GRANITE CONSTRUCTION INC - Annual Report: 2009 (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, 2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission
file number 1-12911
Granite
Construction Incorporated
(Exact
name of registrant as specified in its charter)
|
Delaware
|
77-0239383
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
|
585
West Beach Street
|
|
|
Watsonville,
California
|
95076
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s telephone
number, including area code: (831)
724-1011
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which
registered
|
|
Common
Stock, $0.01 par value
|
New
York Stock Exchange
|
Securities registered
pursuant to Section 12(g) of the Act: None
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes x
No o
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes o
No x
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No
o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) 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. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in 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 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 $1.3 billion as
of June 30, 2009, 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 12, 2010, 38,629,378
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 7, 2010, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 2009.
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 heavy-civil infrastructure projects,
including the construction of roads, highways, mass transit facilities, airport
infrastructure, bridges, dams and canals. Within the private sector, we
perform site preparation and infrastructure services for residential
development, commercial and industrial buildings, and other facilities.
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.
Operating
Structure
Our
construction business has been organized into two geographic segments, Granite
West and Granite East. Included in our Granite West segment is our
vertically integrated construction materials business. The Company also has
a real estate investment and development business, Granite Land Company (“GLC”).
Our results of operations discussed herein have been reported with the segment
structure that was in place during 2009. See Note 20 of “Notes to the
Consolidated Financial Statements” for additional information about our
operating segments.
On August
31, 2009, we announced changes to our organizational structure designed to
improve operating efficiencies and position the Company for long-term
growth. In
conjunction with the reorganization we are changing our reportable segments to
reflect our business product lines. Beginning in fiscal 2010, the Company’s new
reportable segments are: Construction, Large Project Construction, Construction
Materials and Real Estate. The Real Estate segment will contain what was
previously known as Granite Land Company. We will continue to
provide geographic information within the new segment structure.
Granite
West: In 2009
and 2008, Granite West contract revenue and sales of construction materials
was $1.4 billion and $2.0 billion (71.9% and 73.7% of our total revenue),
respectively. Granite West revenue is derived from both public and private
sector clients. Typical public sector projects include both new
construction and improvement of roads, highways, airport infrastructure and
bridges. 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 decentralized operating structure includes 14 branch offices in the
western United States, several with additional satellite operations. In
2009, individual branch revenues ranged from $47.0 million
to $210.1 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, 2009, had four active large
projects, each with total contract revenue greater than $50.0
million.
The
Company mines aggregates and/or operates plants that process aggregates into
construction materials for internal use and for sale to third parties. These
activities are vertically integrated into Granite West and provide 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.
Aggregate
products used in our construction projects represented approximately 54.9%
of our aggregate sales during 2009 and ranged from 42.3% to 54.9% over the
last five years. The remainder is sold to third parties.
Granite East: In 2009,
revenue from Granite East was $550.2 million (28.0% of our total
revenue), compared with $695.0 million (26.0% of our total revenue) in
2008. Granite East’s focus is on large, complex infrastructure projects and
included major highways, mass transit facilities, bridges, tunnels,
waterway locks and dams, pipelines, canals, 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 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 $466.5 million
at December 31, 2009.
3
Joint Ventures and Design/Build
Projects: We participate in joint ventures with other
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 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”).
We also
utilize the design/build 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 64.0% and 66.4% of Granite East revenue in 2009
and 2008, respectively, and 10.1% and 14.1% of Granite West
revenue in 2009 and 2008, respectively. Although these projects
carry additional risk as compared to traditional bid/build projects, the
profit potential can also be higher.
Granite Land Company: GLC is
an investor in a diversified portfolio of land assets and 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. The range of our
involvement in an individual project may vary from passive investment to
management of land rights or entitlement (use of land authorized by government
agency), development, construction, leasing and eventual sale of the project.
GLC projects have long lead times affording us the flexibility to stage our land
entitlement and construction activities to meet market demand. Our strategy is
to remain flexible, and to evaluate opportunities to sell any of our
investments at any stage of the development process.
Generally,
we team with partners who have local knowledge and expertise in the development
of each property. Each of these developments is affected by such factors as
changes in general economic conditions, bank-lending practices, interest rate
fluctuations, and demand for real estate. In addition, each project is subject
to issues unique to that property such as environmental conditions, local
entitlement policies and market conditions.
Our
current investments are located in Washington, Oregon, California
and Texas. In 2009, revenue from GLC was $2.3 million (0.1% of our
total revenue), compared with $9.0 million (0.3% of our total revenue) in
2008.
Business
Strategy
Our
fundamental objective is to increase long-term shareholder value as
measured by the appreciation of the value of our common stock over a period of
time as well as dividend yields. A specific measure of our financial
success is the achievement of a return on net assets greater than the cost of
capital, creating “Granite Value Added.” The following are key factors in our
ability to achieve these objectives:
Controlled Growth - We intend
to grow our business by working on many types of infrastructure projects as well
as by expanding into new geographic areas. In addition, we are focusing our
efforts on larger projects wherein our financial strength and project experience
provide us with a competitive
advantage.
Decentralized Profit
Centers - Each of
our operating groups is established as an individual profit center which
encourages entrepreneurial activity while allowing the offices to benefit from
centralized administrative and
support functions.
Diversification -
To mitigate the risks inherent in the
construction business as the result of 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.
Aggregate
Materials - We own and lease aggregate reserves
and own processing plants that are vertically integrated into our construction
operations. By ensuring availability of these resources and providing quality
products, we believe we have a competitive advantage in many of our
markets as well as a source of revenue and income from the sale of construction
materials to third parties.
Ownership
of Construction Equipment - We own a large fleet of well maintained
heavy construction equipment. We
believe that ownership of construction equipment enables us to compete more
effectively by ensuring availability of the equipment at a favorable
cost.
Profit-based
Incentives - Profit
center managers are incentivized with cash compensation and restricted stock,
payable upon the attainment of pre-established annual financial and
non-financial metrics.
Selective
Bidding - We focus our resources on bidding jobs that meet our
selective bidding criteria, which include analyzing the risk of a potential job
relative to: (i) available personnel to estimate and prepare the
proposal, (ii) available personnel to effectively manage and build the project,
(iii) the competitive environment, (iv) our experience with the type
of work, (v) our experience with the owner, (vi) local resources and
partnerships, (vii) equipment resources, (viii) the size and
complexity of the job and (ix) profitability.
Our operating
principles include:
Accident
Prevention - We believe accident prevention is a moral
obligation as well as 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 in environmentally responsible
operations. We are committed to protecting the environment, maintaining good
community relations and ensuring compliance with government agency
requirements.
Quality
and High Ethical Standards - We believe in the importance
of performing high quality work and maintaining high ethical standards through
an established code of conduct and an effective corporate compliance
program.
Raw
Materials
We
purchase raw materials consisting of aggregate products, cement, diesel fuel,
liquid asphalt, natural gas, propane and steel from numerous sources. Our
aggregate reserves supply a portion of the raw materials needed in our
construction projects. The price and availability of raw materials may vary from
year to year due to market conditions and production capacities. We do not
foresee the lack of availability of any raw materials.
Seasonality
The first
and fourth quarter of our fiscal year are typically affected by weather
conditions, primarily in the West, which may alter our construction schedules
and can create variability in our revenues, profitability and the required
number of employees.
Customers
We have
customers in both the public and private sectors. Our largest volume
customer is the California Department of Transportation (“Caltrans”).
Contracts with Caltrans represented 11.9% and 9.6% of our total
revenue and 16.6% and 13.1% of our Granite West revenue in 2009 and 2008,
respectively. Public sector revenue in California represented 28.1% and 27.7% of
our total revenue in 2009 and 2008, respectively. 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 various state departments of transportation, local
transit authorities, and federal agencies.
Contract
Backlog
Our
contract backlog is comprised of the unearned portion of revenue on awarded
contracts that have not been completed, including 100% of the unearned revenue
of our consolidated joint ventures and our proportionate share of unconsolidated
joint venture contracts. We include a construction project in our contract
backlog at the time 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 are 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.” Our contract backlog was approximately $1.4 billion and $1.7
billion at December 31, 2009 and 2008, respectively.
Approximately $931.2 million of the December 31, 2009 contract backlog is
expected to be completed during 2010.
Equipment
At
December 31, 2009 and 2008, we owned the following construction equipment and
vehicles:
|
December
31,
|
2009
|
2008
|
||||||
|
Heavy
construction equipment
|
2,362
|
2,775
|
||||||
|
Trucks,
truck-tractors, trailers and vehicles
|
5,254
|
5,812
|
Our
portfolio of equipment includes loaders, bulldozers, excavators, rollers, motor
graders, pavers, scrapers,
cranes, trucks, backhoes and barges.
We believe that ownership of equipment is generally preferable to leasing
because it ensures the equipment is available as needed and normally results in
lower costs. We pool certain equipment for use by both Granite West and
Granite East to maximize utilization. On a short-term basis, we lease or
rent equipment to supplement existing equipment in response to construction
activity peaks. In 2009 and 2008, we spent approximately $17.6 million and
$36.5 million, respectively, on purchases of construction equipment and
vehicles.
Employees
On
December 31, 2009, we employed approximately 1,800 salaried employees,
who work in management, estimating and clerical capacities, plus
approximately 600 hourly employees. The total number of hourly personnel we
employ is subject to the volume of construction in progress and is seasonal.
During 2009, the number of hourly employees ranged from approximately
600 to 3,600 and averaged approximately 2,700. 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 a 14.6% equity
ownership at December 31, 2009 through our Employee Stock Ownership Plan, our
Profit Sharing and 401(k) Plan and performance-based incentive compensation
arrangements. Our managerial and supervisory personnel have an average of
approximately 11 years
of service with us.
Competition
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.
Factors
influencing our competitiveness include price, estimating abilities, knowledge
of local markets and conditions, project management, financial strength,
reputation for quality, the availability of aggregate materials, and
machinery and equipment. 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. 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 “fixed unit price” or “fixed price.” Under
fixed unit price contracts, we are committed to providing materials or services
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 increased to approximately 75.1% at
December 31, 2009 compared with approximately 68.7% at December 31,
2008.
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 review process includes identifying risks and
opportunities during the bidding process and managing these risks through
mitigation efforts such as insurance and pricing. Contracts fitting certain
criteria of size and complexity are reviewed 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, weather and
other 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 increase costs and
lower profits. Conversely, positive variations in any of these or other
factors can decrease costs and improve profitability. However, the ability to
realize improvements on project profitability is often
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. These unknown factors
may cause higher than anticipated construction costs and additional
liability to the contract owner. 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.
However, there is no guarantee that these risk management strategies will
always be successful.
Most of
our contracts, including those with the government, provide for termination 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 could
be significant.
We act as
prime contractor on most of our construction projects. We complete 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 the subcontractor to furnish a bond or other
type of security to guarantee 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 have
significantly affected our ability to grow our business, there is no
assurance that it will not significantly affect 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 and 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, which will result in higher equipment related expenses. To date, costs to prepare the Company for compliance have been minimal. However, it is too early to determine what the full cost of compliance will be.
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 have implemented dust control procedures to measure
compliance with requisite thresholds and to verify that respiratory protective
equipment is made available as necessary. 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 this Report or otherwise adversely affect our
business.
|
·
|
Reductions
in governmental infrastructure spending could have a negative impact on
our business. A
significant portion of our revenue is generated from infrastructure work
funded by various government entities, including state departments of
transportation such as Caltrans. Infrastructure spending by
government entities could be negatively affected by the overall
condition of the economy and declining tax revenues. Our ability to obtain
future public sector work at reasonable margins is highly dependent on the
amount of work that is available to bid. 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.
|
|
·
|
We work in
a highly competitive marketplace. 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 public projects
intensifies and this increased competition may result in a decrease in new
awards at acceptable profit margins. In addition, downturns in residential
and commercial construction activity increases the competition for
available public sector work, further impacting our revenue, contract
backlog and profit
margins.
|
|
·
|
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 expenses, 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 could result
in the reversal of previously recognized revenue and profit. Such
changes could have a material adverse effect on our financial position,
results of operations, and cash
flows.
|
|
·
|
Our success
depends on attracting and retaining qualified personnel in a competitive
environment. The single largest factor affecting our ability to
profitably execute our work is our ability to attract, develop and retain
qualified personnel. 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 compensation packages and a work
environment that are
competitive.
|
|
·
|
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.
|
|
·
|
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 certain date. If we subsequently fail to complete
the project as scheduled we may be held responsible for costs resulting
from the delay, generally in the form of contractually agreed-upon
liquidated damages. To the extent these events occur, the total cost of
the project could exceed our original estimate and we could experience
reduced profits or, in some cases, a loss on that
project.
|
|
·
|
Weather can
significantly affect our quarterly revenues and profitability.
Our ability
to perform work is significantly affected by weather conditions such as
precipitation and temperature. Changes in weather conditions can cause
delays and otherwise significantly affect our project costs. The impact of
weather conditions can result in variability in our quarterly revenues and
profitability, particularly in the first and fourth quarters of the
year.
|
|
·
|
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 as it provides the
owner with a single point of responsibility for both design and
construction. We generally subcontract design responsibility to
architectural and engineering firms. However, in the event of a design
error or omission causing damages, there is risk that the subcontractor or
their errors and omissions insurance would not be able to absorb the
liability. In this case we may be responsible, resulting in a
potentially material adverse effect on our financial position, results of
operations and cash
flows.
|
|
·
|
Failure of
our subcontractors to perform as anticipated could have a negative effect
on our results. As further described under
“Contract Provisions and Subcontracting” above, we subcontract portions of
many of our contracts to specialty subcontractors, but 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. In this case we may be responsible, resulting in
a potentially adverse effect on our financial position, results of
operations and cash
flows.
|
|
·
|
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 breach of contract damages
which may include restrictions on our ability to bid on future projects as
well as monetary damages. To the extent we are responsible for monetary
damages, 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
contracts generally have strict regulatory requirements. Approximately 86.0% of our
consolidated revenue in 2009 was derived from contracts funded by federal,
state and local government agencies and authorities. Government contracts
are subject to specific procurement regulations, contract provisions and a
variety of socioeconomic requirements relating to their formation,
administration, performance and accounting and often include express or
implied certifications of compliance. Claims for civil or criminal fraud
may be brought for violations of 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 the 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.
Should one of these events occur, it could have a material adverse
effect on our financial position, results of operations, and cash
flows.
|
|
·
|
We are
subject to environmental and other regulation. As more fully described
under “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 effect 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
affected by strikes or work stoppages in the past, such labor actions
could have a significant effect on our operations if they occur in the
future.
|
|
·
|
Unavailability
of insurance coverage could have a negative effect 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 reasonably
priced insurance coverage to meet our requirements in the past, there is
no assurance that we will be able to do so in the future, and our
inability to obtain such coverage could materially affect our
financial position, results of operations and cash
flows.
|
|
·
|
An
inability to obtain bonding would have a negative effect 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 reasonably priced surety
bonds in the future could significantly affect our ability to be awarded
new contracts, which would have a material adverse effect on our financial
position, results of operations and cash
flows.
|
|
·
|
Our joint
venture contracts with project owners subject us to joint and several
liability. As further described in
“Joint Ventures; Off-Balance Sheet Arrangements” under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” if a joint venture partner fails to perform we could be
liable for completion of the entire contract. If the contract were
unprofitable, this could result in a material adverse effect on our
financial position, results of operations and cash
flows.
|
|
·
|
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 adversely affect the revenue
and profit we ultimately realize on these
projects.
|
|
·
|
We
use certain commodity products that are subject to significant price
fluctuations. Diesel
fuel, liquid asphalt and other petroleum-based products are used
to fuel and lubricate our equipment and fire our asphalt
concrete processing plants. In addition, they constitute a
significant part of the asphalt paving materials that are used in many of
our construction projects and are sold to third 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 steel and other commodities in our construction projects that can
be subject to significant price fluctuations. We enter into supply
agreements or pre-purchase commodities to secure pricing. 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.
|
|
·
|
An
inability to secure and permit aggregate reserves could negatively affect
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, our
operating results and financial conditions may be adversely affected by an
increasingly difficult permitting
process.
|
|
·
|
Private
sector work can 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 strength 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 affect 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 real
estate investments may require additional funding. Granite Land Company’s
real estate investments generally utilize short-term debt financing for
their development activities. Due to the tightening of the credit markets,
banks have required lower loan-to-value ratios often resulting in the need
to pay a portion of the debt when short-term financing is
renegotiated. If our real estate investment partners are unable to make
their proportional share of a required repayment, GLC may be required to
provide the additional funding which could materially affect our financial
position and cash flows. Also, if we assume full financial management
responsibility, additional real estate investments may need to be
consolidated in our financial
statements.
|
|
·
|
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 11 of “Notes to the Consolidated Financial Statements”
included in this report. In most cases, failure to meet the restrictive
covenants would result in the acceleration of outstanding indebtedness
requiring 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 could 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 a material adverse
effect on our business and financial
condition.
|
|
·
|
As a part
of our growth strategy we may 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 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, as well as
amortization expenses related to certain other intangible assets. Failure
to manage and successfully integrate acquisitions could harm our financial
position, results of operations and cash
flows.
|
The
foregoing list is not all-inclusive. 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 affect 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.
Quarry Properties
We have
53 active and 37 inactive quarry properties available for the
extraction of sand and gravel and hard rock, all of which are located in
the western United States. All of our quarries are open-pit and are primarily
accessible by road. We process aggregates into construction materials for
internal use and for sale to third parties. The following map shows the
approximate locations of our permitted quarry properties as of December 31,
2009.
We estimate our permitted
proven1 and probable2 aggregate reserves to be
752 million tons with an average permitted life of approximately
38 years at present operating levels. Present operating levels are
determined based on a three-year annual average aggregate production rate
of 15.9 million tons. Reserve estimates were made by our geologists
and engineers based primarily on drilling studies. Our plant equipment is
powered mostly by electricity provided by local utility
companies.
1Proven
reserves are determined through the testing of samples obtained from closely
spaced subsurface drilling and/or exposed pit faces. Proven reserves are
sufficiently understood so that quantity, quality, and engineering conditions
are known with sufficient accuracy to be mined without the need for any further
subsurface work. Actual required spacing is based on geologic judgment about the
predictability and continuity of each deposit.
2Probable
reserves are determined through the testing of samples obtained from subsurface
drilling but the sample points are too widely spaced to allow detailed
prediction of quantity, quality, and engineering conditions. Additional
subsurface work may be needed prior to mining the
reserve.
The
following tables present information about our quarry properties as of December
31, 2009:
|
Type
|
Permitted | Unpermitted | Three-Year Annual Average |
||||||||
|
Quarry
Properties
|
Sand
& Gravel
|
Hard
Rock
|
Aggregate
Reserves (tons)
|
Aggregate
Reserves (tons)
|
Production
Rate (tons)
|
Average
Reserve Life
|
|||||
|
Owned
quarry properties
|
31
|
8
|
416.0 million
|
540.0 million
|
8.0 million
|
47 years
|
|||||
|
Leased
quarry properties1
|
35
|
16
|
336.3 million
|
644.0 million
|
7.9 million
|
33 years
|
|||||
1
Our leases have expiration dates which range from 5 to 50 years
with most including an option to renew.
|
Permitted
Reserves
for
Each Product Type (tons)
|
Percentage
of Permitted Reserves Owned and Leased
|
|||||||||||||||||||
|
State
|
Number
of Properties
|
Sand
& Gravel
|
Hard
Rock
|
Owned
|
Leased
|
|||||||||||||||
|
California
|
49
|
210.6
million
|
264.2
million
|
51
|
%
|
49
|
%
|
|||||||||||||
|
Non-California
|
41
|
184.2 million
|
93.3 million
|
63
|
%
|
37
|
%
|
|||||||||||||
Plant
Properties
We
operate plants at our quarry sites to process aggregates into construction
materials. Some of our quarry sites may have more than one crushing, concrete or
asphalt processing plant. At December 31, 2009 and
2008, we owned the following plants:
|
December
31,
|
2009
|
2008
|
||||||
|
Aggregate
crushing plants
|
52
|
54
|
||||||
|
Asphalt
concrete plants
|
69
|
68
|
||||||
|
Portland
cement concrete batch plants
|
22
|
24
|
||||||
|
Asphalt
rubber plants
|
5
|
5
|
||||||
|
Lime
slurry plants
|
9
|
9
|
Other Properties
The
following table provides our estimate of certain information about other
properties as of December 31, 2009:
|
Land
Area (acres)
|
Building
Square Feet
|
|
|
Office
and shop space (owned and leased)
|
1,200
|
1,100,000
|
|
Real
estate held for development and sale and use
|
3,600
|
108,000
|
Granite
West uses approximately 86% of our office and shop space with the
remainder being primarily utilized by Granite East.
Silica
Litigation
Our
wholly-owned subsidiary Granite Construction Company (“GCCO”) is one of
approximately 100 to 300 defendants in six active California Superior Court
lawsuits. Of the six lawsuits, four were filed against GCCO in 2005 and two were
filed against GCCO in 2006, in Alameda County (Dominguez vs. A-1 Aggregates, et
al.; 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 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
eighteen 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 has presented its detailed written responses to
the initial determinations of the Agencies as well as the investigation by the
USDOJ. On September 17, 2009, the USDOJ replied to MnTC’s
responses. MnTC and the USDOJ are continuing to engage in informal
discussions in an attempt to resolve this matter. Such discussions, if
successful, are expected to include resolution of issues with the USDOT and with
the state agencies. We cannot, however, rule out the possibility of 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 violations of YRC’s stormwater permit. In June 2009, YRC was
informed that the USDOJ had assumed the criminal investigation that
the Oregon Department of Justice had previously been conducting in connection
with stormwater runoff from the project. YRC and its members are fully
cooperating in the investigation. We do not know whether any criminal
charges or civil lawsuits 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 (the
“City”) 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 mistakes, rates paid to GCCO appear to be generally
reasonable. GCCO has reimbursed the City for 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 another contractor that had been awarded a similar cleanup contract
with the City. In the complaint, the City alleges that 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 City Attorney agreed to stay the
lawsuit in order to allow the City Attorney time to complete its investigation.
The stay expired in January 2010, and the parties have agreed to jointly request
a further stay. 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.
Grand
Avenue Project DBE Issues
On
March 6, 2009, the U.S. Department of Transportation, Office of Inspector
General (“OIG”) served upon our wholly-owned subsidiary, Granite Construction
Northeast, Inc. (“Granite Northeast”), a United States District Court Eastern
District of New York subpoena to testify before a grand jury by producing
documents. The subpoena seeks all documents pertaining to a Granite
Northeast Disadvantaged Business Enterprise (“DBE”) subcontractor (the
“Subcontractor”), and the Subcontractor’s non-DBE lower tier
subcontractor/consultant, relating to the Subcontractor’s work on the Grand
Avenue Bus Depot and Central Maintenance Facility for the Borough of Queens
Project (the “Grand Avenue Project”). The subpoena also seeks all documents
regarding Granite Northeast’s use of the Subcontractor as a DBE on the Grand
Avenue Project and all documents related to the Subcontractor as a DBE on any
other contract including other public works construction projects. We have
complied with the subpoena and are fully cooperating with the OIG’s
investigation. To date, Granite Northeast has not been notified that it is
either a subject or target of the OIG’s investigation. As a result, we do not
know whether any criminal charges or civil lawsuits 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.
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 pending proceedings and compliance inquiries, individually and in the
aggregate, will not have a material adverse affect 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 affect on our 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 be resolved through settlement is neither predictable nor
guaranteed.
During
the fourth quarter of 2009, no matter was submitted to a vote of security
holders through the solicitation of proxies or otherwise.
Executive
Officers of the Registrant
Our
current executive officers are as follows:
|
Name
|
Age
|
Position
|
|
William
G. Dorey
|
65
|
President,
Chief Executive Officer and Director
|
|
James
H. Roberts
|
53 |
Executive
Vice President and Chief Operating Officer
|
|
LeAnne
M. Stewart
|
45 |
Senior
Vice President and Chief Financial Officer
|
|
Michael
F. Donnino
|
55 |
Senior
Vice President and Group
Manager
|
| John A. Franich | 53 | Vice President and Group Manager |
| Thomas S. Case | 47 | Vice President and Group 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 Chief Executive Officer since January 2004 and President since
February 2003. He also served as Chief Operating Officer from May 1998 to
January 2004, Executive Vice President from November 1998 to February 2003,
Senior Vice President from 1990 to 1998, Branch Division Manager from 1987 to
1998, and Vice President and Branch Division Assistant Manager from 1983 to
1987. Mr. Dorey has also served as a member of our Board of Directors since
January 2004. He received a B.S. degree in Construction Engineering from Arizona
State University in 1967.
Mr. Roberts
joined Granite in 1981 and has served in various capacities, including Executive
Vice President and Chief Operating Officer since September 2009, Senior Vice
President from May 2004 to September 2009, Granite West Manager from February
2007 to September 2009, 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. He
also completed the Stanford Executive Program in 2009.
Ms.
Stewart has been a Senior Vice President of Granite since February 2008. In June
2008, she was appointed Chief Financial Officer. Prior to joining Granite, Ms.
Stewart was employed by Nash Finch Company as Senior Vice President
and Chief Financial Officer from October 2004 to January 2007 and as Vice
President and
Corporate Controller from April 2000 to October 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. from the Wharton School at the
University of Pennsylvania in 1997.
Mr.
Donnino joined Granite in 1977 and has served as Senior Vice President and Group
Manager since January 2010, 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.
Franich joined Granite in 2005 and has served as Vice President and Group
Manager since January 2010, Vice President and Granite West Manager of
Construction from February 2007 to December 2009, and Vice President, Branch
Division Construction Manager from January 2005 through January 2007. Prior to
joining Granite in 2005, Mr. Franich has held various positions in the
construction industry since 1979 and was formerly the President of Associated
General Contractors of California. Mr. Franich received a B.S. in Business
Administration (Finance) from California State University, Chico in
1979.
Mr. Case
has been an employee of Granite since 1987 and has been Vice President and Group
Manager since January 2010. He also served as Southwest Operating Group Manager
from March 2007 to December 2009, Utah Operations Branch Manager
from August 2001 through March 2007, Utah Operations Construction
Manager during 2001, Utah Operations Materials Manager between 1996 and 2000,
and in various positions at Granite’s Nevada and Santa Barbara, California
operations between 1986 and 1996. Mr. Case received a B.S. degree in
Construction Management from California Polytechnic State University in
1986.
Our
common stock trades on the New York Stock Exchange under the ticker symbol GVA.
As of
February 12, 2010, there were 38,629,378
shares of our common stock outstanding held
by 1,529 shareholders of record.
We have
paid quarterly cash dividends since the second quarter of 1990, and
we expect to continue to do so. 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
such other factors as the Board of Directors deems relevant.
|
Market
Price and Dividends of Common Stock
|
|
|
||||||||||||||
|
2009
Quarters Ended
|
December
31,
|
September
30,
|
June 30,
|
March 31,
|
||||||||||||
|
High
|
$ | 34.58 | $ | 36.39 | $ | 45.94 | $ | 45.82 | ||||||||
|
Low
|
$ | 27.14 | $ | 29.41 | $ | 32.29 | $ | 30.14 | ||||||||
| Dividends per share |
$
|
0.13 | $ | 0.13 | $ | 0.13 |
$
|
0.13 | ||||||||
| 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 | ||||||||
During
the three months ended December 31, 2009, 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,
2009:
|
Period
|
Total Number
of Shares Purchased1
|
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 through October 31, 2009
|
479
|
$ |
29.52
|
-
|
$
|
64,065,401
|
||||||||||
|
November
1 through November 30, 2009
|
89
|
$
|
31.35
|
-
|
$
|
64,065,401
|
||||||||||
|
December 1 through
December 31, 2009
|
14,846
|
$
|
29.97
|
-
|
$
|
64,065,401
|
||||||||||
|
Total
|
15,414
|
$ |
29.97
|
-
|
||||||||||||
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 U.S. Heavy Construction index. The Dow Jones
U.S. 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 reinvestment of
all dividends) from December 31, 2004 to December 31,
2009.
|
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||||
|
Granite
Construction Incorporated
|
$ | 100.00 | $ | 136.76 | $ | 193.23 | $ | 140.14 | $ | 172.69 | $ | 134.32 | ||||||||||||
|
S&P
500
|
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
|
Dow
Jones U.S. Heavy Construction
|
100.00 | 144.50 | 180.25 | 342.40 | 153.66 | 175.65 | ||||||||||||||||||
The
selected consolidated operations data for 2009, 2008 and 2007 and consolidated
balance sheet data as of December 31, 2009 and 2008 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 2006 and 2005 and the
consolidated balance sheet data as of December 31, 2007, 2006 and 2005 have
been derived from our audited consolidated financial statements not included
herein. These historical results are not necessarily indicative of the results
of operations to be expected for any future period.
|
Selected
Consolidated Financial Data
|
|||||||||||||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Operating
Summary
|
(Dollars
In Thousands, Except Per Share Data)
|
||||||||||||||||||||
|
Revenue
|
$ | 1,963,479 | $ | 2,674,244 | $ | 2,737,914 | $ | 2,969,604 | $ | 2,641,352 | |||||||||||
|
Gross
profit
|
346,373 | 468,720 | 410,744 | 295,720 | 319,372 | ||||||||||||||||
|
As
a percent of revenue
|
17.6 | % | 17.5 | % | 15.0 | % | 10.0 | % | 12.1 | % | |||||||||||
|
General
and administrative expenses
|
224,910 | 257,532 | 246,202 | 199,481 | 192,692 | ||||||||||||||||
|
As
a percent of revenue
|
11.5 | % | 9.6 | % | 9.0 | % | 6.7 | % | 7.3 | % | |||||||||||
| Restructuring charges1 | 9,453 | - | - | - | - | ||||||||||||||||
|
Goodwill
impairment charge2
|
- | - | - | 18,011 | - | ||||||||||||||||
| Net income | 100,201 | 165,738 | 132,924 | 74,339 | 100,898 | ||||||||||||||||
|
Amount
attributable to noncontrolling interests3
|
(26,701 | ) | (43,334 | ) | (20,859 | ) | 6,170 | (17,748 | ) | ||||||||||||
|
Net
income attributable to Granite
|
73,500 | 122,404 | 112,065 | 80,509 | 83,150 | ||||||||||||||||
|
As
a percent of revenue
|
3.7 | % | 4.6 | % | 4.1 | % | 2.7 | % | 3.1 | % | |||||||||||
|
Net
income per share attributable to common
shareholders4:
|
|||||||||||||||||||||
|
Basic
|
$ | 1.91 | $ | 3.19 | $ | 2.69 | $ | 1.93 | $ | 2.00 | |||||||||||
|
Diluted
|
1.90 | 3.18 | 2.68 | 1.92 | 1.99 | ||||||||||||||||
|
Weighted
average shares of common stock:
|
|||||||||||||||||||||
|
Basic
|
37,566 | 37,606 | 40,866 | 40,874 | 40,614 | ||||||||||||||||
|
Diluted
|
37,683 | 37,709 | 40,909 | 40,920 | 40,684 | ||||||||||||||||
|
Consolidated
Balance Sheet
|
|||||||||||||||||||||
|
Total
assets
|
$ | 1,709,575 | $ | 1,743,455 | $ | 1,786,418 | $ | 1,632,838 | $ | 1,472,230 | |||||||||||
|
Cash,
cash equivalents and marketable securities
|
458,341 | 520,402 | 485,348 | 394,878 | 301,381 | ||||||||||||||||
|
Working
capital
|
500,605 | 475,942 | 397,568 | 319,762 | 367,801 | ||||||||||||||||
|
Current
maturities of long-term debt
|
58,978 | 39,692 | 28,696 | 28,660 | 26,888 | ||||||||||||||||
|
Long-term
debt
|
244,688 | 250,687 | 268,417 | 78,576 | 124,415 | ||||||||||||||||
|
Other
long-term liabilities
|
48,998 | 43,604 | 46,441 | 58,419 | 46,556 | ||||||||||||||||
|
Granite
shareholders’ equity
|
830,651 | 767,509 | 700,199 | 694,544 | 621,560 | ||||||||||||||||
|
Book
value per share
|
21.50 | 20.06 | 17.75 | 16.60 | 14.91 | ||||||||||||||||
|
Dividends
per share
|
0.52 | 0.52 | 0.43 | 0.40 | 0.40 | ||||||||||||||||
|
Common
shares outstanding
|
38,635 | 38,267 | 39,451 | 41,834 | 41,682 | ||||||||||||||||
|
Contract
backlog
|
$ | 1,401,988 | $ | 1,699,396 | $ | 2,084,545 | $ | 2,256,587 | $ | 2,331,540 | |||||||||||
1
During 2009, we recorded restructuring charges of
approximately $9.5 million as part of our
reorganization.
2
In 2006, we recorded a goodwill impairment charge of
approximately $18.0 million related to our Granite Northeast operation in New
York.
3
Effective January 1, 2009, we adopted a new accounting standard
requiring net income attributable to both the parent and noncontrolling
interests to be disclosed separately as well as the components of equity
attributable to the parent and noncontrolling interests. Prior years have
been adjusted to conform to this new
standard.
4
Computed using the two-class method required by accounting
standards adopted January 1, 2009, which requires prior period per share data to
be restated retrospectively for comparability.
General
We are
one of the largest heavy civil contractors in the United States engaged in the
construction and improvement of streets, roads, highways, mass transit
facilities, airport infrastructure, bridges, dams and other
infrastructure-related projects. We produce construction materials through
the use of our aggregate reserves and plant facilities. We also operate a real
estate investment and development company on a significantly smaller scale. We
have three operating segments: Granite West, Granite East and Granite
Land Company (“GLC”). Our
offices are located in Alaska, Arizona, California, Florida, Nevada, New
York, Oregon, Texas, Utah and Washington.
Our
construction business has been organized into two geographic segments, Granite
West and Granite East. Included in our Granite West segment is our
vertically integrated construction materials business. The Company also has
a real estate investment and development business, Granite Land Company (“GLC”).
Our results of operations discussed herein have been reported with the segment
structure that was in place during 2009. See Note 20 of “Notes to the
Consolidated Financial Statements” for additional information about our
operating segments.
On August
31, 2009, we announced changes to our organizational structure designed to
improve operating efficiencies and position the Company for long-term
growth. In
conjunction with the reorganization we are changing our reportable segments to
reflect our business product lines. Beginning in fiscal 2010, the Company’s new
reportable segments are: Construction, Large Project Construction, Construction
Materials and Real Estate. The Real Estate segment will contain what was
previously known as Granite Land Company. We will continue to
provide geographic information within the new segment
structure.
Our
contracts are obtained primarily through competitive bidding in response to
advertisements by both public agencies and private parties and to a lesser
extent on a
negotiated basis as a result of direct solicitation by 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.
The three
primary economic drivers of our business are (1) the overall health of the
economy, (2) federal, state and local public funding levels and (3) population
growth with the resulting private development. For example, a stagnant or
declining economy will generally result in 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 affect 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. Some funding sources that have been specifically
earmarked for infrastructure spending, such as diesel and gasoline taxes, are
not as directly affected by a stagnant or declining economy. However,
even these 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,
increased levels of 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 expenses 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 re-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).
Critical
Accounting Policies and Estimates
The
financial statements included in “Item 8. Financial Statements and Supplementary
Data” have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”). The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. Our estimates, judgments and assumptions are continually evaluated
based on available information and experiences; however, actual amounts could
differ from those estimates.
Certain
of our accounting policies and estimates require higher degrees of judgment 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 insurance estimates. The Audit and Compliance
Committee of our Board of Directors has reviewed our
disclosure of critical accounting estimates.
Revenue
Recognition for Construction Contracts
Revenue
and earnings on construction contracts, including construction joint ventures,
are recognized under the percentage of completion method using the
ratio of costs incurred to estimated total costs. Revenue in an amount equal to
cost incurred is recognized prior to contracts reaching 25% completion,
thus deferring the related profit. It is our judgment that until a project
reaches 25% completion, there is insufficient information to determine the
estimated profit on the project with a reasonable level of certainty. In
the case of large, complex design/build projects we may defer profit recognition
beyond the point of 25% completion based on an evaluation of specific project
risks. The factors considered in this evaluation include the stage of design
completion, the stage of construction completion, status of outstanding purchase
orders and subcontracts, certainty of quantities of labor and materials,
and certainty of schedule and the relationship with the owner.
Revenue
from contract claims is recognized when we have a signed 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. All contract costs,
including those associated with claims and change orders, are recorded
as incurred and revisions to estimated total costs are reflected as
soon as the obligation to perform is determined. 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).
The
accuracy of our revenue and profit recognition in a given period is dependent on
the accuracy of our estimates of the cost to complete each project. 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 to owner, weather and other 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.
|
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 increased from approximately 68.7% at December 31,
2008 to approximately 75.1% at December 31, 2009. 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.
Valuation of Real
Estate Held for Development and Sale
We assess impairment of
our real estate held for development and sale at least annually or whenever
events or changes in circumstances indicate that carrying values of these
assets may not be recoverable. Events or changes in 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 legal factors or the business
climate;
|
|
·
|
accumulation of
costs significantly in excess of the amount originally expected for the
acquisition, development or construction of the asset;
and
|
|
·
|
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.
|
If events and changes in
circumstances indicate that the carrying amounts of the real estate held for
development and sale might not be fully recoverable, we compare projected
undiscounted net cash flows associated with the related asset or group of assets
against their respective carrying amounts. Future undiscounted cash flows are
estimated based on entitlement status, market conditions, cost of construction,
debt load, development schedules, status of joint venture partners and other
factors applicable to the specific project. In the event that the
projected undiscounted cash flows are not sufficient to recover the carrying
value of the assets, the assets are written down to their estimated fair values.
Fair value is estimated based on the expected future cash flows
attributable to the asset or group of assets and on other assumptions
that market participants would use in determining fair value, such as market
discount rates, transaction prices for other comparable assets, and other market
data. Our
estimates of cash flows may differ from actual cash flows due to, among other
things, fluctuations in interest rates, decisions made by jurisdictional
agencies, economic conditions, or changes to our business
operations.
In 2009 and 2008, we
recorded impairment charges of $1.7 million and $4.5 million,
respectively. The impairments were due to changes in sales and pricing
projections for three of our residential real estate investments that
reduced the estimated fair value of the assets below the carrying amounts. Given
the current economic environment surrounding real estate, we regularly evaluate
the recoverability of our real estate held for development and sale and have
determined that no further impairment loss was required.
A
continued decline in the residential and/or commercial real estate markets may
decrease the expected profitability for certain development activities to the
point we would be required to recognize additional impairments in the
future.
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. Payment for claim
amounts 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 affect our assessment of
the ultimate liability and could have a material effect on our operating results
and financial position.
Current Economic Environment and
Outlook for 2010
Challenging
market conditions negatively affected our overall revenue and contract backlog
in 2009. The continued weak residential and commercial development
markets significantly reduced demand for our construction materials and created
a highly competitive bidding environment for available public sector work. In
addition, the slow pace of the economic recovery has affected the financial
health of state and local agencies and ultimately the amount of work available
to bid.
We
currently expect 2010 to be a challenging year for our business due to the
ongoing competitive climate and uncertainty surrounding both federal and state
funding. Despite an increase in contract backlog in Granite East, our contract
backlog in Granite West is substantially lower and includes projects with lower
projected gross profit margins than recent years. In response, we have reduced
our planned capital spending from recent levels and will continue to focus on
reducing our costs.
Results of
Operations
|
Comparative
Financial Summary
|
||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||||
|
Total
revenue
|
$
|
1,963,479
|
$
|
2,674,244
|
$
|
2,737,914
|
||||
|
Gross
profit
|
346,373
|
468,720
|
410,744
|
|||||||
| Restructuring charges | 9,453 | - | - | |||||||
|
Operating
income
|
129,179
|
216,691
|
174,885
|
|||||||
|
Other
income
|
9,672
|
16,739
|
23,509
|
|||||||
|
Provision
for income taxes
|
38,650
|
67,692
|
65,470
|
|||||||
|
Amount
attributable to noncontrolling interests
|
(26,701
|
) |
(43,334
|
) |
(20,859
|
) | ||||
|
Net
income attributable to Granite
|
73,500
|
122,404
|
112,065
|
|||||||
Revenue
|
Total
Revenue
|
|||||||||||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Segment:
|
|||||||||||||||||||
|
Granite
West
|
$
|
1,411,016
|
71.9
|
$
|
1,970,196
|
73.7
|
$
|
1,928,751
|
70.4
|
||||||||||
|
Granite
East
|
550,189
|
28.0
|
695,035
|
26.0
|
768,451
|
28.1
|
|||||||||||||
|
Granite
Land Company
|
2,274
|
0.1
|
9,013
|
0.3
|
40,712
|
1.5
|
|||||||||||||
|
Total
|
$
|
1,963,479
|
100.0
|
$
|
2,674,244
|
100.0
|
$
|
2,737,914
|
100.0
|
||||||||||
|
Granite
West Revenue
|
||||||||||||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||
|
California:
|
||||||||||||||||||||
|
Public
sector
|
$
|
512,111
|
75.7
|
$
|
697,551
|
67.8
|
$
|
595,733
|
56.7
|
|||||||||||
|
Private
sector
|
36,499
|
5.4
|
106,489
|
10.4
|
215,770
|
20.5
|
||||||||||||||
|
Construction
materials
|
127,649
|
18.9
|
224,736
|
21.8
|
239,660
|
22.8
|
||||||||||||||
|
Total
|
$
|
676,259
|
100.0
|
$
|
1,028,776
|
100.0
|
$
|
1,051,163
|
100.0
|
|||||||||||
|
West
(excluding California):
|
||||||||||||||||||||
|
Public
sector
|
$
|
624,517
|
85.0
|
$
|
721,922
|
76.7
|
$
|
563,392
|
64.2
|
|||||||||||
|
Private
sector
|
31,944
|
4.3
|
91,119
|
9.7
|
178,156
|
20.3
|
||||||||||||||
|
Construction
materials
|
78,296
|
10.7
|
128,379
|
13.6
|
136,040
|
15.5
|
||||||||||||||
|
Total
|
$
|
734,757
|
100.0
|
$
|
941,420
|
100.0
|
$
|
877,588
|
100.0
|
|||||||||||
|
Total
Granite West:
|
||||||||||||||||||||
|
Public
sector
|
$
|
1,136,628
|
80.5
|
$
|
1,419,473
|
72.0
|
$
|
1,159,125
|
60.1
|
|||||||||||
|
Private
sector
|
68,443
|
4.9
|
197,608
|
10.0
|
393,926
|
20.4
|
||||||||||||||
|
Construction
materials
|
205,945
|
14.6
|
353,115
|
18.0
|
375,700
|
19.5
|
||||||||||||||
|
Total
|
$
|
1,411,016
|
100.0
|
$
|
1,970,196
|
100.0
|
$
|
1,928,751
|
100.0
|
|||||||||||
Granite
West Revenue:
Revenue
from Granite West for the year ended December 31, 2009 decreased by $559.2
million, or 28.4%, compared to the year ended December 31, 2008 as a result of
the economic downturn and decline in residential development in the
West. The decrease in revenue affected all sectors of our Granite West
segment. With less private work available, competition has
migrated into the public sector. In addition, lack of available private
sector work has reduced the demand for construction materials. There is
also less work available for bid in the public sector as a result of reduced
state and local government budgets.
|
Granite
East Revenue
|
|||||||||||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
|
Revenue
by Geographic Area:
|
|||||||||||||||||||
|
Midwest
|
$
|
157,338
|
28.6
|
$
|
175,763
|
25.3
|
$
|
93,896
|
12.2
|
||||||||||
|
Northeast
|
117,783
|
21.4
|
125,024
|
18.0
|
196,653
|
25.6
|
|||||||||||||
|
South
|
95,612
|
17.4
|
128,454
|
18.5
|
125,164
|
16.3
|
|||||||||||||
|
Southeast
|
178,467
|
32.4
|
221,167
|
31.8
|
299,084
|
38.9
|
|||||||||||||
|
West
|
989
|
0.2
|
44,627
|
6.4
|
53,654
|
7.0
|
|||||||||||||
|
Total
|
$
|
550,189
|
100.0
|
$
|
695,035
|
100.0
|
$
|
768,451
|
100.0
|
||||||||||
|
Revenue
by Market Sector:
|
|||||||||||||||||||
|
Public
sector
|
$
|
544,719
|
99.0
|
$
|
675,188
|
97.1
|
$
|
747,580
|
97.3
|
||||||||||
|
Private
sector
|
5,470
|
1.0
|
19,847
|
2.9
|
20,871
|
2.7
|
|||||||||||||
|
Total
|
$
|
550,189
|
100.0
|
$
|
695,035
|
100.0
|
$
|
768,451
|
100.0
|
||||||||||
Granite
East Revenue: Revenue
from Granite East for the year ended December 31, 2009 decreased
by $144.8 million, or 20.8%, compared to the year ended December 31,
2008. This
decrease was the result of an increased number of large projects nearing
completion in 2009 compared to 2008, the stage of a large project when
revenue recognition typically slows. Additionally, in
2009, delays in notices to proceed on three awarded projects
contributed to lower revenue. Included in Granite East revenue for the years
ended 2009 and 2008, were settlements of negotiated claims with contract owners
in the amounts of $16.0 million and $39.3 million, respectively, both of
which improved revenue.
The
following table provides information about revenue from our large projects
for the years ended December 31, 2009, 2008 and 2007:
|
Large
Project Revenue
|
||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
(dollars
in thousands)
|
||||||||||
|
Granite
West
|
$
|
142,555
|
$
|
245,514
|
$
|
160,232
|
||||
|
Number
of projects1
|
6
|
8
|
6
|
|||||||
|
Granite
East
|
$
|
496,561
|
$
|
621,215
|
$
|
732,086
|
||||
|
Number
of projects1
|
19
|
19
|
31
|
|||||||
|
Total
|
$
|
639,116
|
$
|
866,729
|
$
|
892,318
|
||||
|
Number
of projects1
|
25
|
27
|
37
|
|||||||
1 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, 2009 decreased by $6.7 million, or 74.8%,
compared to the year ended December 31, 2008. GLC’s
revenues have been negatively impacted by the downturn in the real estate
market.
Contract
Backlog
Our contract backlog is comprised of
the unearned revenue on awarded contracts that have not been completed,
including 100% of our consolidated joint ventures and our proportionate share of
unconsolidated joint venture contracts. 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.
The
following tables illustrate our contract backlog as of the respective
dates:
|
Total
Contract Backlog
|
|||||||||||||
|
December
31,
|
2009
|
2008
|
|||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Contract
Backlog by Segment:
|
|||||||||||||
|
Granite
West
|
$
|
439,155
|
31.3
|
$
|
788,872
|
46.4
|
|||||||
|
Granite
East
|
962,833
|
68.7
|
910,524
|
53.6
|
|||||||||
|
Total
|
$
|
1,401,988
|
100.0
|
$
|
1,699,396
|
100.0
|
|||||||
|
Granite
West Contract Backlog
|
|||||||||||||
|
December
31,
|
2009
|
2008
|
|||||||||||
|
(in thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
California:
|
|||||||||||||
|
Public
sector
|
$
|
218,701
|
96.6
|
$
|
430,421
|
94.8
|
|||||||
|
Private
sector
|
7,608
|
3.4
|
23,841
|
5.2
|
|||||||||
|
Total
|
$
|
226,309
|
100.0
|
$
|
454,262
|
100.0
|
|||||||
|
West
(excluding California):
|
|||||||||||||
|
Public
sector
|
$
|
208,215
|
97.8
|
$
|
319,271
|
95.4
|
|||||||
|
Private
sector
|
4,631
|
2.2
|
15,339
|
4.6
|
|||||||||
|
Total
|
$
|
212,846
|
100.0
|
$
|
334,610
|
100.0
|
|||||||
|
Total
Contract Backlog:
|
|||||||||||||
|
Public
sector
|
$
|
426,916
|
97.2
|
$
|
749,692
|
95.0
|
|||||||
|
Private
sector
|
12,239
|
2.8
|
39,180
|
5.0
|
|||||||||
|
Total
|
$
|
439,155
|
100.0
|
$
|
788,872
|
100.0
|
|||||||
Granite
West Contract
Backlog:
Granite West contract backlog of $439.2 million at December 31,
2009 was $349.7 million, or 44.3%, lower
than at December 31, 2008. The
decrease in contract backlog was due to a number of projects being completed
or nearing completion in 2009. Additionally, the current economic
climate and increased competition significantly reduced new awards in
contract backlog at December 31, 2009 relative to
2008.
|
Granite
East Contract Backlog
|
|||||||||||||
|
December
31,
|
2009
|
2008
|
|||||||||||
|
(in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||
|
Contract
Backlog by Geographic Area:
|
|||||||||||||
|
Midwest
|
$
|
13,604
|
1.4
|
$
|
163,795
|
18.0
|
|||||||
|
Northeast
|
434,873
|
45.2
|
250,232
|
27.5
|
|||||||||
|
South
|
78,285
|
8.1
|
91,720
|
10.0
|
|||||||||
|
Southeast
|
434,343
|
45.1
|
402,062
|
44.2
|
|||||||||
|
West
|
1,728
|
0.2
|
2,715
|
0.3
|
|||||||||
|
Total
|
$
|
962,833
|
100.0
|
$
|
910,524
|
100.0
|
|||||||
|
Contract
Backlog by Market Sector:
|
|||||||||||||
|
Public
sector
|
$
|
960,926
|
99.8
|
$
|
906,470
|
99.6
|
|||||||
|
Private
sector
|
1,907
|
0.2
|
4,054
|
0.4
|
|||||||||
|
Total
|
$
|
962,833
|
100.0
|
$
|
910,524
|
100.0
|
Granite East Contract
Backlog:
Granite East contract backlog of $962.8 million at December 31,
2009 was $52.3 million, or 5.7%, higher than at December 31,
2008. The increase reflects new
projects awarded in 2009, including our portion of the work for the
expansion of Houston’s light rail project, as well as our participation in joint
ventures for a tunnel in New York City and a highway reconstruction project in
North Carolina. The decrease in contract backlog in the Midwest was due to the
substantial completion of a large design/build project in St. Louis, Missouri.
Not included in contract backlog is approximately $400.0
million associated with the Houston light rail project that will be booked
into contract backlog as additional notices to proceed are
received.
The following
tables provide additional information about our large project contract
backlog at December 31, 2009 and 2008:
|
Large
Project Contract Backlog by Expected Profitability (dollars
in thousands)
|
|||||||||||
|
December
31, 2009
|
Number
of Projects1
|
Average
Percent Complete
|
Remaining
Contract Backlog
|
Percent
|
|||||||
|
Projects with
Forecasted Loss:
|
|||||||||||
|
Granite
West
|
1
|
68%
|
|
$
|
62,013
|
5.9%
|
|
||||
|
Granite
East
|
5
|
97%
|
|
32,347
|
3.1%
|
|
|||||
|
Total
|
6
|
93%
|
|
94,360
|
9.0%
|
|
|||||
|
Projects with
Forecasted Profit:
|
|||||||||||
|
Granite
West
|
3
|
90%
|
|
51,531
|
4.9%
|
|
|||||
|
Granite
East
|
10
|
66%
|
|
900,569
|
86.1%
|
|
|||||
|
Total
|
13
|
70%
|
|
952,100
|
91.0%
|
|
|||||
|
Total
|
19
|
$
|
1,046,460
|
100.0%
|
|
||||||
| December 31, 2008 |
|
|
|||||||||
|
Projects with
Forecasted Loss:
|
|||||||||||
|
Granite
West
|
1
|
44%
|
|
$
|
104,428
|
9.4%
|
|
||||
|
Granite
East
|
6
|
95%
|
|
66,670
|
6.0%
|
|
|||||
|
Total
|
7
|
89%
|
|
171,098
|
15.4%
|
|
|||||
|
Projects with
Forecasted Profit:
|
|||||||||||
|
Granite
West
|
5
|
78%
|
|
139,390
|
12.5%
|
|
|||||
|
Granite
East
|
8
|
67%
|
|
801,968
|
72.1%
|
|
|||||
|
Total
|
13
|
69%
|
|
941,358
|
84.6%
|
|
|||||
|
Total
|
20
|
$
|
1,112,456
|
100.0%
|
|
||||||
1Includes 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 operating segment for the
respective periods:
| Gross Profit (Loss) | ||||||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||||
|
(in
thousands)
|
||||||||||||||
|
Granite
West
|
$
|
236,868
|
$
|
348,818
|
$
|
369,080
|
||||||||
|
Percent
of segment revenue
|
16.8
|
|
%
|
17.7
|
|
% |
19.1
|
|
%
|
|||||
|
Granite
East
|
$
|
110,823
|
$
|
121,425
|
$
|
25,824
|
|
|||||||
|
Percent
of segment revenue
|
20.1
|
|
% |
17.5
|
|
% |
3.4
|
|
% | |||||
|
Granite
Land Company
|
$
|
(1,318
|
) |
$
|
(1,523
|
) |
$
|
15,840
|
||||||
|
Percent
of segment revenue
|
(58.0
|
)
|
%
|
(16.9
|
)
|
% |
38.9
|
|
% | |||||
|
Total
|
$
|
346,373
|
$
|
468,720
|
$
|
410,744
|
||||||||
|
Percent
of total revenue
|
17.6
|
|
% |
17.5
|
|
% |
15.0
|
|
% | |||||
Gross
Profit (Loss): We defer profit recognition until a project reaches
25% completion. In the case of large, complex design/build projects, we may
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 smaller projects
at various stages of completion in Granite West, this policy generally has a
lesser affect 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 from period to period 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,
|
2009
|
2008
|
2007
|
|||||||||||
|
(in
thousands)
|
||||||||||||||
|
Granite
West
|
$
|
5,664
|
$
|
24,148
|
$
|
43,590
|
||||||||
|
Granite
East
|
63,098
|
1,674
|
131,694
|
|||||||||||
|
Total
revenue from contracts with deferred profit
|
$
|
68,762
|
$
|
25,822
|
$
|
175,284
|
||||||||
We do not
recognize revenue from contract claims until we have a signed agreement and
payment is assured, nor do we 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 costs are incurred and revisions to
estimated total costs are reflected as soon as the obligation to
perform is determined. As a result, our gross profit as a percent of revenue can
vary depending on the magnitude and timing of settlement claims and change
orders.
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.
Granite West Gross
Profit: Granite West gross profit
in 2009 decreased
to $236.9 million, or 16.8%, from $348.8 million, or 17.7%, in
2008. Construction
gross profit as a percent of construction revenue remained relatively unchanged
at 18.5% and 18.9% for 2009 and 2008, respectively. Construction gross
profit margins were
negatively affected by lower gross profit margins on projects bid in a more
competitive environment, offset by the positive effect of significant project
forecast changes of $44.6
million for the year ended December 31, 2009 compared
with $44.5 million
for the year ended December 31, 2008. These positive forecast changes were
due to change orders, resolution of issues with owners, projects nearing
completion and production efficiencies (see Note 2 of “Notes to
the Consolidated Financial Statements”).
Construction
materials gross profit as a percent of material sales in 2009 decreased to 7.0%
from 11.9% in 2008. Fixed plant costs together with
decreased sales contributed to lower gross
profit.
Granite East Gross Profit:
Granite East
gross profit in 2009 decreased to $110.8 million from $121.4 million in 2008.
Gross profit as a percent of revenue increased
to 20.1% in 2009 from 17.5% in 2008 as a result of improved margins.
The increase was primarily
related to the resolution of project uncertainties on projects nearing
completion as well as improved project productivity. Gross profits in 2009 and
2008 were favorably affected by negotiated claims settlements with contract
owners for $18.3 million and $32.2 million, respectively.
The
positive effect of significant project
forecast changes was $59.5
million for the year ended December 31, 2009 compared to $50.5 million
for the year ended December 31, 2008. These positive forecast changes were due
to the resolution of project uncertainties, the settlement of outstanding
issues with various contract owners and improved productivity
on certain projects (see Note 2 of “Notes to the Consolidated
Financial Statements”).
GLC Gross Loss: GLC recorded gross losses of $1.3
million and $1.5 million for the years ended December 31, 2009 and 2008,
respectively. These gross
losses included amounts attributable to noncontrolling interests of $2.5 million
in 2009 and $0.6 million in 2008.
During 2009 and 2008, we recorded
impairment charges related to our real estate held for development and sale
of $1.7 million and $4.5 million, respectively. A
continued decline in the residential and/or commercial real estate markets may
decrease the expected profitability of certain development activities to the
point that we would be required to recognize additional valuation impairments in
the future.
General
and Administrative Expenses
The
following table presents the components of general and administrative
expenses for the respective periods:
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
|||||||||||
| Salaries and related expenses | $ | 125,381 | $ | 131,811 | $ | 124,804 | |||||
|
Incentive
compensation, discretionary profit sharing and other variable
compensation
|
34,602
|
37,707
|
37,745
|
||||||||
| (Recovery of) provision for doubtful accounts, net | (4,404 | ) | 10,958 | 3,894 | |||||||
|
Other
general and administrative expenses
|
69,331
|
77,056
|
79,759
|
||||||||
|
Total
|
$
|
224,910
|
$
|
257,532
|
$
|
246,202
|
|||||
|
Percent
of revenue
|
11.5
|
%
|
9.6
|
%
|
9.0
|
%
|
|||||
General
and administrative expenses for 2009 decreased $32.6 million, or
12.7%, compared to 2008 as we continue to reduce our overall cost
structure. Salaries and incentive compensation declined by $9.5 million, or
5.6%, compared to 2008 as a result of reduced headcount and lower incentive
compensation associated with lower profits in 2009. For 2009, our
provision for doubtful accounts was offset by the recovery of $4.6 million related
to one account with a real estate developer that had been reserved for in 2008.
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. Approximately $5.3
million of the decrease in other general and administrative expenses in
2009 was due
to lower travel expenses, and a reduction in relocation and occupancy
costs.
Restructuring
Charges
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||||
|
Restructuring
charges
|
$
|
9,453
|
$
|
-
|
$
|
-
|
||||
During
2009, we recorded restructuring charges of approximately $9.5 million as part of
our reorganization.
Included in this amount was $7.0 million associated with a reduction
in force announced on October 1, 2009 and an impairment of $2.5 million
related to selected plant facilities in the Pacific Northwest. Of the total
charges, $3.0 million remains outstanding as of December 31, 2009. We estimate
annualized pre-tax savings associated with the personnel reduction to be
approximately $11.0 million.
Other
Income (Expense)
The
following table presents the components of other income (expense) for the
respective periods:
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||||
|
Interest
income
|
$
|
5,049
|
$
|
18,445
|
$
|
26,925
|
||||
|
Interest
expense
|
(15,756
|
) |
(16,001
|
)
|
(6,367
|
)
|
||||
|
Acquisition
expense
|
-
|
-
|
|
(7,752
|
) | |||||
|
Equity
in income (loss) of affiliates
|
7,696
|
(1,058
|
) |
5,205
|
||||||
|
Other
income, net
|
12,683
|
15,353
|
5,498
|
|||||||
|
Total
|
$
|
9,672
|
$
|
16,739
|
$
|
23,509
|
||||
Interest income decreased $13.4
million, or 72.6%, in 2009 compared to 2008 as investment interest yields
on marketable securities were lower in 2009. The change in equity in income
(loss) of affiliates during 2009 was primarily due to an increase in income
earned on our investment in an entity that owns and operates an asphalt terminal
in Nevada, which is accounted for under the equity method. In 2009, other
income, net included a gain on the sale of gold, a by-product of our
aggregate mining operations, of $10.2 million and a gain on
assets held in the Rabbi Trust related to our Non-Qualified Deferred
Compensation Plan of $2.2 million. Other income, net, in 2008
included a $10.9 million loss on the sale of available-for-sale securities, a
$9.3 million gain on the sale of gold and a $14.4 million gain on the
sale of an investment in an affiliate.
Provision
for Income Taxes
The
following table presents the provision for income taxes for the
respective periods:
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
||||||||
|
(in
thousands)
|
|||||||||||
|
Provision
for income taxes
|
$
|
38,650
|
$
|
67,692
|
$
|
65,470
|
|||||
|
Effective
tax rate
|
27.8
|
%
|
29.0
|
%
|
33.0
|
%
|
|||||
Our effective tax rate
decreased to 27.8% in 2009 from 29.0% in 2008. The decrease was primarily
due to lower estimated state taxes in 2009, an increased benefit of
percentage depletion in 2009, and higher nontaxable gains from investments in
our company owned life insurance compared to the prior year. The tax
benefit related to company owned life insurance is included in “Other” in the
reconciliation of the statutory-to-effective tax rate (See Note 17 of “Notes to
the Consolidated Financial Statements”). Our tax rate is also affected by
discrete items that may occur in any given year, but are not consistent from
year to year. Noncontrolling interests are generally not subject to
income taxes on a stand-alone basis and are deducted from income before
provision for income taxes in arriving at our effective tax rate for the
year.
Amount
Attributable to Noncontrolling Interests
The
following table presents the amount attributable to noncontrolling
interests in consolidated subsidiaries for the respective
periods:
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||||
|
Amount
attributable to noncontrolling interests
|
$
|
(26,701
|
) |
$
|
(43,334
|
)
|
$
|
(20,859
|
) | |
The
amount attributable to the noncontrolling interests in consolidated subsidiaries
represents the noncontrolling owners’ share of the income or loss of our
consolidated construction joint ventures and real estate development
entities. Included
in amounts attributable to noncontrolling interests for the years ended
2009 and 2008 are noncontrolling owners’ share of settlements of claims with two
contract owners in the amounts of $1.0 million and $17.7 million,
respectively.
Prior
Years
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. This increase
was due to an increase in public sector revenue of $260.3 million, or 22.5%,
offset by a decrease of $218.9 million, or 28.4%, in private sector and
materials revenues. 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.
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 was 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.
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 had a direct affect on the anticipated timing of several GLC
development projects.
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 increased competition on public
sector work, as competitors migrated 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 of $910.5 million at December 31, 2008 was $319.9 million,
or 26.0%, lower than at December 31, 2007. The decrease reflected progress on
construction projects. 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 received $37.9 million in awards from Houston
Metro for preliminary work and 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.
Gross
Profit (Loss): Granite
West gross profit as a percent of revenue for 2008 decreased to 17.7% from 19.1%
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 were negatively affected 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 use.
Additionally, margins were negatively affected by the fixed costs of our plants
running at less than normal capacity. These decreases were partially offset by
the positive effect of significant project forecast changes of $44.5 million for
2008 compared with $7.8 million for 2007 (see Note 2 of “Notes to the
Consolidated Financial Statements”).
Granite
East gross profit as a percent of revenue for 2008 increased to 17.5% 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. The
positive effect of significant project forecast changes was $50.5 million for
the year ended December 31, 2008 compared with $0.4 million for the year ended
December 31, 2007 (see Note 2 of “Notes to the Consolidated Financial
Statements”).
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, of amounts attributable to
noncontrolling partners.
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. The change was due to
an increased allowance for doubtful accounts for Granite West,
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 decreased by $4.8 million, or 46.8%, for the
year ended December 31, 2008 compared with 2007.
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 an affiliate,
gains on the sale of gold 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: 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 attributable
to noncontrolling interests in our consolidated construction joint
ventures and other entities which are not subject to income taxes on a stand
alone basis.
Amount
Attributable to Noncontrolling Interests: The
increase in noncontrolling interests in our 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 $17.7 million for settlement 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.
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,
|
2009
|
2008
|
|||||
|
(in
thousands)
|
|||||||
|
Cash
and cash equivalents excluding consolidated joint
ventures
|
$
|
216,518
|
$
|
339,842
|
|||
|
Consolidated
joint venture cash and cash equivalents
|
122,438
|
121,001
|
|||||
|
Total
consolidated cash and cash equivalents
|
338,956
|
460,843
|
|||||
| Short-term and long-term marketable securities1 |
119,385
|
59,559
|
|||||
|
Total
cash, cash equivalents and marketable securities
|
$ |
458,341
|
$ |
520,402
|
|||
| Working capital | $ |
500,605
|
$ |
475,942
|
|||
1See Note 3 of
“Notes to the Consolidated Financial Statements” for the composition of our
marketable securities.
Our
primary sources of liquidity are cash and cash equivalents and short-term
marketable securities. Our cash and cash equivalents are comprised of
deposits held with established national financial institutions and money
market funds. Short-term marketable securities consist of municipal bonds,
commercial paper, and U.S. government and agency obligations. We also hold
long-term marketable securities consisting of municipal bonds and U.S.
government and agency obligations. Cash and cash equivalents held by our
consolidated joint ventures represents 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.
Cash
Flows
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||||
|
Net
cash provided by (used in):
|
||||||||||
|
Operating
activities
|
$
|
64,301
|
$
|
257,336
|
$ |
234,788
|
||||
|
Investing
activities
|
(129,879
|
) |
(18,257
|
)
|
(166,744
|
) | ||||
|
Financing
activities
|
(56,309
|
) |
(130,670
|
) |
79,497
|
|||||
| Capital expenditures |
87,645
|
94,135 |
118,612
|
|||||||
Cash
provided by operating activities decreased $193.0 million in 2009 compared to
2008. The decrease was primarily due to reduced revenues and the associated
negative effect on net income of $65.5 million. Receivables were $64.8
million lower consistent with the decline in revenues. Cash used for equity
in construction joint ventures increased $12.7 million due
to contributions to newly formed joint ventures associated with
2009 project awards. The $24.8 million increase in the use of
cash for billings in excess of cost was due to project progression.
Cash used
in investing activities was $111.6 million higher in 2009 than in
2008. This change was primarily due to reduced proceeds
and increased purchases of marketable securities as we
moved from cash and cash equivalents to longer term investments in
2009.
Cash used
in financing activities was $74.4 million lower than in 2008. The primary
driver of this change was a reduction in the purchase of our common stock
of $42.1 million. Additionally, distributions to
noncontrolling partners were $19.9 million lower.
Capital
Expenditures
During 2009, we had
capital expenditures of $87.6 million compared to $94.1 million during
2008. Major capital expenditures are
typically for aggregate and asphalt production facilities, aggregate reserves,
construction equipment, buildings and leasehold improvements, and upgrades
to our information technology systems. 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. We currently anticipate
investing approximately $50.0 million in
2010.
Debt
and Contractual Obligations
The
following table summarizes our significant obligations outstanding as of
December 31, 2009:
|
Payments
Due by Period
|
||||||||||||||||
|
(in
thousands)
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
|||||||||||
|
Long-term
debt - principal
|
$
|
303,666
|
$
|
58,978
|
$
|
27,394
|
$
|
8,778
|
$
|
208,516
|
||||||
| Long-term debt - interest1 | 108,978 | 16,721 | 28,204 | 25,832 | 38,221 | |||||||||||
| Operating leases2 |
43,776
|
9,225
|
11,005
|
6,189
|
17,357
|
|||||||||||
|
Other
purchase obligations3
|
22,113
|
11,340
|
7,593
|
3,180
|
-
|
|||||||||||
|
Deferred
compensation obligations4
|
28,532
|
3,938
|
4,362
|
3,026
|
17,206
|
|||||||||||
|
Total
|
$
|
507,065
|
$
|
100,202
|
$
|
78,558
|
$
|
47,005
|
$
|
281,300
|
||||||
1
Included in the total is $6.4 million related to mortgages,
the terms of which include variable interest rates that range from 3.75% to
9.5%. The future payments were calculated using rates in effect as of December
31, 2009 and may differ from actual results.
2
These obligations
represent the minimum rental commitments and minimum royalty requirements under
all noncancellable operating leases. See Note 18 of “Notes to the
Consolidated Financial Statements”.
3 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.
4 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, 2009, the
following obligations were excluded from the foregoing table:
|
·
|
approximately
$5.9 million
associated with uncertain tax positions filed on our tax returns were
excluded because we cannot estimate the timing of potential payments
relative to such reserves;
|
|
·
|
asset retirement
obligations of $19.7 million associated with our owned and leased quarry
properties were excluded because they are performance
obligations (see Note 8 of “Notes to the Consolidated Financial
Statements”); and
|
|
·
|
purchase commitments
for purchases of materials and subcontract services in the ordinary course
of business related to our current contract backlog were excluded as
they are generally settled in less than one year.
|
Bank
and Surety Credit Facilities
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 0.80% at December 31, 2009. The unused and
available portion of this line of credit was $145.8 million at December 31,
2009. We had
standby letters of credit (“Letters”) totaling approximately $4.2 million
outstanding at December 31, 2009, all of which will expire
between March
2010 and October 2010. These Letters will be replaced upon
expiration.
Additionally, we are
generally required to provide various types of surety bonds that provide an
additional measure of security under certain public and private sector
contracts. At December 31, 2009, approximately $1.4 billion of our contract
backlog was bonded. Performance bonds do not have stated expiration dates;
rather, we are generally released from the bonds when the owner accepts the
contract. The ability to maintain bonding capacity to support our current and
future level of contracting requires that we maintain cash and working capital
balances satisfactory to our sureties.
A significant portion of
our real estate held for development and sale is secured by mortgages. These
mortgages are typically renegotiated to reflect the evolving nature of the real
estate projects as they progress through acquisition, entitlement and
development. Modification of mortgage terms may include changes in
loan-to-value ratios requiring GLC’s real estate entities to repay portions
of the debt. During 2009, we provided additional funding of $4.6 million to our
real estate investments to facilitate mortgage refinancing. As of
December 31, 2009, GLC mortgages were $63.5
million of which $44.0 million is included in current maturities of
long-term debt and $19.5 million is included in long-term debt on our
consolidated balance sheet.
Covenants
contained in our debt agreements require the maintenance of certain financial
ratios and the maintenance of tangible net worth (as defined by the debt
agreements). Our debt agreements define certain events of default such as the
failure to observe certain covenants or the failure by us or one of our
consolidated subsidiaries, which may include a real estate affiliate of GLC over
which we exercise control, to pay its debts as they become due. As of December
31, 2009, we were in compliance with our debt covenants and our affiliates and
consolidated subsidiaries were current with their debt agreements. We are not
aware of any debt agreement non-compliance by our unconsolidated
entities as of December 31, 2009. Should we, our affiliates, consolidated
subsidiaries, or unconsolidated entities fail to comply with these covenants, or
should any other event of default occur, the lenders could cause the amounts due
under the debt agreements to become immediately payable and terminate their
obligation to make further credit available.
Share
Purchase Program
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, 2009, we did not purchase shares under the share purchase
program. From the inception of this program in 2007
through December 31, 2009, we have purchased a total of 3.8
million shares of our common stock for an aggregate price of $135.9
million. All shares were retired upon acquisition. At December
31, 2009, $64.1 million of the $200.0 million authorization was available for
additional 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, 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. 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 fund 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, 2009,
we had approximately $1.5 billion of construction work to be completed on
unconsolidated construction joint venture contracts of which $562.2 million
represented our portion and the remaining $915.4 million
represented our partners’ proportionate share. Due to the joint and several
liability under our joint venture arrangements, if one of our many joint
venture partners fails to perform, we and the remaining joint venture partners,
would be responsible for completion of the outstanding work. As of December 31, 2009,
we are not aware of situations that would require us to fulfill responsibilities
of our joint venture partners pursuant to the joint and several liability under
our contracts.
Recently
Issued Accounting Pronouncements
Consolidation
of Variable Interest Entities
In June
2009, the Financial Accounting Standards Board (“FASB”) issued a new standard
requiring ongoing analysis to determine whether a company holds a controlling
financial interest in a variable interest entity (“VIE”). The standard includes
a new approach for determining who should consolidate a VIE, requiring a
qualitative rather than a quantitative analysis. This standard also changes when
it is necessary to reassess who should consolidate a VIE. Previously an
enterprise was required to reconsider whether it was the primary beneficiary of
a VIE only when specific events had occurred. The new standard requires
continuous reassessment of an enterprise’s interest in the VIE to determine who
is the primary beneficiary. This statement will be effective for us in 2010. We
do not expect the adoption of this accounting standard to have a material effect
on our consolidated financial statements.
Disclosures
about Fair Value Measurements
In
January 2010, the FASB issued a new accounting standard update (“ASU”) which
clarifies
and provides additional disclosure requirements on the transfers of assets and
liabilities between Level 1 (quoted prices in active market for identical assets
or liabilities) and Level 2 (significant other observable inputs) of the fair
value measurement hierarchy, including the reasons for and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities on
purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). This ASU is effective for us in 2010, except for the
requirements to provide Level 3 activity which will become effective us in 2011.
We do not expect the adoption of this ASU to have a material effect on our
consolidated financial statements.
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. This
policy prohibits investments in auction rate and asset-backed
securities. It also limits the amount of credit exposure to any one
issue, issuer or type of instrument. The portfolio is limited to an average
maturity of no more than one year from date of purchase. On an ongoing basis we
monitor credit ratings, financial condition and other factors that could affect
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 do not have any business transactions in foreign
currencies.
We are exposed to various
commodity price risks, including, but not limited to, diesel fuel, natural gas,
propane, steel, cement and liquid asphalt arising from transactions that are
entered into in the normal course of business. In order to manage or reduce
commodity price risk, we monitor the costs of these commodities at the time of
bid and price them into our contracts accordingly. Additionally, some of our
contracts include commodity price escalation clauses which partially protect us
from increasing prices. At times we enter into supply agreements or pre-purchase
commodities to secure pricing and are reviewing the use of financial contracts
to further manage price risk. At this time, we have no such financial
contracts in place.
The fair
value of our short-term held-to-maturity investment portfolio and related income
would not be significantly affected 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
affected by changes in interest rates.
Given the
short-term nature of certain investments, our investment income is subject to
the general level of interest rates in the United States at the time of maturity
and reinvestment.
We had
outstanding senior notes payable, which carry a fixed interest rate per annum,
as follows (in millions):
| December 31, | 2009 | |||
|
Principal
payments due in nine equal installments that
began in 2002, 6.54%
|
$ | 6.7 | ||
|
Principal
payments due in nine equal installments that
began in 2005, 6.96%
|
33.3
|
|
||
|
Principal
payments due in five equal installments beginning
in 2015, 6.11%
|
200.0 | |||
| Total | $ | 240.0 |
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, 2009 (in
thousands):
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
|||||||||||||||||
|
Assets
|
|||||||||||||||||||||||
|
Cash,
cash equivalents, held-to-maturity and trading
investments
|
$
|
381,404
|
$
|
40,872
|
$
|
36,065
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
458,341
|
|||||||||
|
Weighted
average interest rate
|
0.65
|
%
|
1.47
|
%
|
1.27
|
%
|
-
|
%
|
-
|
%
|
-
|
%
|
0.77
|
%
|
|||||||||
|
Liabilities
|
|||||||||||||||||||||||
|
Fixed rate debt
|
|||||||||||||||||||||||
|
Senior notes payable
|
$
|
15,000
|
$
|
8,333
|
$
|
8,333
|
$
|
8,334
|
$
|
- |
$
|
200,000
|
$
|
240,000
|
|||||||||
|
Weighted average interest rate
|
6.77
|
%
|
6.96
|
%
|
6.96
|
%
|
6.96
|
%
|
-
|
%
|
6.11
|
%
|
6.24
|
%
|
|||||||||
The
estimated fair value of our cash, cash equivalents and short-term
held-to-maturity investments approximates 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 $249.2 million as of December 31, 2009 and $200.9
million as of December 31, 2008.
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, 2009 and 2008
Consolidated
Statements of Income - Years Ended December 31, 2009, 2008 and 2007
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income - Years Ended
December 31, 2009, 2008 and 2007
Consolidated
Statements of Cash Flows - Years Ended December 31, 2009, 2008 and
2007
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, 2009, our disclosure
controls and procedures were
effective.
Changes
in Internal Control Over Financial Reporting: During the fourth quarter
of 2009, 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,
2009.
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, 2009. The report, which
expresses an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009, 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
7, 2010 (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 and Compliance Committee’s financial expert and our Committees of the
Board, we direct you to the subsection captioned “Committees of the Board” in
the Proxy Statement. For information regarding our Nomination Policy, we direct
you to the subsection captioned “Board of Directors’ Nomination Policy” in the
Proxy Statement. For information regarding our Code of Conduct, we direct you to
the subsection 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 and 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 sections captioned “Transactions with Related
Persons” in the Proxy Statement. This information is incorporated herein by
reference.
You will
find this information in the subsection captioned “Principal Accountant Fees and
Services” in the Proxy Statement. This information is incorporated herein by
reference.
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:
|
Financial
Statements
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
F-2
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2009, 2008 and
2007
|
F-3
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the Years
Ended December 31, 2009, 2008 and 2007
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
|
F-5 to
F-6
|
|
Notes
to the Consolidated Financial Statements
|
F-7
to F-40
|
| Quarterly Financial Data |
F-41
|
2.
Financial
Statement Schedule. The following financial statement schedule of Granite
for the years ended December 31, 2009, 2008 and 2007 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, 2009 and December 31, 2008, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2009 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, 2009, 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.
As
discussed in Note 1 of “Notes
to the Consolidated Financial Statements”, the Company changed the manner
in which it accounts for noncontrolling interests in 2009.
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.
/s/PricewaterhouseCoopers
LLP
San
Francisco, California
February
25, 2010
|
GRANITE
CONSTRUCTION INCORPORATED
|
||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
(in
thousands, except share and per share data)
|
||||||||
|
December
31,
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$
|
338,956
|
$
|
460,843
|
||||
|
Short-term
marketable securities
|
42,448
|
38,320
|
||||||
|
Receivables,
net
|
280,252
|
314,733
|
||||||
|
Costs
and estimated earnings in excess of billings
|
10,619
|
13,295
|
||||||
|
Inventories
|
45,800
|
55,223
|
||||||
|
Real estate held for development and sale
|
139,449
|
75,089
|
||||||
|
Deferred
income taxes
|
31,034
|
43,637
|
||||||
|
Equity
in construction joint ventures
|
67,693
|
44,681
|
||||||
|
Other
current assets
|
50,467
|
56,742
|
||||||
|
Total
current assets
|
1,006,718
|
1,102,563
|
||||||
|
Property
and equipment, net
|
520,778
|
517,678
|
||||||
|
Long-term
marketable securities
|
76,937
|
21,239
|
||||||
|
Investments
in affiliates
|
24,644
|
19,996
|
||||||
|
Other
noncurrent assets
|
80,498
|
81,979
|
||||||
|
Total
assets
|
$
|
1,709,575
|
$
|
1,743,455
|
||||
|
LIABILITIES
AND EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
maturities of long-term debt
|
$
|
58,978
|
$
|
39,692
|
||||
|
Accounts
payable
|
131,251
|
174,626
|
||||||
|
Billings
in excess of costs and estimated earnings
|
156,041
|
227,364
|
||||||
|
Accrued
expenses and other current liabilities
|
159,843
|
184,939
|
||||||
|
Total
current liabilities
|
506,113
|
626,621
|
||||||
|
Long-term
debt
|
244,688
|
250,687
|
||||||
|
Other
long-term liabilities
|
48,998
|
43,604
|
||||||
|
Deferred
income taxes
|
27,220
|
18,261
|
||||||
|
Commitments
and contingencies
|
||||||||
|
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 2009
and 2008; issued and outstanding 38,635,021
shares as of December 31, 2009 and 38,266,791 shares as of December
31, 2008
|
386
|
383
|
||||||
|
Additional
paid-in capital
|
94,633
|
85,035
|
||||||
|
Retained
earnings
|
735,632
|
682,237
|
||||||
|
Accumulated
other comprehensive loss
|
-
|
(146
|
) | |||||
|
Total
Granite Construction Inc. shareholders’ equity
|
830,651
|
767,509
|
||||||
| Noncontrolling interests | 51,905 | 36,773 | ||||||
| Total equity | 882,556 | 804,282 | ||||||
|
Total
liabilities and equity
|
$
|
1,709,575
|
$
|
1,743,455
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GRANITE
CONSTRUCTION INCORPORATED
|
|||||||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|||||||||||||
|
(in
thousands, except per share data)
|
|||||||||||||
|
Years
Ended December 31,
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
|||||||||||||
|
Construction
|
$ | 1,755,260 | $ | 2,312,116 | $ | 2,321,502 | |||||||
|
Construction
materials
|
205,945 | 353,115 | 375,700 | ||||||||||
|
Real
estate
|
2,274 | 9,013 | 40,712 | ||||||||||
|
Total
revenue
|
1,963,479 | 2,674,244 | 2,737,914 | ||||||||||
|
Cost
of revenue
|
|||||||||||||
|
Construction
|
1,421,969 | 1,883,742 | 2,002,064 | ||||||||||
|
Construction
materials
|
191,545 | 311,246 | 300,234 | ||||||||||
|
Real
estate
|
3,592 | 10,536 | 24,872 | ||||||||||
|
Total
cost of revenue
|
1,617,106 | 2,205,524 | 2,327,170 | ||||||||||
|
Gross
profit
|
346,373 | 468,720 | 410,744 | ||||||||||
|
General
and administrative expenses
|
224,910 | 257,532 | 246,202 | ||||||||||
| Restructuring charges | 9,453 | - | - | ||||||||||
|
Gain
on sales of property and equipment
|
17,169 | 5,503 | 10,343 | ||||||||||
|
Operating
income
|
129,179 | 216,691 | 174,885 | ||||||||||
|
Other
income (expense)
|
|||||||||||||
|
Interest
income
|
5,049 | 18,445 | 26,925 | ||||||||||
|
Interest
expense
|
(15,756 | ) | (16,001 | ) | (6,367 | ) | |||||||
|
Acquisition
expense
|
- | - | (7,752 | ) | |||||||||
|
Equity
in income (loss) of affiliates
|
7,696 | (1,058 | ) | 5,205 | |||||||||
|
Other
income, net
|
12,683 | 15,353 | 5,498 | ||||||||||
|
Total
other income
|
9,672 | 16,739 | 23,509 | ||||||||||
|
Income
before provision for income taxes
|
138,851 | 233,430 | 198,394 | ||||||||||
|
Provision
for income taxes
|
38,650 | 67,692 | 65,470 | ||||||||||
|
Net
income
|
100,201 | 165,738 | 132,924 | ||||||||||
|
Amount
attributable to noncontrolling interests
|
(26,701 | ) | (43,334 | ) | (20,859 | ) | |||||||
|
Net
income attributable to Granite Construction Inc.
|
$ | 73,500 | $ | 122,404 | $ | 112,065 | |||||||
|
Net
income per share attributable to common shareholders (see Note 15)
|
|||||||||||||
|
Basic
|
$ | 1.91 | $ | 3.19 | $ | 2.69 | |||||||
|
Diluted
|
$ | 1.90 | $ | 3.18 | $ | 2.68 | |||||||
|
Weighted
average shares of common stock
|
|||||||||||||
|
Basic
|
37,566 | 37,606 | 40,866 | ||||||||||
|
Diluted
|
37,683 | 37,709 | 40,909 | ||||||||||
|
Dividends
per common share
|
$ | 0.52 | $ | 0.52 | $ | 0.43 | |||||||
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)
|
|||||||||||||||||||||||||
|
|
Outstanding
Shares
|
Common
Stock
|
Additional
Paid-in Capital
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Total
Granite Shareholders’ Equity
|
Noncontrolling Interests |
Total
Equity
|
|||||||||||||||||
|
Balances
at December 31, 2006
|
41,833,559
|
$
|
418
|
$
|
78,620
|
$
|
612,875
|
$
|
2,631
|
$
|
694,544
|
|
$ | 15,532 |
$
|
710,076
|
|||||||||
|
Comprehensive
income (see Note 16):
|
|||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
112,065
|
-
|
112,065
|
20,859 |
|
|||||||||||||||||
|
Changes
in net unrealized gains (losses) on investments
|
-
|
-
|
-
|
-
|
(1,533
|
) |
(1,533
|
) | - |
|
|||||||||||||||
|
Total
comprehensive income
|
131,391
|
||||||||||||||||||||||||
|
Restricted
stock issued
|
149,409
|
2
|
(2
|
)
|
-
|
-
|
-
|
- |
-
|
||||||||||||||||
| Stock issued for services | 19,712 | - | 1,134 | - | - | 1,134 | - | 1,134 | |||||||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
6,208
|
-
|
-
|
6,208
|
- |
6,208
|
|||||||||||||||||
|
Repurchase
of common stock
|
(2,558,726
|
)
|
(25
|
)
|
(11,092
|
)
|
(86,897
|
) |
-
|
(98,014
|
) | - |
(98,014
|
)
|
|||||||||||
|
Cash
dividends on common stock
|
-
|
-
|
-
|
(17,710
|
)
|
-
|
(17,710
|
) | - |
(17,710
|
)
|
||||||||||||||
|
Net tax
benefit on stock-based compensation
|
-
|
-
|
3,659
|
-
|
-
|
3,659
|
- |
3,659
|
|||||||||||||||||
|
Cumulative
effect of adopting accounting standard for uncertain tax
provisions
|
- | - | - | (634 | ) | - | (634 | ) | - | (634 | ) | ||||||||||||||
|
Transactions
with noncontrolling interests, net
|
- | - | - | - | - | - | (12,920 | ) | (12,920 | ) | |||||||||||||||
|
Stock
options exercised and other
|
6,969
|
-
|
480
|
-
|
-
|
480
|
- |
480
|
|||||||||||||||||
|
Balances
at December 31, 2007
|
39,450,923
|
395
|
79,007
|
619,699
|
1,098
|
700,199
|
23,471 |
723,670
|
|||||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
122,404
|
-
|
122,404
|
43,334 | ||||||||||||||||||
|
Changes
in net unrealized gains (losses) on
investments
|
-
|
-
|
-
|
-
|
(1,244
|
)
|
(1,244
|
) | - | ||||||||||||||||
|
Total
comprehensive income
|
164,494
|
||||||||||||||||||||||||
|
Restricted
stock issued
|
232,096
|
2
|
(2
|
)
|
-
|
-
|
-
|
- |
-
|
||||||||||||||||
|
Stock
issued for services
|
14,998
|
-
|
461
|
-
|
-
|
461
|
- |
461
|
|||||||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
7,002
|
-
|
-
|
7,002
|
- |
7,002
|
|||||||||||||||||
|
Repurchase
of common stock
|
(1,440,869
|
)
|
(14
|
)
|
(5,561
|
)
|
(39,965
|
)
|
-
|
(45,540
|
) | - |
(45,540
|
)
|
|||||||||||
|
Cash
dividends on common stock
|
-
|
-
|
-
|
(19,901
|
)
|
-
|
(19,901
|
) | - |
(19,901
|
)
|
||||||||||||||
|
Net tax
benefit on stock-based compensation
|
-
|
-
|
851
|
-
|
-
|
851
|
- |
851
|
|||||||||||||||||
|
Non-qualified
deferred compensation plan stock units
|
-
|
-
|
3,237
|
-
|
|
- | 3,237 | - |
3,237
|
|
|||||||||||||||
|
Transactions
with noncontrolling
interests, net
|
- | - | - | - | - | - | (30,032 | ) | (30,032 | ) | |||||||||||||||
|
Stock
options exercised and other
|
9,643
|
-
|
40
|
-
|
-
|
40
|
- |
40
|
|||||||||||||||||
|
Balances
at December 31, 2008
|
38,266,791
|
|
383
|
|
85,035
|
|
682,237
|
|
(146
|
) |
|
767,509
|
36,773 |
|
804,282
|
||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
73,500
|
-
|
73,500
|
26,701 | ||||||||||||||||||
|
Changes
in net unrealized gains on investments
|
-
|
-
|
-
|
-
|
146
|
146
|
- | ||||||||||||||||||
|
Total
comprehensive income
|
100,347
|
||||||||||||||||||||||||
|
Restricted
stock issued
|
390,468
|
4
|
(4
|
) |
-
|
-
|
-
|
- |
-
|
||||||||||||||||
|
Stock
issued for services
|
47,126
|
-
|
1,904
|
-
|
-
|
1,904
|
- |
1,904
|
|||||||||||||||||
|
Amortized
restricted stock
|
-
|
-
|
10,765
|
-
|
-
|
10,765
|
- |
10,765
|
|||||||||||||||||
|
Repurchase
of common stock
|
(93,763
|
)
|
(1
|
) |
(3,430
|
) |
-
|
-
|
(3,431
|
) | - |
(3,431
|
) | ||||||||||||
|
Cash
dividends on common stock
|
-
|
-
|
-
|
(20,105
|
) |
-
|
(20,105
|
) | - |
(20,105
|
) | ||||||||||||||
|
Net tax
benefit on stock-based compensation
|
-
|
-
|
632
|
-
|
-
|
632
|
- |
632
|
|||||||||||||||||
|
Transactions
with noncontrolling
interests, net
|
- | - | - | - | - | - | (11,569 | ) | (11,569 | ) | |||||||||||||||
|
Stock
options exercised and other
|
24,399
|
-
|
(269
|
) |
-
|
-
|
(269
|
) | - |
(269
|
) | ||||||||||||||
|
Balances
at December 31, 2009
|
38,635,021
|
$
|
386
|
$
|
94,633
|
$
|
735,632
|
$
|
-
|
$
|
830,651
|
$ | 51,905 |
$
|
882,556
|
||||||||||
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,
|
2009
|
2008
|
2007
|
||||||||
|
Operating
activities
|
|||||||||||
|
Net
income
|
$
|
100,201
|
$
|
165,738
|
$
|
132,924
|
|||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|||||||||||
|
Impairment
of real estate held for development and sale
|
1,686
|
4,500
|
3,000
|
||||||||
|
Intangible
impairment charge
|
3,873 | - | - | ||||||||
|
Inventory
written down
|
3,097
|
12,848
|
478
|
||||||||
|
Depreciation,
depletion and amortization
|
80,195
|
87,311
|
82,157
|
||||||||
|
(Recovery
of ) provision for doubtful accounts
|
(4,404
|
) |
10,958
|
3,894
|
|||||||
|
Gain
on sales of property and equipment
|
(17,169
|
) |
(5,503
|
)
|
(10,343
|
)
|
|||||
|
Change
in deferred income taxes
|
21,107
|
1,190
|
|
(7,822
|
)
|
||||||
|
Stock-based compensation
|
10,765
|
7,463
|
7,342
|
||||||||
|
Excess
tax benefit on stock-based compensation
|
(828
|
) |
(851
|
)
|
(3,659
|
)
|
|||||
|
Acquisition
expense
|
-
|
-
|
7,752
|
||||||||
|
(Gain) loss
from marketable securities
|
(485 | ) | 10,939 | - | |||||||
|
Equity
in (income) loss of affiliates
|
(7,696
|
) |
1,058
|
|
(5,205
|
)
|
|||||
|
Acquisition
of noncontrolling interest
|
-
|
(16,617
|
) |
-
|
|||||||
|
Gain
on sale of investment in affiliate
|
-
|
(14,416
|
) |
-
|
|||||||
|
Gain
on early extinguishment of debt
|
-
|
(1,150
|
) |
-
|
|||||||
|
Changes
in assets and liabilities, net of the effects of acquisition and
consolidations:
|
|||||||||||
|
Receivables
|
35,706
|
100,533
|
102,992
|
|
|||||||
|
Inventories
|
6,326
|
(10,812
|
)
|
(10,391
|
)
|
||||||
|
Real
estate held for development and sale
|
(17,263
|
) |
(15,225
|
) |
2,179
|
|
|||||
|
Equity
in construction joint ventures
|
(23,012
|
) |
(10,341
|
)
|
(2,428
|
)
|
|||||
|
Other
assets, net
|
2,590
|
40,870
|
|
(12,624
|
)
|
||||||
|
Accounts
payable
|
(43,480
|
) |
(38,956
|
)
|
(44,502
|
) | |||||
|
Accrued
expenses and other liabilities, net
|
(18,261
|
)
|
(28,378
|
)
|
3,198
|
||||||
|
Billings
in excess of costs and estimated earnings, net
|
(68,647
|
) |
(43,823
|
) |
(14,154
|
) | |||||
|
Net
cash provided by operating activities
|
64,301
|
257,336
|
234,788
|
||||||||
|
Investing
activities
|
|||||||||||
|
Purchases
of marketable securities
|
(99,011
|
) |
(71,630
|
)
|
(152,954
|
)
|
|||||
|
Maturities of
marketable securities
|
36,970
|
108,090
|
195,313
|
||||||||
|
Proceeds
from sale of marketable securities
|
7,966 | 22,499 | - | ||||||||
|
Purchase
of company owned life insurance
|
(8,000
|
) |
(8,000
|
) |
-
|
||||||
|
Release
of funds for acquisition of noncontrolling interest
|
-
|
28,332
|
-
|
||||||||
|
Additions
to property and equipment
|
(87,645
|
) |
(94,135
|
)
|
(118,612
|
)
|
|||||
|
Proceeds
from sales of property and equipment
|
23,020
|
14,539
|
17,777
|
||||||||
|
Acquisition
of businesses
|
-
|
(14,022
|
)
|
(76,427
|
) | ||||||
|
Contributions
to affiliates
|
(4,969
|
) |
(8,053
|
)
|
(6,805
|
)
|
|||||
|
Distributions
from affiliates
|
-
|
3,895
|
-
|
||||||||
|
Acquisition
of noncontrolling interest
|
-
|
-
|
|
(28,495
|
) | ||||||
|
Issuance
of notes receivable
|
(11,314 | ) | - | - | |||||||
|
Collection
of notes receivable
|
13,104 | 728 | 3,683 | ||||||||
|
Other
investing activities, net
|
-
|
(500
|
) |
(224
|
) | ||||||
|
Net
cash used in investing activities
|
(129,879
|
) |
(18,257
|
)
|
(166,744
|
)
|
|||||
|
Financing
activities
|
|||||||||||
|
Proceeds
from long-term debt
|
10,750
|
3,725
|
330,260
|
||||||||
|
Long-term
debt principal payments
|
(18,856
|
) |
(17,092
|
)
|
(139,598
|
)
|
|||||
|
Purchase
of common stock
|
(3,431
|
) |
(45,540
|
)
|
(98,014
|
)
|
|||||
|
Cash
dividends paid
|
(20,057
|
) |
(20,055
|
)
|
(16,764
|
)
|
|||||
|
Contributions
from noncontrolling partners
|
420
|
5,026
|
33,287
|
||||||||
|
Distributions
to noncontrolling partners
|
(26,019
|
) |
(45,909
|
)
|
(33,813
|
)
|
|||||
|
Acquisition
of noncontrolling interest
|
-
|
(11,716
|
) |
-
|
|||||||
|
Excess
tax benefit on stock-based compensation
|
828
|
851
|
3,659
|
||||||||
|
Other
financing activities
|
56
|
40
|
480
|
||||||||
|
Net
cash (used in) provided by financing activities
|
(56,309
|
) |
(130,670
|
) |
79,497
|
|
|||||
|
(Decrease)
increase in cash and cash equivalents
|
$
|
(121,887
|
) |
$
|
108,409
|
$
|
147,541
|
||||
|
Cash
and cash equivalents at beginning of year
|
460,843
|
352,434
|
204,893
|
||||||||
|
Cash
and cash equivalents at end of year
|
$
|
338,956
|
$
|
460,843
|
$
|
352,434
|
|||||
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, | 2009 | 2008 | 2007 | |||||||
|
Supplementary
Information
|
||||||||||
|
Cash
paid during the period for:
|
||||||||||
|
Interest
|
$
|
22,783
|
$
|
12,700
|
$
|
6,508
|
||||
|
Income
taxes
|
54,082
|
68,492
|
66,503
|
|||||||
|
Non-cash
investing and financing activities:
|
||||||||||
|
Restricted
stock issued for services, net
|
$
|
18,405
|
$
|
6,961
|
$
|
11,190
|
||||
|
Restricted
stock units issued
|
52
|
3,237
|
-
|
|||||||
|
Accrued cash dividends
|
5,023
|
4,975
|
5,129
|
|||||||
|
Assets
acquired through issuances of debt
|
-
|
-
|
3,202
|
|||||||
|
Debt
payments from sale of assets
|
-
|
2,652
|
9,237
|
|||||||
|
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 roads, highways, mass
transit facilities, airport infrastructure, bridges, dams and canals. We are
also diversified into real estate investment and development. We have offices in
Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and
Washington. Unless otherwise indicated, the terms “we”, “us”, “our”, “Company”
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”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, and related standards. 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. Real
estate entities 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 where we have determined we are not the primary
beneficiary but do exercise significant influence. Effective
January 1, 2009, we adopted a new accounting standard that required
noncontrolling interests, formerly known as minority interest, to be
separately presented in both the consolidated balance sheets and consolidated
statements of income. Prior years have been adjusted to conform to this new
standard.
Subsequent Events: In
preparing these financial statements, we have evaluated events and transactions
for potential recognition or disclosure through the date the financial
statements were issued.
Use
of Estimates in the Preparation of Financial Statements: The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”). The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. Our estimates, judgments and assumptions are continually evaluated
based on available information and experiences; however, actual amounts could
differ from those estimates.
Revenue
Recognition - Construction: Revenue
and earnings on construction contracts, including construction joint ventures,
are recognized under the percentage of completion method using the
ratio of costs incurred to estimated total costs. Revenue in an amount equal to
cost incurred is recognized prior to contracts reaching 25% completion,
thus deferring the related profit. It is our judgment that until a project
reaches 25% completion, there is insufficient information to determine the
estimated profit on the project with a reasonable level of certainty. In
the case of large, complex design/build projects we may defer profit recognition
beyond the point of 25% completion based on an evaluation of specific project
risks. The factors considered in this evaluation include the stage of design
completion, the stage of construction completion, status of outstanding purchase
orders and subcontracts, certainty of quantities of labor and materials,
certainty of schedule and the relationship with the
owner.
Revenue
from contract claims is recognized when we have a signed 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. All contract costs,
including those associated with claims and change orders, are recorded
as incurred and revisions to estimated total costs are reflected as
soon as the obligation to perform is determined. 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).
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The
accuracy of our revenue and profit recognition in a given period is dependent on
the accuracy of our estimates of the cost to complete each project. 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 to owner, weather and other 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. 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 Recognition -
Materials: Revenue from the sale of materials is recognized when
delivery occurs and risk of ownership passes to the customer.
Revenue Recognition - Real Estate:
Revenue
from the sale of real estate is recognized when title passes to the new owner,
receipt of funds is reasonably assured and we do not have substantial continuing
obligations on the property. If the criteria for recognition of a sale are
not met, we account for the continuing operations of the property by applying
the deposit, finance, installment or cost recovery methods, as
appropriate. We use estimates and forecasts to determine total costs at
completion of the development project to calculate cost of revenue related to
sales transactions.
Balance
Sheet Classifications: Amounts receivable and payable under construction
contracts (principally retentions) that may extend beyond one year are included
in current assets and liabilities. Additionally, the cost of property
purchased for development and sale is included 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 re-evaluate 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. Amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity, and 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.
Debt securities 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/loss until realized. Short-term marketable
securities include trading securities and are carried at fair value
with realized gains and losses reported in other income,
net.
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: We measure and disclose certain financial assets
and liabilities at fair value. ASC Topic
820 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. ASC Topic 820 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 of Credit Risk and
Other Risks: Financial instruments,
which potentially subject us to concentrations of credit risk, consist primarily
of cash and cash equivalents, short-term and long-term marketable securities,
and accounts receivable. We maintain our cash and cash equivalents and 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 one financial institution.
Our
receivables are from customers concentrated in the United States and we
have no foreign operations. 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 doubtful accounts which has been within management’s
expectations.
A
significant portion of our labor force is subject to collective bargaining
agreements.
Inventories:
Inventories consist primarily of quarry products valued at the lower of average
cost or market. We write down the inventories based on
estimated quantities of materials on hand in excess of estimated
foreseeable use.
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.
Long-lived
assets: We
review property and equipment, and amortizable intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of these assets is
measured by comparison of their carrying amounts to future undiscounted cash
flows the assets are expected to generate. If the assets are considered to be
impaired, an impairment charge will be recognized equal to the
amount by which the carrying value of the asset exceeds its fair
value.
Amortizable
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.
Real
Estate Held for Development and
Sale:
We
assess impairment of our real estate held for development and sale at least
annually or whenever events or changes in circumstances indicate
that carrying values of these assets may not be recoverable. Events or
changes in circumstances, which could trigger an impairment review include, but
are not limited
to:
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·
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significant
decreases in the market price of the
asset;
|
|
·
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significant adverse
changes in legal factors or the business
climate;
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·
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accumulation of
costs significantly in excess of the amount originally expected for the
acquisition, development or construction of the asset;
and
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·
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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.
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If events and changes in
circumstances indicate that the carrying amounts of the real estate held for
development and sale might not be fully recoverable, we compare projected
undiscounted net cash flows associated with the related asset or group of assets
against their respective carrying amounts. Future undiscounted cash flows are
estimated based on entitlement status, market conditions, cost of construction,
debt load, development schedules, status of joint venture partners and other
factors applicable to the specific project. In the event that the
projected undiscounted cash flows are not sufficient to recover the carrying
value of the assets, the assets are written down to their estimated fair values.
Fair value is estimated based on the expected future cash flows
attributable to the asset or group of assets and on other assumptions
that market participants would use in determining fair value, such as market
discount rates, transaction prices for other comparable assets, and other market
driven data. Our estimates of cash
flows may differ from actual cash flows due to, among other things, fluctuations
in interest rates, decisions made by jurisdictional agencies, economic
conditions, or changes to our business
operations.
GRANITE
CONSTRUCTION INCORPORATED
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Goodwill and Indefinite-Lived
Intangible Assets: We perform impairment
tests annually during the fourth quarter and more frequently when events and
circumstances occur that indicate a possible impairment of goodwill and
indefinite-lived intangible assets.
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. Our assessment of goodwill impairment during the fourth quarter of
2009 indicated that the fair value of the reporting unit substantially
exceeded its net book value and therefore goodwill was not
impaired.
In
determining whether there is an impairment of indefinite-lived intangible
assets, we compare the fair value of the asset to the carrying value. We use
internal discounted cash flow estimates, quoted market prices when available and
independent appraisals, as appropriate, to determine fair value. If the carrying
value exceeds the fair value, an impairment charge is recognized equal to the
amount by which the carrying value of the asset exceeds its fair value. During
2009, we recognized an impairment charge of $1.7 million related to water use
rights in Nevada.
Reclamation
Costs: We account for the costs related to legal obligations to reclaim
aggregate mining sites and other facilities by recording our estimated
reclamation liability when incurred, capitalizing the estimated liability as
part of the related asset’s carrying amount and allocating 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 contract. 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