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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] 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 0-17124
GRANITE CONSTRUCTION INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 77-0239383
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of voting and non-voting stock held by non-affiliates
of the registrant was approximately $557,675,310 as of March 19, 1999 based upon
the average of the high and low sales 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 March 19, 1999, 27,243,811 shares of Common Stock, par value $0.01 of the
registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held May 24, 1999, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1998.
This report, including all exhibits and attachments, contains 241 pages. The
exhibit index is on pages 27-29.
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TABLE OF CONTENTS
Page
----
No.
PART I................................................................................................3
Item 1. BUSINESS................................................................................3
Item 2. PROPERTIES.............................................................................10
Item 3. LEGAL PROCEEDINGS......................................................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................10
PART II..............................................................................................12
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS....................................................................12
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA...................................................12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................14
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................20
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............................21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES..............................................................22
PART III.............................................................................................23
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................23
Item 11. EXECUTIVE COMPENSATION.................................................................23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........................23
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................23
PART IV..............................................................................................24
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................24
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING DISCLOSURE
This report contains forward-looking statements; such as
statements related to the impact of government regulations on the
Company's operations, the adequacy of the Company's aggregate reserves,
1998 backlog expected to be completed in 1999, the existence of bidding
opportunities, the costs of planned year 2000 modifications and expected
dates of year 2000 plan completion, the most reasonably likely worst
case year 2000 scenario, and the impact of legislation, availability of
highway funds and economic conditions on the Company's future results.
Additionally, forward-looking statements include statements that can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative
thereof or comparable terminology, or by discussions of strategy.
All such forward looking statements are subject to risks and
uncertainties that could cause actual results of operations and
financial condition and other events to differ materially from those
expressed or implied in such forward-looking statements. Specific risk
factors include, without limitation, changes in the composition of
applicable federal and state legislation appropriation committees;
federal and state appropriation changes for infrastructure spending; the
general state of the economy; competition and pricing pressures; and
state referendums and initiatives. Forward-looking statements related to
the Company's aggregate reserves and completion of backlog carry risk
factors which include, without limitation, changes in estimates of
existing reserves and estimates of the Company's need for those reserves
and delays in the progress of work in the 1998 backlog. Additionally,
forward-looking statements regarding the year 2000 issue carry risk
factors which include, without limitation, the availability and cost of
personnel trained in these areas; the ability to locate and correct all
relevant computer codes; changes in consulting fees and costs to
remediate or replace hardware and software; changes in non-incremental
costs resulting from redeployment of internal resources; timely
responses to and corrections by third parties such as significant
customers and suppliers; and similar uncertainties.
INTRODUCTION
Granite Construction Incorporated, the "Company" or "Granite," was
incorporated in Delaware in January 1990 as the holding company for Granite
Construction Company, which was incorporated in California in 1922. Therefore,
references herein to the "Company" or "Granite" in the context of operations
should be read to mean Granite Construction Company and Granite Construction
Incorporated's other subsidiaries.
The Company is one of the largest heavy civil construction contractors
in the United States and operates nationwide. Its focus is primarily in the
west, southwest, and southeast serving both public and private sector clients.
Within the public sector, the Company concentrates on infrastructure projects;
including the construction of roads, highways, bridges, dams, tunnels, canals,
mass transit facilities and airports. Within the private sector, the Company
performs site preparation services for buildings, plants, subdivisions and other
facilities. Granite's participation in both the public and private sectors and
its diverse mix of project types and sizes have contributed to the Company's
revenue growth and profitability in various economic environments.
The Company owns and leases substantial aggregate reserves and owns 108
construction materials processing plants. The Company also owns one of the
largest heavy construction contractor equipment fleets in the United States. The
Company believes that the ownership of these assets enables it to compete more
effectively by ensuring availability of these resources at a favorable cost.
OPERATING STRUCTURE
The principal operating company, Granite Construction Company, is
organized into two business segments, the Branch Division and the Heavy
Construction Division. The Branch Division is comprised of branch offices which
serve local markets, while the Heavy Construction Division pursues major
infrastructure projects throughout the nation. The Heavy Construction Division
("HCD") generally builds large heavy civil projects with contract amounts in
excess of $15 million and contract durations greater than two years, while the
Branch Division projects are typically smaller in size and shorter in duration.
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The two divisions complement each other in a variety of ways. The Heavy
Construction Division is a major user of large construction equipment and
employs sophisticated techniques on complex projects. The branches draw on these
resources which are generally not available to smaller, local competitors.
Conversely, the Branch Division has greater knowledge of local markets and
provides the Heavy Construction Division with valuable information regarding
larger projects in the branches' areas. The two divisions sometimes jointly
perform projects when a project in a particular region exceeds the local
branch's capabilities.
As decentralized profit centers, the branch offices and the Heavy
Construction Division independently estimate, bid and complete contracts. Both
divisions are supported by centralized functions, including finance, accounting,
tax, human resources, labor relations, safety, legal, insurance, surety and
management information services. The Company believes that centralized support
for decentralized profit centers results in a more market responsive business
with effective controls and reduced overhead.
In addition to cost and profitability estimates, Granite considers the
availability of estimating and project building personnel as key factors when
determining whether to bid on a project. Other factors considered include the
client, the geographic location, Granite's competitive advantages and
disadvantages relative to likely competitors for the project, current and
projected workload, and the likelihood of follow-up work. Both operating
divisions use a proprietary computer-based project estimating system that
reflects Granite's significant accumulated experience. Granite believes that an
exhaustive, detailed approach to a project's estimate and bid is important in
order to best identify the project's risks and opportunities. The Company's
estimates are comprehensive in nature, sometimes totaling hundreds of pages of
analysis. Each project is broken into phases and line items, for which separate
labor, equipment and material estimates are made. Once a project begins, the
estimate provides Granite with a budget against which actual project cost is
regularly measured, enabling Granite to manage its projects more effectively.
Information about the Company's business segments for the years ended
December 31, 1998, 1997 and 1996 is incorporated in Note 14 of the "Notes to the
Consolidated Financial Statements," located on page F-17 of this Annual Report
on Form 10K.
The Branch Division. In 1998, Branch Division contract revenue and sales of
aggregate products were $945.9 million (77.1% of Company revenue) as compared
with $831.9 million (80.9% of Company revenue) in 1997. The Branch Division has
both public and private sector clients. Public sector activities include both
new construction and improvement of streets, roads, highways and bridges. For
example, the branches widen and re-pave roads and modify and replace bridges.
Major private sector contracts include site preparation for housing, including
excavation; grading and street paving; and installation of curbs, gutters,
sidewalks and underground utilities.
The Company currently has 11 branch offices with 14 satellite operations.
The Company's branch offices in California are located in Bakersfield, Hanford
(Central Valley), Monterey Bay Area, Palm Springs (Southern California Region),
Sacramento, San Jose, Santa Barbara and Stockton. The Company's branch offices
outside of California are located in Arizona, Nevada and Utah. Each branch
effectively operates as a local or regional construction company and its
management is encouraged to participate actively in the local community. While
individual branch revenues vary from year to year, in 1998 these revenues ranged
from $41 million to $187 million.
As part of the Company's strategy, many of Granite's branches mine
aggregates and operate plants which process aggregates into construction
materials for internal use and for sale to others. These activities provide both
a source of profits and a competitive advantage to the Company's construction
business. Close to half of the aggregate products are used in the Company's
construction projects. The remainder is sold to unaffiliated parties and
accounted for $141.7 million of revenue in 1998, representing 11.6% of the
Company's total 1998 revenue. The Company has significant aggregate reserves
which it has acquired by ownership in fee or through long-term leases. It is the
Company's objective to continue to own or lease adequate aggregate reserves.
Heavy Construction Division. In 1998, revenue from HCD was $280.2 million
(22.9% of Company revenue) as compared with $196.3 million (19.1% of Company
revenue) in 1997. HCD projects are usually larger and more complex than those
performed by the Branch Division. The Division has completed projects throughout
the nation; including mass transit projects in the metropolitan areas of
Atlanta, Baltimore, Los Angeles, San Francisco and Washington, D.C., and 27
major dam and tunnel projects in eight states.
HCD builds infrastructure projects; including major highways, large dams,
mass transit facilities, bridges, pipelines, canals, tunnels, waterway locks and
dams and airport runways, and has engaged in contract mine stripping and
reclamation and large site preparation. It also performs activities such as
demolition, clearing, excavation, de-watering, drainage, embankment fill,
structural concrete, concrete and asphalt paving, and tunneling.
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The Division markets, estimates, bids and provides management overview of
its projects from its Watsonville, California headquarters and satellite
estimating offices in Texas, Georgia, Florida and Maryland. Project staff
located at job sites have the managerial, technical, and clerical capacity to
meet on-site project management requirements. HCD has the ability, if
appropriate, to process locally sourced aggregates into construction materials
using its own portable crushing, concrete and asphalt processing plants.
HCD participates in joint ventures with other large construction companies
from time to time. Joint ventures are used for large, technically complex
projects, including design/build projects, where it is desirable to share risk
and resources. Joint ventures provide independently prepared estimates, and
shared financing, equipment and expertise.
Design/build projects have emerged as an expanding market for HCD. Unlike
traditional projects where owners first hire a design firm and then put the
plans out to bid to find a contractor, design/build projects provide the owner
with a single point of responsibility and a single contact. Past design/build
projects have included the SR-91 Tollway which was completed in 1995 and the San
Joaquin Hills Transportation Corridor which was completed in 1996. Ongoing
projects include the I-15 rebuild in Salt Lake City, Utah, the Atlantic
City/Brigantine Connector in New Jersey and a recently awarded I-17 rebuild
project in Phoenix, Arizona. Design/build projects have historically been bid
with the Company as part of a joint venture team. While design/build is being
used considerably more in the private sector, the public sector is expanding its
use.
INVESTMENT IN T.I.C. HOLDINGS, INC.
The Company holds a 30% minority interest in T.I.C. Holdings, Inc. ("TIC")
as part of its diversification strategy (See Business Strategy). TIC, founded in
1974, is one of the leading merit shop general heavy industrial contractors in
the U.S. TIC performs all major disciplines including civil, structural steel
erection, heavy mechanical, process piping and electrical/instrumentation. TIC
has offices in Colorado, Georgia, California, Texas, Louisiana, Kansas, Nevada,
Oregon and Wyoming. TIC operates both nationally and internationally. TIC had
annual revenue of $534 million in 1998. By market sector 52% of its 1998 revenue
came from industrial/petrochemical projects, 26% from water/sewer/wastewater
projects, 18% from power-related projects and the remaining 4% from
transportation-related and other work.
BUSINESS STRATEGY
Granite's fundamental objective is to increase long-term shareholder value
by focusing on consistent profitability from carefully managed revenue growth.
Shareholder value is measured by the appreciation of the value of Granite stock
over a period of years, and to some degree, a return from dividends. Further, it
is a specific measure of the Company's financial success to achieve a Return on
Net Assets ("RONA") greater than the cost of capital, creating "Granite Value
Added." To accomplish these objectives, Granite employs the following
strategies:
Heavy/Highway Construction Focus - Granite concentrates its core
competencies on this segment of the construction industry which includes
the building of roads, highways, bridges, dams and tunnels, mass transit
facilities and site preparation. This focus emphasizes the Company's
specialized strengths which include earth moving, grading, paving and
concrete structures.
Vertical Integration of Aggregate Materials into Construction - Granite
owns aggregate reserves and processing plants and thus, by ensuring
availability of these resources at favorable cost, it believes it has
significant bidding advantages in many of its markets.
Selective Bidding - Once Granite selects a job that meets its bidding
criteria, the project is estimated using a highly detailed method with a
proprietary estimating system which applies both contingency cost and
margin to achieve the appropriate profit margin for the risk assumed.
Diversification - To mitigate the risks inherent in construction and
general economic factors, Granite pursues 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) of various sizes, durations and complexity; and (v) in the
heavy industrial market segment.
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Decentralized Profit Centers - Granite addresses each selected market with
a highly customer responsive organization through its decentralized
structure. Each of Granite's branches and the Heavy Construction Division
are individual profit centers.
Management Incentives - The Company compensates its profit center managers
with lower-than-market fixed salaries coupled with a substantial variable
cash and restricted stock incentive element based on the annual profit
performance of their respective profit centers.
Ownership of Construction Equipment - By owning and carefully maintaining a
large fleet of heavy construction equipment, Granite essentially operates
an internal leasing company and therefore competes more effectively by
ensuring availability of these resources at favorable cost.
Controlled Expansion - The Company intends to continue its geographic
expansion by selectively adding branches in the western United States,
pursuing major infrastructure projects throughout the nation and expanding
into other construction market segments through acquisitions.
Accident Prevention - Granite believes that the prevention of accidents is
both a moral obligation and good business. By identifying and preventing
potential accidents, the Company continues to significantly reduce the
costs associated with accidents.
Environmental Affairs - Granite believes it benefits everyone to maintain
environmentally responsible operations. The Company is committed to
effective air quality control measures and reclamation at its plant sites
and to waste reduction and recycling of the environmentally sensitive
products used in its operations.
Quality and High Ethical Standards - Granite emphasizes the importance of
performing high quality work and maintaining high ethical standards through
an established code of conduct and an effective corporate compliance
program.
CUSTOMERS
The Company has customers in both the public and private sectors. The
Branch Division's principal customers are state departments of transportation in
California, Utah, Nevada, and Arizona and the US Army Corp. of Engineers. In
1998, contracts with the California Department of Transportation represented
11.6% of the Company's revenue. Other Branch Division clients include county and
city public works departments and developers and owners of industrial,
commercial and residential sites. The principal clients of the Heavy
Construction Division are in the public sector and currently include the U.S.
Bureau of Reclamation and the State Departments of Highways and Public
Transportation in Utah, Texas, Florida, and New Jersey. Total Company contracts
(including the Company's share of a construction joint venture) with the Utah
Department of Transportation represented 11.3% of the Company's revenue in 1998.
(See Note 2 of Notes to Consolidated Financial Statements).
A breakdown of the Company's revenues for the last three years by market
sector is as follows (in thousands):
1998 1997 1996
-------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------
Contract revenues
Federal agencies ........ $ 44,844 3.7% $ 38,789 3.8% $ 32,825 3.5%
State agencies .......... 516,485 42.1 449,727 43.6 345,505 37.2
Local public agencies ... 274,657 22.4 238,141 23.2 278,917 30.0
Private sector .......... 248,447 20.2 174,479 17.0 178,053 19.2
Construction materials sales 141,667 11.6 127,069 12.4 93,499 10.1
-------------------------------------------------------------------------------------------
Total ...................... $1,226,100 100.0% $1,028,205 100.0% $ 928,799 100.0%
===========================================================================================
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BACKLOG
The Company's backlog (anticipated revenue from uncompleted portions of
existing contracts) was $901.6 million at December 31, 1998, down from $909.8
million at December 31, 1997, and was $597.9 million at December 31, 1996.
Approximately $260 million of the December 31, 1998 backlog is expected to
remain at December 31, 1999. The Company includes a construction project in its
backlog at such time as a contract is awarded or a firm letter of commitment is
obtained and funding is in place. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations.") The Company believes its
backlog figures are firm, subject only to the cancellation and modification
provisions contained in various contracts. Substantially all of the contracts in
the backlog may be canceled or modified at the election of the client. However,
the Company has not been materially adversely affected by contract cancellations
or modifications in the past. (See "Business-Contract Provisions and
Subcontracting.") A sizeable percentage of the Company's anticipated revenue in
any year is not reflected in its backlog at the start of the year due to the
short duration of smaller Branch Division projects that are initiated and
completed during such year ("Turn Business"). The following is a breakdown of
backlog as of December 31, 1998, 1997 and 1996 (in millions):
1998 1997 1996
---------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------
By Geographic Area:
California ................ $ 192.1 21.3% $ 214.4 23.6% $ 247.5 41.4%
West (excluding California) 312.0 34.7 379.5 41.7 72.6 12.1
South/East ................ 397.5 44.0 315.9 34.7 277.8 46.5
---------------------------------------------------------------------
$ 901.6 100.0% $ 909.8 100.0% $ 597.9 100.0%
=====================================================================
By Market Sector:
Federal agencies .......... $ 22.6 2.5% $ 29.7 3.3% $ 28.7 4.8%
State agencies ............ 635.8 70.5 674.9 74.2 374.8 62.7
Local public agencies ..... 133.1 14.8 144.9 15.9 123.0 20.6
Private sector ............ 110.1 12.2 60.3 6.6 71.4 11.9
---------------------------------------------------------------------
$ 901.6 100.0% $ 909.8 100.0% $ 597.9 100.0%
=====================================================================
EQUIPMENT
The Company purchases and maintains many pieces of equipment; including
cranes, bulldozers, scrapers, graders, loaders, trucks, pavers, rollers, and
construction materials processing plants. In 1998 and 1997, the Company spent
approximately $41.2 million and $45.4 million, respectively, for construction
equipment, plants and vehicles. The breakdown of the Company's construction
equipment, plants and vehicles at December 31, 1998 is as follows:
Heavy construction equipment ........................ 2,349 units
Trucks, truck-tractors and trailers and vehicles .... 2,965 units
Aggregate crushing plants ........................... 38 plants
Asphalt concrete plants ............................. 43 plants
Portland cement concrete batch plants ............... 25 plants
Thermal Soil Remediation Plants ..................... 2 plants
The Company believes that ownership of equipment is preferable to leasing
because ownership ensures the equipment is available as needed and normally
results in lower equipment costs. The Company attempts to keep its equipment as
fully utilized as possible by pooling equipment for use by both the Branch
Division and the Heavy Construction Division. From time to time, the Company
leases or rents equipment on a short-term basis.
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EMPLOYEES
On December 31, 1998, Granite employed 1,101 salaried employees, who work
in management, estimating and clerical capacities, and 2,760 hourly employees.
The total number of hourly personnel employed by the Company is subject to the
volume of construction in progress. During 1998, the number of hourly employees
ranged from 2,254 to 4,357 and averaged approximately 3,388. The Company's
wholly owned subsidiary, Granite Construction Company, is a party to craft
collective bargaining agreements in many areas in which it is working.
The Company believes its employees are its most valuable resource and that
its workforce possesses a strong dedication to and pride in the Company. Among
salaried and non-union hourly employees, this dedication is reinforced by 32%
equity ownership through the Employee Stock Ownership Plan ("ESOP") and
performance-based incentive compensation arrangements. The Company's 371
managerial and supervisory personnel have an average of 11 years of service with
Granite.
COMPETITION
Factors influencing the Company's competitiveness are price, reputation for
quality, the availability of aggregate materials, machinery and equipment,
financial strength, knowledge of local markets and conditions, and estimating
abilities. The Company believes that it competes favorably on the basis of the
foregoing factors. Branch Division competitors range from small local
construction companies to large regional construction companies. While the
market areas of these competitors overlap with several of the markets served by
the Company's branches, few, if any, compete in all of the Company's market
areas. The Heavy Construction Division normally competes with large regional and
national construction companies. Although the construction business is highly
competitive, particularly for competitively bid projects in the public sector,
the Company believes it is well positioned to compete effectively.
CONTRACT PROVISIONS AND SUBCONTRACTING
The Company's revenue is substantially derived from contracts that are
"fixed unit price" contracts under which the Company is committed to provide
materials or services required by a project at fixed unit prices (for example,
dollars per cubic yard of concrete 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 the Company's
unit cost over the unit price bid, whether due to inflation, inefficiency,
faulty estimates or other factors, is borne by the Company unless otherwise
provided in the contract. The Company's contracts are obtained primarily through
competitive bidding in response to advertisements by federal, state and local
government agencies and private parties.
All federal government contracts and many of the Company's other contracts
provide for termination of the contract for the convenience of the party
contracting with the Company. In addition, many of the Company's contracts are
subject to certain completion schedule requirements with liquidated damages in
the event schedules are not met. The Company has not been materially adversely
affected by these provisions in the past.
The Company acts as prime contractor on most of the construction projects
it undertakes. The Company accomplishes the majority of its projects with its
own resources and subcontracts specialized activities such as electrical and
mechanical work. As prime contractor the Company is responsible for the
performance of the entire contract, including subcontract work. Thus, the
Company is subject to increased costs associated with the failure of one or more
subcontractors to perform as anticipated. The Company's subcontractors generally
furnish bonds which provide an additional measure of security of their
performance. Disadvantaged business enterprise regulations require the Company
to use its best efforts to subcontract a specified portion (historically ranging
up to 25%) of contract work done for governmental agencies to certain types of
subcontractors. Some of these subcontractors may not be able to obtain surety
bonds. The Company has not incurred any material loss or liability on work
performed by subcontractors to date.
INSURANCE AND BONDING
The Company maintains general and excess liability, construction equipment,
and workers' compensation insurance; all in amounts consistent with industry
practices. Management believes its insurance programs are adequate.
In connection with its business, the Company generally is required to
provide various types of surety bonds which provide an additional measure of
security of its performance under certain public and private sector contracts.
The Company's ability to obtain surety bonds depends upon its capitalization,
working capital, past performance, management expertise and other factors.
Surety companies consider such factors in light of the amount of surety bonds
then outstanding for the Company and their current underwriting
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standards, which may change from time to time. The Company has been bonded by
the same surety for more than 60 years and has never been refused a bond.
GOVERNMENT REGULATIONS
The Company's operations are subject to compliance with regulatory
requirements of federal, state, and municipal agencies and authorities;
including regulations concerning labor relations, affirmative action and the
protection of the environment. While compliance with applicable regulatory
requirements has not adversely affected the Company's operations in the past
relative to its competitive position within its industry sector, there can be no
assurance that these requirements will not change and that compliance will not
adversely affect the Company's operations. In addition, the aggregate materials
operations of the Company require operating permits granted by governmental
agencies. The Company believes 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.
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ITEM 2. PROPERTIES
The Company owns and leases real property for use in its construction and
aggregate mining and processing activities. The Company owns approximately
394,300 square feet of office and shop space and leases, pursuant to leases
expiring between January 1999 and April 2003, an additional 44,800 square feet
of office and shop space. The Company owns approximately 10,700 acres of land of
which 1,600 acres are un-permitted reserves available for future use and leases
approximately 4,636 additional acres of land at sites in California, Nevada,
Arizona and Utah. A majority of the land owned or leased by the Company is
intended to serve as aggregate reserves. There are no significant encumbrances
against owned property. The Company's leases for aggregate reserves generally
limit the Company's interest in the reserves to the right to mine the reserves.
These leases range from month-to-month leases to leases with expiration dates
ranging from January 1999 to January 2016. The Company considers its available
and future aggregate reserves adequate to meet operating needs. The Company
pursues a plan of acquiring new sources of aggregate reserves to replenish those
depleted and to assure future growth.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings. The Company
believes that the nature and number of these proceedings are typical for a
construction firm of its size and scope and that none of these proceedings is
material to the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has not submitted any matters to a vote of security holders
during the fourth quarter of the year ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
Age Position
--- --------
David H. Watts 60 President, Chief Executive Officer and Director
William G. Dorey 54 Executive Vice President and Chief Operating Officer
William E. Barton 54 Vice President and Chief Financial Officer
Patrick M. Costanzo 60 Senior Vice President and Manager, Heavy Construction Division
Mark E. Boitano 50 Senior Vice President and Manager, Branch Division
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 the executive
officers of the registrant include the periods in which they served for Granite
Construction Company.
Mr. Watts joined the Company in 1987 as President and Chief Executive
Officer and has served as a director since 1988. In 1997, Mr. Watts became a
director of TIC Holdings, Inc., in which Granite Construction Incorporated owns
a 30% interest. From 1984 until 1987, Mr. Watts served as President, Chief
Executive Officer and a director of Ford, Bacon & Davis, Inc., an industrial
engineering and construction firm. From 1965 until 1984, Mr. Watts was employed
by an underwater services and construction firm in various capacities, including
as President and Chief Operating Officer. He received a B.A. degree in economics
from Cornell University in 1960.
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Mr. Dorey has been an employee of the Company since 1968 and has served in
various capacities, including Executive Vice President and Chief Operating
Officer since 1998, Senior Vice President and Manager, Branch Division from 1987
to 1998, and as Vice President and Assistant Manager, Branch Division from 1983
to 1987. In 1997, Mr. Dorey became a director of TIC Holdings, Inc., in which
Granite Construction Incorporated owns a 30% interest. He received a B.S. degree
in construction engineering from Arizona State University in 1967.
Mr. Barton has been an employee of the Company since 1980 and has served in
various capacities, including Vice President and Chief Financial Officer since
1990, Controller in 1989, Treasurer in 1988 and Cash Manager from 1980 until
1988. In 1997, Mr. Barton became a director of TIC Holdings, Inc., in which
Granite Construction Incorporated owns a 30% interest. He received a B.S. degree
in accounting and finance from San Jose State University in 1967 and an M.B.A.
degree from the University of Santa Clara in 1973.
Mr. Costanzo has been an employee of the Company since 1970 and has served
in various capacities, including Senior Vice President and Manager, Heavy
Construction Division, since 1990, Vice President and Assistant Manager, Heavy
Construction Division, from 1988 to 1989, and an Area or Project Manager with
the Heavy Construction Division from 1971 to 1987. In 1997, Mr. Costanzo became
a director of TIC Holdings, Inc., in which Granite Construction Incorporated
owns a 30% interest. He received a B.S. degree in civil engineering from the
University of Connecticut in 1960 and a M.S. degree in civil engineering from
Stanford University in 1961.
Mr. Boitano has been an employee of the Company since 1977 and has served
in various capacities, including Senior Vice President and Manager, Branch
Division since 1998, Assistant Branch Division Manager from 1987 to 1998, Branch
Manager, Arizona operations from 1983 to 1987, Assistant Manager, Arizona
operations from 1980 to 1983, Assistant Manager, Salinas Branch in 1980, and
Project Manager Estimator from 1977 to 1980. He received a B.S. degree in Civil
Engineering from Santa Clara University in 1971 and an M.B.A. degree from
California State University, Fresno in 1977.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On April 25, 1997, the Company commenced trading its common stock on the
New York Stock Exchange under the ticker symbol GVA. The Company's move from
NASDAQ Stock Market to the New York Stock Exchange was intended to improve
trading efficiencies and liquidity in an effort to promote enhanced shareholder
value. See Quarterly Results in Item 7 for a two-year summary of quarterly
dividends and high and low sales prices of the Company's stock.
The Company expects to pay a quarterly cash dividend of $0.07 plus a
special dividend of $0.12 per share of common stock to stockholders of record as
of March 31, 1999 payable on April 16, 1999 (See Note 15 of Notes to
Consolidated Financial Statements). Declaration and payment of dividends is
within the sole discretion of the Company's Board of Directors, subject to
limitations imposed by Delaware law, and will depend on the Company's earnings,
capital requirements, financial conditions and such other factors as the Board
of Directors deems relevant. As of March 19, 1999 there were 27,243,811 shares
of common stock outstanding held by approximately 334 stockholders of record.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected Operations and Balance Sheet data set forth below have been
derived from Consolidated Financial Statements of the Company, which have been
audited by PricewaterhouseCoopers LLP, independent accountants.
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13
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
=============================================================================================================================
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING SUMMARY
Revenue $1,226,100 $1,028,205 $ 928,799 $ 894,796 $ 693,388 $ 570,379
Gross profit 153,092 111,730 110,655 111,963 89,988 50,743
As a percent of revenue 12.5% 10.9% 11.9% 12.5% 13.0% 8.9%
General and administrative expenses 83,834 73,593 71,587 69,610 62,795 47,107
As a percent of revenue 6.8% 7.2% 7.7% 7.8% 9.1% 8.3%
Income before cumulative effect of change
in accounting principle * 46,507 27,832 27,348 28,542 19,488 3,492
Net income 46,507 27,832 27,348 28,542 19,488 4,492
As a percent of revenue 3.8% 2.7% 2.9% 3.2% 2.8% 0.8%
Income per share before cumulative effect
of change in accounting principle: **
Basic $ 1.75 $ 1.05 $ 1.04 $ 1.10 $ 0.75 $ 0.13
Diluted 1.70 1.03 1.02 1.08 0.74 0.13
Net income per share:
Basic 1.75 1.05 1.04 1.10 0.75 0.17
Diluted 1.70 1.03 1.02 1.08 0.74 0.17
Weighted average shares of common and
common stock equivalents outstanding:**
Basic 26,559 26,397 26,207 25,916 25,884 25,875
Diluted 27,339 26,942 26,748 26,474 26,289 26,133
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION SUMMARY
Total assets $ 626,571 $ 551,809 $ 473,045 $ 454,744 $ 349,098 $ 319,416
Cash, cash equivalents and short-term
investments 121,424 72,769 72,230 66,992 48,638 48,810
Working capital 142,448 103,910 92,542 77,179 65,537 64,619
Current maturities of long-term debt 10,787 12,921 10,186 13,948 10,070 10,060
Long-term debt 69,137 58,396 43,602 39,494 17,237 28,585
Stockholders' equity 301,282 257,434 233,605 209,905 182,692 164,338
Book value per share** 10.90 9.40 8.59 7.82 6.91 6.25
Dividends per share** $ 0.30 $ 0.24 $ 0.25 $ 0.19 $ 0.09 $ 0.09
Common shares outstanding** 27,649 27,400 27,189 26,828 26,433 26,301
- -----------------------------------------------------------------------------------------------------------------------------
BACKLOG $ 901,592 $ 909,793 $ 597,876 $ 590,075 $ 550,166 $ 659,738
- -----------------------------------------------------------------------------------------------------------------------------
===============================================================================================================
YEARS ENDED DECEMBER 31, 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------
OPERATING SUMMARY
Revenue $ 518,312 $ 564,060 $ 557,996 $ 504,084 $ 437,230
Gross profit 50,578 69,502 70,646 60,837 55,614
As a percent of revenue 9.8% 12.3% 12.7% 12.1% 12.7%
General and administrative expenses 46,906 46,541 44,466 41,915 33,702
As a percent of revenue 9.0% 8.3% 8.0% 8.3% 7.7%
Income before cumulative effect of change
in accounting principle * 3,924 17,622 18,811 14,211 15,009
Net income 3,924 17,622 18,811 14,211 15,009
As a percent of revenue 0.8% 3.1% 3.4% 2.8% 3.4%
Income per share before cumulative effect
of change in accounting principle: **
Basic $ 0.15 $ 0.68 $ 0.76 $ 0.63 $ 0.67
Diluted 0.15 0.67 0.75 0.63 0.67
Net income per share:
Basic 0.15 0.68 0.76 0.63 0.67
Diluted 0.15 0.67 0.75 0.63 0.67
Weighted average shares of common and
common stock equivalents outstanding:**
Basic 25,875 25,875 24,863 22,500 22,500
Diluted 26,114 26,123 24,933 22,500 22,500
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION SUMMARY
Total assets $ 316,978 $ 277,426 $ 260,426 $ 245,880 $ 205,847
Cash, cash equivalents and short-term
investments 54,139 54,973 50,451 46,306 44,911
Working capital 66,329 55,186 52,352 34,902 39,656
Current maturities of long-term debt 15,469 7,669 7,887 14,228 12,497
Long-term debt 38,618 14,816 19,084 39,707 44,328
Stockholders' equity 158,594 153,159 131,026 86,552 69,033
Book value per share** 6.05 5.87 5.06 3.85 3.07
Dividends per share** $ 0.09 $ 0.09 $ 0.07 $ -- $ --
Common shares outstanding** 26,216 26,078 25,875 22,500 22,500
- ---------------------------------------------------------------------------------------------------------------
BACKLOG $ 245,234 $ 292,017 $ 368,384 $ 377,529 $ 231,338
- ---------------------------------------------------------------------------------------------------------------
* Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes".
** On July 6, 1998, the Company announced a three-for-two stock split in the
form of a 50% stock dividend payable on August 7, 1998. All per share
amounts are calculated on a post split basis.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Granite is one of the largest heavy civil contractors in the United
States and is engaged in the construction of highways, dams, airports, mass
transit facilities and other infrastructure-related projects. The Company has
offices in California, Texas, Georgia, Nevada, Arizona, Florida, Oregon,
Maryland and Utah.
The Company's contracts are obtained primarily through competitive
bidding in response to advertisements by federal, state and local agencies, and
private parties. The Company's bidding activity is affected by such factors as
backlog, current utilization of equipment and other resources, ability to obtain
necessary surety bonds and competitive considerations. Bidding activity, backlog
and revenue resulting from the award of new contracts to the Company may vary
significantly from period to period.
Revenue from construction contracts including construction joint
ventures is recognized using the percentage-of-completion method of accounting,
based upon costs incurred and projected costs. Revenue in an amount equal to
cost incurred is recognized prior to contracts reaching 25% completion. The
related earnings are not recognized until the period in which such percentage
completion is attained. Cost of revenue consists of direct costs on contracts;
including labor and materials, amounts payable to subcontractors, direct
overhead costs, equipment expense (primarily depreciation, maintenance and
repairs) and insurance costs. Depreciation is provided using accelerated methods
for construction equipment. Contracts frequently extend over a period of more
than one year and revisions in cost and profit estimates during construction are
reflected in the accounting period in which the facts that require the revision
become known. Losses on contracts, if any, are provided in total when
determined, regardless of the degree of project completion. Claims for
additional contract revenue are recognized in the period when it is probable
that the claim will result in additional revenue and the amount can be reliably
estimated. The foregoing as well as weather, stage of completion, and mix of
contracts at different margins may cause fluctuations in gross profit between
periods.
The Company's compensation strategy for selected management personnel is
to rely heavily on a variable cash and restricted stock performance-based
incentive element. Thus, the Company may experience an increase in general and
administrative expenses in a very profitable year and a decrease in less
profitable years. The Company's pension contribution in excess of the 401K
matching contributions is at the discretion of the Board of Directors based on
the Company reaching certain levels of profitability each year.
CURRENT YEAR
REVENUE AND BACKLOG. During the year ended December 31, 1998, revenue
increased $197.9 million (19.2%) to $1.226 billion. The Branch Division revenue
increased $114.0 million to $945.9 million in 1998, from $831.9 million in 1997.
The Branch Division increase is due primarily to improved market conditions
(particularly in the private sector), and to a lesser extent, contributions made
from flood related emergency work caused by severe winter weather conditions.
Heavy Construction Division (HCD) revenue increased $83.9 million to $280.2
million in 1998, from $196.3 million in 1997 which reflects increased revenue
from HCD's portion of the Company's Interstate - 15 rebuild project in Utah and
various projects added to backlog in 1998. The Company's revenue from public
sector contracts increased to $836.0 million in 1998 from $726.6 million in 1997
while decreasing to 68.2% of the Company's total revenue in 1998 from 70.6% in
1997. Revenue from private sector contracts increased $73.9 million to $248.4
million or 20.2% of total revenue in 1998, from $174.5 million or 17.0% of total
revenue in 1997.
The Company's backlog at December 31, 1998 was $901.6 million, down $8.2
million, or 0.9% from 1997. The relatively flat backlog in 1998 reflects new
awards which offset a reduction due to a full year's work on the Company's 23%
share of the I-15 Corridor Reconstruction project in Salt Lake City, Utah which
was awarded in the first quarter of 1997. Work on our $313 million portion of
the contract began during the second quarter of 1997 and was approximately 48%
complete at the end of 1998. Management believes that approximately 71% of the
work in the backlog at December 31, 1998 will be recognized as revenue during
1999. The Company believes its bidding opportunities in its major marketplaces
remain strong (see "Outlook").
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15
GROSS PROFIT. For the year ended December 31, 1998, gross profit reached
$153.1 million, a $41.4 million increase from 1997. As a percentage of revenue,
gross profit increased in 1998 to 12.5% from 10.9% in 1997. The increased gross
profit margin reflects the current favorable market conditions as well as the
Company's Interstate- 15 rebuild project which reached the 25% completion
threshold for profit recognition during the second quarter of 1998. Revenue in
an amount equal to cost incurred is recognized prior to contracts reaching 25%
completion.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include salaries, incentive compensation, retirement plans, costs associated
with the Company's estimating and bidding activities, and other administrative
costs. General and administrative expenses increased from $73.6 million in 1997
to $83.8 million in 1998 and decreased from 7.2% of revenue in 1997, to 6.8% of
revenue in 1998. The dollar increase is primarily due to higher profit sharing,
incentive compensation and other costs resulting from the Company's increased
revenue and bidding activities partially offset by the collection of a
previously written-off bad debt. The decrease as a percent of revenue is due to
the fixed nature of certain expenses and higher revenue from non-sponsored joint
venture contracts which do not create a corresponding level of administrative
expense.
OPERATING INCOME. The Branch Division's contribution to operating income
in 1998 increased over the 1997 contribution due primarily to improved market
conditions which increased both the volume of work and the profit margins the
Division was able to achieve. The Heavy Construction Division's contribution to
operating income also increased in 1998, primarily due to the impact of the I-15
project reaching the 25% completion threshold for profit recognition as
described above.
OTHER INCOME (EXPENSES). Other income decreased $0.2 million to $5.8
million in 1998. The decrease was due to an increase in interest expense
resulting from additional borrowings under long-term debt agreements and lower
gain on sale of property and equipment which was partially offset by higher
interest income due to higher short-term investments and cash and cash
equivalents.
OUTLOOK. As we enter 1999, the Company's fundamental business outlook
remains very favorable, based on record levels of public infrastructure funding
and healthy economic conditions in many of the Company's geographic
marketplaces.
TEA-21, as we have noted in the past, is the federal transportation bill
that will act as a flywheel to drive the various state highway programs for the
next five plus years. According to the U.S. Department of Transportation,
California, the Company's largest market, is expected to see a 45.6% increase in
funding during this period over the previous authorizing legislation for surface
transportation. Moreover, Texas and Florida, two additional states where we are
actively bidding and building work, anticipate funding increases of 60.7% and
57.3% during this period, respectively, also according to the U.S. Department of
Transportation. We should caution investors, however, that the opportunities
that TEA-21 will provide for contractors such as Granite are just beginning to
emerge. Because the cycle for federal money to progress from planning to design
to actual construction bids takes time, we most likely will not see any
significant increase in bidding opportunities until mid-1999 at the earliest.
Therefore, considering that profits on a job are not recognized until it is 25%
complete, we would not anticipate any meaningful boost to our bottom line from
TEA-21-funded projects until the year 2000 and beyond. However we believe there
will be ample bidding opportunities in the first half of the year from other
sources.
Increased public infrastructure funding is also getting renewed
attention in California, where leaders from both parties in both the Assembly
and the Senate have proposed a package of multi-billion-dollar bills ranging
from bond issues to dedicating a quarter cent of the existing sales tax toward
the renovation and construction of roads, bridges and other public facilities.
In fact, Governor Davis in early March appointed a select committee on
infrastructure, a major focus of which will be transportation.
Aside from increased bidding opportunities, we believe increased public
highway funding will help advance the design-build segment of our industry.
Highway departments are increasingly sensitive to the public demand to complete
projects in the shortest time possible. Mega design-build projects like HCD's
I-15 reconstruction joint venture in Salt Lake City, Utah give clients many cost
and time advantages and in return offer us the opportunity to earn higher than
normal gross profit margins, if we execute the work successfully. A further
example of the benefit to the Company is the recent award of a design-build
project in Arizona which allowed that state to expedite the use of available
TEA-21 monies.
Additionally, increased bidding opportunities fueled by additional
transportation dollars should give both of our divisions the increased latitude
to be more selective in targeting those bidding opportunities that meet the
Company's profitability objectives. Specifically, our Heavy Construction
Division has targeted several design-build projects to bid this year, including
a bridge replacement project in Florida, major wharf improvements in South
Carolina and a water storage project in Massachusetts. HCD will again be
actively bidding on transportation projects in its core markets of Texas and
Florida and plans to step up its bidding
15
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efforts in new markets including Pennsylvania and the Carolinas. HCD and TIC,
our strategic industrial partner, plan to joint venture a number of
opportunities this year, including merchant power and wastewater treatment
projects.
Looking ahead at the private component of our business, we are
encouraged by the underlying strength of California's economic base. According
to the Center for the Continuing Study of the California Economy, the state
added 400,000 new jobs in 1998. As a result, California's unemployment rate fell
to 5.7%, the lowest level since before the 1990 recession. Furthermore,
construction spending grew at double digit rates in 1998, the Center noted.
Housing markets continued to improve moderately in 1998, the economists noted,
although the 125,000 new units built in 1998 were still less than half of
mid-1980s building levels. To date, we have not seen any significant impact on
the California construction marketplace from the economic crisis afflicting Asia
and South America. We should remind investors that our business focus is the
domestic marketplace, thus we have no exposure to delays or cancellations of
overseas projects unlike some companies in our industry.
A healthy private and public California marketplace should provide a
strong bidding climate for our Branch Division. The California Department of
Transportation expects increased funding from TEA-21 to impact its bidding
schedules beginning this summer. Arizona has already seen an impact from TEA-21
funding. Private and public markets are also expected to stay strong in Nevada
and Utah in 1999.
We will not, however, benefit financially in 1999 from two separate
events that contributed to our success in 1998. Absent in 1999 will be a
one-time boost to earnings of the magnitude that the Company received when the
I-15 rebuild project in Utah reached the 25% completion threshold in the second
quarter of 1998. Secondly, the Company in 1999 will not benefit from emergency
work resulting from El Nino that helped the first and second quarters in 1998.
Finally, the Company remains focused on growth both internally and
externally. We believe we are working to carry out a strategic plan that puts us
in the right place at the right time to capitalize on the exciting opportunities
ahead of us. We will continue to work our plan, focusing on profitable growth
through expanding internal operations and strategic acquisitions in an effort to
provide an optimal level of value to our stockholders.
PRIOR YEARS
REVENUE AND BACKLOG. During the year ended December 31, 1997, revenue
increased $99.4 million (10.7%) to $1.028 billion. The increase in revenue is
associated with higher levels of bidding opportunities and awards in our Branch
Division. The Branch Division revenue increased $116.3 million to $831.9 million
in 1997, from $715.6 million in 1996. Heavy Construction Division (HCD) revenue
decreased $16.9 million to $196.3 million in 1997, from $213.2 million in 1996.
The Company's revenue from public sector contracts increased to $726.6 million,
or 70.6% of the Company's revenue in 1997, from $657.2 million, or 70.7% in
1996. Revenue from private sector contracts decreased $3.6 million to $174.5
million in 1997, and decreased from 19.2% of total revenue in 1996 to 17.0% of
total revenue in 1997.
During the year ended December 31, 1996 revenue increased $34.0 million
(3.8%) to $928.8 million due to higher levels of bidding opportunities and
awards in our Branch Division and a full year of Utah Branch activity in 1996.
The Company's backlog at December 31, 1997 was $909.8 million, up $311.9
million, or 52.2% over the same period in 1996.
GROSS PROFIT. For the year ended December 31, 1997, gross profit reached
$111.7 million, a $1.0 million increase from 1996. As a percentage of revenue,
gross profit decreased in 1997 to 10.9% from 11.9% in 1996, due in part to an
increase in revenue recognized for contracts that had not reached the 25%
completion threshold. Additionally, gross profit in 1997 reflected the absence
of the San Joaquin Hills Toll Road Project completed in late 1996 which carried
a higher than average gross profit margin.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $71.6 million, or 7.7% of revenue in 1996, to $73.6 million, or
7.2% of revenue in 1997. The increase reflects a higher level of costs to
support the Company's increased revenue and bidding activities and increased
personnel to support the Company's expansion into the South/East marketplace.
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OPERATING INCOME. The Branch Division's contribution to operating income
in 1997 increased over the 1996 contribution due primarily to increased revenue
driven by higher levels of bidding opportunities and awards. The Heavy
Construction Division's contribution to operating income decreased in 1997 as
compared to 1996, due in part to an increase in revenue recognized for contracts
that had not reached the 25% completion threshold. Additionally, HCD's operating
income in 1997 reflects the absence of the San Joaquin Hills Toll Road Project
completed in late 1996 which carried a higher than average gross profit margin.
OTHER INCOME (EXPENSES). Other income increased $1.7 million to $6.0
million in 1997. The increase was due to an increase in the Company's equity in
the earnings of its affiliates partially offset by higher interest expense
associated with higher debt levels and a decrease in gains on sales of property
and equipment.
LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------------
Dollars in thousands 1998 1997 1996
---------------------------------------------------------------
Cash and cash equivalents $ 62,470 $ 54,359 $ 38,663
Net cash provided (used) by:
Operating activities 96,030 63,798 61,424
Investing activities (87,194) (49,207) (37,548)
Financing activities (725) 1,105 (7,623)
Capital expenditures 52,462 48,448 46,139
Working Capital 142,448 103,910 92,542
---------------------------------------------------------------
During 1998, cash provided from operations of $96.0 million was
primarily used to purchase $52.5 million of property and equipment, to purchase
short-term investments and to pay dividends of $7.7 million. Changes in cash
provided by operating activities primarily reflect profitability and normal
variations in the cash flow on contracts and payables.
The Company's practice has been to replace and replenish its equipment
fleet with cash generated from operations. Cash purchases of property and
equipment increased $4.1 million from 1997 to 1998 and $2.3 million from 1996 to
1997.
On March 19, 1998 the Company issued Senior Notes in the amount of $60
million to a group of institutional holders. The notes are due in nine equal
annual installments beginning in 2002 and bear interest at 6.54% per annum. The
Company used $39 million of the proceeds of the notes to retire its bank
revolving credit notes.
On March 17, 1999, the Board of Directors authorized the Company to
repurchase, at management's discretion, up to $35 million of its common stock on
the open market, exclusive of repurchases related to employee benefit plans.
This authorization amends an authorization previously made in March of 1997.
Through March 26, 1999 581,050 shares have been repurchased for a total purchase
price of $13.7 million, including 561,400 shares repurchased subsequent to
December 31, 1998. The remaining amount authorized of $21.3 million equates to
919,178 shares using the closing market price of $23.13 on March 25, 1999.
The Company has budgeted $58.0 million for capital expenditures in 1999,
which includes amounts for construction equipment, aggregate and asphalt plants,
buildings, leasehold improvements and the purchase of land and aggregate
reserves. The Company anticipates that cash generated internally and amounts
available under its existing credit facilities will be sufficient to meet its
capital and other requirements, including contributions to employee benefit
plans, for the foreseeable future. The Company currently has access to funds
under its revolving credit agreement which allow it to borrow up to $75.0
million, of which $71.5 million was available at December 31, 1998.
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SUBSEQUENT EVENTS. On March 17, 1999, the Board of Directors declared a
special dividend of $0.12 per share of common stock in addition to a $0.07 per
share quarterly dividend, payable on April 16, 1999 to stockholders of record as
of March 31, 1999. The quarterly dividend represents a $0.01 per share increase
over the dividends paid in the third and fourth quarter of 1998 of $0.06 per
share.
IMPACT OF THE YEAR 2000 ISSUE. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. The issue arises if date-sensitive software recognizes a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company's information technology systems consist primarily of
hardware and software purchased from outside parties. The vendor for the
Company's enterprise-wide software has informed the Company that the version of
its software that the Company is currently utilizing is Year 2000 compliant and
the Company has substantially completed its testing to verify that this is the
case and will have its testing reviewed by a third party during the first half
of 1999. The Company is in the process of addressing the Year 2000 compliance of
other software and hardware, including embedded chips, being used in its
business. The Company is utilizing a seven step process in addressing compliance
of these other systems: (1) awareness; (2) inventory of all systems and
documentation; (3) assessment to identify any areas of noncompliance; (4)
remediation/renovation of any noncompliant systems; (5) verification of
compliance through testing and/or vendor certification; (6) implementation of
any necessary changes revealed during verifications; and (7) monitoring of the
results of implementation. The Company expects to have completed this process
for its non-enterprise software and hardware in mid 1999.
The Company has begun the process of identifying and making inquiries of
its significant suppliers and large public and private sector customers to
determine the extent to which the Company is vulnerable to those third parties'
failure to solve their own Year 2000 issues. The Company expects that the
process of making inquiries to these significant suppliers and customers will be
ongoing through the end of 1999. However, there can be no guarantee that the
systems of other companies or public agencies with which the Company does
business will be timely converted, or that failure to convert by another company
or public agency would not have a material adverse effect on the Company.
The Company's most reasonably likely worst case Year 2000 scenario would
be an interruption in work or cash flow resulting from unanticipated problems
encountered with the information systems of the Company, or of any of the
significant third parties with whom the Company does business. The Company
believes that the risk of significant business interruption due to unanticipated
problems with its own systems is low based on the progress of the Year 2000
project to date. If unforeseen internal disruptions occur, the Company believes
that its existing disaster recovery program, which includes the manual
processing of certain key transactions, would significantly mitigate the impact.
The Company's highest risk relates to significant suppliers or customers failing
to remediate their Year 2000 issues in a timely manner. Relating to its
suppliers, the Company has identified and will continue to identify alternative
suppliers. The Company's suppliers are generally locally or regionally based,
which tends to lessen the Company's exposure from the lack of readiness of any
single supplier. The risk relating to the Company's customers relates primarily
to any delay in receipt of payment due to a customer's unresolved Year 2000
issue. The Company's existing financial resources will help to mitigate such an
impact and the Company will continue to assess this risk as it receives
communications about the Year 2000 status of its customers.
The Company estimates that costs to address the Year 2000 issue will
total approximately $500,000, including costs already incurred. These estimated
costs include consulting fees and costs to remediate or replace hardware and
software as well as non-incremental costs resulting from redeployment of
internal resources. To date, approximately $420,000 has been incurred and
expensed related to the Year 2000 issue. The Company's Year 2000 costs will be
funded from its operating cash flows. The Company does not expect its Year 2000
efforts to have any significant impact on other information technology projects.
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QUARTERLY RESULTS
The following table sets forth selected unaudited financial information
for the Company for the eight quarters in the period ended December 31, 1998.
This information has been prepared on the same basis as the audited financial
statements and, in the opinion of management, contains all adjustments necessary
for a fair presentation thereof.
QUARTERLY FINANCIAL DATA
(Unaudited - In Thousands, Except for Per Share Data)
- -----------------------------------------------------------------------------------------------------
1998 QUARTERS ENDED DEC. 31 SEPT. 30 JUNE 30 MARCH 31
- -----------------------------------------------------------------------------------------------------
Revenue $ 338,000 $ 411,986 $ 292,792 $ 183,322
Gross profit 37,335 54,203 42,380 19,174
As a percent of revenue 11.1% 13.2% 14.5% 10.5%
Net income 10,059 20,521 14,545 1,382
As a percent of revenue 3.0% 5.0% 5.0% 0.8%
Net income per share:
Basic $ 0.38 $ 0.77 $ 0.55 $ 0.05
Diluted $ 0.36 $ 0.75 $ 0.54 $ 0.05
- -----------------------------------------------------------------------------------------------------
Dividends per share $ 0.06 $ 0.06 $ 0.05 $ 0.13
Market price
High $ 34.38 $ 33.50 $ 20.59 $ 19.68
Low $ 25.13 $ 19.68 $ 17.38 $ 14.26
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
1997 QUARTERS ENDED DEC. 31 SEPT. 30 JUNE 30 MARCH 31
- -----------------------------------------------------------------------------------------------------
Revenue $ 309,820 $ 328,988 $ 242,576 $ 146,821
Gross profit 26,008 38,882 30,990 15,850
As a percent of revenue 8.4% 11.8% 12.8% 10.8%
Net income 5,631 13,651 8,307 243
As a percent of revenue 1.8% 4.1% 3.4% 0.2%
Net income per share:
Basic $ 0.21 $ 0.51 $ 0.31 $ 0.01
Diluted $ 0.21 $ 0.51 $ 0.31 $ 0.01
- -----------------------------------------------------------------------------------------------------
Dividends per share $ 0.04 $ 0.04 $ 0.04 $ 0.13
Market price
High $ 16.01 $ 16.05 $ 14.17 $ 16.51
Low $ 13.55 $ 12.84 $ 11.84 $ 11.51
- -----------------------------------------------------------------------------------------------------
19
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks due primarily to
changes in interest rates which it manages primarily by managing the maturities
in its investment portfolio. The Company does not use derivatives to alter the
interest characteristics of its investment securities or its debt instruments.
The Company has no holdings of derivative or commodity instruments and does not
transact business in foreign currencies.
The fair value of the Company's investment portfolio or related income
would not be significantly impacted by changes in interest rates since the
investment maturities are short and the interest rates are primarily fixed. The
Company's senior notes payable of $60.0 million at December 31, 1998 carry a
fixed interest rate of 6.54% per annum with principle payments due in nine equal
annual installments beginning in 2002. The Company's notes payable to bank of
$15.0 million carry a variable interest rate at primarily the IBOR rate plus
margin (5.91% at December 31, 1998) with principal payable semiannually through
June 2000.
The table below presents principal amounts and related weighted average
interest rates by year for the Company's cash and cash equivalents, short-term
investments and significant debt obligations:
- ---------------------------------------------------------------------------------------------------------------------------
Dollars in thousands ................ 1999 2000 2001 2002 2003 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Cash, cash equivalents and short-term
investments ......................... $120,396 $ -- $ 1,028 $ -- $ -- $ -- $121,424
Weighted average interest rate ...... 5.18% -- 5.0% -- -- --
Liabilities
Fixed rate debt
Senior notes payable ........... -- -- -- 6,667 6,667 46,666 60,000
Weighted average interest rate . -- -- -- 6.54% 6.54% 6.54% 6.54%
Variable rate debt (IBOR plus margin)
Notes payable to bank .......... 10,000 5,000 -- -- -- -- 15,000
- ---------------------------------------------------------------------------------------------------------------------------
The estimated fair value of the Company's cash, cash equivalents and
short-term investments approximate the principal amounts reflected above based
on the short maturities of these financial instruments. The estimated fair value
of the Company's debt obligations approximates the principal amounts reflected
above based on rates currently available for debt with similar terms and
remaining maturities.
20
21
ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Registrant and
auditor's report are included in Item 8 and appear following Item 14:
Report of Independent Accountants
Consolidated Balance Sheets - At December 31, 1998 and 1997
Consolidated Statements of Income - Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Additionally, a two-year Summary of Quarterly Results is included in
Item 7 under "Quarterly Results."
21
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
22
23
PART III
Certain information required by Part III is omitted from this Report in
that the Company will file its definitive proxy statement (the "Proxy
Statement") pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report, and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company is set forth under the
caption "Information about Granite - Management, Directors" in the Company's
definitive Proxy Statement in connection with the Annual Meeting of Stockholders
to be held May 24, 1999. Such information is incorporated herein by reference.
Information relating to the executive officers of the Company is set forth in
Part I of this report under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
caption "Information about Granite - Compensation of Directors and Executive
Officers" in the Company's definitive Proxy Statement in connection with the
Annual Meeting of Stockholders to be held May 24, 1999. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to ownership of equity securities of the Company by
certain beneficial owners and Management is set forth under the caption
"Information about Granite Stock Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement in connection with the
Annual Meeting of Stockholders to be held May 24, 1999. Such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
set forth under the caption "Information about Granite - Management, Certain
Transactions with Management" in the Company's definitive Proxy Statement in
connection with the Annual Meeting of Stockholders to be held May 24, 1999. Such
information is incorporated herein by reference.
23
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a) 1. FINANCIAL STATEMENTS. The following consolidated financial
statements are filed as part of this Report:
Form 10-K
Pages
-----------
Report of Independent Accountants.................................. F-1
Consolidated Balance Sheets at December 31, 1998 and 1997.......... F-2
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996................................ F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996................................ F-5
Notes to the Consolidated Financial Statements..................... F-6 to F-18
2. FINANCIAL STATEMENT SCHEDULE. The following financial statement
schedule of Granite Construction Incorporated for the years ended
December 31, 1998, 1997 and 1996 is filed as part of this Report and
should be read in conjunction with the consolidated financial
statements of Granite Construction Incorporated.
Form 10-K
Pages
-----------
Report of Independent Accountants on Financial Statement Schedule...... S-1
Schedule
Schedule II - Schedule of Valuation and Qualifying Accounts....... S-2
Schedules not listed above have been omitted because the required
information is not applicable or is shown in the financial statements
or notes.
3. EXHIBITS. The Exhibits listed in the accompanying Exhibit Index are
filed or incorporated by reference as part of this Report.
(b) REPORTS ON FORM 8-K. The registrant was not required to file any
reports on Form 8-K during the fourth quarter of fiscal 1998.
24
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Granite Construction Incorporated:
Watsonville, California
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Granite
Construction Incorporated and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes 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. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 12, 1999, except
Note 15, as to which the date is
March 26, 1999
F-1
26
GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
===============================================================================================
DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 62,470 $ 54,359
Short-term investments 58,954 18,410
Accounts receivable 174,748 168,968
Costs and estimated earnings in excess of billings 14,677 22,585
Inventories 12,773 12,251
Deferred income taxes 15,397 13,365
Equity in construction joint ventures 20,020 12,951
Other current assets 11,769 11,394
-----------------------
Total current assets 370,808 314,283
- -----------------------------------------------------------------------------------------------
Property and equipment 205,737 194,339
- -----------------------------------------------------------------------------------------------
Other assets 50,026 43,187
- -----------------------------------------------------------------------------------------------
$ 626,571 $ 551,809
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 10,787 $ 12,921
Accounts payable 88,194 80,809
Billings in excess of costs and estimated earnings 50,619 51,573
Accrued expenses and other current liabilities 78,760 65,070
-----------------------
Total current liabilities 228,360 210,373
- -----------------------------------------------------------------------------------------------
Long-term debt 69,137 58,396
- -----------------------------------------------------------------------------------------------
Deferred income taxes 27,792 25,606
- -----------------------------------------------------------------------------------------------
Commitments and contingencies -- --
- -----------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, $0.01 par value, authorized 3,000,000 shares,
none outstanding -- --
Common stock, $0.01 par value, authorized 50,000,000 shares;
issued and outstanding 27,648,961 shares in 1998
and 27,399,563 in 1997 277 274
Additional paid-in capital 45,080 39,745
Retained earnings 262,517 223,498
-----------------------
307,874 263,517
Unearned compensation (6,592) (6,083)
-----------------------
301,282 257,434
- -----------------------------------------------------------------------------------------------
$ 626,571 $ 551,809
===============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
27
GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
====================================================================================================
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Revenue $ 1,226,100 $ 1,028,205 $ 928,799
Cost of revenue 1,073,008 916,475 818,144
-------------------------------------------
GROSS PROFIT 153,092 111,730 110,655
General and administrative expenses 83,834 73,593 71,587
-------------------------------------------
OPERATING INCOME 69,258 38,137 39,068
- ----------------------------------------------------------------------------------------------------
Other income (expense)
Interest income 9,856 7,941 6,330
Interest expense (9,551) (7,515) (4,367)
Gain on sales of property and equipment 1,819 2,463 3,458
Other, net 3,629 3,152 (1,080)
-------------------------------------------
5,753 6,041 4,341
- ----------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 75,011 44,178 43,409
Provision for income taxes 28,504 16,346 16,061
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 46,507 $ 27,832 $ 27,348
====================================================================================================
Net income per share
Basic $ 1.75 $ 1.05 $ 1.04
Diluted $ 1.70 $ 1.03 $ 1.02
Weighted average shares of common and
common stock equivalents outstanding
Basic 26,559 26,397 26,207
Diluted 27,339 26,942 26,748
Dividends per share $ 0.30 $ 0.24 $ 0.25
====================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
28
GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
==========================================================================================================================
ADDITIONAL
COMMON PAID-IN RETAINED UNEARNED
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 STOCK CAPITAL EARNINGS COMPENSATION TOTAL
- --------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 $ 270 $ 32,409 $ 180,341 $ (3,115) $ 209,905
Net income -- -- 27,348 -- 27,348
Restricted stock issued - 273,134 shares, net 1 3,993 -- (3,994) --
Amortized restricted stock -- -- -- 1,968 1,968
Employee stock options exercised and
related tax benefit- 89,025 shares 2 934 -- -- 936
Repurchase of common stock - 161,412 shares -- (2,076) -- -- (2,076)
Common stock contributed to ESOP - 120,000 shares -- 1,550 -- -- 1,550
Cash dividends on common stock -- -- (6,760) -- (6,760)
Tax benefit from ESOP dividends -- -- 734 -- 734
- --------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 273 36,810 201,663 (5,141) 233,605
Net income -- -- 27,832 -- 27,832
Restricted stock issued - 234,396 shares, net 1 3,240 -- (3,241) --
Amortized restricted stock -- -- -- 2,299 2,299
Employee stock options exercised and
related tax benefit- 32,850 shares -- 350 -- -- 350
Repurchase of common stock - 251,163 shares -- (3,011) (126) -- (3,137)
Common stock contributed to ESOP - 195,000 shares -- 2,356 -- -- 2,356
Cash dividends on common stock -- -- (6,578) -- (6,578)
Tax benefit from ESOP dividends -- -- 707 -- 707
- --------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 274 39,745 223,498 (6,083) 257,434
Net income -- -- 46,507 -- 46,507
Restricted stock issued - 213,926 shares, net 2 3,793 -- (3,795) --
Amortized restricted stock -- -- -- 3,286 3,286
Employee stock options exercised and
related tax benefit- 81,405 shares 1 1,402 -- -- 1,403
Repurchase of common stock - 107,733 shares -- (2,440) -- -- (2,440)
Common stock contributed to ESOP - 61,800 shares -- 1,580 -- -- 1,580
Cash dividends on common stock -- -- (8,288) -- (8,288)
Tax benefit from ESOP dividends and other -- 1,000 800 -- 1,800
- --------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 $ 277 $ 45,080 $ 262,517 $ (6,592) $ 301,282
==========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
29
GRANITE CONSTRUCTION INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
===========================================================================================================
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 46,507 $ 27,832 $ 27,348
Add (deduct) noncash items included in net income:
Depreciation, depletion and amortization 38,124 38,219 37,775
Gain on sales of property and equipment (1,819) (2,463) (3,458)
Deferred income taxes 154 726 3,962
Decrease in unearned compensation 3,286 2,299 1,968
Common stock contributed to ESOP 1,580 2,356 1,550
Equity in (gain) loss of affiliates (2,728) (733) 1,648
Cash provided by (used in):
Accounts and notes receivable (10,715) (43,072) 15,990
Inventories (522) 1,242 (3,313)
Equity in construction joint ventures (7,069) (7,580) (5,161)
Other assets 189 864 (277)
Accounts payable 7,385 16,751 (3,998)
Billings in excess of costs and estimated earnings, net 6,954 13,130 (9,739)
Accrued expenses 14,704 14,227 (2,871)
----------------------------------
Net cash provided by operating activities 96,030 63,798 61,424
- -----------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property and equipment (52,462) (48,448) (46,139)
Proceeds from sales of property and equipment 5,357 4,688 8,027
Investment in affiliates (385) (13,689) (8,566)
Additions to notes receivable (173) (203) (874)
Repayments of notes receivable 502 720 618
Sales of (additions to) investments and other assets 511 (7,432) (1,629)
Purchases of short-term investments (91,090) (27,351) (45,639)
Maturities of short-term investments 50,546 42,508 56,654
----------------------------------
Net cash used by investing activities (87,194) (49,207) (37,548)
- -----------------------------------------------------------------------------------------------------------
Financing Activities
Additions to long-term debt 60,000 27,046 15,000
Repayments of long-term debt (51,392) (16,480) (14,654)
Employee stock options exercised 832 246 673
Repurchase of common stock (2,440) (3,137) (2,076)
Dividends paid (7,725) (6,570) (6,566)
----------------------------------
Net cash provided (used) by financing activities (725) 1,105 (7,623)
- -----------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 8,111 15,696 16,253
Cash and cash equivalents at beginning of year 54,359 38,663 22,410
----------------------------------
Cash and cash equivalents at end of year $ 62,470 $ 54,359 $ 38,663
===========================================================================================================
Supplementary Information Cash paid during the year for:
Interest $ 4,857 $ 5,180 $ 3,464
Income taxes 22,294 10,172 10,258
Noncash financing and investing activity:
Restricted stock issued for services $ 3,795 $ 3,241 $ 3,994
Dividends accrued but not paid 1,659 1,096 1,088
Financed acquisition of property and equipment -- 6,963 --
===========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
30
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: The Company is a heavy civil
contractor engaged in the construction of highways, dams, airports,
mass transit facilities, real estate site developments and other
infrastructure related projects. The Company has offices in
California, Texas, Georgia, Nevada, Arizona, Utah, Maryland and
Florida.
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and accounts
have been eliminated. The Company uses the equity method of
accounting for companies where its ownership is between 20% and 50%
and for other ventures and partnerships in which less than a
controlling interest is held. The Company's proportionate share of
construction joint venture revenue, cost of revenue and other income
is included in the consolidated statements of income.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONSTRUCTION CONTRACTS: Earnings on construction contracts
including construction joint ventures are recognized on the
percentage of completion method in the ratio of costs incurred to
estimated final costs. Revenue in an amount equal to cost incurred is
recognized prior to contracts reaching 25% completion. The related
earnings are not recognized until the period in which such percentage
completion is attained. Revisions in contract revenue and cost
estimates are reflected in the accounting period when known.
Provision for the entire amount of estimated losses on uncompleted
contracts is made in the period such losses are determined. Claims
for additional contract revenue are recognized if it is probable that
the claim will result in additional revenue and the amount can be
reliably estimated.
BALANCE SHEET CLASSIFICATIONS: The Company includes in
current assets and liabilities amounts receivable and payable under
construction contracts which may extend beyond one year. 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
held for cash management purposes having maturities of three months
or less from the date of purchase.
SHORT-TERM INVESTMENTS: Short-term investments that are
deemed by management to be held-to-maturity are reported at amortized
cost. Short-term investments that are considered available-for-sale
are carried at fair value. Unrealized gains and losses, if material,
are reported net of tax as a separate component of stockholders'
equity until realized. Realized gains and losses, if any, are
determined using the specific identification method.
FINANCIAL INSTRUMENTS: The carrying value of short-term
investments approximates their fair value as determined by market
quotes. All significant debt obligations carry variable interest
rates or interest rates that approximate market and their carrying
value is considered to approximate fair value. 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.
INVENTORIES: Inventories consist primarily of quarry
products valued at the lower of average cost or market.
F-6
31
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY AND EQUIPMENT: Property and equipment are stated
at cost. Depreciation is provided using accelerated methods over
lives ranging from four to ten years for construction equipment and
the straight-line method over lives from three to twenty years for
the remaining depreciable assets. Depletion of quarry property is
based on the usage of depletable reserves. The cost and accumulated
depreciation or depletion of property sold or retired are removed
from the accounts and gains or losses, if any, are reflected in
earnings for the period.
INTANGIBLE ASSETS: Intangible assets consist primarily of
covenants not to compete amortized on a straight-line basis over five
years.
INCOME TAXES: Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss carryforwards and deferred
tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
COMPUTATION OF EARNINGS PER SHARE: Basic earnings per share
is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding, excluding
restricted common stock. Diluted earnings per share is computed
giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon the exercise
of stock options, warrants and upon the vesting of restricted common
stock.
STOCK SPLIT: On July 6, 1998, the Company announced that
its Board of Directors approved a three-for-two stock split in the
form of a 50% stock dividend payable on August 7, 1998 to
stockholders of record on July 17, 1998. All references in the
financial statements to number of shares and per share amounts of the
Company's common stock have been retroactively restated to reflect
the increased number of shares outstanding.
RECLASSIFICATIONS: Certain financial statement items have
been reclassified to conform to the current year's format. These
reclassifications had no impact on previously reported net income.
COMPREHENSIVE INCOME: In the first quarter of 1998 the
Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which specifies the computation,
presentation and disclosure requirements for comprehensive income.
There was no impact on the Company's financial position, results of
operations or cash flows as a result of adoption. Comprehensive
income and net income are the same.
F-7
32
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
2. DISCLOSURE OF SIGNIFICANT RISKS AND UNCERTAINTIES
DISCLOSURE OF SIGNIFICANT ESTIMATES - REVENUE RECOGNITION:
As outlined in the Summary of Significant Accounting Policies, the
Company's construction revenue is recognized on the percentage of
completion basis. Consequently, construction revenue and gross margin
for each reporting period is determined on a contract by contract
basis by reference to estimates by the Company's engineers of
expected costs to be incurred to complete each project. These
estimates include provisions for known and anticipated cost overruns,
if any exist or are expected to occur. These estimates may be subject
to revision in the normal course of business.
DISCLOSURE OF SIGNIFICANT ESTIMATES - LITIGATION: The
Company has been named as a defendant in legal proceedings wherein
substantial damages are claimed. Such proceedings are not uncommon in
the Company's business and usually involve claims against multiple
defendants who were involved in the project which is the subject of
the proceeding. Historically, the Company has been successful in
defending such actions or has settled them within insured limits.
CONCENTRATIONS: The Company maintains the majority of cash
balances and all of its short-term investments with several financial
institutions. The Company invests with high credit quality financial
institutions, and, by policy, limits the amount of credit exposure to
any financial institution. A significant portion of the Company's
labor force is subject to collective bargaining agreements.
Collective bargaining agreements covering 26.6% of the Company's
unionized labor force at December 31, 1998 will expire during 1999.
Revenue received from federal, state and local government
agencies amounted to $835,986 (68.2%) in 1998, $726,657 (70.6%) in
1997, and $657,247 (70.7%) in 1996. California Department of
Transportation represented $142,008 (11.6%) in 1998, $139,300 (13.5%)
in 1997, and $104,171 (11.2%) in 1996 of total revenue. Utah
Department of Transportation, including the Company's portion of a
construction joint venture, represented $138,077 (11.3%) of total
revenue in 1998. At December 31, 1998, 1997 and 1996 the Company had
significant amounts receivable from these agencies. The Company
performs ongoing credit evaluations of its customers and generally
does not require collateral, although the law provides the Company
the ability to file mechanics liens on real property improved for
private customers in the event of non-payment by such customers. The
Company maintains reserves for potential credit losses and such
losses have been within management's expectations. The Company has no
foreign operations.
F-8
33
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
3. SHORT-TERM INVESTMENTS
The carrying and market values of short-term investments
are as follows at December 31, 1998 and 1997:
Held-To-Maturity Held-To-Maturity
December 31, 1998 December 31, 1997
Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair
Value Gains Losses Value Value Gains Losses Value
----------------------------------------------------------------------------------------------
U.S. Government and Agency
Obligations $ 19,271 $ 10 $ -- $ 19,281 $ 1,998 $ -- $ -- $ 1,998
Commercial Paper 25,721 2 (4) 25,719 -- -- -- --
Municipal Bonds 5,022 12 -- 5,034 5,019 -- -- 5,019
Domestic Banker's Acceptance 4,921 -- (3) 4,918 3,450 -- -- 3,450
----------------------------------------------------------------------------------------------
54,935 24 (7) 54,952 10,467 -- -- 10,467
----------------------------------------------------------------------------------------------
Available-For-Sale Available-For-Sale
December 31, 1998 December 31, 1997
Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair
Value Gains Losses Value Value Gains Losses Value
----------------------------------------------------------------------------------------------
U.S. Government and Agency
Obligations 2,991 7 -- 2,998 2,984 -- -- 2,984
Municipal Bonds 1,028 4 -- 1,032 4,959 44 -- 5,003
-------- -------- -------- -------- ---------- ------ ------ --------
4,019 11 -- 4,030 7,943 44 -- 7,987
-------- -------- -------- -------- ---------- ------ ------ --------
Total Short-Term Investments $ 58,954 $ 35 $ (7) $ 58,982 $ 18,410 $ 44 $ -- $ 18,454
======== ======== ======== ======== ========== ====== ====== ========
There were no sales of investments classified as
available-for-sale for the years ended December 31, 1998, 1997 and
1996. Unrealized gains and losses were considered immaterial for both
1998 and 1997 and, thus, not recorded as a separate item in
stockholders' equity. At December 31, 1998, scheduled maturities of
investments are as follows:
------------------------------------------------------------------------------
Held-To- Available-
Maturity For-Sale Total
------------------------------------------------------------------------------
Within one year $54,935 $ 2,991 $57,926
After one year through five years -- 1,028 1,028
------------------------------------------------------------------------------
$54,935 $ 4,019 $58,954
==============================================================================
For the years ended December 31, 1998 and 1997, purchases and
maturities were as follows:
December 31, 1998 December 31, 1997
--------------------------------------- ------------------------------------------
Held-To- Available- Held-To- Available-
Maturity For-Sale Total Maturity For-Sale Total
--------------------------------------- ------------------------------------------
Purchases $83,968 $ 7,122 $91,090 $ 16,566 $ 10,785 $ 27,351
Maturities 39,500 11,046 50,546 26,500 16,008 42,508
--------------------------------------- ------------------------------------------
Net change $44,468 $ (3,924) $40,544 $ (9,934) $ (5,223) $(15,157)
======================================= ==========================================
F-9
34
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
4. ACCOUNTS RECEIVABLE
------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
------------------------------------------------------------------------------
Construction Contracts
Completed and in progress $ 96,895 $ 94,482
Retentions 56,774 55,041
------------------------------------------------------------------------------
153,669 149,523
Construction material sales 19,554 17,383
Other 2,224 2,753
------------------------------------------------------------------------------
175,447 169,659
Less allowance for doubtful accounts 699 691
------------------------------------------------------------------------------
$174,748 $168,968
==============================================================================
The balances billed but not paid by customers pursuant to
retainage provisions in construction contracts generally
become due upon completion of the contracts and acceptance
by the owners. Retainage amounts at December 31, 1998 are
expected to be collected as follows: $50,912 in 1999; $5,603
in 2000, zero in 2001 and $259 in 2002.
5. EQUITY METHOD INVESTMENTS
The Company participates in various construction joint venture
partnerships. Generally, each construction joint venture is formed to
accomplish a specific project and is dissolved upon completion of the
project. The combined assets, liabilities and net assets of these
ventures are as follows:
--------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
--------------------------------------------------------------------------------------------
Assets
Total $245,071 $276,038
Less other venturers' interest 183,701 208,830
--------------------------------------------------------------------------------------------
Company's interest 61,370 67,208
--------------------------------------------------------------------------------------------
Liabilities
Total 162,476 223,711
Less other venturers' interest 121,126 169,454
--------------------------------------------------------------------------------------------
Company's interest 41,350 54,257
--------------------------------------------------------------------------------------------
Company's interest in net assets $ 20,020 $ 12,951
============================================================================================
F-10
35
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
5. EQUITY METHOD INVESTMENTS, CONTINUED
The revenue and costs of revenue of construction joint
ventures are as follows:
----------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
----------------------------------------------------------------------------------------------------
Revenue
Total $649,042 $326,895 $234,824
Less other venturers' interest 497,407 248,028 164,676
----------------------------------------------------------------------------------------------------
Company's interest 151,635 78,867 70,148
----------------------------------------------------------------------------------------------------
Cost of Revenue
Total 578,608 287,705 160,056
Less other venturers' interest 443,123 220,497 112,313
----------------------------------------------------------------------------------------------------
Company's interest 135,485 67,208 47,743
----------------------------------------------------------------------------------------------------
$ 16,150 $ 11,659 $ 22,405
====================================================================================================
Additionally, the Company has investments in affiliates that
are accounted for on the equity method. The most significant of
these investments is a 30% interest in T.I.C. Holdings, Inc. and a
22.2% limited partnership interest in a partnership which
constructed and operates a private toll road. At December 31, 1998
the Company had a commitment supported by a letter of credit of
$2,044 related to its limited partnership interest. The summarized
unaudited financial information below represents an aggregation of
the Company's nonsubsidiary affiliates:
-------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
-------------------------------------------------------------------------------------------------
Balance sheet data
Assets $ 328,496 $275,685
Liabilities 267,397 216,512
Net assets 61,099 59,173
-------------------------------------------------------------------------------------------------
Company's equity investment in affiliates 29,515 25,008
-------------------------------------------------------------------------------------------------
Earnings data
Revenue 561,568 434,389 $ 6,719
Gross profit 50,452 41,137 (3,104)
Earnings (loss) before taxes 7,510 1,891 (7,446)
-------------------------------------------------------------------------------------------------
Company's equity in earnings (loss) $ 2,728 $ 733 $ (1,648)
-------------------------------------------------------------------------------------------------
F-11
36
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
6. PROPERTY AND EQUIPMENT
------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
------------------------------------------------------------------------------
Land $ 30,195 $ 20,654
Quarry property 35,862 35,862
Buildings and leasehold improvements 20,595 17,175
Equipment and vehicles 443,095 416,073
Office furniture and equipment 4,835 5,467
------------------------------------------------------------------------------
534,582 495,231
Less accumulated depreciation,
depletion and amortization 328,845 300,892
------------------------------------------------------------------------------
$205,737 $194,339
==============================================================================
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
----------------------------------------------------------------------------
DECEMBER 31, 1998 1997
----------------------------------------------------------------------------
Payroll and related employee benefits $34,829 $24,374
Accrued insurance 26,487 25,882
Income taxes 2,542 3,129
Other 14,902 11,685
----------------------------------------------------------------------------
$78,760 $65,070
============================================================================
8. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
-----------------------------------------------------------------------------
DECEMBER 31, 1998 1997
-----------------------------------------------------------------------------
Bank revolving credit notes $ -- $39,000
Senior notes payable 60,000 --
Notes payable to bank 15,000 25,000
Other notes payable 4,924 7,317
-----------------------------------------------------------------------------
79,924 71,317
Less current maturities 10,787 12,921
-----------------------------------------------------------------------------
$69,137 $58,396
=============================================================================
The aggregate minimum principal maturities of long-term debt
for each of the five years following December 31, 1998 are
as follows: 1999 - $10,787; 2000 - $6,539; 2001 - $1,290;
2002 - $6,851; 2003 - $6,863 and beyond 2003 - $47,594.
The Company has a bank revolving line of credit of $75,000
which allows for unsecured borrowings for up to five years through
June 30, 2000, with interest rate options. Outstanding borrowings
under the revolving line of credit are at the IBOR interest rate
plus margin with principal payable semiannually beginning December
2000 through June 2005 and interest payable quarterly. There were
no amounts outstanding at December 31, 1998.
The Company has standby letters of credit totaling
approximately $5,542 outstanding at December 31, 1998 of which
$3,498 reduces the amount available under the revolving line of
credit and $2,044 supports the commitment by the Company related
to its investment in a limited partnership. The unused and
available portion of the line of credit at December 31, 1998 was
approximately $71,500.
F-12
37
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
8. LONG-TERM DEBT AND CREDIT ARRANGEMENTS, CONTINUED
On March 19, 1998 the Company issued Senior Notes Payable
in the amount of $60 million to a group of institutional holders. The
notes are due in nine equal annual installments beginning in 2002 and
bear interest at 6.54% per annum. The Company used $39 million of the
proceeds of the notes to retire its bank revolving credit notes.
Notes payable to bank are unsecured with principal payable
semiannually and interest payable quarterly at primarily the IBOR
rate plus margin (5.91% at December 31, 1998) through June 2000.
Restrictive covenants under the terms of debt agreements
include the maintenance of certain levels of working capital and cash
flow. Other covenants prohibit capital expenditures in excess of
specified limits and require the maintenance of tangible net worth
(as defined) of approximately $211,000.
Other notes payable are comprised primarily of notes
incurred in connection with the purchase of property and equipment,
and other assets. These notes are collateralized by the assets
purchased and bear interest at 6.5% per annum with principal and
interest payable in installments through 2007.
9. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN: The Company's Employee Stock
Ownership Plan ("ESOP") covers all employees not included in
collective bargaining agreements. As of December 31, 1998, the ESOP
owned 7,641,422 shares of the Company's common stock. Dividends on
shares held by the ESOP are charged to retained earnings and all
shares held by the ESOP are treated as outstanding in computing the
Company's earnings per share.
Contributions to the ESOP are at the discretion of the
Board of Directors. Contributions for the years ended December 31,
1998, 1997 and 1996 were approximately $1,957, $1,812 and $2,094,
respectively.
PROFIT SHARING AND 401K PLAN: The Profit Sharing and 401k
Plan is a defined contribution plan covering all employees not
included in collective bargaining agreements. Each employee can elect
to have up to 6% of gross pay contributed to the plan on a before-tax
basis. The plan allows for Company matching and additional
contributions at the discretion of the Board of Directors.
Contributions to the Profit Sharing and 401K Plan for the
years ended December 31, 1998, 1997 and 1996 were $8,402, $4,706 and
$4,064, respectively. Included in the contributions were 401K
matching contributions of $1,990, $1,807 and 1,647, respectively.
OTHER: The Company`s wholly owned subsidiary, Granite
Construction Company, also contributes to various multi-employer
pension plans on behalf of union employees. Contributions to these
plans for the years ended December 31, 1998, 1997 and 1996 were
approximately $13,498, $11,972 and $10,406, respectively.
10. STOCKHOLDERS' EQUITY
1990 OMNIBUS STOCK AND INCENTIVE PLAN: Under the Company's
1990 Omnibus Stock and Incentive Plan (the "Stock Plan") a total of
1,000,000 shares of the Company's common stock are reserved to grant
key employees of the Company restricted common stock, incentive and
nonqualified stock options, performance units and performance shares.
Restricted common stock is issued for services to be rendered and may
not be sold, transferred or pledged for such period as determined by
the compensation committee.
F-13
38
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
10. STOCKHOLDERS' EQUITY, CONTINUED
Restricted shares outstanding under the Plan at December
31, 1998 were 1,024,717 shares. Unearned compensation is amortized
over the restriction periods of generally five years. Compensation
expense related to restricted shares for the years ended December 31,
1998, 1997 and 1996 was $3,286, $2,299 and $1,968, respectively.
The exercise price for incentive and nonqualified stock
options granted under the Stock Plan may not be less than 100% and
85%, respectively, of the fair market value at the date of the grant.
Options granted will be exercisable at such times and be subject to
such restrictions and conditions as determined by the compensation
committee, but no option shall be exercisable later than ten years
from the date of grant. Options generally vest one third after 3 years
of service from the date of grant and one third during each of the
following two years. Stock option transactions during 1998, 1997 and
1996 are summarized as follows:
----------------------------------------------------------------------------------------
December 31, 1998 1997 1996
----------------------------------------------------------------------------------------
Options outstanding, beginning of year 157,125 189,975 279,000
Options exercised (81,405) (32,850) (89,025)
Options forfeited (5,095) -- --
----------------------------------------------------------------------------------------
Options outstanding, end of year 70,625 157,125 189,975
----------------------------------------------------------------------------------------
At December 31, 1998 all options are 100% vested. All
options were granted in 1990 and will expire in the year 2000 and were
granted, exercised and canceled at $7.56 per share.
OTHER: The Company has issued a warrant to purchase 450,000
shares of its common stock at an exercise price of $13.37 per share.
The warrant is exercisable after July 25, 1999 and expires on
July 25, 2002.
F-14
39
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
11. EARNINGS PER SHARE
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted
earnings per share is provided as follows:
----------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
----------------------------------------------------------------------------------------------------------
NUMERATOR - BASIC AND DILUTED EARNINGS PER SHARE
Net income $46,507 $27,832 $27,348
==========================================================================================================
DENOMINATOR - BASIC EARNINGS PER SHARE
Common stock outstanding 27,570 27,375 27,099
Less restricted stock outstanding 1,011 978 892
----------------------------------------------------------------------------------------------------------
TOTAL 26,559 26,397 26,207
----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.75 $ 1.05 $ 1.04
==========================================================================================================
DENOMINATOR - DILUTED EARNINGS PER SHARE
Denominator - Basic Earnings per Share 26,559 26,397 26,207
Effect of Dilutive Securities:
Warrants 175 -- --
Common stock options 64 74 99
Restricted stock 541 471 442
----------------------------------------------------------------------------------------------------------
TOTAL 27,339 26,942 26,748
----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.70 $ 1.03 $ 1.02
==========================================================================================================
12. INCOME TAXES
Provision for income taxes:
----------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
----------------------------------------------------------------------------------------------------------
Federal
Current $ 23,592 $ 12,964 $ 9,727
Deferred 138 646 3,470
----------------------------------------------------------------------------------------------------------
23,730 13,610 13,197
----------------------------------------------------------------------------------------------------------
State
Current 4,758 2,656 2,372
Deferred 16 80 492
----------------------------------------------------------------------------------------------------------
4,774 2,736 2,864
----------------------------------------------------------------------------------------------------------
$ 28,504 $ 16,346 $ 16,061
==========================================================================================================
Reconciliation of statutory to effective
tax rate:
----------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
----------------------------------------------------------------------------------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit 4.1 4.0 4.3
Percentage depletion deduction (1.1) (2.0) (1.3)
Other -- -- (1.0)
----------------------------------------------------------------------------------------------------------
38.0% 37.0% 37.0%
==========================================================================================================
F-15
40
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
12. INCOME TAXES, CONTINUED
Deferred tax assets and liabilities:
----------------------------------------------------------------------
DECEMBER 31, 1998 1997
----------------------------------------------------------------------
Deferred Tax Assets:
Accounts receivable $ 915 $ 2,280
Inventory 1,556 1,520
Property and equipment 1,755 2,508
Insurance accruals 9,849 8,301
Deferred compensation 3,014 2,144
Other accrued liabilities 4,341 3,113
Other 936 621
Valuation allowance -- --
----------------------------------------------------------------------
22,366 20,487
----------------------------------------------------------------------
Deferred Tax Liabilities:
Property and equipment 29,697 28,837
Contract recognition 1,532 1,207
TIC basis difference 3,053 1,355
Other 479 1,329
----------------------------------------------------------------------
34,761 32,728
----------------------------------------------------------------------
$(12,395) $(12,241)
======================================================================
13. LEASES
Minimum rental commitments under all noncancellable operating
leases, primarily quarry property and construction equipment, in
effect at December 31, 1998 were:
Years Ending December 31,
1999 $ 4,418
2000 3,793
2001 1,936
2002 1,483
2003 1,487
Later years (through 2016) 5,142
--------------------------------------------------------------------
Total minimum rental commitment $18,259
====================================================================
Operating lease rental expense was $4,628 in 1998, $4,414 in
1997, and $3,593 in 1996.
F-16
41
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------
14. BUSINESS SEGMENT INFORMATION
The Company has two reportable segments: the Branch
Division and the Heavy Construction Division (HCD). The Branch
Division is comprised of branch offices that serve local markets,
while HCD pursues major infrastructure projects throughout the nation.
HCD generally has large heavy civil projects with contract amounts in
excess of $15 million and contract durations greater than two years,
while the Branch Division projects are typically smaller in size and
shorter in duration. HCD has been the primary participant in the
Company's construction joint ventures. Substantially all of the
revenue from these joint ventures is included in HCD's revenues from
external customers (Note 5).
The accounting policies of the segments are the same as
those described in the summary of significant accounting policies
(Note 1). The Company evaluates performance based on operating profit
or loss which does not include income taxes, interest income, interest
expense or other income (expense).
INFORMATION ABOUT PROFIT OR LOSS AND ASSETS
-------------------------------------------------------------------------------------------
HCD BRANCH TOTAL
-------------------------------------------------------------------------------------------
1998
Revenues from external customers $ 305,856 $920,244 $1,226,100
Intersegment revenue transfer (25,668) 25,668 --
--------------------------------------------
Net revenue 280,188 945,912 1,226,100
Depreciation and amortization 7,396 27,292 34,688
Operating income 12,139 86,688 98,827
Property and equipment 26,618 167,540 194,158
-------------------------------------------------------------------------------------------
1997
Revenues from external customers $ 208,094 $820,111 $1,028,205
Intersegment revenue transfer (11,831) 11,831 --
--------------------------------------------
Net revenue 196,263 831,942 1,028,205
Depreciation and amortization 7,364 27,513 34,877
Operating income 3,394 54,679 58,073
Property and equipment 26,995 159,057 186,052
-------------------------------------------------------------------------------------------
1996
Revenues from external customers $ 213,212 $715,587 $ 928,799
Intersegment revenue transfer -- -- --
--------------------------------------------
Net revenue 213,212 715,587 928,799
Depreciation and amortization 6,852 27,462 34,314
Operating income 19,400 38,400 57,800
Property and equipment 21,245 149,470 170,715
-------------------------------------------------------------------------------------------
F-17
42
14. BUSINESS SEGMENT INFORMATION, CONTINUED
RECONCILIATION OF SEGMENT PROFIT OR LOSS AND ASSETS TO THE COMPANY'S
CONSOLIDATED TOTALS:
-----------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------
Profit or Loss:
Total profit or loss for reportable segments $ 98,827 $ 58,073 $ 57,800
Other income 5,753 6,041 4,341
Unallocated other corporate expenses (29,569) (19,936) (18,732)
-----------------------------------------------------------------------------------------------
Income before provision for income taxes $ 75,011 $ 44,178 $ 43,409
===============================================================================================
Assets:
Total assets for reportable segments $194,158 $186,052
Assets not allocated to segments:
Cash and cash equivalents 62,470 54,359
Short-term investments 58,954 18,410
Deferred income taxes 15,397 13,365
Other current assets 233,987 228,149
Property and equipment 11,579 8,287
Other assets 50,026 43,187
-----------------------------------------------------------------------------------------------
Consolidated Total $626,571 $551,809
===============================================================================================
15. SUBSEQUENT EVENTS
On March 17, 1999 the Board of Directors declared a cash
dividend of $0.07 per common share plus a special cash dividend of
$0.12 per share of common stock to stockholders of record as of March
31, 1999, payable on April 16, 1999.
Subsequent to December 31, 1998 and through March 26, 1999
the Company repurchased and retired 561,400 shares of its common stock
for a total price of $13,470.
F-18
43
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Granite Construction Incorporated on Form S-8 (File No. 33-36482 and 33-36485)
of our report dated February 12, 1999 (except Note 15, as to which the date is
March 26, 1999) on our audits of the consolidated financial statements and the
financial statement schedule of Granite Construction Incorporated, as of
December 31, 1998 and 1997, and the years ended December 31, 1998, 1997 and
1996, which report is included in the Annual Report on Form 10-K on Page F-1.
PricewaterhouseCoopers LLP
San Jose, California
March 30, 1999
25
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 26, 1999 GRANITE CONSTRUCTION INCORPORATED
By: /s/ William E. Barton
--------------------------------------
[William E. Barton, Vice President and
Chief Financial Officer]
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below on March 26, 1999, by the following persons in the
capacities indicated.
/s/ Richard C. Solari
- ------------------------------- Chairman of the Board
[Richard C. Solari] and Director
/s/ David H. Watts
- ------------------------------- President, Chief Executive Officer,
[David H. Watts] and Director
/s/ William E. Barton Vice President and
- ------------------------------- Chief Financial Officer
[William E. Barton] Principal Accounting and
Financial Officer
/s/ Joseph J. Barclay Director
- -------------------------------
[Joseph J. Barclay]
/s/ Richard M. Brooks Director
- -------------------------------
[Richard M. Brooks]
/s/ Brian C. Kelly Director
- -------------------------------
[Brian C. Kelly]
/s/ Rebecca A. McDonald Director
- -------------------------------
[Rebecca A. McDonald]
/s/ Raymond E. Miles Director
- -------------------------------
[Raymond E. Miles]
/s/ George B. Searle Director
- -------------------------------
[George B. Searle]
26
45
INDEX TO FORM 10-K EXHIBITS
Exhibit Page
No. Description No.
- ------- ----------- ----
3.1 Certificate of Incorporation of Granite Construction Incorporated [a]
3.1.a Amendment to the Certificate of Incorporation of Granite
Construction Incorporated --
3.1.b Certificate of Incorporation of Granite Construction Incorporated
as Amended and Restated (Effective May 22, 1998) --
3.2 Bylaws of Granite Construction Incorporated (as amended and
restated effective February 27, 1991) [b]
10.1 Amendment to and Restatement of the Granite Construction
Incorporated Employee Stock Ownership Plan adopted November 16,
1998 and effective January 1, 1998 --
10.1.a Granite Construction Incorporated Employee Stock Ownership Trust Agreement [b]
10.1.b Amendment 1 to the Granite Construction Incorporated Employee
Stock Ownership Plan Trust Agreement adopted December 19, 1995,
effective January 1, 1996 [e]
10.2 Amendment to and Restatement of the Granite Construction Company
Profit Sharing and 401K Plan adopted December 15, 1994 and
effective January 1, 1995 [c]
10.2.a Amendment to and Restatement of Granite Construction Incorporated
Profit Sharing and 401K Plan and Trust Agreement adopted and
effective as of December 15, 1994 [c]
10.2.b Amendment 2 to the Granite Construction Incorporated Profit
Sharing and 401K Plan and Trust Agreement adopted March 20, 1995
and effective January 1, 1996 [e]
10.2.c Amendment 3 to the Granite Construction Incorporated Profit
Sharing and 401K Plan adopted August 23, 1996 and effective
January 1, 1997 [f]
10.2.d Amendment 4 to the Granite Construction Incorporated Profit
Sharing and 401K Plan adopted July 24, 1997 and effective January
1, 1995, January 1, 1997, February 3, 1997 and January 1, 1998
[g]
10.2.e Amendment 5 to the Granite Construction Incorporated Profit
Sharing and 401K Plan adopted December 29, 1997 and effective
January 1, 1997 and January 1, 1998 [g]
10.2.f Amendment 6 to the Granite Construction Incorporated Amended and
Restated Profit Sharing and 401K Plan and Trust Agreement adopted
March 30, 1998 and effective April 1, 1998 --
10.3 Credit Agreement dated and effective June 30, 1997 [g]
10.3.a First Amendment to the Credit Agreement entered into January 16,
1998 [g]
10.3.b Second Amendment to the Credit Agreement entered into June 30,
1998 --
10.4 Form of Director and Officer Indemnification Agreement [a]
10.5 Form of Executive Officer Employment Agreement [a]
27
46
10.6 Stock Purchase Agreement among Granite Construction Incorporated,
Gibbons Company and all of the Shareholders of Gibbons Company,
dated March 17, 1995 [d]
10.7 Restated Gibbons Company Profit Sharing and Retirement Plan
adopted December 30, 1994 and effective January 1, 1989 [f]
10.7.a First Amendment to the Restated Gibbons Company Profit Sharing
and Retirement Plan adopted March 29, 1995 and effective January
1, 1989 [f]
10.7.b Second Amendment to the Restated Gibbons Company Profit Sharing
and Retirement Plan adopted April 27, 1995 and effective May 8,
1995 and May 31, 1995 [f]
10.7.c Third Amendment to the Restated Gibbons Company Profit Sharing
and Retirement Plan adopted June 23, 1995 and effective July 1,
1995 [f]
10.7.d Fourth Amendment to the Restated Gibbons Company Profit Sharing
and Retirement Plan adopted December 1, 1995 [f]
10.7.e Fifth Amendment to the Restated Gibbons Company Profit Sharing
and Retirement Plan adopted July 16, 1996 and effective January
1, 1995 [f]
10.7.f Sixth Amendment to the Restated Gibbons Company Profit Sharing
and Retirement Plan adopted May 30, 1997 and effective January 1,
1989 and July 1, 1993 [g]
10.7.g Seventh Amendment to the Restated Gibbons Company Profit Sharing
and Retirement Plan adopted February 27, 1998 and effective April
1, 1998 --
10.8 Amendment to and Restatement of the Granite Construction
Incorporated Key Management Deferred Compensation Plan adopted
and effective January 1, 1998 --
10.9 Amendment to and Restatement of the Granite Construction
Incorporated Key Management Deferred Incentive Compensation Plan
adopted and effective January 1, 1998 --
10.10 Stock Purchase Agreement between Granite Construction
Incorporated and TIC Holdings, Inc. dated December 23, 1996 [g]
10.11 Note Purchase Agreement between Granite Construction Incorporated
and certain purchasers dated March 1, 1998 --
10.12 Subsidiary Guaranty Agreement from the Subsidiaries of Granite
Construction Incorporated as Guarantors of the Guaranty of Notes
and Note Agreement and the Guaranty of Payment and Performance
dated March 1, 1998 --
28
47
21.1 List of Subsidiaries of Granite Construction Incorporated [f]
24.1 Consent of PricewaterhouseCoopers LLP is contained on page 25 of
this Report
27.1 SEC Filing - Financial Data Table, Article 5 of Regulation S-X
[a] Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-1 (No. 33-33795).
[b] Incorporated by reference to the exhibits filed with the Company's
Form 10-K for the year ended December 31, 1991.
[c] Incorporated by reference to the exhibits filed with the Company's
10-K for the year ended December 31, 1994.
[d] Incorporated by reference to the exhibits filed with the Company's
8-K dated May 8, 1995.
[e] Incorporated by reference to the exhibits filed with the Company's
10-K for the year ended December 31, 1995.
[f] Incorporated by reference to the exhibits filed with the Company's
10-K for the year ended December 31, 1996.
[g] Incorporated by reference to the exhibits filed with the Company's
10-K for the year ended December 31, 1997.
29
48
Report of Independent Accountants on Financial Statement Schedule
To the Stockholders and Board of Directors
Granite Construction Incorporated:
Our audits of the consolidated financial statements referred to in our report
dated February 12, 1999, except for Note 15 as to which the date is March 26,
1999 appearing on page F-1 of this Form 10-K also included an audit of the
financial statement schedule listed in Item14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, CA
February 12, 1999, except
Note 15 as to which the date is
March 26, 1999
S-1
49
SCHEDULE II
GRANITE CONSTRUCTION INCORPORATED
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
Additions
---------------------------
Balance at Adjustments Balance at
Beginning Bad Debt and End of
Description of Year Expense Collections Deductions(1) Period
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts ......... $691 $(2,628) $3,538 $ (902) $699
======================================================================
Allowance for notes receivable .......... $ 68 $ -- $ -- $ -- $ 68
======================================================================
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts ......... $693 $ 759 $1,162 $(1,923) $691
======================================================================
Allowance for notes receivable .......... $ 68 $ -- $ -- $ -- $ 68
======================================================================
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts ......... $898 $ 3,614 $1,576 $(5,395) $693
======================================================================
Allowance for notes receivable .......... $ 68 $ -- $ -- $ -- $ 68
======================================================================
(1) Accounts deemed to be uncollectible
S-2