UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
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.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 12, 2002.
TABLE OF CONTENTS
Index
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PART I. FINANCIAL INFORMATION
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Item 1. FINANCIAL STATEMENTS (unaudited)
Granite Construction Incorporated
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Granite Construction IncorporatedNOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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11. Subsequent Events:
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Disclosure:
Results of Operations
Revenue: Revenue for the three and six month periods ended June 30, 2002 increased over the corresponding 2001 periods by $82.3 million and $124.0 million, respectively. Branch Division revenue for the three and six month periods in 2002 includes $35.9 million in revenue from the newly consolidated Wilder Construction Company (“Wilder”) subsidiary (see Note 9 to the condensed consolidated financial statements). Excluding the Wilder revenue, Branch Division revenue for the three and six month periods
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ended June 30, 2002 decreased over the corresponding 2001 periods by $4.4 million and $4.9 million, respectively. Revenue from the Company’s Heavy Construction Division (“HCD”) increased 50.5% and 52.7% in the three and six months ended June 30, 2002 over the corresponding periods in 2001. The increased HCD revenue reflects larger volume from higher backlog at the beginning of 2002 and includes revenue from the new Granite Halmar location in New York of $26.0 million and $46.1 million in the three and six month periods ended June 30, 2002, respectively.
Overall, the Company has seen its largest revenue growth in the public sector, reflecting the continued strength of the market for publicly funded infrastructure projects (see “Outlook”). The growth in private sector revenue for the three and six months ended June 30, 2002 over the comparable 2001 periods was due to the inclusion of revenue from Wilder and the Company’s Granite Halmar subsidiary in the 2002 periods. Excluding revenue from Wilder and Granite Halmar, private sector revenue actually decreased slightly in the 2002 periods. The increase in revenue from the sales of construction materials in both the three and six month periods ended June 30, 2002 reflects continued strong demand, particularly in California.
Backlog:The Company’s backlog at June 30, 2002 of $1,587.9 million was $151.6 million higher than the backlog at June 30, 2001, including $99.3 million related to the newly consolidated Wilder subsidiary and $243.2 million from its Granite Halmar location in New York. Branch Division backlog decreased by $106.3 million or 18.4% from June 30, 2001 to June 30, 2002, after adjusting to remove the Wilder backlog from the 2002 balance. This represents a 27% decrease in private sector backlog and a 16% decrease in public sector backlog for the Branch Division (excluding Wilder) which the Company believes is attributable to the impact of a slowdown in private development projects and the related increased competitiveness in bidding for public sector projects due to recent economic slowdowns — particularly in the West (see “Outlook”).
Heavy Construction Division backlog at June 30, 2002 of $1,017.1 million represents an increase of $158.6 million from its backlog at June 30, 2001 and $43.8 million from its backlog at March 31, 2002 and includes $243.2 million from its Granite Halmar location in New York. HCD’s awards for the second quarter of 2002 included a $55.0 million design-build bridge and highway contract in New York, a $73.5
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million interchange reconstruction project in Florida and a $38.0 million share of a joint venture contract in Arkansas.
In the period from July 1, 2002 to July 22, 2002 the Company was awarded four large new contracts totaling $309.2 million consisting of a $43.6 million highway rehabilitation project in southern California, a $67.3 million share of a joint venture highway project in New Mexico, a $27.6 million infrastructure project in Florida and a $170.7 million design-build railroad project in Nevada, none of which are included in backlog at June 30, 2002.
Gross Profit: Gross profit as a percent of revenue increased to 13.9% in the second quarter 2002 from 12.3% in the second quarter 2001 and to 12.5% for the six months ended June 30, 2002 from 11.4% in the corresponding 2001 period. Gross profit in the quarter ended June 30, 2002 was positively impacted by a lower volume of revenue from projects less than 25% complete. The Company recognizes revenue only to the extent of cost incurred until a project reaches 25% complete. The amount of revenue generated in the quarter by jobs below the 25% completion threshold was approximately $35.0 million versus $58.0 million in the same period in 2001. This decrease was partially due to the $153.0 million Las Vegas Monorail project reaching the 25% completion threshold during the quarter. Partially offsetting the positive effect of lower revenue from jobs less than 25% complete was the recognition of additional costs to complete several New York area projects, which negatively impacted gross profit in the quarter by approximately $3.0 million (see “Outlook”).
Cost of revenue consists of direct costs on contracts, including labor and materials, subcontractor costs, direct overhead costs and equipment expense (primarily depreciation, maintenance and repairs).
General and Administrative Expenses: Salaries and related expenses increased for the three and six months ended June 30, 2002 over the comparable periods in 2001 due to increased staffing to support the Company’s current and expected growth, including approximately $3.3 million and $5.1 million for the three and six month periods ended June 30, 2002, respectively, in costs associated with the Company’s geographic expansion into New York and northern California as well as the inclusion of costs in 2002 from the newly consolidated Wilder subsidiary. Incentive compensation and discretionary profit sharing and pension costs increased as a function of the Company’s higher operating profit in 2002. Increases in other general and administrative expenses primarily result from costs associated with the Company’s continued growth, including approximately $2.2 million and $3.1 million for the three and six month periods ended June 30, 2002, respectively, in costs associated with the Company’s expansion into New York and northern California as well as the inclusion of costs from the newly consolidated Wilder subsidiary. Other general and administrative costs include information technology, occupancy, office equipment and supplies,
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depreciation, travel and entertainment, outside services, advertising and marketing, training and other miscellaneous expenses, none of which individually exceeded 10% of total general and administrative expense.
Operating Income: The Heavy Construction Division’s contribution to operating income increased in the second quarter 2002 compared to the second quarter 2001 due primarily to increased volume at a higher profit margin as described in “Revenue” and “Gross Profit” above. Branch Division operating income for the quarter and six months ended June 30, 2002 includes approximately $2.8 million from the newly consolidated Wilder subsidiary. Excluding the effects of Wilder, Branch Division operating income decreased slightly in the 2002 periods due to lower revenue as described in “Revenue” above and higher general and administrative costs primarily related to geographic expansion into northern California.
Other Income (Expense): Other income decreased by $5.7 million to $0.3 million for the six months ended June 30, 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 as well as the impact of discontinuing recording the results of T.I.C. Holdings and Wilder in other income under the equity method of accounting during the second quarter of 2002 (see Notes 9 and 10 to the condensed consolidated financial statements).
Income Taxes: The Company’s effective tax rate decreased to 37.5% for the three and six month periods ended June 30, 2002 compared to 38.0% in the comparable 2001 periods. The decrease is primarily due to the impact of higher percent depletion deductions related to quarry properties.
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Outlook
Nationally, we are entering the second half of 2002 with a strong backlog with healthy margins and are on track for another positive year. The Company also continues to experience a sizeable increase in new awards. New awards for the second quarter ended June 30, 2002 totaled $707.8 million (including $102.9 million added as a result of the initial consolidation of Wilder), leading to a backlog at June 30, 2002 of $1.6 billion, (including $99.3 million related to the newly consolidated Wilder), an increase of 10.6 percent over the backlog at June 30, 2001.
Although the Company has reduced forecasted results for the year 2002 to between $1.25 and $1.30 per common share, the fundamentals of its public sector business are still strong. The bulk of the Company’s new awards comes from its public marketplace. Fueled by recent high levels of expenditures from federal, state and local sources, the Company expects that its public sector market will provide good bidding opportunities as the year unfolds.
The condition of the private sector construction market, however, is less clear at this time. The Branch Division has witnessed some softening in this marketplace, and believes that this is due primarily to a weaker and more uncertain economy, which has prompted private developers to delay planned commercial and residential projects. The effect on Granite’s business is expected to be a decrease in private sector bidding opportunities and the resulting expectation of increased competition in the public sector. Accordingly, as the Company has stated previously, it expects Branch Division earnings and revenue for 2002 to decrease approximately 15 percent from the previous year. While the Branch Division has been awarded a number of large projects during the first half of the year, it sees weakness in its “turn business” (work that is awarded and completed within the year) going forward.
Our entry into the New York-area market has not been without its challenges. In late July, the Company announced that its expectations for earnings were lower than Wall Street’s consensus estimate for the second quarter ended June 30, 2002 and for the year 2002. The reduced earnings expectations are not only related to the lower expectations from the Branch “turn business,” but is also related to the increased costs on certain contracts at Granite Halmar, our New York subsidiary. We continue working to build the capabilities of our team in the New York region and have been incorporating Granite’s processes and systems as well as providing the training necessary of Granite Halmar personnel to support the size of their business. This effort includes training on Granite’s bid estimating and job cost systems. While the transition and integration process for Granite Halmar has been challenging, we believe that by providing the appropriate tools and training, it can successfully improve its operations going forward and take advantage of significant upcoming opportunities in the New York area.
On the federal front, the full Senate Appropriations Committee approved a fiscal year 2003 transportation spending measure that would provide $31.8 billion for the federal highway program—the same investment level as the current year. The proposed highway investment level would eliminate the potential $8.6 billion reduction in federal highway investment that was the result of the economic recession and overly optimistic forecasts of Highway Trust Fund receipts. The measure would also provide $7.3 billion for the federal transit program, $100.0 million above the TEA-21 guaranteed funding level. According to the American Road and Transportation Builders Association, any Senate action will have to be resolved with the House of Representatives, which is expected to offer a highway funding level closer to the TEA-21 guaranteed investment of $27.7 billion for FY 2003.
Politically in California, the state entered its new fiscal year on July 1st without an approved state budget. Although the Senate passed its version of the $99.0 billion annual spending plan in late June, the bill continues to be stuck in the Assembly where lawmakers are debating over how to bridge the state’s $23.6 billion shortfall. Since most of the projects we are currently working on for the California Department of Transportation (“Caltrans”) are projects awarded during the state’s fiscal year 2002 and are therefore being paid for with 2002 funds, we have not been negatively impacted by the budget impasse to
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date. However, a continued stalemate has the potential to delay the number of projects that Caltrans puts out to bid until a resolution is reached. It is important to note that other states have also been reporting lower tax receipts that are placing stress on future year budgets; however, it is uncertain what impact this fiscal strain will have on state highway budgets going forward.
Also included in the proposed California state budget is a provision that specifies that $175.0 million would be loaned from the state highway account to go into the general fund. The plan could include loaning another $1.054 billion from Governor Gray Davis’ Transportation Congestion Relief Plan to the general fund. While no money has been loaned from the highway account to date, Caltrans has stated that its building program will not be delayed or cancelled as a result of these loans.
Another political issue we are closely monitoring is Referendum 51 in Washington State. Referendum 51 is a measure on the November ballot that would raise $7.7 billion for transportation projects statewide. If approved by voters, Referendum 51 would increase highway capacity, public transportation, passenger and freight rail, and transportation financing accountability through increased fuel excise taxes, sales taxes on vehicles, and weight fees on trucks and large vehicles. Earlier this year, Granite increased its ownership in Wilder to 55.3%. Wilder has regional offices located in Washington, Oregon and Alaska and had annual revenues of approximately $160.0 million in 2001. Approximately 60% of Wilder’s revenues are generated in the state of Washington.
Overall, despite the weakness in our Branch “turn business” and the challenge in New York, we are very pleased with the success of our current operations, the strength of our backlog and the bidding opportunities ahead. For the time being the Company continues to witness a strong public sector marketplace nationwide and a high level of bidding opportunities, particularly in the area of large, design-build projects. As a result, we remain very positive in our outlook for the business going forward.
Liquidity and Capital Resources
Cash provided by operating activities of $11.4 million for the six months ended June 30, 2002 was slightly higher than the comparable period in 2001 due primarily to higher net income in the 2002 period. Changes in cash from operating activities primarily reflect seasonal variations based on the amount and progress of work being performed. The change in accounts and notes receivable for the six months ended June 30, 2002 of $37.7 million decreased as compared to the change for the six months ended June 30, 2001 of $48.2 million due primarily to a larger quarter-to-quarter increase in revenue from the fourth quarter 2000 to the second quarter 2001 compared to the growth from the fourth quarter 2001 to the second quarter 2002. The change in accrued liabilities for the six months ended June 30, 2002 of $11.7 million increased as compared to the change for the six months ended June 30, 2001 of $2.9 million due to higher accrued costs primarily related to a higher volume of work in the six months ended June 30, 2002 as compared to the same period in 2001. Billings in excess of cost decreased during the six month period ended June 30, 2002 due primarily to the progress of work on several projects that had received advanced payments in 2001. Included in costs and estimated earnings in excess of billings at June 30, 2002 is approximately $12.0 million related to claims and unexecuted change orders acquired from Halmar Builders of New York, Inc. that the Company believes are probable of collection.
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Cash used by investing activities for the six months ended June 30, 2002 decreased $18.3 million over the corresponding 2001 period due primarily to higher net maturities of short-term investments, cash received from T.I.C. Holdings, Inc. (“TIC”) related to the repurchase of TIC shares held by the Company and a decrease in additions to property and equipment, partially offset by amounts paid for business acquisitions during the 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 for the six months ended June 30, 2002 was $21.9 million as compared to $66.0 million provided by financing activities in the corresponding 2001 period, reflecting the absence of significant proceeds from long-term debt during the 2002 period.
Included in long-term debt at June 30, 2002 is $15.8 million from the Company’s newly consolidated Wilder subsidiary, of which $6.1 million is collateralized by certain of Wilder’s assets. This Wilder debt bears interest at rates varying between the bank’s prime rate less 1.0% and 8.0% per annum and is generally payable in installments through 2010. Wilder also has a $10.0 million line of credit with a bank, collateralized by certain of Wilder’s assets, of which $7.0 million was available at June 30, 2002.
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. In addition to its working capital and cash generated from operations, the Company currently has access to funds under a $60.0 million bank revolving line of credit (exclusive of the Wilder line of credit described above), of which $55.7 million was available at June 30, 2002.
The Company believes that its current cash and cash equivalents, short-term investments, cash generated from operations and amounts available under its existing credit facilities will be sufficient to meet its expected working capital needs, capital expenditures, financial commitments and other liquidity requirements associated with its existing operations through at least the next twelve months.
Newly Effective and Recently Issued Accounting Pronouncements: In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 142 became effective on January 1, 2002 and requires that goodwill and intangible assets with indefinite lives no longer be amortized but rather reviewed at least annually for impairment. At June 30, 2002, the Company had goodwill of approximately $19.2 million, which substantially relates to its acquisition of Halmar Builders of New York, Inc. in July of 2001 and is primarily included in the Heavy Construction Division operating segment. The Company did not record any significant amortization of goodwill during the six months ended June 30, 2001. The Company has completed a goodwill impairment review as of the beginning of 2002 and found no impairment. During the first six months of 2002, no goodwill was acquired, impaired or written off.
In August 2001, the 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 No. 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.
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In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. SFAS 146 is required to be adopted by the company on January 1, 2003. The Company does not believe the adoption will have a material effect on its financial position, results of operations, or cash flows
Subsequent Events: On August 1, 2002 the Company’s Board of Directors declared a regular quarterly cash dividend of $0.08 per common share on the Company’s common stock. The dividend is payable October 15, 2002 to stockholders of record September 30, 2002.
On March 17, 1999, the Company’s Board of Directors authorized the Company to repurchase, at management’s discretion, up to $35.0 million of its common stock on the open market, exclusive of repurchases related to employee benefit plans, of which approximately $14.0 million remained at June 30, 2002. During the period from July 1, 2002 to August 9, 2002, the Company repurchased and retired 110,700 shares for a total repurchase price of $2.0 million.
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There has been no material change in the Company’s exposure to market risk since December 31, 2001.
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PART II. OTHER INFORMATION
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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.