UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
For the Quarter ended March 31, 2002
Commission File No. 1-12911
GRANITE CONSTRUCTION INCORPORATED
Corporate Administration:
585 W. Beach StreetWatsonville, California 95076(831) 724-1011
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 10, 2002.
TABLE OF CONTENTS
Index
2
PART I. FINANCIAL INFORMATION
3
Item 1. FINANCIAL STATEMENTS (unaudited)
Granite Construction IncorporatedCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)
The accompanying notes are an integral part of these condensed consolidatedfinancial statements.
4
Granite Construction IncorporatedCONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)(Unaudited - in thousands, except per share data)
5
Granite Construction IncorporatedCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
6
Granite Construction IncorporatedNOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except share and per share data)
7
Common stock options, warrants and common stock equivalents representing 714 shares have been excluded from the calculation of diluted earnings per share for the quarter ended March 31, 2002 because their effects are anti-dilutive.
8
9
10
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Disclosure:
Results of Operations
Revenue and Backlog: The following is a breakdown of revenue for the three months ended March 31, 2002 and 2001 by division and market sector:
Revenue for the first quarter of 2002 increased 18.2% to $269.1 million from $227.6 million in the first quarter of 2001. The increased revenue reflects larger volume in the Company’s Heavy Construction Division (“HCD”) generated from higher backlog at the beginning of 2002, including approximately $20 million in first quarter revenue from the new Granite Halmar location in New York. The Company anticipates that revenue from HCD will make up a higher percentage of the Company’s total revenue for the year ending December 31, 2002 than in prior years due to its high backlog and recent geographic expansion.
Revenue from the private sector in the first quarter of 2002 was flat compared with the first quarter of 2001 but declined as a percent of total revenue from 21.9% in 2001 to 17.8% in 2002. Although the Company has seen some signs of softening of its private marketplace, particularly in the West, it is still too early in the year to determine what impact, if any, this will have on its results for the year (see “Outlook”).
11
The Company’s backlog at March 31, 2002 was $1,339.2 million, down $14.7 million, or 1.1% from March 31, 2001, and also decreased $38.0 million, or 2.8%, from December 31, 2001. New awards for the first quarter 2002 totaled $231.2 million versus $461.0 million for the first quarter 2001. The decrease in new awards is largely attributable to the absence of three projects totaling approximately $225.6 million that were awarded in the first quarter of 2001. New awards for the first quarter 2002 included the Company’s $65.4 million share of a design-build joint venture award for the construction of the Largo Extension, an extension of the Blue Line Metrorail (Heavy Rail System) near Washington, D.C.
Gross Profit: Gross profit as a percent of revenue rose to 10.0% in the first quarter of 2002 from 9.8% in the first quarter of 2001. Included in HCD’s gross profit is a loss of approximately $5.0 million for the first quarter of 2002 at the Company’s location in New York. The loss is due to higher than anticipated estimated costs to complete two large jobs in the New York metropolitan area. Revenue recognized from projects less than 25% complete was approximately $25.4 million and $29.9 million for the three months ended March 31, 2002 and 2001, respectively. The Company recognizes revenue only to the extent of cost incurred until a project reaches 25% complete. The approximately $4.5 million decrease in revenue recognized with no associated gross profit had a very slight positive impact on the Company’s gross profit margin for the three months ended March 31, 2002.
The Company’s gross profit margin for sales of construction materials increased to 13.7% for the three months ended March 31, 2002 from 9.9% in the comparable prior year period primarily due to relatively higher selling prices in certain of the Company’s locations (see “Outlook”).
Cost of revenue consists of direct costs on contracts; including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, maintenance and repairs). The Company has experienced upward pressure on costs associated with labor markets and energy, fuel and oil prices; however, the Company’s gross profit margins were not materially impacted by such changes during the first three months of 2002.
General and Administrative Expenses: General and administrative expenses for the three months ended March 31, 2002 and 2001, respectively, was comprised of the following:
12
Salaries and related expenses increased for the three months ended March 31, 2002 as compared to the same period in 2001, due to the addition of the Company’s new Granite Halmar location in New York, and other increased staffing to support the Company’s current and expected growth. Other general and administrative expenses include various costs to support the Company’s operations, none of which exceeds 10% of total general and administrative expenses. The increase in other general and administrative expenses from $8.3 million for the three months ended March 31, 2001 to $11.2 million for the comparable 2002 period reflects costs related to the Company’s current and projected growth including increased costs related to expanding and enhancing its information technology infrastructure, increased travel related to its geographic expansion, increases in employee development and corporate development costs as well as other increases due to the Company’s new location in New York.
Operating Income: HCD’s contribution to operating income decreased in the first quarter of 2002 compared to the first quarter of 2001 due primarily to higher general and administrative costs supporting the new Granite Halmar location that were only partially offset by higher gross profit as discussed in the “Gross Profit” section above.
The Branch Division’s contribution to operating income increased in the first quarter of 2002 over the comparable 2001 period, primarily due to increases in materials sales and gross profit margins discussed in the “Gross Profit” section above.
Other Income (Expenses): Other income decreased $3.8 million to $0.9 million for the three months ended March 31, 2002 over the same period in 2001. The decrease was due primarily to the absence of a $1.8 million gain on the sale of equipment and a $2.2 million gain from the sale of developed property in Texas, both recorded in the first quarter of 2001.
Additionally, significantly lower interest rates in 2002 compared to 2001 reduced interest income for the first quarter of 2002 compared to the comparable period in 2001.
13
Provision for Income Taxes: The Company’s effective tax rate decreased to 37.5% for the three months ended March 31, 2002 compared to the same period last year, which reflects the impact of higher non-taxable costs related to quarry properties.
Outlook
Overall, we are pleased with how our operations performed during the first quarter of 2002. Looking ahead, we feel that there are many excellent bidding opportunities for both our Branch and Heavy Construction Divisions in the months ahead.
Currently, healthy highway, airport and transit budgets coupled with our on-going geographic expansion are providing our Heavy Construction Division (HCD) with a robust slate of bidding opportunities in 2002. More specifically, HCD is targeting over $900.0 million in work over the next two to three months, including the Reno Transportation Rail Access Corridor in Nevada, Knightdale Bypass and US 64 in North Carolina, Interstate 4 in Florida and the reconstruction of FDR Drive in New York City.
Also, we are continuing to see states increasing their use of the design-build form of project delivery over the traditional form of design/bid/build. Currently, design-build projects make up approximately 50% of HCD’s total backlog. States such as North Carolina, Florida and Minnesota are increasingly letting more and more design-build type projects – a form of project delivery that favors companies like ours which have technical expertise and financial strength to bid and build these types of projects. Some of our current design-build projects include the Las Vegas Monorail in Nevada, Hiawatha Light Rail in Minnesota, Hathaway Bridge reconstruction in Florida and the US 60 highway project in Arizona.
The Branch Division is off to a good start in 2002, buoyed by a quality backlog and normal weather conditions in most of our branch locations. As is typical of our branch business cycle, the second and third quarters are our strongest indicators of how the Branch Division will fare for the year. As we have said before, we have seen some slow down in the amount of private sector work being put out to bid, however, it is unclear whether this trend will continue into the remainder of 2002. While most economists believe that the recession is over, there remains widespread uncertainty as to the timing and the strength of the recovery. According to the Center for Continuing Study of the California Economy’s (CCSCE) California Economic Growth – 2002 Edition, the U.S. economic downturn is probably over, however, there does not seem to be a lot of confidence as to the strength of the recovery. The study notes that while industrial production is up and job and unemployment levels have stabilized, “fiscal policy is in disarray.” With deficits in the $50.0-100.0 billion range, state and local governments throughout the U.S. will face spending cuts that are likely to cause some delays in the economic recovery.
Our materials business continues to be very strong, particularly in areas such as California, Nevada and Arizona. During the first quarter of 2002, aggregate sales to third parties were $31.3 million, or approximately 12% of total Company revenues. We have seen the demand for materials increase, which has been reflected in higher pricing in most locations. We also feel that the quality of our products, in conjunction with the level of service that we provide to our customers, gives us a competitive edge in the materials market.
On the political front, one of the key issues we have been following closely is the legislative attempt to restore money to the fiscal year 2003 federal transportation budget. Included in the Administration’s proposed decrease is the $8.6 billion highway-funding shortfall from the financing adjustment formula created in the Transportation Act for the 21st Century (TEA-21). This adjustment is known as the Revenue Aligned Budget Authority, or RABA. On May 1, 2002, the House Transportation and Infrastructure Committee unanimously approved legislation that would restore $4.4 billion of the shortfall thereby bringing the fiscal year 2003 highway investment level back to the TEA-21 baseline level of $27.7 billion. Prior to a final appropriation action, the Senate bill will need votes by Senate authorizers and House and Senate appropriators.
14
On the state level, it appears that California is looking at a severe budget crunch. According to our legislative advocates, California state income tax receipts for April have come in about $3.0 billion below Governor Gray Davis’ earlier projections. There is also speculation that there will be at least a $20.0 billion budget gap to close when Davis’ administration puts forward its revised budget plan later this month. Although we believe that this can be threatening to transportation spending, it is our opinion that the vulnerability of transportation dollars is very limited from both a legal and political standpoint. Over the last few years, we have continued to see an increase in transportation spending within the state and it is anticipated that these spending levels will be generally sustained despite the current fiscal crisis.
In Washington state, voters will likely be presented with two key pieces of transportation legislation on their November ballot. The first being a statewide finance plan that includes a 9-cent-a-gallon gas tax increase, a 1% surtax on car sales and a 30% increase in trucking fees. The increase would be used to fund Governor Gary Locke’s $7.7 billion border-to-border list of transportation projects that include state highways, local roads, ferries, rail and mass transit projects. The second transportation-related plan aimed for the November ballot is the $12.6 billion regional transportation improvement package for King, Snohomish and Pierce counties. Voters would be voting on a 0.4% to 0.5% sales tax increase, a 0.4% motor-vehicle excise tax and a new $75 annual vehicle-license fee. On April 30, 2002, the Company increased its ownership in the Pacific Northwest based Wilder Construction Company to a majority position of approximately 59%. Historically, approximately 50% of Wilder’s revenues has come from work in Washington state.
In summary, we feel that the outlook for our business going forward continues to be positive, driven by record levels of public sector funding, and we are optimistic that we can take advantage of the opportunities to grow our business in 2002.
Liquidity and Capital Resources
Cash used by operating activities of $2.6 million for the three months ended March 31, 2002 represents a $5.8 million decrease from the amount provided in the same period in 2001 largely due to the net loss recorded in the first quarter of 2002 as compared to net income in the first quarter of 2001. Changes in cash from operating activities primarily reflect seasonal variations based on the amount and progress of work being performed. As is typical in the Company’s first quarter, accounts receivable, accounts payable, billings in excess of costs, net and accrued expenses are substantially lower than at December 31, 2001 due to lower first quarter volume.
15
The decrease in cash used by investing activities from the quarter ended March 31, 2001 to the quarter ended March 31, 2002 was $7.6 million and was due largely to lower purchases of property and equipment and the lack of additional investment in affiliates in the 2002 period. The lower property and equipment purchases reflect purchasing timing differences and are not indicative of the Company’s expectations for the year.
Cash used by financing activities in 2002 increased $9.9 million over 2001 due to scheduled repayment of the Company’s long term debt, as well as to an increase in shares repurchased for contribution to the Company’s Employee Stock Ownership Plan.
The Company has budgeted $69.8 million for capital expenditures in 2002, which includes amounts for construction equipment, aggregate and asphalt plants, buildings, leasehold improvements and the purchase of 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 allows it to borrow up to $60.0 million, of which $48.4 million was available at March 31, 2002.
Recent Accounting Pronouncements: In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations,” which is effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires, among other things, that the retirement obligations be recognized when they are incurred and displayed as liabilities on the balance sheet. In addition, the asset’s retirement costs are to be capitalized as part of the asset’s carrying amount and subsequently allocated to expense over the asset’s useful life. The Company is in the process of assessing the impact, if any, of SFAS 143 to the financial position or results of operations of the Company.
Subsequent Events: On April 30, 2002, the Company purchased an additional 698,483 shares of Wilder Construction Company (“Wilder”) common stock for a purchase price of approximately $7.9 million. As a result, the Company became the majority stockholder with a 59% interest in Wilder. At April 30, 2002, the Company held 2,648,229 shares of Wilder stock.
Also on April 30, 2002, the Company completed the purchase of certain assets, primarily construction materials, plant facilities and aggregate reserves, of a materials and construction business in Northern California for a total purchase price of approximately $8.0 million.
16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company’s exposure to market risk since December 31, 2001.
17
PART II. OTHER INFORMATION
18
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
Item 3. DEFAULTS UPON SENIOR SECURITIES
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
b) Reports on Form 8-K
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
20