construction project in our
contract backlog at such time as a contract is awarded and funding is in place,
with the exception of certain federal government contracts for which funding is
appropriated on a periodic basis. Substantially all of the contracts in our
contract backlog may be canceled or modified at the election of the customer;
however, we have not been materially adversely affected by contract
cancellations or modifications in the past (see “Contract Provisions and
Subcontracting”). Most Granite West projects are added and completed within each
year and therefore not reflected in our year-end contract backlog. Contract
backlog by segment is presented in “Contract Backlog” under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Equipment
and Plants
We own
many pieces of equipment, including loaders, bulldozers, excavators, rollers,
motor graders, pavers, scrapers,
cranes, trucks, backhoes and barges as well
as construction materials processing plants. In 2008 and 2007, we spent
approximately $54.8 million and $88.4 million, respectively, for
construction equipment, plants and vehicles. At December 31, 2008 and 2007, we
owned the following construction equipment, plants and vehicles:
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December
31,
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2008
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2007
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||||||
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Heavy
construction equipment (units)
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3,523
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3,896
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Trucks,
truck-tractors and trailers and vehicles (units)
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5,467
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5,699
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Aggregate
crushing plants
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54
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55
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Asphalt
concrete plants
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68
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69
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Portland
cement concrete batch plants
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24
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25
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||||||
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Asphalt
rubber plants
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5
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5
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||||||
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Lime
slurry plants
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9
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9
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We
believe that ownership of equipment is generally preferable to leasing because
ownership ensures the equipment is available as needed and normally results in
lower equipment costs. We keep our equipment as fully utilized as possible
by pooling certain equipment for use by both Granite West and Granite East. We
regularly lease or rent equipment on a short-term basis to supplement existing
equipment and respond to construction activity peaks.
Employees
On
December 31, 2008, we employed approximately 2,000 salaried employees,
who work in management, estimating and clerical capacities, plus
approximately 1,500 hourly employees. The total number of hourly personnel
employed by us is subject to the volume of construction in progress and is
seasonal. During 2008, the number of hourly employees ranged from
approximately 1,500 to 4,600 and averaged approximately 3,500. Two of
our wholly owned subsidiaries - Granite Construction Company and Granite
Construction Northeast, Inc. - are parties to craft collective bargaining
agreements in many areas in which they work.
We
believe our employees are our most valuable resource and that our workforce
possesses a strong dedication to and pride in our company. Among salaried and
non-union hourly employees, this dedication is reinforced by 15.8% equity
ownership through our Employee Stock Ownership Plan, our Profit Sharing and
401(k) Plan and performance-based incentive compensation arrangements at
December 31, 2008. Our managerial and supervisory personnel have an average
of approximately 10 years
of service with us.
Competition
Factors
influencing our competitiveness include price, reputation for quality, the
availability of aggregate materials, machinery and equipment, financial
strength, knowledge of local markets and conditions, and project management and
estimating abilities. Although some of our competitors are larger than us and
may possess greater resources, we believe that we compete favorably on the basis
of the foregoing factors. Historically, the construction business has not
required large amounts of capital, particularly for the smaller size
construction work pursued by Granite West, which can result in relative ease of
market entry for companies possessing acceptable qualifications. Granite West
competitors range from small local construction companies to large regional,
national and global construction companies. While the market areas of these
competitors overlap with several of the markets served by our branches, few
compete in all of our market areas. Many of our Granite West competitors have
the ability to perform work in either the private or public sectors. When
opportunities for work in one sector are reduced, competitors tend to look for
opportunities in the other sector. This migration has the potential to
reduce revenue growth and/or increase pressure on gross profit margins. In
addition, we own and/or have long-term leases on aggregate resources that
provide an extra measure of competitive advantage in certain markets.
Granite East normally competes with large regional, national and global
construction companies. Although the construction business is highly
competitive, we believe we are well positioned to compete effectively in the
markets in which we operate.
Contract
Provisions and Subcontracting
Our contracts
with our customers are primarily either “fixed unit price” or “fixed price.”
Under fixed unit price contracts, we are committed to provide materials or
services required by a project at fixed unit prices (for example, dollars per
cubic yard of concrete poured or cubic yard of earth excavated). While the fixed
unit price contract shifts the risk of estimating the quantity of units required
for a particular project to the customer, any increase in
our unit cost over the expected unit cost in the bid, whether due to inflation,
inefficiency, errors in our estimates or other factors, is borne by us unless
otherwise provided in the contract. Fixed price contracts are priced on a
lump-sum basis under which we bear the risk of performing all the work for
the specified amount. The percentage of fixed price contracts in our contract
backlog decreased to
approximately 68.7% at December 31, 2008 compared with approximately
72.0% at December 31, 2007. Our contracts are generally obtained through
competitive bidding in response to advertisements by federal, state and local
government agencies and private parties. Less frequently, contracts may be
obtained through direct negotiations with private owners. Our contract risk
mitigation process includes identifying risks and opportunities during the
bidding process, review of bids fitting certain criteria by various levels of
management and, in some cases, by the executive committee of our Board of
Directors.
There are
a number of factors that can create variability in contract performance and
results as compared to a project’s original bid. The most significant of these
include the completeness and accuracy of the original bid, costs associated
with added scope changes, extended overhead due to owner and weather delays,
subcontractor performance issues, changes in productivity expectations, site
conditions that differ from those assumed in the original bid (to the extent
contract remedies are unavailable), the availability and skill level of workers
in the geographic location of the project and a change in the availability and
proximity of equipment or materials. All of these factors can impose
inefficiencies on contract performance, which can drive up costs and lower
profits. Conversely, if any of these or other factors are more positive than the
assumptions in our bid, project profitability can improve. However, the ability
to realize improvements on project profitability is more limited than
the risk of lower profitability. Design/build projects typically incur
additional costs such as right-of-way and permit acquisition costs and
carry additional risks such as design error risk and the risk
associated with estimating quantities and prices before the project design
is completed. Design errors may result in higher than anticipated
construction costs and additional liability to the contract owner. Although
we manage this additional risk by adding contingencies to our bid amounts,
obtaining errors and omissions insurance and obtaining indemnifications from our
design consultants where possible, there is no guarantee that these risk
management strategies will always be successful.
All of
our state and federal government contracts and most of our other contracts
provide for termination of the contract at the convenience of the contract
owner, with provisions to pay us for work performed through the date of
termination. We have
not been materially adversely affected by these provisions in the
past. Many of our contracts contain provisions that require us to
pay liquidated damages if specified completion schedule requirements are not met
and these amounts can be significant.
We act as
prime contractor on most of the construction projects we undertake. We
accomplish the majority of our projects with our own resources and subcontract
specialized activities such as electrical and mechanical work. As prime
contractor, we are responsible for the performance of the entire contract,
including subcontract work. Thus, we may be subject to increased costs
associated with the failure of one or more subcontractors to perform as
anticipated. Based on our analysis of their construction and financial
capabilities, among other criteria, we determine whether to require that the
subcontractor furnish a bond or other type of security that guarantees their
performance. Disadvantaged business enterprise regulations require us to use our
best efforts to subcontract a specified portion of contract work done for
governmental agencies to certain types of disadvantaged subcontractors. As with
all of our subcontractors, some may not be able to obtain surety bonds
or other types of performance security.
Insurance
and Bonding
We
maintain general and excess liability, construction equipment and workers’
compensation insurance; all in amounts consistent with industry
practices.
In
connection with our business, we generally are required to provide various types
of surety bonds that provide an additional measure of security for our
performance under certain public and private sector contracts. Our ability to
obtain surety bonds depends upon our capitalization, working capital, past
performance, management expertise and external factors, including the capacity
of the overall surety market. Surety companies consider such factors in light of
the amount of our contract backlog that we have currently bonded and their
current underwriting standards, which may change from time to time. The capacity
of the surety market is subject to market-based fluctuations driven primarily by
the level of surety industry losses and the degree of surety market
consolidation. When the surety market capacity shrinks it results in higher
premiums and increased difficulty obtaining bonding, in particular for larger,
more complex projects throughout the market. In order to help mitigate this
risk, we employ a co-surety structure involving three sureties. Although we
do not believe that fluctuations in surety market capacity has significantly
impacted our ability to grow our business, there is no assurance that it will
not significantly impact our ability to obtain new contracts in the future (see
“Item 1A. Risk Factors”).
Environmental
Regulations
Our
operations are subject to various federal, state and local laws and regulations
relating to the environment, including those relating to discharges to air,
water and land, the handling and disposal of solid and hazardous waste, the
handling of underground storage tanks and the cleanup of properties affected by
hazardous substances. Certain environmental laws impose substantial penalties
for non-compliance and others, such as the federal Comprehensive Environmental
Response, Compensation and Liability Act, impose strict, retroactive, joint and
several liability upon persons responsible for releases of hazardous substances.
We continually evaluate whether we must take additional steps at our locations
to ensure compliance with environmental laws. While compliance with applicable
regulatory requirements has not materially adversely affected our operations in
the past, there can be no assurance that these requirements will not change and
that compliance will not adversely affect our operations in the future. In
addition, our aggregate materials operations require operating permits granted
by governmental agencies. We believe that tighter regulations for the protection
of the environment and other factors will make it increasingly difficult to
obtain new permits and renewal of existing permits may be subject to more
restrictive conditions than currently exist.
In July 2007, the California Air Resources Board (“CARB”) approved a regulation that will require California equipment owners/operators to reduce diesel particulate and nitrogen oxide emissions from in-use off-road diesel equipment to meet progressively more restrictive emission targets proposed for each year from 2010 to 2020. In December 2008, CARB approved a similar regulation for in-use on-road diesel equipment that includes more restrictive emission targets from 2010 to 2022. The emission targets will require California off-road and on-road diesel equipment owners to retrofit equipment with diesel emission control devices or replace equipment with new engine technology as it becomes available. Between now and the year 2022, Granite will be required to implement an equipment management strategy that includes accelerated turnover of off-road and on-road diesel equipment and retrofitting equipment with CARB approved emission control devices. This will increase equipment related expenses.
As is the
case with other companies in our industry, some of our aggregate products
contain varying amounts of crystalline silica, a common mineral. Also, some of
our construction and material processing operations release, as dust,
crystalline silica that is in the materials being handled. Excessive, prolonged
inhalation of very small-sized particles of crystalline silica has allegedly
been associated with respiratory disease (including silicosis). The Mine Safety
and Health Administration and the Occupational Safety and Health Administration
have established occupational thresholds for crystalline silica exposure as
respirable dust. We monitor to verify that our dust control procedures are
keeping occupational exposures at or below the requisite thresholds and to
verify that respiratory protective equipment is made available when required. We
also communicate, through safety information sheets and other means, what we
believe to be appropriate warnings and cautions to employees and customers about
the risks associated with excessive, prolonged inhalation of mineral dust in
general and crystalline silica in particular.
Website
Access
Our
website address is www.graniteconstruction.com. On our website we make
available, free of charge, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports as
soon as reasonably practicable after such material is electronically filed with
or furnished to the Securities and Exchange Commission (“SEC”). The information
on our website is not incorporated into, and is not part of, this report. These
reports, and any amendments to them, are also available at the website of the
SEC, www.sec.gov.
Set forth
below and elsewhere in this Report and in other documents we file with the SEC
are various risks and uncertainties that could cause our actual results to
differ materially from the results contemplated by the forward-looking
statements contained in the Report or otherwise adversely affect our
business.
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·
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Uncertainty
regarding the impact of the current economic downturn and governmental
initiatives to stimulate the economy. A
protracted financial crisis may affect government funding that we rely
upon for our core infrastructure focus, including state DOT’s such as
Caltrans. A substantial majority of our revenues are derived from
contracts that are funded by federal, state, and local government
agencies. Our ability to obtain future public sector work at
reasonable margins is highly dependent on the amount of work that is
available to bid, which is largely a function of the level of government
funding available. It may also affect our customer base, subcontractors
and suppliers and could materially affect our contract backlog, operating
results, cash flows and our ability to implement our strategic plan. Many
of our risk factors identified below could be negatively impacted should
the current financial crisis be
prolonged.
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|
·
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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.
|
|
·
|
Granite
Land Company is greatly affected by the performance of the real
estate industry. Our real estate development activities are subject
to numerous factors beyond our control including local real estate market
conditions; substantial existing and potential competition; general
national, regional and local economic conditions; fluctuations in interest
rates and mortgage availability and changes in demographic conditions.
If our outlook for a project’s forecasted profitability
deteriorates, we may find it necessary to curtail our development
activities and evaluate our real estate assets for possible
impairment. Our evaluation includes a variety of estimates and
assumptions and future changes in these estimates and assumptions could
impact future impairment analyses. If our real estate assets are
determined to be impaired, the impairment would result in a charge to
income from operations in the year of the
impairment.
|
|
·
|
Our
success depends on attracting and retaining qualified personnel in a
competitive environment. The single largest factor in our
ability to profitably execute our work is our ability to attract, develop
and retain qualified personnel particularly as we grow. Our success in
attracting qualified people is dependent on the resources available in
individual geographic areas and changes in the labor supply as a result of
general economic conditions as well as our ability to provide a
competitive compensation package and work
environment.
|
|
·
|
Our
fixed price and fixed unit price contracts subject us to the risk of
increased project cost. As more fully described under
“Contract Provisions and Subcontracting” above, the profitability of our
fixed price and fixed unit price contracts can be adversely affected by a
number of factors that can cause our actual costs to materially exceed the
costs estimated at the time of our original
bid.
|
|
·
|
Our Design/build contracts
subject us to the risk of design errors and omissions. Design/build
is increasingly being used as a method of project delivery, providing the
owner with a single point of responsibility for both design and
construction. We generally pass design responsibility on to the
architectural and engineering firms that we engage to perform these
services on our behalf. However, in the event of a design error or
omission causing damages, there is risk that the firm or the errors and
omissions insurance would not be able to absorb the liability.
In this case we may be responsible, resulting in a material
adverse effect on our financial position, results of operations and cash
flows.
|
|
·
|
Accounting
for our revenues and costs involves significant estimates. As
further described in “Critical Accounting Estimates” under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” accounting for our contract related revenues and costs, as
well as other cost items, requires management to make a variety of
significant estimates and assumptions. Although we believe we have
sufficient experience and processes to enable us to formulate appropriate
assumptions and produce reasonably dependable estimates, these assumptions
and estimates may change significantly in the future, and these changes
could result in the reversal of previously recognized revenue
and profit and have a material adverse effect on our financial position,
results of operations, and cash
flows.
|
|
·
|
Many
of our contracts have penalties for late completion. In
some instances, including many of our fixed price contracts, we guarantee
that we will complete a project by a scheduled date. If we subsequently
fail to complete the project as scheduled we may be held responsible for
cost impacts resulting from any delay, generally in the form of
contractually agreed-upon liquidated damages. To the extent that these
events occur, the total costs of the project could exceed our original
estimates and we could experience reduced profits or, in some cases, a
loss for that
project.
|
|
·
|
Weather
can significantly impact our quarterly revenues and
profitability. Our ability to perform work is significantly
impacted by weather conditions such as precipitation and temperature.
Changes in weather conditions can create significant variability in our
quarterly revenues and profitability, particularly in the first and fourth
quarters of the year. Additionally, delays and other weather impacts may
increase a project’s cost and decrease its
profitability.
|
|
·
|
We
work in a highly competitive marketplace. As more fully
described under “Competition” above, we have multiple competitors in all
of the areas in which we work. During economic down cycles or times of
lower government funding for public works projects, competition for the
fewer available projects intensifies and this increased competition may
result in a decrease in our ability to be competitive at acceptable
margins.
|
|
·
|
An
inability to secure and permit aggregate reserves could negatively impact
our future operations and results. Tighter regulations for the
protection of the environment and the finite nature of property containing
suitable aggregate reserves are making it increasingly challenging and
costly to secure and permit aggregate reserves. Although we have thus far
been able to secure and permit reserves to support our business, it is
likely to become increasingly difficult and costly to do so and there is
no assurance that we will be able to secure and permit reserves in the
future.
|
|
·
|
We
are subject to environmental and other regulation. As
more fully described under “Government and Environmental Regulations”
above, we are subject to a number of federal, state and local laws and
regulations relating to the environment, workplace safety and a
variety of socioeconomic requirements, the noncompliance with
which can result in substantial penalties, termination or suspension of
government contracts as well as civil and criminal liability. While
compliance with these laws and regulations has not materially adversely
affected our operations in the past, there can be no assurance that these
requirements will not change and that compliance will not adversely affect
our operations in the
future.
|
|
·
|
Strikes
or work stoppages could have a negative impact on our operations and
results. We are party to collective bargaining agreements
covering a portion of our craft workforce. Although our results and
operations have not been significantly impacted by strikes or work
stoppages in the past, such labor actions could have a significant impact
on our operations if they occur in the
future.
|
|
·
|
Unavailability
of insurance coverage could have a negative impact on our operations and
results. We maintain insurance coverage as part of our overall
risk management strategy and pursuant to requirements to maintain
specific coverage that are contained in our financing agreements and in
most of our construction contracts. Although we have been able to obtain
insurance coverage to meet our requirements in the past, there is no
assurance that such insurance coverage will be available in the
future.
|
|
·
|
An
inability to obtain bonding would have a negative impact on our operations
and results. As more fully described in “Insurance and
Bonding” above, we generally are required to provide surety bonds securing
our performance under the majority of our public and private sector
contracts. Our inability to obtain surety bonds in the future would
significantly impact our ability to obtain new contracts, which would have
a material adverse effect on our
business.
|
|
·
|
Our
joint venture contracts with project owners subject us to joint and
several liability. If a joint venture partner fails to perform we
could be liable for completion of the entire contract and, if the contract
were unprofitable, this could result in a material adverse effect on our
financial position, results of operations and cash
flows.
|
|
·
|
We
use certain commodity products that are subject to significant price
fluctuations. Diesel fuel, liquid asphalt and other
petroleum-based products are used to fuel and lubricate our
equipment, fire our asphalt concrete processing plants
and constitute a significant part of the asphalt paving
materials that are used in many of our construction projects and sold
to outside parties. Although we are partially protected by asphalt or
fuel price escalation clauses in some of our contracts, many
contracts provide no such protection. We also use cement, steel and
other commodities in our construction projects that can be subject to
significant price fluctuations. We have not been significantly adversely
affected by price fluctuations in the past; however, there is no guarantee
that we will not be in the
future.
|
10
|
·
|
As
a part of our growth strategy we expect to make future acquisitions and
acquisitions involve many risks. These risks include
difficulties integrating the operations and personnel of the acquired
companies, diversion of management’s attention from our ongoing
operations, potential difficulties and increased costs associated with
completion of any assumed construction projects, insufficient revenues to
offset increased expenses associated with acquisitions and the potential
loss of key employees or customers of the acquired companies. Acquisitions
may also cause us to increase our liabilities, record goodwill or other
non-amortizable intangible assets that will be subject to subsequent
impairment testing and potential impairment charges and incur amortization
expenses related to certain other intangible assets. Failure to manage and
successfully integrate acquisitions could harm our business and operating
results
significantly.
|
|
·
|
Failure
of our subcontractors to perform as anticipated could have a negative
impact on our results. As further described under “Contract
Provisions and Subcontracting” above, we subcontract a portion of many of
our contracts to specialty subcontractors and we are ultimately
responsible for the successful completion of their work. Although we seek
to require bonding or other forms of guarantees, we are not always
successful in obtaining those bonds or guarantees from our higher risk
subcontractors, and there is no guarantee that we will not incur a
material loss due to subcontractor performance
issues.
|
|
·
|
We
may be unable to identify qualified Disadvantaged Business Enterprise (“DBE”)
contractors to perform as subcontractors. Certain of our government
agency projects contain minimum DBE participation clauses. If we
subsequently fail to complete these projects with the minimum DBE
participation we may be held responsible for damages due to breach of
contract including restrictions on our ability to bid on future projects
and monetary damages. To the extent that these events occur, the total
costs of the project could exceed our original estimates and we could
experience reduced profits or, in some cases, a loss for that
project.
|
|
·
|
Government
funded contracts generally have strict regulatory requirements.
Approximately 78.3% of our
consolidated revenue in 2008 was derived from contracts funded by federal,
state and local government agencies and authorities. These government
contracts are subject to specific procurement regulations, contract
provisions and a variety of socioeconomic requirements relating to their
formation, administration, performance and accounting. Many of these
contracts include express or implied certifications of compliance with
applicable laws and contract provisions. As a result of our government
contracting, claims for civil or criminal fraud may be brought by the
government for violations of these regulations, requirements or statutes.
We may also be subject to qui tam (“Whistle Blower”) litigation brought by
private individuals on behalf of the government under the Federal Civil
False Claims Act, which could include claims for up to treble damages.
Further, if we fail to comply with any of these regulations, requirements
or statutes, our existing government contracts could be terminated
and we could be suspended from government contracting or
subcontracting, including federally funded projects at the state level. If
our government contracts are terminated for any reason, or if we are
suspended from government work, we could suffer a significant reduction in
expected revenue.
|
|
·
|
Our
long-term debt and credit arrangements contain restrictive covenants and
failure to meet these covenants could significantly harm our financial
condition. Our long-term debt and credit arrangements and
related restrictive covenants are more fully described in Note 12 of
the “Notes to the Consolidated Financial Statements” included in this
report. In most cases, failure to meet the restrictive covenants would
result in an immediate repayment of all amounts due and cancellation of
open lines of credit. Additionally, failure to meet restrictive covenants
related to our debt and credit agreements would trigger cross-default
provisions that would cause us to also be in default of our surety
agreements. Although we have not had difficulty meeting these covenants in
the past, failure to do so in the future could have material adverse
effects on our business and financial
condition.
|
|
·
|
Our
contract backlog is subject to unexpected adjustments and cancellations
and could be an uncertain indicator of our future earnings. We
cannot guarantee that the revenues projected in our contract backlog will
be realized or, if realized, will be profitable. Projects reflected in our
contract backlog may be affected by project cancellations, scope
adjustments, time extensions or other changes. Such changes may impact the
revenue and profit we ultimately realize on these
projects.
|
The
foregoing list is not exhaustive. There can be no assurance that we have
correctly identified and appropriately assessed all factors affecting our
business or that the publicly available and other information with respect to
these matters is complete and correct. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial also may
adversely impact us. These developments could have material adverse effects on
our business, financial condition and results of operations. For these reasons,
the reader is cautioned not to place undue reliance on our forward-looking
statements.
None.
The
following table provides our estimate of certain information about our
properties as of December 31, 2008:
|
Land
Area (acres)
|
Building
Square Feet
|
Permitted
Aggregate Reserves (tons)
|
Unpermitted
Aggregate Reserves (tons)
|
|
|
Office
and shop space (owned and leased)
|
1,300
|
1,200,000
|
N/A
|
N/A
|
|
Owned
quarry property
|
N/A
|
N/A
|
414.2 million
|
539.1
million
|
|
Leased
quarry property
|
N/A
|
N/A
|
339.2 million
|
565.4 million
|
|
Real
estate held for development and sale and use
|
2,300
|
56,000
|
N/A
|
N/A
|
Approximately
80% of the office and shop space is used by Granite West at their various
locations throughout the western United States and the remainder is primarily
used by Granite East. The quarry property is located at Granite West locations
throughout the western United States. We consider our available and future
aggregate reserves adequate to meet our expected operating needs. We pursue a
plan of acquiring new sources of aggregate reserves to replenish those depleted
and to support future growth.
Silica
Litigation
Our
wholly owned subsidiary Granite Construction Company (“GCCO”) is one of
approximately 100 to 300 defendants in eight active California Superior Court
lawsuits. Of the eight lawsuits, five were filed against GCCO in 2005 and three
were filed against GCCO in 2006, in Alameda County ( Molina vs. A-1 Aggregates,
et al.; Dominguez vs. A-1 Aggregates, et al.; Cleveland vs. A. Teichert &
Son.; Guido vs. A. Teichert & Son, Inc.; Williams vs. A. Teichert & Son,
Inc.; Horne vs. Teichert & Son, Inc.; Kammer vs.A-1 Aggregates, et al.; and
Solis vs. The 3M Company et al.). Each lawsuit was brought by a single plaintiff
who is seeking money damages by way of various causes of action, including
strict product and market share liability, and alleges personal injuries caused
by exposure to silica products and related materials during the plaintiffs’ use
or association with sand blasting or grinding concrete. The plaintiff in each
lawsuit has categorized the defendants as equipment defendants, respirator
defendants, premises defendants and sand defendants. We have been identified as
a sand defendant, meaning a party that manufactured, supplied or distributed
silica-containing products. Our preliminary investigation revealed that we have
not knowingly sold or distributed abrasive silica sand for sandblasting, and
therefore, we believe the probability of these lawsuits resulting in an
incurrence of a material liability is remote. We have been dismissed from
sixteen other similar lawsuits.
Hiawatha
Project DBE Issues
The
Hiawatha Light Rail Transit (“HLRT”) project was performed by Minnesota Transit
Constructors (“MnTC”), a joint venture that consisted of GCCO and other
unrelated companies. GCCO was the managing partner of the joint
venture, with a 56.5% interest. The Minnesota Department of
Transportation (“MnDOT”) is the contracting agency for this federally funded
project. The Metropolitan Council is the local agency conduit for
providing federal funds to MnDOT for the HLRT project. MnDOT and the
U.S. Department of Transportation Office of Inspector General (“OIG”) each
conducted a review of the Disadvantaged Business Enterprise (“DBE”) program
maintained by MnTC for the HLRT project. In addition, the U.S.
Department of Justice (“USDOJ”) is conducting an investigation into compliance
issues with respect to MnTC’s DBE Program for the HLRT project. MnDOT
and the OIG (collectively, the “Agencies”) have initially identified certain
compliance issues in connection with MnTC’s DBE Program and, as a result, have
determined that MnTC failed to meet the DBE utilization criteria as represented
by MnTC. Although there has been no formal administrative subpoena
issued, nor has a civil complaint been filed in connection with the
administrative reviews or the investigation, MnDOT has proposed a monetary
sanction of $4.3 million against MnTC and specified DBE training for personnel
from the members of the MnTC joint venture as a condition of awarding future
projects to joint venture members of MnTC on MnDOT and Metropolitan Council
work. MnTC is fully cooperating with the Agencies and the USDOJ and,
on July 2, 2007, presented its detailed written response to the initial
determinations of the Agencies as well as the investigation by the
USDOJ. We have yet to receive a formal reply from the Agencies or the
USDOJ, those entities instead preferring to engage in informal discussions in
attempt to resolve the matter. We cannot, however, rule out the possibility of a
civil or criminal actions being brought against MnTC or one or more of its
members which could result in civil and criminal
penalties.
US
Highway 20 Project
GCCO and
our wholly-owned subsidiary, Granite Northwest, Inc. are the members of a joint
venture known as Yaquina River Constructors (“YRC”) which is currently
constructing a new road alignment of US Highway 20 near Eddyville, Oregon under
contract with the Oregon Department of Transportation (“ODOT”). The
project involves constructing seven miles of new road through steep and forested
terrain in the Coast Range Mountains. During the fall and winter of
2006, extraordinary rain events produced runoff that overwhelmed erosion control
measures installed at the project and resulted in discharges to surface water in
alleged violation of the stormwater permit. The Oregon
Department of Justice is conducting a criminal investigation in connection with
stormwater runoff from the project. YRC and its members are fully
cooperating in the investigation, but YRC does not know whether criminal
charge civil lawsuits, if any, will be brought or against whom, as a
result of the investigation. Therefore, we cannot estimate what, if any,
criminal or civil penalty or conditional assessment may result from this
investigation.
City
of San Diego Fire Debris Cleanup
In the
aftermath of the 2007 San Diego County wildfires, GCCO bid for and was awarded a
fixed unit price, variable quantity contract with the City of San Diego to
perform specified debris cleanup work. GCCO began work in November
2007 and completed the work in April 2008.
In August
2008, the City announced that it would conduct an independent audit of the
project. In December 2008, the City’s audit report was released with
findings that while some GCCO billings contained minor mistakes, rates paid to
GCCO appear to be generally reasonable. GCCO has reimbursed the City
the undisputed overbilled amount of less than $3,000. The former San Diego City
Attorney, after conducting a separate investigation of GCCO’s work on the
project, filed a civil lawsuit in California Superior Court, County of San Diego
on October 17, 2008 against GCCO and the one other contractor that had been
awarded a similar cleanup contract with the City. In the complaint,
the City alleges both contractors knowingly presented to the City false claims
for payment in violation of the California False Claims Act. The City
seeks trebled damages in an amount to be determined, and a civil penalty in the
amount of $10,000 for each false claim made. After the November 2008 election in
which a new City Attorney was elected, GCCO and the new City Attorney agreed to
suspend the lawsuit to allow the City Attorney time to complete its
investigation. GCCO believes the allegations in the City’s complaint to be
without factual or legal basis and, therefore, the City’s entitlement to relief
sought under the California False Claims Act is remote. GCCO will vigorously
defend itself against the allegations raised.
City
of Sacramento West El Camino Project
In August
2003, the City of Sacramento and GCCO entered into a contract for the
construction of a public work improvement referred to as the West El Camino
Widening and Bridge Replacement Project. During the course of the
project, GCCO excavated significantly more material than the City engineer’s
estimated quantity for that contract bid item. GCCO filed a complaint in the
California Superior Court County of Sacramento against the City in November 2006
seeking payment for the excess quantities. In its defense
to GCCO’s lawsuit, and on July 23, 2008 the City filed a
cross-complaint against GCCO seeking relief pursuant to the California False
Claims Act and asserting various other fraud and misrepresentation based causes
of action. The City’s cross-complaint sought $10,000 for each false
claim, restitution and disgorgement of all earnings, punitive damages, attorney
fees, costs and interest. On January 23, 2009 this matter was
resolved by settlement agreement in which neither party admitted fault, but paid
GCCO a portion of the amount GCCO claimed for the excess
quantities.
Other
Legal Proceedings/Government Inquiries
We are a
party to a number of other legal proceedings arising in the normal course of
business. From time to time, we also receive inquiries from
public agencies seeking information concerning our compliance with government
construction contracting requirements and related laws and regulations. We
believe that the nature and number of these proceedings and compliance inquiries
are typical for a construction firm of our size and scope. Our litigation
typically involves claims regarding public liability or contract related issues.
While management currently believes, after consultation with counsel, that the
ultimate outcome of such proceedings and compliance inquiries which are
currently pending, individually and in the aggregate, will not have a material
adverse effect on our financial position or overall trends in results of
operations or cash flows, litigation is subject to inherent uncertainties. Were
an unfavorable ruling to occur, there exists the possibility of a material
adverse impact on the results of operations, cash flows and/or financial
position for the period in which the ruling occurs. While any one of our pending
legal proceedings is subject to early resolution as a result of our ongoing
efforts to settle, whether or when any legal proceeding will resolve through
settlement is neither predictable nor guaranteed.
During
the fourth quarter of 2008, no matter was submitted to a vote of security
holders through the solicitation of proxies or otherwise.
Executive
Officers of the Registrant
Our
executive officers are as follows:
|
Name
|
Age
|
Position
|
|
William
G. Dorey
|
64
|
President,
Chief Executive Officer and Director
|
|
Mark
E. Boitano
|
60
|
Executive
Vice President and Chief Operating Officer
|
|
LeAnne
M. Stewart
|
44
|
Senior
Vice President and Chief Financial Officer
|
|
Michael
F. Donnino
|
54
|
Senior
Vice President and Granite East Division Manager
|
|
James
H. Roberts
|
52
|
Senior
Vice President and Granite West Division
Manager
|
Granite
Construction Incorporated was incorporated in Delaware in January 1990 as the
holding company for Granite Construction Company, which was incorporated in
California in 1922. All dates of service for our executive officers include the
periods in which they served for Granite Construction Company.
Mr. Dorey
has been an employee of Granite since 1968 and has served in various capacities,
including President and Chief Executive Officer since January 2004, President
and Chief Operating Officer from February 2003 to December 2003, Executive Vice
President and Chief Operating Officer from 1998 to February 2003, Senior Vice
President and Manager, Branch Division from 1987 to 1998, and Vice President and
Assistant Manager, Branch Division from 1983 to 1987. Mr. Dorey has also served
as a member of our Board of Directors since January 2004 and as a director of
TIC Holdings, Inc. from 1997 to 2002. He received a B.S. degree in Construction
Engineering from Arizona State University in 1967.
Mr.
Boitano has been an employee of Granite since 1977 and has served in various
capacities, including Chief Operating Officer since January 2004 and Executive
Vice President since February 2003. He also served as Branch Division Manager
from 1998 to January 2004, and Senior Vice President from 1998 to February 2003.
Mr. Boitano received a B.S. degree in Civil Engineering from Santa
Clara University in 1971 and an M.B.A. degree from
California State University, Fresno in 1977.
Ms. Stewart has been a Senior Vice President of Granite since February,
2008. In June of 2008 she was appointed Chief Financial Officer. Prior to
joining Granite, Ms. Stewart was at Nash Finch Company as Senior Vice President
and Chief Financial Officer from 2004 to 2007, and as a Vice President and
Corporate Controller from 2000 to 2004. She has served on the Board of Trustees
of the College of St. Benedict since 1995. Ms. Stewart became a Certified Public
Accountant in 1987, received a B.A. in Accounting from the College of St.
Benedict in 1987 and an M.B.A. in Business Administration from the Wharton
School at the University of Pennsylvania in 1997.
Mr.
Donnino joined Granite in 1977 and has served as Senior Vice President since
January 2005, Manager of Granite East since February 2007, and Heavy
Construction Division Manager from January 2005 to February 2007. He served as
Vice President and Heavy Construction Division Assistant Manager during 2004,
Texas Regional Manager from 2000 to 2003 and Dallas Estimating Office Area
Manager from 1991 to 2000. Mr. Donnino received a B.S.C.E. in Structural, Water
and Soils Engineering from the University of Minnesota in 1976.
Mr. Roberts
joined Granite in 1981 and has served in various capacities, including Senior
Vice President since May 2004, Granite West Manager since February 2007, Branch
Division Manager from May 2004 to February 2007, Vice President and Assistant
Branch Division Manager from 1999 to 2004, and Regional Manager of Nevada and
Utah Operations from 1995 to 1999. He received a B.S.C.E. in 1979 and an
M.S.C.E. in 1980 from the University of California, Berkeley, and an M.B.A. from
the University of Southern California in 1981.
Our
common stock trades on the New York Stock Exchange under the ticker symbol GVA.
As of
February 13, 2009, there were 38,246,833
shares of our common stock outstanding held by
1,457 shareholders of record.
We have
paid quarterly cash dividends since the second quarter of 1990, and
we expect to continue to pay quarterly cash dividends. However, declaration
and payment of dividends is within the sole discretion of our Board of
Directors, subject to limitations imposed by Delaware law and compliance with
our credit agreements, and will depend on our earnings, capital requirements,
financial condition and other such factors as the Board of Directors deems
relevant.
|
Market Price and Dividends of
Common Stock
|
|
|
||||||||||||||
|
2008
Quarters Ended
|
December
31,
|
September
30,
|
June 30,
|
March 31,
|
||||||||||||
|
High
|
$ | 50.00 | $ | 42.24 | $ | 37.79 | $ | 39.84 | ||||||||
|
Low
|
$ | 21.20 | $ | 30.22 | $ | 29.19 | $ | 26.64 | ||||||||
| Dividends per share |
$
|
0.13 | $ | 0.13 | $ | 0.13 |
$
|
0.13 | ||||||||
| 2007 Quarters Ended | December 31, |
September
30,
|
June
30,
|
March
31,
|
||||||||||||
| High | $ | 57.37 | $ | 74.62 | $ | 70.43 | $ | 59.90 | ||||||||
| Low | $ | 32.46 | $ | 50.33 | $ | 54.57 | $ | 47.74 | ||||||||
| Dividends per share | $ | 0.13 | $ | 0.10 | $ | 0.10 | $ | 0.10 | ||||||||
During
the three months ended December 31, 2008, we did not sell any of our equity
securities that were not registered under the Securities Act of 1933, as
amended. The following table sets forth information regarding the repurchase of
shares of our common stock during the three months ended December 31,
2008:
|
Period
|
Total
number of shares purchased
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced plans or
programs
|
Approximate dollar
value of shares that may yet be purchased under the plans or programs2
|
|||||||||
|
October
1, 2008 through October 31, 2008
|
-
|
-
|
-
|
$
|
64,065,401
|
||||||||
|
November
1, 2008 through November 30, 2008
|
-
|
|
-
|
-
|
$
|
64,065,401
|
|||||||
|
December 1, 2008
through December 31, 20081
|
262
|
$
|
42.89
|
-
|
$
|
64,065,401
|
|||||||
|
Total
|
262
|
$
|
42.89
|
-
|
|||||||||
1The
number of shares purchased is in connection with employee tax withholding
for shares granted under our Amended and Restated 1999 Equity Incentive
Plan.
2In October 2007, our Board
of Directors authorized us to repurchase, at management’s discretion, up to
$200.0 million of our common stock. Under this repurchase program, the Company may
repurchase shares from time to time on the open market or in private
transactions. The specific timing and amount of repurchases will vary based on
market conditions, securities law limitations and other factors. The share
repurchase program may be suspended
or discontinued at any time without prior notice.
Performance
Graph
The
graph below compares Granite Construction Incorporated’s cumulative 5-year total
shareholder return on common stock with the cumulative total returns of the
S&P 500 index and the Dow Jones US Heavy Construction index. The Dow
Jones US Heavy Construction index includes the following companies: EMCOR Group
Inc., Fluor Corp., Foster Wheeler Ltd., Granite Construction Inc., Insituform
Technologies Inc., Jacobs Engineering Group Inc., KBR Inc., McDermott
International Inc., Quanta Services Inc. and Shaw Group Inc. The graph
tracks the performance of a $100 investment in our common stock and in each of
the indexes (with the reinvestment of all dividends) from December 31, 2003 to
December 31, 2008.
|
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
||||||||||||||||||
|
Granite
Construction Incorporated
|
$ | 100.00 | $ | 115.25 | $ | 157.62 | $ | 222.70 | $ | 161.51 | $ | 199.03 | ||||||||||||
|
S&P
500
|
100.00 | 110.88 | 116.33 | 134.70 | 142.10 | 89.53 | ||||||||||||||||||
|
Dow
Jones US Heavy Construction
|
100.00 | 121.26 | 175.23 | 218.58 | 415.21 | 186.34 | ||||||||||||||||||
The
selected consolidated operations data for 2008, 2007 and 2006 and consolidated
balance sheet data as of December 31, 2008 and 2007 set forth below have
been derived from our audited consolidated financial statements included herein,
and are qualified by reference to those consolidated financial statements. The
selected consolidated operations data for 2005 and 2004 and the
consolidated balance sheet data as of December 31, 2006, 2005 and 2004 have
been derived from our audited consolidated financial statements not included
herein. These historical results are not necessarily indicative of the results
of operations to be expected for any future period.
|
Selected
Consolidated Financial Data
|
||||||||||||||||||||
|
Years
Ended December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Operating
Summary
|
(In
Thousands, Except Per Share Data)
|
|||||||||||||||||||
|
Revenue
|
$ | 2,674,244 | $ | 2,737,914 | $ | 2,969,604 | $ | 2,641,352 | $ | 2,136,212 | ||||||||||
|
Gross
profit
|
468,720 | 410,744 | 295,720 | 319,372 | 222,021 | |||||||||||||||
|
As
a percent of revenue
|
17.5 | 15.0 | 10.0 | 12.1 | 10.4 | |||||||||||||||
|
General
and administrative expenses
|
257,532 | 246,202 | 199,481 | 192,692 | 157,035 | |||||||||||||||
|
As
a percent of revenue
|
9.6 | 9.0 | 6.7 | 7.3 | 7.4 | |||||||||||||||
|
Goodwill
impairment charge*
|
- | - | 18,011 | - | - | |||||||||||||||
|
Net
income
|
122,404 | 112,065 | 80,509 | 83,150 | 57,007 | |||||||||||||||
|
As
a percent of revenue
|
4.6 | 4.1 | 2.7 | 3.1 | 2.7 | |||||||||||||||
|
Net
income per share:
|
||||||||||||||||||||
|
Basic
|
$ | 3.25 | $ | 2.74 | $ | 1.97 | $ | 2.05 | $ | 1.41 | ||||||||||
|
Diluted
|
3.21 | 2.71 | 1.94 | 2.02 | 1.39 | |||||||||||||||
|
Weighted
average shares of common stock:
|
||||||||||||||||||||
|
Basic
|
37,606 | 40,866 | 40,874 | 40,614 | 40,390 | |||||||||||||||
|
Diluted
|
38,106 | 41,389 | 41,471 | 41,249 | 41,031 | |||||||||||||||
|
Consolidated
Balance Sheet
|
||||||||||||||||||||
|
Total
assets
|
$ | 1,743,455 | $ | 1,786,418 | $ | 1,632,838 | $ | 1,472,230 | $ | 1,277,954 | ||||||||||
|
Cash,
cash equivalents and marketable securities
|
520,402 | 485,348 | 394,878 | 301,381 | 277,692 | |||||||||||||||
|
Working
capital
|
475,942 | 397,568 | 319,762 | 367,801 | 355,927 | |||||||||||||||
|
Current
maturities of long-term debt
|
39,692 | 28,696 | 28,660 | 26,888 | 15,861 | |||||||||||||||
|
Long-term
debt
|
250,687 | 268,417 | 78,576 | 124,415 | 148,503 | |||||||||||||||
|
Other
long-term liabilities
|
43,604 | 46,441 | 58,419 | 46,556 | 40,641 | |||||||||||||||
|
Shareholders’
equity
|
767,509 | 700,199 | 694,544 | 621,560 | 550,474 | |||||||||||||||
|
Book
value per share
|
20.06 | 17.75 | 16.60 | 14.91 | 13.23 | |||||||||||||||
|
Dividends
per share
|
0.52 | 0.43 | 0.40 | 0.40 | 0.40 | |||||||||||||||
|
Common
shares outstanding
|
38,267 | 39,451 | 41,834 | 41,682 | 41,612 | |||||||||||||||
|
Contract
backlog
|
$ | 1,699,396 | $ | 2,084,545 | $ | 2,256,587 | $ | 2,331,540 | $ | 2,437,994 | ||||||||||
*During
the year ended December 31, 2006, we recorded a goodwill impairment charge
of approximately $18.0 million related to our Granite Northeast operation in New
York .
General
We are
one of the largest heavy civil contractors and producers of construction
materials in the United States. We are engaged in the construction and
improvement of streets, roads, highways and bridges as well as dams,
airport infrastructure, mass transit facilities and other infrastructure-related
projects. We produce construction materials through the use of our
extensive aggregate reserves and plant facilities. We also operate a real estate
development company on a significantly smaller scale. We have offices in
Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas,
Utah and Washington.
Our
contracts are obtained primarily through competitive bidding in response to
advertisements by federal, state and local agencies and private parties and to a
lesser extent through negotiation with private parties. Our bidding activity is
affected by such factors as contract backlog, available personnel, current
utilization of equipment and other resources, our ability to obtain necessary
surety bonds and competitive considerations. Bidding activity, contract backlog
and revenue resulting from the award of new contracts may vary significantly
from period to period. We have three operating segments: Granite
West, Granite East and Granite Land Company.
The three
primary economic drivers of our business are (1) the overall health of the
economy, (2) federal, state and local public funding levels, both nationally and
locally and (3) population growth with the resulting private development.
The level of demand for our services will have a direct correlation to these
drivers. For example, a stagnant or declining economy will generally result in a
reduced demand for construction in the private sector. This reduced demand
increases competition for private sector projects and will ultimately also
increase competition in the public sector as companies migrate from bidding
on scarce private sector work to projects in the public sector. Greater
competition can reduce our revenue growth and/or have a downward impact on gross
profit margins. In addition, a stagnant or declining economy tends to
produce less tax revenue, thereby decreasing a source of funds available
for spending on public infrastructure improvements. There are funding sources
that have been specifically earmarked for infrastructure spending, such as
diesel and gasoline taxes, which are not as directly impacted by a stagnant
or declining economy. However, even these funding sources can be
temporarily at risk as state and local governments struggle to balance their
budgets. Additionally, high fuel prices can have a dampening effect on
consumption, resulting in overall lower tax revenue. Conversely, higher public
funding as well as an expanding or robust economy will generally increase
demand for our services and provide opportunities for revenue growth and margin
improvement.
Our
general and administrative costs include salaries and related expenses,
incentive compensation, discretionary profit sharing, provision for doubtful
accounts and other costs to support our business. In general, these costs
will increase in response to the growth and the related increased complexity of
our business. These costs will vary depending on the number of projects in
process in a particular area and the corresponding level of estimating activity.
For example, as large projects are completed or if the level of work slows down
in a particular area, we will often re-assign project employees to
estimating and bidding activities until another project gets
underway, temporarily allocating their salaries and related costs from
cost of revenue to general and administrative expense. Additionally, our
compensation strategy for selected management personnel is to rely heavily on a
variable cash and restricted stock performance-based incentive element. The cash
portion of these incentives is expensed when earned while the restricted stock
portion is expensed over the vesting period of the restricted stock award
(generally three to five years). Depending on the mix of cash and
restricted stock, these incentives can have the effect of materially
altering general and administrative expenses from year to
year.
Critical
Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience; however,
actual amounts could differ from those estimates.
Certain
of our accounting policies and estimates require higher degrees of judgment than
others in their application. These include the recognition of revenue and
earnings from construction contracts, the valuation of real estate
held for development and sale and other long-lived assets, and insurance
estimates. We evaluate all of our estimates and judgments on an on-going
basis.
Revenue
Recognition for Construction Contracts
Our
contracts with our customers are primarily either “fixed unit price” or “fixed
price.” Under fixed unit price contracts, we are committed to provide materials
or services required by a project at fixed unit prices (for example, dollars per
cubic yard of concrete poured or cubic yards of earth excavated). While the
fixed unit price contract shifts the risk of estimating the quantity of units
required for a particular project to the customer, any increase in our unit cost
over the expected unit cost in the bid, whether due to inflation, inefficiency,
faulty estimates or other factors, is borne by us unless otherwise provided in
the contract. Fixed price contracts are priced on a lump-sum basis under which
we bear the risk that we may not be able to perform all the work profitably for
the specified contract amount. The percentage of fixed price contracts in our
contract backlog decreased from
approximately 72.0% at December 31, 2007 to approximately 68.7% at December 31,
2008. All state and federal government contracts and many of our other contracts
provide for termination of the contract at the convenience of the party
contracting with us, with provisions to pay us for work performed through the
date of termination.
We use
the percentage of completion accounting method for construction contracts in
accordance with the American Institute of Certified Public Accountants Statement
of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Revenue and
earnings on construction contracts, including construction joint ventures, are
recognized using the percentage of completion method in the ratio of costs
incurred to estimated final costs. Revenue in an amount equal to cost incurred
is recognized prior to contracts reaching 25% completion. The related
profit is deferred until the period in which such percentage completion is
attained. It is our judgment that until a project reaches 25% completion,
there is insufficient information to determine what the estimated profit on the
project will be with a reasonable level of assurance. In the case of large,
complex design/build projects we may continue to defer profit recognition beyond
the point of 25% completion based on an evaluation of specific project risks.
The factors considered in this evaluation of risk associated with each
design/build project include the stage of design completion, the stage of
construction completion, status of outstanding purchase orders and subcontracts,
certainty of quantities, certainty of schedule and the relationship with the
owner.
Revenue
from contract claims is recognized when we have a signed settlement agreement
and payment is assured. Revenue from contract change orders, which occur in most
large projects, is recognized when the owner has agreed to the change order in
writing. Provisions are recognized in the consolidated statements of income for
the full amount of estimated losses on uncompleted contracts whenever evidence
indicates that the estimated total cost of a contract exceeds its estimated
total revenue. Contract cost consists of direct costs on contracts, including
labor and materials, amounts payable to subcontractors, direct overhead costs
and equipment expense (primarily depreciation, fuel, maintenance and repairs).
Depreciation is provided using accelerated methods for construction equipment.
Contract cost is recorded as incurred and revisions in contract revenue and cost
estimates are reflected when known. The completion threshold for the start
of contract profit recognition is applied to all percentage of completion
projects unless and until we project a loss on the project, in which case the
estimated loss is immediately recognized.
The
accuracy of our revenue and profit recognition in a given period is almost
solely dependent on the accuracy of our estimates of the cost to complete each
project. Our cost estimates for all of our significant projects use a highly
detailed “bottom up” approach and we believe our experience allows us to provide
materially reliable estimates. There are a number of factors that can
contribute to changes in estimates of contract cost and profitability. The most
significant of these include the completeness and accuracy of the original bid,
costs associated with added scope changes, extended overhead due primarily to
owner and weather delays, subcontractor performance issues, changes in
productivity expectations, site conditions that differ from those assumed in the
original bid (to the extent contract remedies are unavailable), the availability
and skill level of workers in the geographic location of the project and a
change in the availability and proximity of equipment and materials. The
foregoing factors as well as the stage of completion of contracts in process and
the mix of contracts at different margins may cause fluctuations in gross profit
between periods and these fluctuations may be significant. Substantial changes
in cost estimates, particularly in our larger, more complex
projects have had, and can in future periods have, a significant effect on
our profitability.
Valuation of Real
Estate Held for Development and Sale and
other Long Lived Assets
Real
estate held for development and sale and other long-lived assets, which
include property, equipment and intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. We assess impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
of Long-Lived Assets. Circumstances which could trigger an impairment
review include, but are not limited to: significant decreases in the market
price of the asset; significant adverse changes in the business climate or legal
factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period cash
flow or operating losses combined with a history of losses or a forecast of
continuing losses associated with the use of the asset; or current expectation
that the asset will more likely than not be sold or disposed of significantly
before the end of its estimated useful life.
Recoverability
is assessed based on the carrying amount of the asset and its fair value,
which is generally determined based on the sum of the cash flows expected to
result from the use and eventual disposal of the asset. An impairment loss is
recognized in the consolidated statements of income when the carrying amount is
not recoverable and exceeds fair value. In 2008 and 2007 our analyses
determined that portions of our real estate held for development and
sale were impaired. As a result, we recorded impairment charges for the
years ended 2008 and 2007 in the amount of $4.5 million and a $3.0
million, respectively.
The
process of estimating future cash flows related to an asset involves significant
judgment, including future cash inflows related to the use or eventual sale of
the asset and future cash outflows related to the development or use of the
asset. Although we believe the estimates and assumptions we used in
testing for impairment are reasonable and supportable, significant changes in
any one of our assumptions could produce a significantly different
result.
Insurance
Estimates
We carry
insurance policies to cover various risks, primarily general liability and
workers compensation, under which we are liable to reimburse the insurance
company for a portion of each claim paid. The amounts that we are liable for
generally range from the first $0.5 million to $1.0 million per
occurrence. We accrue for the estimated ultimate liability for incurred losses,
both reported and unreported, using actuarial methods based on historic trends
modified, if necessary, by recent events. Changes in our loss assumptions caused
by changes in actual experience would result in a change in our
assessment of the ultimate liability that could have a material effect on our
operating results and financial position.
Results
of Operations
|
Comparative
Financial Summary
|
||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||||
|
Total
revenue
|
$
|
2,674,244
|
$
|
2,737,914
|
$
|
2,969,604
|
||||
|
Gross
profit
|
468,720
|
410,744
|
295,720
|
|||||||
|
Operating
income
|
216,691
|
174,885
|
88,636
|
|||||||
|
Other
income
|
16,739
|
23,509
|
24,381
|
|||||||
|
Provision
for income taxes
|
67,692
|
65,470
|
38,678
|
|||||||
|
Minority
interest in consolidated subsidiaries
|
(43,334
|
) |
(20,859
|
) |
6,170
|
|||||
|
Net
income
|
122,404
|
112,065
|
80,509
|
|||||||
Our
results of operations for the year ended December 31, 2008 reflect a 14.1%
improvement in gross profit over 2007. This was driven by improvements in
Granite East, partially offset by slightly lower margins in Granite West.
Granite Land Company experienced a gross loss during the period versus a gross
profit in 2007. The increase in minority interest reflects the increased
profitability of joint venture work and an increase in the volume or size of our
joint venture work.
Revenue
|
Total
Revenue
|
|||||||||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Division:
|
|||||||||||||||||||
|
Granite
West
|
$
|
1,970,196
|
73.7
|
$
|
1,928,751
|
70.4
|
$
|
1,927,996
|
64.9
|
||||||||||
|
Granite
East
|
695,035
|
26.0
|
768,451
|
28.1
|
1,006,617
|
33.9
|
|||||||||||||
|
Granite
Land Company
|
9,013
|
0.3
|
40,712
|
1.5
|
34,991
|
1.2
|
|||||||||||||
|
Total
|
$
|
2,674,244
|
100.0
|
$
|
2,737,914
|
100.0
|
$
|
2,969,604
|
100.0
|
||||||||||
|
Granite
West Revenue
|
||||||||||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||
|
California:
|
||||||||||||||||||||
|
Public
sector
|
$
|
697,551
|
67.8
|
$
|
595,733
|
56.7
|
$
|
537,967
|
48.5
|
|||||||||||
|
Private
sector
|
106,489
|
10.4
|
215,770
|
20.5
|
300,245
|
27.0
|
||||||||||||||
|
Material
sales
|
224,736
|
21.8
|
239,660
|
22.8
|
272,039
|
24.5
|
||||||||||||||
|
Total
|
$
|
1,028,776
|
100.0
|
$
|
1,051,163
|
100.0
|
$
|
1,110,251
|
100.0
|
|||||||||||
|
West
(excluding California):
|
||||||||||||||||||||
|
Public
sector
|
$
|
721,922
|
76.7
|
$
|
563,392
|
64.2
|
$
|
508,559
|
62.2
|
|||||||||||
|
Private
sector
|
91,119
|
9.7
|
178,156
|
20.3
|
171,166
|
20.9
|
||||||||||||||
|
Material
sales
|
128,379
|
13.6
|
136,040
|
15.5
|
138,020
|
16.9
|
||||||||||||||
|
Total
|
$
|
941,420
|
100.0
|
$
|
877,588
|
100.0
|
$
|
817,745
|
100.0
|
|||||||||||
|
Total
Granite West:
|
||||||||||||||||||||
|
Public
sector
|
$
|
1,419,473
|
72.0
|
$
|
1,159,125
|
60.1
|
$
|
1,046,526
|
54.3
|
|||||||||||
|
Private
sector
|
197,608
|
10.0
|
393,926
|
20.4
|
471,411
|
24.4
|
||||||||||||||
|
Material
sales
|
353,115
|
18.0
|
375,700
|
19.5
|
410,059
|
21.3
|
||||||||||||||
|
Total
|
$
|
1,970,196
|
100.0
|
$
|
1,928,751
|
100.0
|
$
|
1,927,996
|
100.0
|
|||||||||||
Granite
West Revenue: Revenue
from Granite West for the year ended December 31, 2008 increased
by $41.4 million, or 2.1%, compared with the year ended December 31,
2007. The
increase in public sector revenue was primarily attributable to profitable
progress toward completion of federally funded security projects and the
positive effect of the resolution of significant uncertainties on certain
projects. The decreases in private sector and materials revenue were driven
by the ongoing contraction of credit markets and residential construction in all
geographic areas in which Granite West operates. We continue to see
additional competition for the available public sector work, as competitors
migrate from increasingly scarce private sector
work.
|
Granite
East Revenue
|
|||||||||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Geographic Area:
|
|||||||||||||||||||
|
Midwest
|
$
|
175,763
|
25.3
|
$
|
93,896
|
12.2
|
$
|
43,480
|
4.3
|
||||||||||
|
Northeast
|
125,024
|
18.0
|
196,653
|
25.6
|
259,462
|
25.8
|
|||||||||||||
|
South
|
128,454
|
18.5
|
125,164
|
16.3
|
217,647
|
21.6
|
|||||||||||||
|
Southeast
|
221,167
|
31.8
|
299,084
|
38.9
|
281,568
|
28.0
|
|||||||||||||
|
West
|
44,627
|
6.4
|
53,654
|
7.0
|
204,460
|
20.3
|
|||||||||||||
|
Total
|
$
|
695,035
|
100.0
|
$
|
768,451
|
100.0
|
$
|
1,006,617
|
100.0
|
||||||||||
|
Revenue
by Market Sector:
|
|||||||||||||||||||
|
Public
sector
|
$
|
675,188
|
97.1
|
$
|
747,580
|
97.3
|
$
|
979,475
|
97.3
|
||||||||||
|
Private
sector
|
19,847
|
2.9
|
20,871
|
2.7
|
27,042
|
2.7
|
|||||||||||||
|
Material
sales
|
-
|
-
|
-
|
-
|
100
|
-
|
|||||||||||||
|
Total
|
$
|
695,035
|
100.0
|
$
|
768,451
|
100.0
|
$
|
1,006,617
|
100.0
|
||||||||||
|
Revenue
by Contract Type:
|
|||||||||||||||||||
|
Fixed
unit price
|
$
|
56,543
|
8.1
|
$
|
128,501
|
16.7
|
$
|
243,103
|
24.2
|
||||||||||
|
Fixed
price, including design/build
|
638,492
|
91.9
|
639,950
|
83.3
|
763,395
|
75.8
|
|||||||||||||
|
Other
|
-
|
-
|
-
|
-
|
119
|
-
|
|||||||||||||
|
Total
|
$
|
695,035
|
100.0
|
$
|
768,451
|
100.0
|
$
|
1,006,617
|
100.0
|
||||||||||
Granite
East Revenue: Revenue
from Granite East for the year ended December 31, 2008 decreased
by $73.4 million, or 9.6%, compared with the year ended December
31, 2007. This
decrease is reflective, in part, of our plan to slow revenue growth in the
division over the last several years to focus on execution and improved
profitability. Geographically,
the largest decreases were experienced in the Southeast and Northeast due
primarily to certain large projects nearing completion. Increases
in the Midwest and South resulted from revenue contributions from progress on a
large design/build project in St. Louis, Missouri and project productivity on a
bridge project in Mississippi,
respectively.
The
following table provides additional information about revenue from our
large projects for the years ended December 31, 2008, 2007 and
2006:
|
Large
Project Revenue
|
||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||||
|
Granite
West
|
$
|
245,514
|
$
|
160,232
|
$
|
185,474
|
||||
|
Number
of projects*
|
8
|
6
|
6
|
|||||||
|
Granite
East
|
$
|
621,215
|
$
|
732,086
|
$
|
889,201
|
||||
|
Number
of projects*
|
19
|
31
|
28
|
|||||||
|
Total
|
$
|
866,729
|
$
|
892,318
|
$
|
1,074,675
|
||||
|
Number
of projects*
|
27
|
37
|
34
|
|||||||
* Includes
only projects with a total contract value greater than $50.0 million and over
$1.0 million of revenue in the respective
periods.
Granite
Land Company Revenue: Revenue from GLC for the year
ended December 31, 2008 decreased
by $31.7 million, or 77.9%, compared to the year ended December 31,
2007. GLC’s
revenue is dependent on the timing of real estate sales transactions, which are
relatively few in number and can cause variability in the timing of revenue and
profit recognition. The current real estate downturn and associated tightening
of credit markets has had a direct impact on the anticipated timing of several
GLC development projects.
Contract
Backlog
|
Total
Contract Backlog
|
|||||||||||||
|
December
31,
|
2008
|
2007
|
|||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Contract
Backlog by Division:
|
|||||||||||||
|
Granite
West
|
$
|
788,872
|
46.4
|
$
|
854,142
|
41.0
|
|||||||
|
Granite
East
|
910,524
|
53.6
|
1,230,403
|
59.0
|
|||||||||
|
Total
|
$
|
1,699,396
|
100.0
|
$
|
2,084,545
|
100.0
|
|||||||
|
Granite
West Contract Backlog
|
|||||||||||||
|
December
31,
|
2008
|
2007
|
|||||||||||
|
(in thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
California:
|
|||||||||||||
|
Public
sector
|
$
|
430,421
|
94.8
|
$
|
352,398
|
83.9
|
|||||||
|
Private
sector
|
23,841
|
5.2
|
67,479
|
16.1
|
|||||||||
|
Total
|
$
|
454,262
|
100.0
|
$
|
419,877
|
100.0
|
|||||||
|
West
(excluding California):
|
|||||||||||||
|
Public
sector
|
$
|
319,271
|
95.4
|
$
|
398,380
|
91.7
|
|||||||
|
Private
sector
|
15,339
|
4.6
|
35,885
|
8.3
|
|||||||||
|
Total
|
$
|
334,610
|
100.0
|
$
|
434,265
|
100.0
|
|||||||
|
Total
Granite West contract backlog:
|
|||||||||||||
|
Public
sector
|
$
|
749,692
|
95.0
|
$
|
750,778
|
87.9
|
|||||||
|
Private
sector
|
39,180
|
5.0
|
103,364
|
12.1
|
|||||||||
|
Total
|
$
|
788,872
|
100.0
|
$
|
854,142
|
100.0
|
|||||||
Granite
West Contract
Backlog:
Granite West contract backlog of $788.9 million at December 31,
2008 was $65.3 million, or 7.6%, lower
than at December 31, 2007. The reduction in
contract backlog was primarily a result of the ongoing contraction of
residential construction and credit markets. The reduced residential
demand has also increased competition on public sector work, as competitors
migrate from the increasingly scarce private sector work. Granite West project
awards in the fourth quarter 2008 included a $44.0 million highway
rehabilitation project in California and a $42.7 million highway
reconstruction project near the California-Nevada
border.
|
Granite
East Contract Backlog
|
|||||||||||||
|
December
31,
|
2008
|
2007
|
|||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Contract
Backlog by Geographic Area:
|
|||||||||||||
|
Midwest
|
$
|
163,795
|
18.0
|
$
|
328,971
|
26.8
|
|||||||
|
Northeast
|
250,232
|
27.5
|
133,052
|
10.8
|
|||||||||
|
South
|
91,720
|
10.0
|
144,210
|
11.7
|
|||||||||
|
Southeast
|
402,062
|
44.2
|
613,057
|
49.8
|
|||||||||
|
West
|
2,715
|
0.3
|
11,113
|
0.9
|
|||||||||
|
Total
|
$
|
910,524
|
100.0
|
$
|
1,230,403
|
100.0
|
|||||||
|
Contract
Backlog by Market Sector:
|
|||||||||||||
|
Public
sector
|
$
|
906,470
|
99.6
|
$
|
1,213,484
|
98.6
|
|||||||
|
Private
sector
|
4,054
|
0.4
|
16,919
|
1.4
|
|||||||||
|
Total
|
$
|
910,524
|
100.0
|
$
|
1,230,403
|
100.0
|
|||||||
|
Contract
Backlog by Contract Type:
|
|||||||||||||
|
Fixed
unit price
|
$
|
14,086
|
1.5
|
$
|
64,580
|
5.2
|
|||||||
|
Fixed
price including design/build
|
896,438
|
98.5
|
1,165,823
|
94.8
|
|||||||||
|
Total
|
$
|
910,524
|
100.0
|
$
|
1,230,403
|
100.0
|
Granite East Contract
Backlog:
Granite East contract backlog of $910.5 million
at December 31, 2008 was $319.9 million, or 26.0%, lower
than at December 31, 2007. The decrease reflects progress on
construction projects. While we
continued to focus on selective bidding opportunities with higher bid margins, project
awards during the year ended December 31, 2008 included a $33.8 million
freeway project in Texas and a
$161.4 million transit project in
New York. We are a
member of a joint venture team that is currently in pricing negotiations with
Houston Metro for the design and construction of the proposed expansion of the
Houston Rapid Transit system, and received $37.9 million in awards from Houston
Metro for preliminary work associated with this project. Also, we received $67.8 million in additional awards related to our 20%
share of a joint venture project to construct a transportation hub at
the World Trade Center in
New York. As of
December 2008, the total joint venture contract value stands at approximately
$1.0 billion. However, we currently expect total revenue for
this contract to exceed $2.5 billion of which our share could exceed
$500.0 million, the majority of which should be awarded by year end
2009.
The following
tables provide additional information about our large project contract
backlog at December 31, 2008 and 2007:
**Includes only projects with total contract value
greater than $50.0 million and remaining contract backlog over $1.0 million at
the respective dates.
|
Large
Project Contract Backlog by Expected Profitability
|
|||||||||||
|
December
31, 2008
(dollars
in thousands)
|
Number
of Projects***
|
Average
Percent Complete
|
Remaining
Contract Backlog
|
Percent
|
|||||||
|
Projects with
forecasted loss
|
|||||||||||
|
Granite
West
|
1
|
44%
|
|
$
|
104,428
|
9.4%
|
|
||||
|
Granite
East
|
6
|
65%
|
|
66,670
|
6.0%
|
|
|||||
|
Total
|
7
|
52%
|
|
171,098
|
15.4%
|
|
|||||
|
Projects with
forecasted profit
|
|||||||||||
|
Granite
West
|
5
|
43%
|
|
139,390
|
12.5%
|
|
|||||
|
Granite
East
|
8
|
36%
|
|
801,968
|
72.1%
|
|
|||||
|
Total
|
13
|
37%
|
|
941,358
|
84.6%
|
|
|||||
|
Total
|
20
|
$
|
1,112,456
|
100.0%
|
|
||||||
|
December
31, 2007
(dollars
in thousands)
|
Number
of Projects***
|
Average
Percent Complete
|
Remaining
Contract Backlog
|
Percent
|
|||||||
|
Projects with
forecasted loss
|
|||||||||||
|
Granite
West
|
1
|
38%
|
|
$
|
80,688
|
5.7%
|
|
||||
|
Granite
East
|
9
|
58%
|
|
145,016
|
10.3%
|
|
|||||
|
Total
|
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
|
13
|
27%
|
|
1,188,246
|
84.0%
|
|
|||||
|
Total
|
23
|
$
|
1,413,950
|
100.0%
|
|
||||||
***Includes only projects with total contract value
greater than $50.0 million and remaining contract backlog over $1.0
million.
Gross
Profit (Loss)
The
following table presents gross profit (loss) by business segment for the
respective periods:
| Gross Profit (Loss) | ||||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||||
|
(in
thousands)
|
||||||||||||||
|
Granite
West
|
$
|
348,259
|
$
|
370,429
|
$
|
350,587
|
||||||||
|
Percent
of division revenue
|
17.7
|
|
%
|
19.2
|
|
% |
18.2
|
|
%
|
|||||
|
Granite
East
|
$
|
120,866
|
$
|
25,824
|
$
|
(72,565
|
)
|
|||||||
|
Percent
of division revenue
|
17.4
|
|
% |
3.4
|
|
% |
(7.2
|
)
|
% | |||||
|
Granite
Land Company
|
$
|
(1,523
|
) |
$
|
15,840
|
$
|
17,570
|
|||||||
|
Percent
of division revenue
|
(16.9
|
)
|
%
|
38.9
|
|
% |
50.2
|
|
% | |||||
|
Other
|
$
|
1,118
|
$
|
(1,349
|
)
|
$
|
128
|
|||||||
|
Total
|
$
|
468,720
|
$
|
410,744
|
$
|
295,720
|
||||||||
|
Percent
of total revenue
|
17.5
|
|
% |
15.0
|
|
% |
10.0
|
|
% | |||||
Gross
Profit (Loss): We recognize revenue only equal to cost, deferring
profit recognition, until a project reaches 25% completion. In the case of
large, complex design/build projects, we may continue to defer profit
recognition beyond the point of 25% completion until such time as we believe we
have enough information to make a reasonably dependable estimate of contract
revenue and cost. Because we have a large number of projects at various stages
of completion in Granite West, this policy generally has a lesser impact on
Granite West’s gross profit on a quarterly or annual basis.
However, Granite East has fewer projects in process at any given time
and those projects tend to be much larger than Granite West projects.
As a result, Granite East gross profit as a percent of revenue can vary
significantly in periods where one or several very large projects reach
our percentage of completion threshold and the deferred profit is
recognized or conversely, in periods where contract backlog is growing rapidly
and a higher percentage of projects are in their early stages with no associated
gross profit recognition.
Revenue
from projects that have not yet reached our profit recognition threshold is as
follows:
|
Revenue
from Contracts with Deferred Profit
|
||||||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||||
|
(in
thousands)
|
||||||||||||||
|
Granite
West
|
$
|
24,148
|
$
|
43,590
|
$
|
24,868
|
||||||||
|
Granite
East
|
1,674
|
131,694
|
16,397
|
|||||||||||
|
Total
revenue from contracts with deferred profit
|
$
|
25,822
|
$
|
175,284
|
$
|
41,265
|
||||||||
We do not
recognize revenue from contract claims until we have a signed agreement and
payment is assured and we do not recognize revenue from contract change orders
until the contract owner has agreed to the change order in writing. However, we
do recognize the costs related to any contract claims or pending change orders
in our forecasts when we are contractually obligated. As a result, our gross
profit as a percent of revenue can vary depending on the magnitude and timing of
settlement of claims and change orders.
Granite
West gross profit as a percent of revenue for 2008 decreased to
17.7% from 19.2% for 2007. The decrease was primarily due to
significantly lower gross profit margins on the sale of construction
materials. Construction materials gross
profit as a percent of materials sales for 2008 decreased to
11.9% from 20.1% for 2007. Construction materials margins have been
negatively impacted by lower demand from the private sector for our higher
margin products, higher costs of certain raw materials such as diesel
fuel and liquid asphalt, and a write-down of inventory due to production in
excess of estimated foreseeable forecast. Additionally, margins have been
negatively impacted by the fixed costs of our plants not running at normal
capacity. These decreases were partially offset by the positive
effect of project forecast changes of $64.3
million for the year ended December 31, 2008 compared
with $23.0 million
for the year ended December 31, 2007 (see Note 2 of the “Notes to
the Consolidated Financial Statements”).
Granite
East gross profit as a percent of revenue for 2008 increased
to 17.4% from 3.4% for 2007. The improved gross profit
margin in 2008 was driven by favorable
project forecast changes, projects reaching the state of completion allowing
profit recognition, and the settlement of a significant claim associated with a
large design/build project nearing completion in southern
California. Currently, there is only
one project in Granite East for which the profit recognition threshold has not
been reached. The positive effect
of project forecast changes was $54.7
million for the year ended December 31, 2008 compared with $3.0 million
for the year ended December 31, 2007 (see Note 2 of the “Notes to
the Consolidated Financial Statements”).
When we
experience significant contract forecast changes, we undergo a process that
includes reviewing the nature of the changes to ensure that there are no
material amounts that should have been recorded in a prior period rather than as
a change in estimate for the current period. In our review of these changes, we
did not identify any material amounts that should have been recorded in a prior
period.
Included
in GLC’s cost of revenue for 2008 and 2007 were impairment charges of $4.5
million and $3.0 million, respectively, on residential development projects
in California. GLC’s gross loss in 2008 of $1.5 million and gross profit in
2007 of $15.8 million, included approximately $0.6 million and $8.8 million,
respectively, related to our minority partners’ share.
General
and Administrative Expenses
The
following table presents the components of general and administrative expenses
for the respective periods:
| General and Administrative Expenses | |||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
||||||||
|
(in
thousands)
|
|||||||||||
|
Salaries
and related expenses
|
$
|
131,811
|
$
|
124,804
|
$
|
102,935
|
|||||
|
Incentive
compensation, discretionary profit sharing and other variable
compensation
|
37,707
|
37,745
|
33,094
|
||||||||
| Provision for doubtful accounts |
10,958
|
3,894
|
438
|
||||||||
|
Other
general and administrative expenses
|
77,056
|
79,759
|
63,014
|
||||||||
|
Total
|
$
|
257,532
|
$
|
246,202
|
$
|
199,481
|
|||||
|
Percent
of revenue
|
9.6
|
%
|
9.0
|
%
|
6.7
|
%
|
|||||
General
and Administrative Expenses: General and administrative expenses
increased
by $11.3 million, or 4.6%, to $257.5 million in 2008 from $246.2
million in 2007. This was due to a number of factors: an
increase in the allowance for doubtful accounts primarily related to
Granite West private sector receivables from real estate developers,
approximately $3.0 million in severance costs associated with our voluntary
opt-out program and other reductions in force, as well as the full year effect
of, and integration costs associated with, businesses acquired in 2007.
Other general and administrative expenses include information technology,
occupancy, office supplies, depreciation, travel and entertainment, outside
services, marketing, training and other miscellaneous expenses, none of which
individually exceeded 10% of total general and administrative expenses.
Gain
on Sales of Property and Equipment
| Gain on Sales of Property and Equipment | ||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||||
|
Gain
on sales of property and equipment
|
$
|
5,503
|
$
|
10,343
|
$
|
10,408
|
||||
Gain
on Sales of Property and Equipment: Gain on sales of property
and equipment decreased by $4.8 million, or 46.8%, for the year ended
December 31, 2008 compared with 2007. Sales of property and
equipment can vary year to year based on timing of completion of large jobs and
related sales of excess equipment.
Other
Income (Expense)
The
following table presents the components of other income (expense) for the
respective periods:
| Other Income (Expense) | ||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||||
|
Interest
income
|
$
|
18,445
|
$
|
26,925
|
$
|
24,112
|
||||
|
Interest
expense
|
(16,001
|
) |
(6,367
|
)
|
(4,492
|
)
|
||||
|
Acquisition
expense
|
-
|
(7,752
|
)
|
-
|
||||||
|
Equity
in (loss) income of affiliates
|
(1,058
|
) |
5,205
|
2,157
|
||||||
|
Other
income, net
|
15,353
|
5,498
|
2,604
|
|||||||
|
Total
|
$
|
16,739
|
$
|
23,509
|
$
|
24,381
|
||||
Other
Income (Expense): Interest income decreased $8.5
million, or 31.5%, in 2008 compared with 2007 due to
the decline in short term interest rates on our invested balances.
Interest expense increased
in 2008 compared to 2007 due primarily to an increase in the average debt
outstanding during the period. Acquisition expense in 2007 was
associated with the purchase of all remaining shares of Wilder Construction
Company (“Wilder”).
We
recorded equity in the loss of affiliates of $1.1 million during 2008 due
primarily to losses associated with our investment in an asphalt terminal in
Nevada. In 2007 we recorded a gain of approximately $3.9 million on the sale of
a building by a partnership in which we had an equity method investment.
The increase
in other income, net during 2008 was primarily related to a gain
of $14.4 million on the sale of an investment in our affiliate, gains
on the sale of aggregate by-products of $9.3 million, and a gain of $1.2 million
related to a GLC extinguishment of debt. This increase was partially offset
by a $10.9 million loss on the sale of available-for-sale securities; we sold
these securities as a result of changes in our investment policy and to maximize
the associated tax benefit.
Provision
for Income Taxes
| Provision for Income Taxes | |||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
||||||||
|
(in
thousands)
|
|||||||||||
|
Provision
for income taxes
|
$
|
67,692
|
$
|
65,470
|
$
|
38,678
|
|||||
|
Effective
tax rate
|
29.0
|
%
|
33.0
|
%
|
34.2
|
%
|
|||||
Provision
for Income Taxes: Our effective tax rate decreased to 29.0% in 2008
from 33.0% in 2007. The decrease was primarily due to
increases in the estimated income attributed to minority partners’ share in our
consolidated construction joint ventures and other entities which are not
subject to income taxes on a stand alone
basis.
Minority
Interest in Consolidated Subsidiaries
| Minority Interest in Consolidated Subsidiaries | ||||||||||
|
Years
ended December 31,
|
2008
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||||
|
Minority
interest in consolidated subsidiaries
|
$
|
(43,334
|
) |
$
|
(20,859
|
)
|
$
|
6,170
|
||
Minority
Interest in Consolidated Subsidiaries: Our minority interest in
consolidated subsidiaries represents the minority owners’ share of the income or
loss of our consolidated
construction joint ventures and real estate development
entities.
The
increase in the minority interest in consolidated subsidiaries for the year
ended December 31, 2008 compared to the prior year was largely attributable
to the continued progression and the effect of changes in estimates related to
certain consolidated joint venture projects for Granite East,
including minority interest of approximately $17.7 million for
settlement related to the resolution of revenue issues on a large project in
southern California. In addition, the increase reflects the increased
profitability of joint venture work, an increase in the volume of
joint venture contracts and the size of our joint venture
projects.
Prior
Years
Revenue: Revenue
from Granite West for the year ended December 31, 2007 increased
by $0.8 million, or 0.1%, compared with the year ended December 31,
2006. Our California revenue decreased $59.1 million, or 5.3%, in 2007
primarily due to the continued slowing of residential construction which
led to decreases in both private sector construction revenue and revenue from
the sale of construction materials. These decreases were partially offset
by increased California public sector revenue of $57.8 million, or 10.7%,
primarily driven by a higher volume of projects available to bid. Our
revenue from the West (excluding California) in 2007 included approximately
$89.0 million generated as a result of our acquisition of certain assets of the
Superior Group of Companies on April 3, 2007. Other than Northern Nevada, our
locations outside of California have generally been less impacted by the slowing
of residential construction.
Revenue
from Granite East for the year ended December 31, 2007 decreased
by $238.2 million, or 23.7%, compared with the year ended December 31,
2006. Geographically, the largest decreases were experienced in the
West, South and Northeast. Under a realignment effected in 2007,
Granite East retained a project in the West that was nearing completion and
the decrease in revenue of $150.8 million, or 73.8%, in the West reflects
progress on the retained project over time. In the South and
Northeast the decreases of $92.5 million, or 42.5%, and $62.8 million, or 24.2%,
respectively, were due primarily to certain large projects in Texas
and New York nearing completion. Increases in the Southeast of $17.5
million, or 6.2%, resulted from revenue contributions from a large
design/build project in Mississippi that was awarded in February
2006. Increases in the Midwest of $50.4 million, or 116.0 %, resulted
from revenue contributions from a large design/build project
in Missouri that was awarded in the fourth quarter of 2006. The
percent of our revenue from fixed price contracts increased in 2007
to 83.3% due primarily to a higher percentage of design/build projects in
our contract backlog.
Revenue
from GLC for the year ended December 31, 2007 increased by $5.7
million, or 16.4%, compared with the year ended December 31,
2006. GLC’s revenue is dependent on the timing of real estate sales
transactions, which are relatively few in number and can cause variability in
the timing of revenue and profit recognition.
Contract
Backlog: Granite
West contract backlog of $854.1 million at December 31, 2007 was $161.5
million, or 15.9%, lower than at December 31, 2006. The decrease of
$50.5 million, or 32.8%, in private sector contract backlog at December 31,
2007 compared with December 31, 2006 was primarily a result of the slowing
demand for residential construction, particularly in certain California and
Nevada markets.
The decrease of $71.1 million, or 16.8%, in 2007 public sector
contract backlog in California was
largely due to increased competition for the available work as contractors
migrated from the increasingly scarce private sector work. Additionally, the
lower public sector contract backlog reflects progress on a $234.2 million
joint venture highway reconstruction project in Utah that
was awarded at the end of 2005. Granite West project awards in
the fourth quarter 2007 included a $24.4 million highway
reconstruction project near the California-Nevada
border.
Granite
East contract backlog of $1.2 billion at December 31, 2007 was $10.5
million, or 0.8%, lower than at December 31, 2006. The increase of
$290.4, or 90.0%, in 2007 contract backlog in the Southeast was largely driven
by the award in March 2007 of a $464.0 million joint venture design/build
highway project in Maryland. The contract backlog increase in the Southeast
was offset by lower contract backlog in the other Granite East geographic areas
as we continued our strategy of bidding at higher margins in our home
markets. Additional project awards during the year ended December 31, 2007
included a $37.0 million freeway project in Texas, a $93.0 million turnpike
project in Florida and approximately $76.7 million in additional awards related
to our 20% share of a joint venture project to construct a transportation hub at
the World Trade Center in New York.
Gross
Profit (Loss): Granite West gross profit as a percent of revenue
for 2007 increased to 19.2% from 18.2% for 2006. The increase was
largely due to the positive effect of project forecast changes in 2007 of
approximately $23.0 million due to the settlement of outstanding issues with
contract owners, higher productivity than originally estimated and the
resolution of certain project uncertainties. Additionally, in 2006
Granite West was negatively impacted by approximately $18.0 million in net
project forecast changes – primarily from the estimated loss recorded on our
highway project in western Oregon (see Note 2 of the “Notes to the Consolidated
Financial Statements”). Construction
materials gross profit as a percent of materials sales for 2007 decreased
to 20.1% from 23.6% for 2006 primarily
due to a change in product mix resulting from the reduced demand for certain
products typically utilized in residential
construction.
Granite
East gross profit as a percent of revenue for 2007 increased to 3.4% from a
negative gross margin of 7.2% for 2006. The improved gross profit margin in
2007 was driven by a significantly lower negative forecast estimate
changes. The net impact of project forecast estimate changes for 2007 was
an increase in gross profit of approximately $3.0 million compared with a
decrease of approximately $123.0 million for 2006 (see Note 2 of the
“Notes to the Consolidated Financial Statements”).
GLC’s
gross profit in 2007 and 2006 of $15.8 million and $17.6 million,
respectively, included approximately $8.8 million and $7.8 million,
respectively, related to our minority partners’ share. Included in GLC’s
cost of revenue for 2007 was $3.0 million resulting from the partial impairment
of a residential development project in California.
General
and Administrative Expenses: General and administrative expenses
increased by $46.7 million, or 23.4%, to $246.2 million in 2007 from $199.5
million in 2006. Salaries and related expenses in 2007 increased $21.9 million,
or 21.2%, compared to 2006 primarily due to increased personnel and associated
costs to support the addition of our new business in the state of
Washington and our overall growth strategy - particularly in Granite West.
Incentive compensation, discretionary profit sharing and other variable
compensation in 2007 increased $4.7 million, or 14.1%, when compared to 2006 due
to higher income and greater participation in our incentive compensation
plans. Other general and administrative expenses, including the provision
for doubtful accounts, in 2007 increased $20.2 million, or
31.8%, compared to 2006 due primarily to the addition of our new
business in the state of Washington, increased costs related to technology
upgrades and higher reserves for doubtful accounts. Other general and
administrative expenses include information technology, occupancy, office
supplies, depreciation, travel and entertainment, outside services, marketing,
training and other miscellaneous expenses, none of which individually exceeded
10% of total general and administrative expenses.
Gain
on Sales of Property and Equipment: Gain on sales of property and
equipment for the year ended December 31, 2007 was comparable to the
prior year.
Other
Income (Expense): Interest income increased $2.8 million, or 11.7%,
in 2007 compared with 2006 due to higher balances of interest bearing
investments. Interest expense increased in 2007 compared to 2006 due primarily
to an increase in average debt outstanding under our revolving line of
credit. Equity in income of affiliates for 2007 included a gain of
approximately $3.9 million on a sale of a building by a partnership in which we
hold an equity method investment. In December of 2007, we purchased all
remaining shares of Wilder, which resulted in a charge of approximately
$7.8 million. The increase in other (net) during 2007 was primarily related to
capital gains of $2.9 million from certain mutual fund
investments.
Provision
for Income Taxes: Our effective tax rate decreased to 33.0% in 2007
from 34.2% in 2006. The decrease was primarily driven by higher minority
interest in income of consolidated joint ventures and other entities which
are not subject to income taxes on a stand-alone basis. The impact of
higher minority interest was partially offset by the effect of the $7.8 million
charge taken related to the purchase of the remaining Wilder shares
which was not deductible for tax purposes.
Minority
Interest in Consolidated Subsidiaries: In 2007 our minority interest
in consolidated subsidiaries represents the minority owners’ share of the income
or loss of our consolidated subsidiaries - primarily Wilder, certain real
estate development entities and various consolidated construction joint
ventures. In 2006 we recognized a net minority interest benefit of approximately
$6.2 million due to our partners’ share of losses on certain joint venture
construction projects.
Outlook
We
anticipate 2009 to be a challenging year as a product of the uncertainty
surrounding the economic environment and its impact on many of our
customers. However, we expect the diversity and resiliency of our
business model will continue to be extremely valuable as we confront these
challenging economic times.
In the
West, while there is enough work to bid in the public sector, we expect competition to
remain very strong throughout 2009. Our focus this year will be on
targeting those opportunities where we have a competitive
advantage. We are well positioned in our markets with our strong
financial position, versatile construction capability, aggregate reserves, key
plant facilities and, most importantly teams of experienced and dedicated
people.
The
outlook for our Granite East business continues to be positive. We will be
pursuing several large projects this year. Funding for these
projects is coming from various sources. Our strategy for this business has not
changed and we remain very selective with regard to the projects we bid. We
will continue to focus on projects where we can utilize our construction
expertise, mitigate risk and deliver acceptable margins.
With
regard to our Granite Land Company, our strategy in 2009 is to be flexible and
patient in managing our investments. Several of our projects have
long lead times, which afford us the ability to stage the timing of sales
transactions. We will continue to work on entitlements, construct improvements
when prudent and take an opportunistic view of potential new investments. The
expected profitability for certain development activities could continue to
deteriorate to a point that could cause us to recognize impairments if there is
a continued decline in the residential and commercial real estate markets in
which we are operating.
On the
political front, there are many uncertainties surrounding federal and state
transportation funding for 2009. The
American Recovery and Reinvestment Act recently signed into law provides funds
for the construction of public infrastructure and
facilities. Specific to transportation, the Act provides:
$27.5 billion for highways as well as $8.4 billion for transit, $8 billion
for high-speed rail, $1.1 billion for the Airport Improvement Program, and $1.5
billion awarded in the form of competitive discretionary grants across the
spectrum of surface transportation projects.
While
infrastructure funding from the stimulus bill should give our markets a
short-term boost, our longer-term focus will continue to be on the
reauthorization of the Federal Highway Bill, the current version of which will
expire in September. Granite, along with other industry leaders and
industry associations are actively engaging Congress to develop a long-term
strategy to increase and stabilize transportation infrastructure funding
levels.
In
California we expect the recently passed budget compromise will
stabilize California’s fiscal situation. California’s constitutional
officers and legislative leaders are hopeful that the fiscal plan will allow
California to sell proposition 1-B bonds into the marketplace and fund a full
scale transportation program. The compromise provides full funding of
proposition 42 as well as increased design build and public private partnership
authority for transportation projects in the state.
While we are encouraged by
the recent passage of the Federal stimulus bill and budget agreement in
California, it is too
early for us to know to what degree these will impact our
business.
With
regard to raw materials costs, we are subject to energy and petroleum related
price volatility as it relates to our use of diesel fuel for our rolling stock
equipment, natural gas, propane and diesel fuel to heat our plants, as well as
liquid asphalt for production of asphaltic concrete. In 2008, we experienced
significant price volatility in all of these commodities and there is
substantial uncertainty surrounding price trends for 2009. We
continue to manage our exposure to these price changes by monitoring the costs
of these commodities and pricing them into our projects and contracts
accordingly. Some of our contracts include clauses for liquid asphalt
and fuel escalation and de-escalation that provide protection in the event that
oil product prices change significantly. We are exploring
opportunities to better manage our exposure to commodity price volatility and
take advantage of economies of scale through centralized purchasing where
appropriate.
In
summary, although we are cautious about our outlook for 2009, we remain
optimistic about the longer-term opportunities ahead for our
business. Our Granite West business is poised to take advantage of
its entrepreneurial business model in 2009. Our Granite East business
is expected to continue to deliver positive results in 2009. We continue to
focus on cost cutting and improvement initiatives to develop more efficient
business processes. Overall, we are very optimistic about the
long-term view of our markets and are confident that our continued strategic
investment into our construction materials business and the development of
our people is important to increasing long-term shareholder value.
Liquidity
and Capital Resources
We
believe our cash and cash equivalents, short-term investments, cash generated
from operations and amounts available under our existing committed credit
facility will be sufficient to meet our expected working capital needs, capital
expenditures, financial commitments, cash dividend payments, and other liquidity
requirements associated with our existing operations through the next twelve
months. If we experience a significant change in our business operating
results or make a significant acquisition, we may need to acquire
additional sources of financing, which, if available, may be limited by the
terms of our existing debt covenants, or may require the amendment of our
existing debt agreements.
|
December
31,
|
2008
|
2007
|
|||||
|
(in
thousands)
|
|||||||
|
Cash
and cash equivalents excluding consolidated joint
ventures
|
$
|
339,842
|
$
|
209,750
|
|||
|
Consolidated
joint venture cash and cash equivalents
|
121,001
|
142,684
|
|||||
|
Total
consolidated cash and cash equivalents
|
460,843
|
352,434
|
|||||
| Short-term and long-term marketable securities |
59,559
|
132,914
|
|||||
|
Total
cash, cash equivalents and marketable securities
|
$ |
520,402
|
$ |
485,348
|
|||
| Working Capital | $ |
475,942
|
$ |
397,568
|
|||
Our
primary sources of liquidity are cash flows from operations and borrowings under
our credit facilities. Our cash and cash equivalents are comprised of deposits
and money market funds held with established national banks, and fixed income
securities having remaining maturities of three months or less from the date of
purchase. Cash and cash equivalents held by our consolidated joint
ventures is for the working capital needs of each joint venture’s project. The
decision to distribute cash must generally be made jointly by all of the
partners and therefore these funds are not available for the working capital
needs of Granite. Our marketable securities
include United States government obligations, municipal bonds and to a lesser
extent, mutual funds. Primarily in response to deteriorating credit markets, we
have generally not reinvested the proceeds of maturing securities and have
retained these funds in cash and cash equivalents.
Due to the current fiscal situation in California, we have received
notification that progress payments on certain projects may be delayed. If these
payments are delayed we will be given the option to continue or
suspend work. If we continue to work we will be paid interest on the
delayed payment amounts. While the California budget has just
recently passed, it may take some time before the affected funding sources are
reestablished.
Cash
Flows
|
Years
Ended December 31,
|
2008
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||||
|
Net
cash provided by (used in):
|
||||||||||
|
Operating
activities
|
$
|
257,336
|
$
|
234,788
|
$ |
259,643
|
||||
|
Investing
activities
|
(18,257
|
) |
(166,744
|
)
|
(183,683
|
) | ||||
|
Financing
activities
|
(130,670
|
) |
79,497
|
(70,948
|
) | |||||
| Capital Expenditures |
94,135
|
118,612 |
116,238
|
|||||||
Cash provided
by operating activities of $257.3 million in 2008 represents
a $22.5 million increase
from the amount provided by operating activities during 2007. This increase was
primarily due to proceeds from the release of escrow funds to purchase the
remaining shares of our Wilder subsidiary and an increase in minority interest
in consolidated subsidiaries due to higher profitability on construction joint
ventures (including the effects of a large settlement of claims on a large
project in southern
California). This increase was partially offset by a change in the amount
of billings in excess of costs and estimated earnings, net, primarily due to
progress on projects that had received large mobilization payments in the prior
year and cash payments for the remaining minority interest of our Wilder
subsidiary in 2008.
Cash used
in investing activities of $18.3 million for 2008 represents
a $148.5 million decrease
from the amount used in 2007 due primarily to the
effect of the Wilder minority share purchase in 2007 and a decrease in the
amount of cash used for business acquisitions in 2008.
Cash used in
financing activities of $130.7 million
for 2008 represents
a change of $210.2 million
from 2007. This
change was largely attributable to the issuance of $200.0 million in
private placement debt in 2007 and the related payoff of our revolving lines of
credit. The
remainder of the change was primarily due to decreased purchases of common
shares in 2008, the financing cash flow portion of the Wilder minority share
purchase and a decrease in contributions from our minority
partners.
Capital
Expenditures
During the year ended
December 31, 2008, we had capital expenditures of $94.1 million compared
to $118.6 million during the year ended December 31, 2007. We
currently anticipate spending between $65.0 million and $140.0
million for capital expenditures in 2009, which includes amounts for
construction equipment, aggregate and asphalt production facilities, buildings,
leasehold improvements, development of real estate projects and aggregate
reserves. The timing and amount of such expenditures can vary based on the
progress of planned capital projects, the type and size of construction
projects, changes in business outlook and other
factors.
Debt
and Contractual Obligations
The
following table summarizes our significant obligations outstanding as of
December 31, 2008:
|
Payments
due by period
|
||||||||||||||||
|
(in
thousands)
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
|||||||||||
|
Long
term debt (1)
|
$
|
290,379
|
$
|
39,692
|
$
|
33,835
|
$
|
16,705
|
$
|
200,147
|
||||||
| Operating Leases (2) |
48,168
|
9,900
|
12,137
|
5,457
|
20,674
|
|||||||||||
|
Purchase
obligations under construction contracts (3)
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Other
purchase obligations (4)
|
62,437
|
45,539
|
10,951
|
3,409
|
2,538
|
|||||||||||
|
Deferred
compensation obligations (5)
|
25,155
|
2,037
|
14,446
|
4,322
|
4,350
|
|||||||||||
|
Total
|
$
|
426,139
|
$
|
97,168
|
$
|
71,369
|
$
|
29,893
|
$
|
227,709
|
||||||
Note: Asset retirement obligations associated with our owned and
leased quarry properties (see Note 9 of the “Notes to the Consolidated Financial
Statements”) have been excluded from the above table as they are not
contractual obligations.
(1) These
obligations represent the aggregate minimum principal maturities of long-term
debt and do not include interest.
(2)
These obligations represent the minimum rental commitments and minimum
royalty requirements under all noncancellable operating leases. See Note 18 of
the “Notes to the Consolidated Financial Statements”.
(3) In the
ordinary course of business, we enter into purchase commitments for purchases of
materials and subcontract services related to our current contract backlog.
These purchase commitments, are generally settled in less than one year.
(4) These
obligations represent firm purchase commitments for equipment and other goods
and services not connected with our construction contract backlog which are
individually greater than $10,000.
(5) The
timing of expected payment of deferred compensation is based on estimated dates
of retirement. Actual dates of retirement could be different and would
cause the timing of payments to change.
In
addition to the above, as of December 31, 2008, we had
approximately $3.9 million in
liabilities for uncertain tax positions. These reserves are not included in the
table above because we cannot estimate the timing of payments related to such
reserves.
Bank
Line of Credit and Letters of Credit
We have a
$150.0 million bank revolving line of credit, which allows for unsecured
borrowings through June 24, 2011. Borrowings under the line of credit bear
interest at LIBOR plus an applicable margin based upon certain financial ratios
calculated quarterly. The margin was 0.70% at December 31, 2008. The unused and
available portion of this line of credit was $145.6 million at December 31,
2008.
Restrictive
covenants under the terms of our senior notes and revolving line of credit
require the maintenance of certain financial ratios and the maintenance of
tangible net worth (as defined). We were in compliance with
these covenants at December 31, 2008. Failure to comply with these
covenants could cause the amounts due under the debt agreements to become
currently payable.
Share
Purchase Authorization
In 2007,
our Board of Directors authorized us to purchase, at management’s discretion, up
to $200.0 million of our common stock. During the year ended December
31, 2008, we purchased 1.4 million common shares for a total of $43.2
million under this share purchase program. From the inception
of this share purchase program in 2007 through December 31, 2008, we
have purchased a total of 3.8 million common shares for an aggregate cost
of $135.9 million. All shares were retired upon
acquisition. At December 31, 2008, $64.1 million of the $200.0 million
authorization was available for future common share purchases.
Joint
Ventures; Off-Balance-Sheet Arrangements
We
participate in various construction joint venture partnerships in order to share
expertise, risk and resources for certain highly complex projects. Generally,
each construction joint venture is formed to accomplish a specific project
and is jointly controlled by the joint venture partners. We select our
joint venture partners based on our analysis of their construction and financial
capabilities, expertise in the type of work to be performed and past working
relationships with us, among other criteria. The joint venture agreements
typically provide that our interests in any profits and assets, and our
respective share in any losses and liabilities that may result from the
performance of the contract are limited to our stated percentage interest in the
project.
Under
each joint venture agreement, one partner is designated as the sponsor. The
sponsoring partner typically provides all administrative, accounting and most of
the project management support for the project and generally receives a fee from
the joint venture for these services. We have been designated as the sponsoring
partner in certain of our current joint venture projects and are a
non-sponsoring partner in others.
We also
participate in various “line item” joint venture agreements under which each
partner is responsible for performing certain discrete items of the total scope
of contracted work. The revenue for these discrete items is defined in the
contract with the project owner and each venture partner bears the profitability
risk associated with its own work. All partners in a line item joint venture are
jointly and severally liable for the completion of the total project under the
terms of the contract with the project owner. There is not a single set of books
and records for a line item joint venture. Each partner accounts for its items
of work individually as it would for any self-performed contract. We account for
our portion of these contracts as project revenues and costs in our
accounting system and include receivables and payables associated with our work
in our consolidated financial statements.
The
venture’s contract with the project owner typically requires joint and several
liability among the joint venture partners. Although our agreements with our
joint venture partners for both construction joint ventures and line item joint
ventures provide that each party will assume and pay its share of any losses
resulting from a project, if one of our partners was unable to pay its share we
would be fully liable under our contract with the project owner. Circumstances
that could lead to a loss under these guarantee arrangements include a partner’s
inability to contribute additional funds to the venture in the event that the
project incurred a loss or additional costs that we could incur should the
partner fail to provide the services and resources toward project completion
that had been committed to in the joint venture agreement. At December 31, 2008,
approximately $482.9 million of work, representing either our partners’
proportionate share of unconsolidated construction joint ventures or work that
our partners are directly responsible for in line item joint ventures, had yet
to be completed.
Recent
Accounting Pronouncements
See Note
1 of the “Notes to the Consolidated Financial Statements” for a description of
recent accounting pronouncements, including the expected dates of adoption and
effects on our financial position, results of operations and cash
flows.
We
maintain an investment portfolio of various holdings, types and maturities. We
place our cash investments in instruments that meet high credit quality
standards, as specified in our investment policy guidelines. These
guidelines prohibit investments in auction rate and asset-backed
securities. They also limit the amount of our credit exposure to any one
issue, issuer or type of instrument. The portfolio is limited to an average
maturity of no more than one year from date of purchase. On an ongoing basis we
monitor credit ratings, financial condition and other factors that could impact
the carrying amount of our investment portfolio.
Marketable
securities, consisting of U.S. government obligations, agencies and
municipal bonds, are generally classified as held-to-maturity and are stated at
cost, adjusted for amortization of premiums and discounts to
maturity.
We are
exposed to financial market risks due largely to changes in interest rates,
which we have managed primarily by managing the maturities in our investment
portfolio. We currently do not have any business transactions in foreign
currencies.
The fair
value of our short-term held-to-maturity investment portfolio and related income
would not be significantly impacted by changes in interest rates since the
investment maturities are short and the interest rates are primarily fixed. The
fair value of our long-term held-to-maturity investment portfolio may be
impacted by changes in interest rates.
In a
declining interest rate environment, as short term investments mature,
reinvestment occurs at less favorable market rates. Given the short term nature
of certain investments, anticipated declining interest rates will negatively
impact our investment income.
At
December 31, 2008 we had outstanding: (i) senior notes payable of $13.3
million which carry a fixed interest rate of 6.54% per annum with principal
payments due in nine equal annual installments that began in 2002;
(ii) senior notes payable of $41.7 million which carry a fixed
interest rate of 6.96% per annum with principal payments due in nine equal
annual installments that began in 2005 and (iii) senior notes payable
of $200.0 million, which carry a fixed rate interest of 6.11% per annum
with principal payments due in five equal annual installments beginning in
2015.
The table
below presents principal amounts due by year and related weighted average
interest rates for our cash and cash equivalents, held-to-maturity investments
and significant debt obligations as of December 31, 2008 (in
thousands):
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||
|
Assets
|
|||||||||||||||||||||||
|
Cash,
cash equivalents and held-to-maturity investments
|
$
|
498,127
|
$
|
21,239
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
519,366
|
|||||||||
|
Weighted
average interest rate
|
1.01
|
%
|
3.97
|
%
|
-
|
%
|
-
|
%
|
-
|
%
|
-
|
%
|
1.13
|
%
|
|||||||||
|
Liabilities
|
|||||||||||||||||||||||
|
Fixed rate debt
|
|||||||||||||||||||||||
|
Senior notes payable
|
$
|
15,000
|
$
|
15,000
|
$
|
8,333
|
$
|
8,333
|
$
|
8,334 |
$
|
200,000
|
$
|
255,000
|
|||||||||
|
Weighted average interest rate
|
6.77
|
%
|
6.77
|
%
|
6.96
|
%
|
6.96
|
%
|
6.96
|
%
|
6.11
|
%
|
6.27
|
%
|
|||||||||
The
estimated fair value of our cash, cash equivalents and short-term
held-to-maturity investments approximate the principal amounts reflected above
based on the generally short maturities of these financial instruments. The
estimated fair value of our long-term held-to-maturity investments approximates
the principal amounts above due to the relatively minor difference between the
effective yields of these investments and rates currently available on similar
instruments. Rates currently available to us for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt. Based on
the fixed borrowing rates currently available to us for bank loans with similar
terms and average maturities, the fair value of the senior notes payable was
approximately $200.9 million as of December 31, 2008 and $270.0
million as of December 31, 2007.
The
following consolidated financial statements of Granite and the independent
registered public accounting firm’s report are incorporated by reference from
Part IV, Item 15(1) and (2):
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets - At December 31, 2008 and 2007
Consolidated
Statements of Income - Years Ended December 31, 2008, 2007 and 2006
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income - Years Ended
December 31, 2008, 2007 and 2006
Consolidated
Statements of Cash Flows - Years Ended December 31, 2008, 2007 and
2006
Notes to
the Consolidated Financial Statements
Quarterly Financial Data (unaudited)
Schedule
II - Schedule of Valuation and Qualifying Accounts
Not
applicable.
Evaluation
of Disclosure Controls and Procedures: We carried out an evaluation,
under the supervision of and with the participation of management, including our
Chief Executive Officer and our Chief Financial Officer, of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of December 31, 2008, our disclosure
controls and procedures were
effective.
Changes
in Internal Control Over Financial Reporting: During the fourth quarter
of 2008, there were no changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial
reporting.
Management’s
Report on Internal Control Over Financial Reporting: Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d -15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in “Internal Control—Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation our management concluded that our internal
control over financial reporting was effective as of December 31,
2008.
Independent
Registered Public Accounting Firm Attestation Report:
PricewaterhouseCoopers LLP, the independent registered public accounting
firm that audited our consolidated financial statements included in this Annual
Report on Form 10-K, has issued an attestation report on the Company’s internal
control over financial reporting as of December 31, 2008. The report, which
expresses an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008, is included
in Item 15 under the heading “Report of Independent Registered Public
Accounting
Firm.”
Not
applicable.
Certain
information required by Part III is omitted from this report. We will file our
definitive proxy statement for our Annual Meeting of Shareholders to be held on
May
15, 2009 (the “Proxy Statement”) pursuant to Regulation 14A not later
than 120 days after the end of the fiscal year covered by this report, and
certain information included therein is incorporated herein by
reference.
For
information regarding our Directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934, we direct you to the subsections entitled
“Election of Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance,” respectively, in the Proxy Statement. For information regarding our
Audit/Compliance Committee’s financial expert and our Committees of the Board,
we direct you to the section captioned “Committees of the Board” in the Proxy
Statement. For information regarding our Nomination Policy, we direct you to the
section captioned “Board of Directors’ Nomination Policy” in the Proxy
Statement. For information regarding our Code of Conduct, we direct you to the
section captioned “Code of Conduct” in the Proxy Statement. This
information is incorporated herein by reference. Information regarding our
executive officers is contained in the section entitled “Executive Officers of
the Registrant,” in Part I of this report.
For
information regarding our Executive Compensation, we direct you to the section
captioned “Executive & Director Compensation and Other Matters” in the Proxy
Statement. This information is incorporated herein by reference.
This
information is located in the subsections captioned “Stock Ownership
of Beneficial Owners and Certain Management” and “Equity Compensation Plan
Information” in the Proxy Statement. This information is incorporated
herein by reference.
You will
find this information in the subsections captioned “Transactions with Related
Persons” and “Director Independence” in the Proxy Statement. This
information is incorporated herein by reference.
You will
find this information in the subsection captioned “Principal Accounting Fees and
Services” in the Proxy Statement. This information is incorporated herein by
reference.
The
following documents are filed as part of this Report:
1. Financial
Statements. The following consolidated financial statements and related
documents are filed as part of this report:
|
Schedule
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
F-2
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2008, 2007 and
2006
|
F-3
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the Years
Ended December 31, 2008, 2007 and 2006
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
F-5 to
F-6
|
|
Notes
to the Consolidated Financial Statements
|
F-7
to F-39
|
| Quarterly Financial Data |
F-40
|
2. Financial
Statement Schedule. The following financial statement schedule of Granite
for the years ended December 31, 2008, 2007 and 2006 is filed as part of this
report and should be read in conjunction with the consolidated financial
statements of Granite.
|
Schedule
|
Page
|
|
Schedule
II - Schedule of Valuation and Qualifying Accounts
|
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, 2008 and December 31, 2007, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(2) presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements and financial
statement schedule, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management’s Report on Internal Control over
Financial Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial statement
schedule, and on the Company’s internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
San
Jose, California
February
26, 2009
|
GRANITE
CONSTRUCTION INCORPORATED
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
(in
thousands, except share and per share data)
|
||||||||
|
December
31,
|
2008
|
2007
|
||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$
|
460,843
|
$
|
352,434
|
||||
|
Short-term
marketable securities
|
38,320
|
77,758
|
||||||
|
Accounts
receivable, net
|
314,733
|
397,097
|
||||||
|
Costs
and estimated earnings in excess of billings
|
13,295
|
17,957
|
||||||
|
Inventories,
net
|
55,223
|
55,557
|
||||||
|
Real estate held for development and sale
|
75,089
|
51,688
|
||||||
|
Deferred
income taxes
|
43,637
|
43,713
|
||||||
|
Equity
in construction joint ventures
|
44,681
|
34,340
|
||||||
|
Other
current assets
|
56,742
|
96,969
|
||||||
|
Total
current assets
|
1,102,563
|
1,127,513
|
||||||
|
Property
and equipment, net
|
517,678
|
502,901
|
||||||
|
Long-term
marketable securities
|
21,239
|
55,156
|
||||||
|
Investments
in affiliates
|
19,996
|
26,475
|
||||||
|
Other
noncurrent assets
|
81,979
|
74,373
|
||||||
|
Total
assets
|
$
|
1,743,455
|
$
|
1,786,418
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
maturities of long-term debt
|
$
|
39,692
|
$
|
28,696
|
||||
|
Accounts
payable
|
174,626
|
213,135
|
||||||
|
Billings
in excess of costs and estimated earnings
|
227,364
|
275,849
|
||||||
|
Accrued
expenses and other current liabilities
|
184,939
|
212,265
|
||||||
|
Total
current liabilities
|
626,621
|
729,945
|
||||||
|
Long-term
debt
|
250,687
|
268,417
|
||||||
|
Other
long-term liabilities
|
43,604
|
46,441
|
||||||
|
Deferred
income taxes
|
18,261
|
17,945
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Minority
interest in consolidated subsidiaries
|
36,773
|
23,471
|
||||||
|
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 2008
and 2007; issued and outstanding 38,266,791 shares as of December 31,
2008 and 39,450,923 shares as of December
31, 2007
|
383
|
395
|
||||||
|
Additional
paid-in capital
|
85,035
|
79,007
|
||||||
|
Retained
earnings
|
682,237
|
619,699
|
||||||
|
Accumulated
other comprehensive (loss) income
|
(146
|
) |
1,098
|
|||||
|
Total
shareholders’ equity
|
767,509
|
700,199
|
||||||
|
Total
liabilities and shareholders’ equity
|
$
|
1,743,455
|
$
|
1,786,418
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GRANITE
CONSTRUCTION INCORPORATED
|
|||||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|||||||||||||
|
(in
thousands, except per share data)
|
|||||||||||||
|
Years
Ended December 31,
|
2008
|
2007
|
2006
|
||||||||||
|
Revenue
|
|||||||||||||
|
Construction
|
$ | 2,312,116 | $ | 2,321,502 | $ | 2,524,454 | |||||||
|
Material
sales
|
353,115 | 375,700 | 410,159 | ||||||||||
|
Real
Estate
|
9,013 | 40,712 | 34,991 | ||||||||||
|
Total
revenue
|
2,674,244 | 2,737,914 | 2,969,604 | ||||||||||
|
Cost
of revenue
|
|||||||||||||
|
Construction
|
1,883,742 | 2,002,064 | 2,343,134 | ||||||||||
|
Material
sales
|
311,246 | 300,234 | 313,329 | ||||||||||
|
Real
Estate
|
10,536 | 24,872 | 17,421 | ||||||||||
|
Total
cost of revenue
|
2,205,524 | 2,327,170 | 2,673,884 | ||||||||||
|
Gross
Profit
|
468,720 | 410,744 | 295,720 | ||||||||||
|
General
and administrative expenses
|
257,532 | 246,202 | 199,481 | ||||||||||
|
Goodwill
impairment charge
|
- | - | 18,011 | ||||||||||
|
Gain
on sales of property and equipment
|
5,503 | 10,343 | 10,408 | ||||||||||
|
Operating
income
|
216,691 | 174,885 | 88,636 | ||||||||||
|
Other
income (expense)
|
|||||||||||||
|
Interest
income
|
18,445 | 26,925 | 24,112 | ||||||||||
|
Interest
expense
|
(16,001 | ) | (6,367 | ) | (4,492 | ) | |||||||
|
Acquisition
expense
|
- | (7,752 | ) | - | |||||||||
|
Equity
in (loss) income of affiliates
|
(1,058 | ) | 5,205 | 2,157 | |||||||||
|
Other
income, net
|
15,353 | 5,498 | 2,604 | ||||||||||
|
Total
other income
|
16,739 | 23,509 | 24,381 | ||||||||||
|
Income
before provision for income taxes and minority
interest
|
233,430 | 198,394 | 113,017 | ||||||||||
|
Provision
for income taxes
|
67,692 | 65,470 | 38,678 | ||||||||||
|
Income
before minority interest
|
165,738 | 132,924 | 74,339 | ||||||||||
|
Minority
interest in consolidated subsidiaries
|
(43,334 | ) | (20,859 | ) | 6,170 | ||||||||
|
Net
income
|
$ | 122,404 | $ | 112,065 | $ | 80,509 | |||||||
|
Net
income per common share
|
|||||||||||||
|
Basic
|
$ | 3.25 | $ | 2.74 | $ | 1.97 | |||||||
|
Diluted
|
$ | 3.21 | $ | 2.71 | $ | 1.94 | |||||||
|
Weighted
average shares of common stock
|
|||||||||||||
|
Basic
|
37,606 | 40,866 | 40,874 | ||||||||||
|
Diluted
|
38,106 | 41,389 | 41,471 | ||||||||||
|
Dividends
per common share
|
$ | 0.52 | $ | 0.43 | $ | 0.40 | |||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
|
GRANITE
CONSTRUCTION INCORPORATED
|
|||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME
|
|||||||||||||||||||||||
|
(in
thousands, except share data)
|
|||||||||||||||||||||||
|
Years
Ended December 31,
2006,
2007 and 2008
|
Outstanding
Shares
|
Common
Stock
|
Additional
Paid-in Capital
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (loss)
|
Unearned
Compensation
|
Total
|
||||||||||||||||
|
Balances,
December 31, 2005
|
41,682,010
|
$
|
417
|
$
|
80,619
|
$
|
549,101
|
$
|
1,602
|
$
|
(10,179
|
)
|
$
|
621,560
|
|||||||||
|
Comprehensive
income (see Note 16):
|
|||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
80,509
|
-
|
-
|
|
||||||||||||||||
|
Changes
in net unrealized gains (losses) 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
|
-
|
-
|
|||||||||||||||||
|
Changes
in net unrealized gains (losses) 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
|
||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
122,404
|
-
|
-
|
|||||||||||||||||
|
Changes
in net unrealized gains (losses) on investments
|
-
|
-
|
-
|
-
|
(1,244
|
) |
-
|
||||||||||||||||
|
Total
comprehensive income
|
121,160
|
||||||||||||||||||||||
|
Restricted
stock issued
|
232,096
|
2
|
(2
|
) |
-
|
-
|
-
|
-
|
|||||||||||||||
|
Stock
issued for services
|
14,998
|
-
|
461
|
-
|
-
|
-
|
461
|
||||||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
7,002
|
-
|
-
|
-
|
7,002
|
||||||||||||||||
|
Repurchase
of common stock
|
(1,440,869
|
)
|
(14
|
) |
(5,561
|
) |
(39,965
|
) |
-
|
-
|
(45,540
|
) | |||||||||||
|
Cash
dividends on common stock
|
-
|
-
|
-
|
(19,901
|
) |
-
|
-
|
(19,901
|
) | ||||||||||||||
|
Excess
tax benefit on stock-based compensation
|
-
|
-
|
851
|
-
|
-
|
-
|
851
|
||||||||||||||||
|
Non-qualified
deferred compensation plan stock units
|
-
|
-
|
3,237
|
-
|
-
|
-
|
3,237
|
||||||||||||||||
|
Stock
options exercised
|
9,643
|
-
|
40
|
-
|
-
|
-
|
40
|
||||||||||||||||
|
Balances,
December 31, 2008
|
38,266,791
|
$
|
383
|
$
|
85,035
|
$
|
682,237
|
$
|
(146
|
) |
$
|
-
|
$
|
767,509
|
|||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GRANITE
CONSTRUCTION INCORPORATED
|
|||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||
|
Years
Ended December 31,
|
2008
|
2007
|
2006
|
||||||||
|
Operating
Activities
|
|||||||||||
|
Net
income
|
$
|
122,404
|
$
|
112,065
|
$
|
80,509
|
|||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||||||
|
Impairment
of real estate held for development and sale
|
4,500
|
3,000
|
-
|
||||||||
|
Goodwill
impairment charge
|
-
|
-
|
18,011
|
||||||||
|
Inventory
reserve adjustment
|
12,848
|
478
|
2,244
|
||||||||
|
Depreciation,
depletion and amortization
|
87,311
|
82,157
|
69,180
|
||||||||
|
Provision
for doubtful accounts
|
10,958
|
3,894
|
438
|
||||||||
|
Gain
on sales of property and equipment
|
(5,503
|
) |
(10,343
|
)
|
(10,408
|
)
|
|||||
|
Change
in deferred income taxes
|
1,190
|
(7,822
|
)
|
(29,462
|
)
|
||||||
|
Stock-based compensation
|
7,463
|
7,342
|
7,572
|
||||||||
|
Excess
tax benefit on stock-based compensation
|
(851
|
) |
(3,659
|
)
|
(3,390
|
)
|
|||||
|
Common
stock contributed to ESOP
|
-
|
-
|
1,995
|
||||||||
|
Minority
interest in consolidated subsidiaries
|
43,334
|
20,859
|
(6,170
|
)
|
|||||||
|
Acquisition
expense
|
-
|
7,752
|
-
|
||||||||
|
Equity
in loss (income) of affiliates
|
1,058
|
(5,205
|
)
|
(2,157
|
)
|
||||||
|
Acquisition
of minority interest
|
(16,617
|
) |
-
|
-
|
|||||||
|
Gain
on sale of investment in affiliate
|
(14,416
|
) |
-
|
-
|
|||||||
|
Loss
on sale of marketable securities
|
10,939
|
-
|
-
|
||||||||
|
Gain
on early extinguishment of debt
|
(1,150
|
) |
-
|
-
|
|||||||
|
Changes
in assets and liabilities, net of the effects of
acquisitions:
|
|||||||||||
|
Accounts
receivable
|
100,533
|
102,992
|
(19,343
|
)
|
|||||||
|
Inventories,
net
|
(10,812
|
) |
(10,391
|
)
|
(10,612
|
)
|
|||||
|
Real
estate held for development and sale
|
(15,225
|
) |
2,179
|
(10,289
|
)
|
||||||
|
Equity
in construction joint ventures
|
(10,341
|
) |
(2,428
|
)
|
(4,504
|
)
|
|||||
|
Other
assets, net
|
40,870
|
(12,624
|
)
|
(10,073
|
)
|
||||||
|
Accounts
payable
|
(38,956
|
) |
(44,502
|
)
|
24,805
|
||||||
|
Accrued
expenses and other liabilities
|
(28,378
|
)
|
3,198
|
|
54,474
|
||||||
|
Billings
in excess of costs and estimated earnings, net
|
(43,823
|
) |
(14,154
|
) |
106,823
|
||||||
|
Net
cash provided by operating activities
|
257,336
|
234,788
|
259,643
|
||||||||
|
Investing
Activities
|
|||||||||||
|
Purchases
of marketable securities
|
(71,630
|
) |
(152,954
|
)
|
(233,868
|
)
|
|||||
|
Maturities of
marketable securities
|
108,090
|
195,313
|
153,024
|
||||||||
|
Purchase
of company owned life insurance
|
(8,000
|
) |
-
|
-
|
|||||||
|
Proceeds
from sale of marketable securities
|
22,499
|
-
|
-
|
||||||||
|
Release
of funds for acquisition of minority interest
|
28,332
|
-
|
-
|
||||||||
|
Additions
to property and equipment
|
(94,135
|
) |
(118,612
|
)
|
(116,238
|
)
|
|||||
|
Proceeds
from sales of property and equipment
|
14,539
|
17,777
|
16,398
|
||||||||
|
Acquisition
of business
|
(14,022
|
) |
(76,427
|
)
|
-
|
||||||
|
Contributions
to affiliates
|
(8,053
|
) |
(6,805
|
)
|
(6,982
|
)
|
|||||
|
Distributions
from affiliates
|
3,895
|
-
|
1,970
|
||||||||
|
Acquisition
of minority interest
|
-
|
(28,495
|
)
|
-
|
|||||||
|
Other
investing activities, net
|
228
|
3,459
|
2,013
|
||||||||
|
Net
cash used in investing activities
|
(18,257
|
) |
(166,744
|
)
|
(183,683
|
)
|
|||||
|
Financing
Activities
|
|||||||||||
|
Proceeds
from long-term debt
|
3,725
|
330,260
|
56,869
|
||||||||
|
Long-term
debt principal payments
|
(17,092
|
) |
(139,598
|
)
|
(92,873
|
)
|
|||||
|
Repurchase
of common stock
|
(45,540
|
) |
(98,014
|
)
|
(7,375
|
)
|
|||||
|
Cash
dividends paid
|
(20,055
|
) |
(16,764
|
)
|
(16,722
|
)
|
|||||
|
Contributions
from minority partners
|
5,026
|
33,287
|
6,171
|
||||||||
|
Distributions
to minority partners
|
(45,909
|
) |
(33,813
|
)
|
(23,007
|
)
|
|||||
|
Acquisition
of minority interest
|
(11,716
|
) |
-
|
-
|
|||||||
|
Excess
tax benefit on stock-based compensation
|
851
|
3,659
|
3,390
|
||||||||
|
Other
financing activities
|
40
|
480
|
2,599
|
||||||||
|
Net
cash (used in) provided by financing activities
|
(130,670
|
) |
79,497
|
(70,948
|
)
|
||||||
|
Increase in
cash and cash equivalents
|
$
|
108,409
|
$
|
147,541
|
$
|
5,012
|
|||||
|
Cash
and cash equivalents at beginning of year
|
352,434
|
204,893
|
199,881
|
||||||||
|
Cash
and cash equivalents at end of year
|
$
|
460,843
|
$
|
352,434
|
$
|
204,893
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GRANITE
CONSTRUCTION INCORPORATED
|
|||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS - (Continued)
|
|||||||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||||||
| Years Ended December 31, | 2008 | 2007 | 2006 | |||||||
|
Supplementary
Information
|
||||||||||
|
Cash
paid during the period for:
|
||||||||||
|
Interest
|
$
|
12,700
|
$
|
6,508
|
$
|
5,009
|
||||
|
Income
taxes
|
68,492
|
66,503
|
79,511
|
|||||||
|
Non-cash
investing and financing activity:
|
||||||||||
|
Restricted
stock issued for services, net
|
$
|
6,961
|
$
|
11,190
|
$
|
9,774
|
||||
|
Restricted
stock units issued
|
3,237
|
-
|
-
|
|||||||
|
Accrued cash dividends
|
4,975
|
5,129
|
4,184
|
|||||||
|
Assets
acquired through issuances of debt
|
-
|
3,202
|
5,335
|
|||||||
|
Debt
payments from sale of assets
|
2,652
|
9,237
|
13,398
|
|||||||
|
Settlement
of debt from release of assets
|
5,250
|
-
|
-
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
Description
of Business: Granite Construction Incorporated is a heavy civil
contractor and a construction materials producer. We are engaged in the
construction of highways, dams, airport infrastructure, mass transit facilities,
real estate site development and other infrastructure related projects with
offices in Alaska, Arizona, California, Florida, Nevada, New
York, Oregon, Texas, Utah and Washington. Unless otherwise indicated, the
terms “we,” “us,” “our,” and “Granite” refer to Granite Construction
Incorporated and its consolidated subsidiaries.
Principles
of Consolidation: The consolidated financial statements include the
accounts of Granite Construction Incorporated and its wholly owned and majority
owned subsidiaries. All material inter-company transactions and accounts have
been eliminated. We use the equity method of accounting for affiliated companies
where we have the ability to exercise significant influence, but not control.
Additionally, we participate in joint ventures with other construction companies
and various real estate ventures. We have consolidated these ventures where we
have determined that through our participation we have a variable interest and
are the primary beneficiary as defined by Financial Accounting Standards Board
(“FASB”) Interpretation No. 46 (revised December 2003) Consolidation
of Variable Interest Entities, (“FIN 46(R)”). Where we have determined we
are not the primary beneficiary, we account for our share of the operations of
jointly controlled construction joint ventures on a pro rata basis in the
consolidated statements of income and as a single line item in the consolidated
balance sheets in accordance with Emerging Issues Task Force Issue 00-01, Investor Balance Sheet and Income Statement Display
under the Equity Method for Investments in Certain Partnerships and Other
Ventures, (“EITF 00-01”). Those
real estate entities where we have determined we are not the primary beneficiary
but do exercise significant influence are accounted for under the equity method
of accounting, as a single line item in both the consolidated statements of
income and in the consolidated balance sheets, in accordance with generally
accepted accounting principles.
Use
of Estimates in the Preparation of Financial Statements: The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Revenue
Recognition: We use
the percentage of completion accounting method for construction contracts in
accordance with American Institute of Certified Public Accountants Statement of
Position 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.
Revenue and earnings on construction contracts, including construction joint
ventures, are recognized on the percentage of completion method in the ratio of
costs incurred to estimated final costs. Revenue in an amount equal to cost
incurred is recognized prior to contracts reaching 25% completion. The
related profit is deferred until the period in which such percentage completion
is attained. It is our judgment that until a project reaches 25%
completion, there is insufficient information to determine what the estimated
profit on the project will be with a reasonable level of assurance. In the case
of large, complex design/build projects we may continue to defer profit
recognition beyond the point of 25% completion based on evaluation of specific
project risks. The factors considered in this evaluation of risk associated
with each design/build project include the stage of design completion, the stage
of construction completion, status of outstanding purchase orders and
subcontracts, certainty of quantities, certainty of schedule and the
relationship with the owner.
Revenue
from contract claims is recognized when we have a signed settlement agreement
and payment is assured. Revenue from contract change orders, which occur in most
large projects, is recognized when the owner has agreed to the change order in
writing. Provisions are recognized in the consolidated statements of income for
the full amount of estimated losses on uncompleted contracts whenever evidence
indicates that the estimated total cost of a contract exceeds its estimated
total revenue. Contract cost consists of direct costs on contracts, including
labor and materials, amounts payable to subcontractors, direct overhead costs
and equipment expense (primarily depreciation, fuel, maintenance and repairs).
Depreciation is provided using accelerated methods for construction equipment.
Contract cost is recorded as incurred and revisions in contract revenue and cost
estimates are reflected when known. The completion threshold for the start
of contract profit recognition is applied to all percentage of completion
projects unless and until we project a loss on the project, in which case the
estimated loss is immediately recognized.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
accuracy of our revenue and profit recognition in a given period is almost
solely dependent on the accuracy of our estimates of the cost to complete each
project. Our cost estimates for all of our significant projects use a highly
detailed “bottom up” approach and we believe our experience allows us to provide
materially reliable estimates. There are a number of factors that can
contribute to changes in estimates of contract cost and profitability. The most
significant of these include the completeness and accuracy of the original bid,
costs associated with added scope changes, extended overhead due primarily to
owner and weather delays, subcontractor performance issues, changes in
productivity expectations, site conditions that differ from those assumed in the
original bid (to the extent contract remedies are unavailable), the availability
and skill level of workers in the geographic location of the project and a
change in the availability and proximity of equipment and materials. Incorporated in our forecasts are our best estimates
of the financial impact of these project uncertainties prior to their resolution
which may vary significantly from the actual amounts
realized. The
foregoing factors as well as the stage of completion of contracts in process and
the mix of contracts at different margins may cause fluctuations in gross profit
between periods and these fluctuations may be significant. Substantial changes
in cost estimates, particularly in our larger, more complex
projects have had and can in future periods have a significant effect on
our profitability.
Revenue
from the sale of materials is recognized when delivery occurs and risk of
ownership passes to the customer.
In recognizing revenue
from real estate transactions, we follow the provisions in Statement
of Financial Accounting Standards No. 66, Accounting
for Sales of Real Estate (“SFAS 66”). The specific timing of a sale is
measured against various criteria in SFAS 66 related to the terms of the
transaction and any continuing involvement in the form of management or
financial assistance associated with the property. If the sales criteria are not
met, we defer recognition and account for the continued operations of the
property by applying the deposit, finance, installment or cost recovery methods,
as appropriate. When a sale occurs within one of our real estate
developments and we have not completed all infrastructure development related to
the total project, we follow SFAS 66 and Statement of Financials Accounting
Standards No. 67, Accounting
for Costs and Initial Rental Operations of Real Estate Projects, to
determine the appropriate cost of sales and the timing of recognition of the
sale. In the calculation of cost of sales, we use estimates and forecasts
to determine total costs at completion of the development
project.
Balance
Sheet Classifications: We include in current assets and liabilities
amounts receivable and payable under construction contracts (principally
retentions) that may extend beyond one year. Additionally, we include the cost
of property purchased for development and sale in current assets. A one-year
time period is used as the basis for classifying all other current assets and
liabilities.
Cash
and Cash Equivalents: Cash equivalents are securities having remaining
maturities of three months or less from the date of
purchase.
Marketable
Securities: We determine the classification of our marketable securities
at the time of purchase and reevaluate these determinations at each balance
sheet date. Debt securities are classified as held-to-maturity when we have the
positive intent and ability to hold the securities to maturity. Held-to-maturity
investments are stated at amortized cost. Debt securities for which we do not
have the positive intent or ability to hold to maturity are classified as
available-for-sale, along with any investments in equity securities. Securities
available-for-sale are carried at fair value with the unrealized gains and
losses, net of income taxes, reported as a separate component of other
comprehensive income until realized. We have no investments that qualify as
trading.
The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity, which is included in interest income.
Realized gains and losses are included in other income, net. The cost of
securities sold is based on the specific identification method.
Financial
Instruments: The carrying value of marketable securities approximates
their fair value as determined by market quotes. Rates currently available to us
for debt with similar terms and remaining maturities are used to estimate the
fair value of existing debt. The carrying value of receivables and other amounts
arising out of normal contract activities, including retentions, which may be
settled beyond one year, is estimated to approximate fair value.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fair Value of Financial Assets and
Liabilities: As of January 1, 2008 we adopted Statement of Financial
Accounting Standards No. 157, Fair
Value Measurements (“SFAS 157”). SFAS 157 introduces a
framework for measuring fair value and expands required disclosure about fair
value measurements of certain assets and liabilities.
SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The
standard describes three levels of inputs that may be used to measure fair
value:
Level 1 -
Quoted prices in active markets for identical assets or
liabilities.
Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 -
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
We
utilize the active market approach to measure fair value for our financial
assets and liabilities.
Concentrations:
We maintain the majority of our cash balances and all of our marketable
securities with several financial institutions. We invest with high credit
quality financial institutions and, by policy, limit the amount of credit
exposure to any financial institution. Additionally, a significant portion
of our labor force is subject to collective bargaining
agreements.
We
perform ongoing credit evaluations of our customers and generally do not require
collateral, although the law provides us the ability to file mechanics’ liens on
real property improved for private customers in the event of non-payment by such
customers. We maintain an allowance for potential credit losses and
such losses have been within management’s expectations. We have no foreign
operations.
Inventories:
Inventories consist primarily of quarry products valued at the lower of average
cost or market. We reserve inventory based on estimated quantities of
materials on hand in excess of estimated foreseeable forecasts.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property
and Equipment: Property and equipment are stated at cost. Depreciation
for construction and other equipment is primarily provided using accelerated
methods over lives ranging from three to seven years and the straight-line
method over lives from three to twenty years for the remaining depreciable
assets. We believe that accelerated methods best approximate the service
provided by the construction and other equipment. Depletion of quarry property
is based on the usage of depletable reserves. We frequently sell property and
equipment that has reached the end of its useful life or no longer meets our
needs, including depleted quarry property. Such property is held in property and
equipment until sold. The cost and accumulated depreciation or depletion of
property sold or retired is removed from the accounts and gains or losses, if
any, are reflected in earnings for the period. Maintenance and repairs are
charged to operations as incurred.
Real
Estate Held for Development and Sale
and other Long-Lived Assets: Real
estate held for development and sale and other long-lived assets held and
used by us are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If we determine that such circumstances exist, we assess, and
if necessary will record an impairment loss when the asset’s carrying value
exceeds its estimated fair value.
The
carrying amounts of all real estate development assets and other long-lived
assets are evaluated for recoverability in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment
of Long-Lived Assets (“SFAS
144”). A real estate development asset is considered impaired when
its carrying amount is greater than the undiscounted future net cash flows the
asset is expected to generate. The carrying value of impaired real estate
development assets is generally determined based on the sum of the discounted
cash flows expected to result from the eventual disposal of the asset.
Impairment assessment inherently involves judgment as to assumptions about
expected future cash flows and the impact of market conditions on those
assumptions. Future events and changing market conditions may impact our
assumptions as to sales prices, costs, holding periods or other factors that may
result in changes in our estimates of future cash flows. Although we believe the
assumptions we used in testing for impairment are reasonable, changes in any one
of our assumptions could produce a significantly different
result.
Goodwill and Other Intangible
Assets: We
perform goodwill impairment tests in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and
Other Intangible Assets (“SFAS 142”). We perform these impairment tests
annually during our fourth quarter and more frequently when events and
circumstances occur that indicate a possible impairment of goodwill. In
determining whether there is an impairment of goodwill, we calculate the
estimated fair value of the reporting unit in which the goodwill is recorded
using a discounted future cash flow method. We then compare the resulting fair
value to the net book value of the reporting unit, including goodwill. If the
net book value of a reporting unit exceeds its fair value, we measure and record
the amount of the impairment loss by comparing the implied fair value of the
reporting unit’s goodwill with the carrying amount of that goodwill.
Other
intangible assets include covenants not to compete, permits, trade names and
customer lists which are being amortized on a straight-line basis over
terms from three to thirty years.
Reclamation
Costs: We account for the costs related to legal obligations to reclaim
aggregate mining sites and other facilities in accordance with Statement of
Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations (“SFAS 143”). Accordingly, we
record our estimated reclamation liability when incurred, capitalize the
estimated liability as part of the related asset’s carrying amount and allocate
it to expense over the asset’s useful life.
Warranties:
Many
of our construction contracts contain warranty provisions covering defects in
equipment, materials, design or workmanship that generally run from six months
to one year after our customer accepts the project. Because of the nature of our
projects, including contract owner inspections of the work both during
construction and prior to acceptance, we have not experienced material warranty
costs for these short-term warranties and therefore, do not believe an accrual
for these costs is necessary. Certain construction contracts carry longer
warranty periods, ranging from two to ten years for which we have accrued an
estimate of warranty cost. The warranty cost is estimated based on our
experience with the type of work and any known risks relative to the project