UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2001 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _____________ Commission File No. 1-12911 GRANITE CONSTRUCTION INCORPORATED State of Incorporation: I.R.S. Employer Identification Delaware Number: 77-0239383 Corporate Administration: 585 West Beach Street Watsonville, California 95076 (831) 724-1011 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 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 November 9, 2001. Class Outstanding - ------------------------------- ----------------- Common Stock, $0.01 par value 41,110,410 shares
GRANITE CONSTRUCTION INCORPORATED INDEX <TABLE> <CAPTION> Page ---- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000.................................................4 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2001 and 2000.......................................5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000.......................................6 Notes to the Condensed Consolidated Financial Statements...........................................7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................12-19 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......20 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................22 Item 2. Changes in Securities............................................22 Item 3. Defaults upon Senior Securities..................................22 Item 4. Submission of Matters to a Vote of Security Holders..............................................22 Item 5. Other Information................................................22 Item 6. Exhibits and Reports on Form 8-K.................................22 </TABLE> 2
PART I. FINANCIAL INFORMATION 3
GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) <TABLE> <CAPTION> ============================================================================================= SEPTEMBER 30, December 31, 2001 2000 - --------------------------------------------------------------------------------------------- (UNAUDITED) <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 112,038 $ 57,759 Short-term investments 53,142 42,972 Accounts receivable 341,344 221,374 Costs and estimated earnings in excess of billings 53,810 19,473 Inventories 22,420 16,747 Deferred income taxes 16,138 15,857 Equity in construction joint ventures 25,191 25,151 Other current assets 7,993 12,295 --------------------------- Total current assets 632,076 411,628 - --------------------------------------------------------------------------------------------- Property and equipment 270,720 249,077 - --------------------------------------------------------------------------------------------- Investments in affiliates 55,364 40,052 - --------------------------------------------------------------------------------------------- Other assets 23,216 10,385 - --------------------------------------------------------------------------------------------- $ 981,376 $ 711,142 ============================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 7,515 $ 1,130 Accounts payable 147,295 90,111 Billings in excess of costs and estimated earnings 113,957 57,412 Accrued expenses and other current liabilities 113,783 82,924 --------------------------- Total current liabilities 382,550 231,577 - --------------------------------------------------------------------------------------------- Long-term debt 150,319 63,891 - --------------------------------------------------------------------------------------------- Other long-term liabilities 9,779 6,370 - --------------------------------------------------------------------------------------------- Deferred income taxes 31,540 31,540 - --------------------------------------------------------------------------------------------- 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 100,000,000 shares; issued and outstanding 41,110,272 shares in 2001 and 40,881,908 in 2000 411 409 Additional paid-in capital 61,601 56,381 Retained earnings 358,714 330,172 Accumulated other comprehensive loss (734) -- --------------------------- 419,992 386,962 Unearned compensation (12,804) (9,198) --------------------------- 407,188 377,764 - --------------------------------------------------------------------------------------------- $ 981,376 $ 711,142 ============================================================================================= </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4
GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> ====================================================================================================== THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Revenue Construction $ 452,555 $ 391,014 $ 977,237 $ 885,637 Material sales 64,177 50,742 143,792 116,261 ---------------------------- ---------------------------- Total revenue 516,732 441,756 1,121,029 1,001,898 ---------------------------- ---------------------------- Cost of revenue Construction 406,733 332,740 874,425 759,559 Material sales 48,213 41,538 116,151 98,813 ---------------------------- ---------------------------- Total cost of revenue 454,946 374,278 990,576 858,372 ---------------------------- ---------------------------- GROSS PROFIT 61,786 67,478 130,453 143,526 General and administrative expenses 31,926 29,304 83,213 79,088 ---------------------------- ---------------------------- OPERATING INCOME 29,860 38,174 47,240 64,438 - ------------------------------------------------------------------------------------------------------ Other income (expense) Interest income 3,949 2,775 8,712 8,438 Interest expense (2,549) (1,948) (6,452) (5,933) Gain on sales of property and equipment 3,456 218 8,380 2,596 Other, net 3,894 1,268 4,069 2,586 ---------------------------- ---------------------------- 8,750 2,313 14,709 7,687 - ------------------------------------------------------------------------------------------------------ INCOME BEFORE PROVISION FOR INCOME TAXES 38,610 40,487 61,949 72,125 Provision for income taxes 14,672 15,587 23,541 29,068 - ------------------------------------------------------------------------------------------------------ NET INCOME $ 23,938 $ 24,900 $ 38,408 $ 43,057 ====================================================================================================== Net income per share Basic $ 0.60 $ 0.63 $ 0.97 $ 1.09 Diluted $ 0.59 $ 0.62 $ 0.94 $ 1.07 Weighted average shares of common stock Basic 39,828 39,522 39,788 39,434 Diluted 40,784 40,370 40,673 40,263 Dividends per share $ 0.08 $ 0.07 $ 0.24 $ 0.24 ====================================================================================================== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 5
GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS) <TABLE> <CAPTION> =========================================================================================================== NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Operating Activities Net income $ 38,408 $ 43,057 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 35,797 33,124 Gain on sales of property and equipment (8,380) (2,596) Gain on sale of investment -- (636) Increase in deferred income tax (450) -- Amortization of unearned compensation 3,564 4,464 Common stock contributed to ESOP -- 632 Equity in gain of affiliates and other (3,600) (431) Changes in assets and liabilities: Accounts and notes receivable (77,099) (73,387) Inventories (5,673) (2,779) Equity in construction joint ventures (40) 3,253 Other assets 4,257 1,745 Accounts payable 13,121 19,076 Billings in excess of costs and estimated earnings, net 36,972 (5,540) Accrued expenses 31,260 19,280 ------------------------- Net cash provided by operating activities 68,137 39,262 - ----------------------------------------------------------------------------------------------------------- Investing Activities Purchases of short-term investments (88,175) (61,994) Maturities of short-term investments 77,271 66,780 Additions to property and equipment (57,947) (38,985) Proceeds from sales of property and equipment 18,263 4,547 Proceeds from sale of investment -- 5,000 Investment in affiliates (11,712) (14,303) Acquisition of Halmar Builders of New York Inc., net of cash acquired (11,394) -- Development and sale of land and other investing activities (2,065) 2,658 ------------------------- Net cash used by investing activities (75,759) (36,297) - ----------------------------------------------------------------------------------------------------------- Financing Activities Additions of long-term debt 103,000 -- Repayments of long-term debt (29,717) (5,776) Employee stock options exercised -- 406 Repurchase of common stock (2,080) (1,834) Dividends paid (9,302) (8,985) ------------------------- Net cash provided (used) by financing activities 61,901 (16,189) - ----------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 54,279 (13,224) Cash and cash equivalents at beginning of period 57,759 61,832 ------------------------- Cash and cash equivalents at end of period $ 112,038 $ 48,608 =========================================================================================================== Supplementary Information Cash paid during the period for: Interest $ 4,044 $ 4,966 Income taxes 3,147 10,441 Noncash investing and financing activity: Restricted stock issued for services $ 7,170 $ 6,912 Dividends accrued but not paid 3,289 2,729 =========================================================================================================== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 6
Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Data) 1. BASIS OF PRESENTATION: The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted, although the Company believes the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position at September 30, 2001 and the results of operations and cash flows for the periods presented. The December 31, 2000 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Interim results are subject to significant seasonal variations and the results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. 2. INVENTORIES: Inventories consist primarily of quarry products valued at the lower of average cost or market. 3. PROPERTY AND EQUIPMENT: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, 2001 2000 (UNAUDITED) - ---------------------------------------------------------------------------------- <S> <C> <C> Land $ 37,934 $ 38,113 Quarry property 44,655 45,080 Buildings and leasehold improvements 42,871 38,753 Equipment and vehicles 549,588 508,976 Office furniture and equipment 9,180 8,597 --------------------------- 684,228 639,519 Less accumulated depreciation, depletion and amortization 413,508 390,442 - ---------------------------------------------------------------------------------- $270,720 $249,077 ================================================================================== </TABLE> 7
Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Data) 4. EARNINGS PER SHARE: <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> NUMERATOR - BASIC AND DILUTED EARNINGS PER SHARE Net income $23,938 $24,900 $38,408 $43,057 ============================================================================================ DENOMINATOR - BASIC EARNINGS PER SHARE Common stock outstanding 41,107 40,932 41,070 40,793 Less restricted stock outstanding 1,279 1,410 1,282 1,359 ------------------------------------------- TOTAL 39,828 39,522 39,788 39,434 ------------------------------------------- Basic earnings per share $ 0.60 $ 0.63 $ 0.97 $ 1.09 ============================================================================================ DENOMINATOR - DILUTED EARNINGS PER SHARE Denominator - Basic Earnings per Share 39,828 39,522 39,788 39,434 Effect of Dilutive Securities: Common stock options 17 12 17 14 Warrants 204 144 201 142 Restricted stock 735 692 667 673 ------------------------------------------- TOTAL 40,784 40,370 40,673 40,263 ------------------------------------------- Diluted earnings per share $ 0.59 $ 0.62 $ 0.94 $ 1.07 ============================================================================================ </TABLE> 5. COMPREHENSIVE INCOME: The components of comprehensive income, net of tax, are as follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2001 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> Net income $ 23,938 $ 38,408 Other comprehensive loss: Changes in net unrealized losses on investments (622) (734) ------------------------------------ TOTAL COMPREHENSIVE INCOME $ 23,316 $ 37,674 ====================================================================================================== </TABLE> 6. COMMITMENTS AND CONTINGENCIES: DISCLOSURE OF SIGNIFICANT ESTIMATES - LITIGATION: The Company is a party to a number of legal proceedings and 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 are material to the Company's financial position. The Company's litigation typically involves claims regarding public liability or contract related issues. 7. RECLASSIFICATIONS: Certain prior-year financial statement items have been reclassified to conform to the current year's presentation. 8
Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Data) 8. STOCK SPLIT: On February 21, 2001, the Company announced a three for two stock split in the form of a 50% stock dividend payable April 13, 2001. All references in the condensed consolidated 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. 9. INVESTMENT IN WILDER CONSTRUCTION: On February 23, 2001, the Company purchased an additional 450,000 shares of Wilder Construction Company ("Wilder") common stock for a purchase price of approximately $4.6 million. The Company currently holds a 48% minority interest in Wilder. At September 30, 2001 the Company held 1,949,746 shares of Wilder stock. 10. LONG-TERM DEBT: In May 2001 the Company issued long-term debt in the amount of $75.0 million to a group of institutional holders. The notes are due in nine equal annual installments beginning in 2005 and bear interest at 6.96% per annum. Restrictive covenants under the agreement require the maintenance of consolidated net worth (as defined) of approximately $289,000. The funds will be used for general corporate purposes. 11. ACQUISITION OF HALMAR BUILDERS OF NEW YORK, INC.: On July 1, 2001 the Company acquired 100% of the common stock of Halmar Builders of New York, Inc., a Mt. Vernon, New York heavy-civil construction company ("Halmar") for a cash payment of approximately $13.0 million ($11.4 million net of cash acquired) on a total purchase price of approximately $19.0 million, subject to final closing adjustments. The new entity operates under the name Granite Halmar Construction Company, Inc. ("Granite Halmar") as a wholly-owned subsidiary of Granite Construction Incorporated. If Granite Halmar achieves certain predetermined financial results over a two-year period, the Company will pay the former Halmar shareholders up to an additional $2.0 million. The acquisition was accounted for in accordance with Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." The results of operations of Granite Halmar are included in these condensed consolidated financial statements as of July 1, 2001. The current purchase price allocation is considered preliminary, as certain information needed for finalization is not yet available. The Acquisition is not considered material. Therefore, certain disclosures otherwise required have been omitted. 12. 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. 9
Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Data) The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating profit or loss which does not include income taxes, interest income, interest expense or other income (expense). <TABLE> <CAPTION> Information about Profit and Assets: - -------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, HCD BRANCH TOTAL - -------------------------------------------------------------------------------- <S> <C> <C> <C> 2001 Revenues from external customers $ 146,430 $ 370,302 $ 516,732 Intersegment revenue transfer (4,059) 4,059 -- -------------------------------------- Net revenue 142,371 374,361 516,732 Depreciation and amortization 2,553 8,320 10,873 Operating (loss) profit (7,462) 49,520 42,058 - -------------------------------------------------------------------------------- 2000 Revenues from external customers $ 91,120 $ 350,636 $ 441,756 Intersegment revenue transfer (4,196) 4,196 -- -------------------------------------- Net revenue 86,924 354,832 441,756 Depreciation and amortization 1,735 7,982 9,717 Operating profit 10,015 39,609 49,624 - -------------------------------------------------------------------------------- <CAPTION> - -------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, HCD BRANCH TOTAL - -------------------------------------------------------------------------------- <S> <C> <C> <C> 2001 Revenues from external customers $ 327,231 $ 793,798 $1,121,029 Intersegment revenue transfer (8,376) 8,376 -- -------------------------------------- Net revenue 318,855 802,174 1,121,029 Depreciation and amortization 6,900 24,333 31,233 Operating (loss) profit (5,609) 81,733 76,124 Property and equipment 44,332 207,699 252,031 - -------------------------------------------------------------------------------- 2000 Revenues from external customers $ 276,207 $ 725,691 $1,001,898 Intersegment revenue transfer (12,017) 12,017 -- -------------------------------------- Net revenue 264,190 737,708 1,001,898 Depreciation and amortization 5,416 23,769 29,185 Operating profit 27,472 63,810 91,282 Property and equipment 26,446 200,137 226,583 - -------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Reconciliation of Segment Profit to the Company's Consolidated Totals: - -------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 - -------------------------------------------------------------------------- <S> <C> <C> Profit: Total profit for reportable segments $42,058 $49,624 Other income 8,750 2,313 Unallocated other corporate expenses (12,198) (11,450) - -------------------------------------------------------------------------- Income before provision for income taxes $38,610 $40,487 ========================================================================== </TABLE> 10
Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Data) <TABLE> <CAPTION> - --------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 - --------------------------------------------------------------------------- <S> <C> <C> Profit: Total profit for reportable segments $ 76,124 $ 91,282 Other income 14,709 7,687 Unallocated other corporate expenses (28,884) (26,844) - --------------------------------------------------------------------------- Income before provision for income taxes $ 61,949 $ 72,125 =========================================================================== </TABLE> 13. RECENT ACCOUNTING PRONOUNCEMENTS: In July 2001, the Financial Accounting and Standards Board ("FASB") issued Statement No. 141 ("SFAS 141"), "Business Combinations," and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under a single method--the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment upon initial adoption of the Statement and on an annual basis going forward. The provisions of SFAS 142 will be effective for fiscal years beginning after December 15, 2001. In August 2001, FASB issued Statement No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations." SFAS 143 requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. SFAS 143 will be effective for financial statements for fiscal years beginning after June 15, 2002. In October 2001, FASB issued Statement No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 provides guidance on the accounting for the impairment or disposal of long-lived assets, supercedes SFAS 121, and is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact, if any, of adopting SFAS 142, 143 and 144. 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 existence of bidding opportunities 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," "appears," "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; weather conditions; competition and pricing pressures; and state referendums and initiatives. RESULTS OF OPERATIONS <TABLE> <CAPTION> - --------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------ REVENUE (IN MILLIONS) 2001 2000 VARIANCE % - --------------------------------------------------------------------------- <S> <C> <C> <C> <C> By Division Branch Division $374.4 $354.9 $19.5 5.4% Heavy Construction Division 142.3 86.9 55.4 63.8% -------------------------------------------- 516.7 441.8 74.9 17.0% =========================================================================== </TABLE> <TABLE> <CAPTION> - --------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- REVENUE (IN MILLIONS) 2001 2000 VARIANCE % - --------------------------------------------------------------------------- <S> <C> <C> <C> <C> By Division Branch Division $ 802.2 $ 737.7 $ 64.5 8.7% Heavy Construction Division 318.8 264.2 54.6 20.7% ------------------------------------------ 1,121.0 1,001.9 119.1 11.9% =========================================================================== </TABLE> Revenue: Revenue for the quarter ended September 30, 2001 increased in both the Branch Division and the HCD over the corresponding quarter in 2000. The Branch Division saw increased revenue from its public sector projects in both the three-month and nine-month periods in 2001 reflecting increases in funding for public infrastructure projects due primarily to the impact of TEA-21 funding. Partially offsetting the increased public sector revenue in the Branch Division was a decrease in private sector revenue of $8.7 million and $21.9 million for the 2001 three-month and nine-month periods, respectively, from the same periods in 2000. As further discussed in the "Outlook" section, the Company believes there has been some softening of the private sector market. The increased HCD revenue for the three months and nine months ended September 30, 2001 over the corresponding periods in 2000 is a reflection of the division's strong backlog of public sector projects. HCD's private sector revenue decreased $10.6 million and $35.8 million in the three months and nine months ended September 30, 2001 as compared to the corresponding periods in 2000 due to the 12
completion of two large private sector projects in 2000. <TABLE> <CAPTION> - -------------------------------------------------------------------------------- SEPTEMBER 30, JUNE 30, SEPTEMBER 30, ---------------------------------------------- BACKLOG (IN MILLIONS) 2001 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> <C> By Market Sector Federal $ 56.2 $ 56.4 $ 78.2 State 829.7 956.0 663.8 Local 528.1 310.0 309.8 ---------------------------------------------- Total public sector 1,414.0 1,322.4 1,051.8 Private sector 179.1 113.9 114.1 ---------------------------------------------- $1,593.1 $1,436.3 $1,165.9 - -------------------------------------------------------------------------------- By Geographic Area California $ 363.7 $ 442.7 $ 289.3 West (excluding California) 337.7 395.0 326.8 Midwest 169.6 186.0 207.3 South/East 722.1 412.6 342.5 ---------------------------------------------- $1,593.1 $1,436.3 $1,165.9 ================================================================================ </TABLE> Backlog: Including approximately $200.0 million from the Halmar acquisition, the Company's backlog was $1,593.1 million at September 30, 2001, an increase of $427.2 million from September 30, 2000 and an increase of $156.8 million from June 30, 2001. New awards for the quarter included the Company's $113.9 million share of a subway reconstruction project in New York and the Company's $69.5 million share of design/build rail reconstruction project in Florida. <TABLE> <CAPTION> - --------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED GROSS PROFIT SEPTEMBER 30, SEPTEMBER 30, - --------------------------------------------------------------------------------- IN MILLIONS 2001 2000 2001 2000 - --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Total Gross Profit $61.8 $67.5 $130.5 $143.5 - --------------------------------------------------------------------------------- % of Revenue 12.0% 15.3% 11.6% 14.3% ================================================================================= </TABLE> Gross Profit: Gross profit as a percent of revenue decreased to 12.0% for the third quarter 2001 from 15.3% for the third quarter 2000 and to 11.6% for the nine months ended September 30, 2001 from 14.3% in the corresponding 2000 period. The lower gross profit margin is partially due to a higher amount of revenue recognized from projects less than 25% complete, particularly in HCD. The Company recognizes revenue only to the extent of cost incurred until a project reaches 25% complete. The amount of revenue generated in the first three quarters of 2001 by jobs below the 25% completion threshold was approximately $113.3 million versus $23.2 million in the same period in 2000. The increase is primarily due to several large HCD projects that were awarded in late 2000 and early 2001 including three that are not expected to reach 25% complete in 2001. Also contributing to the decreased profit margins was a reduction in the forecasted profitability of a non-sponsored joint venture project on the East Coast. The profit reduction primarily reflects the acceleration of work to complete the project on time to avoid paying liquidated damages. The Company recorded a pretax loss of approximately $5.2 million and $7.6 million for its portion of the expected reduced profitability of the project in the three-month and the nine-month periods ending September 30, 2001, respectively. 13
The reductions in gross profit described above were partially offset by strong gross margins in the Branch Division. In particular, gross profit as a percent of material sales revenue increased to 24.9% for the third quarter 2001 from 18.1% for the third quarter 2000 and to 19.2% for the nine months ended September 30, 2001 from 15.0% in the corresponding 2000 period. 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 some upward pressure on costs associated with labor markets, however, the Company's gross profit was not significantly impacted by such changes during the first nine months of 2001. <TABLE> <CAPTION> - -------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED GENERAL AND ADMINISTRATIVE EXPENSES SEPTEMBER 30, SEPTEMBER 30, - -------------------------------------------------------------------------------- IN MILLIONS 2001 2000 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Salaries and related expenses $13.9 $11.6 $39.3 $35.2 Incentive compensation, discretionary profit sharing and pension 9.4 9.0 16.2 18.4 Other general and administrative expenses 8.6 8.7 27.7 25.5 - -------------------------------------------------------------------------------- Total $31.9 $29.3 $83.2 $79.1 - -------------------------------------------------------------------------------- Percent of revenue 6.2% 6.6% 7.4% 7.9% ================================================================================ </TABLE> General and Administrative Expenses: Salaries and related expenses increased for the three and nine months ended September 30, 2001 over the comparable periods in 2000 due primarily to increased staffing to support the Company's current and expected growth. Incentive compensation and discretionary profit sharing and pension costs decreased in the nine month period in 2001 as a function of the Company's lower profitability in the same period. Increases in other general and administrative expenses for the nine-month period in 2001 primarily result from costs associated with the pursuit of new business opportunities and the support of the Company's continued growth, none of which exceeds 10% of total general and administrative expenses. <TABLE> <CAPTION> - -------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED OPERATING INCOME (LOSS) SEPTEMBER 30, SEPTEMBER 30, - -------------------------------------------------------------------------------- IN MILLIONS 2001 2000 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Branch Division $ 49.5 $ 39.6 $ 81.7 $ 63.8 Heavy Construction Division (7.5) 10.0 (5.6) 27.5 Unallocated corporate expenses (12.2) (11.4) (28.9) (26.8) - -------------------------------------------------------------------------------- Total $ 29.8 $ 38.2 $ 47.2 $ 64.5 ================================================================================ </TABLE> Operating Income: The Heavy Construction Division's contribution to operating income decreased in the third quarter 2001 compared to the third quarter 2000 due primarily to the decreased gross profit margin described in "Gross Profit" above and higher general and administrative cost attributable to the division's revenue growth. The Branch Division's contribution to operating income increased in both the three months and nine months ended September 30, 2001 due primarily to the increases in revenue described in "Revenue and Backlog" and gross margins described in "Gross Profit" above. 14
<TABLE> <CAPTION> - -------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED OTHER INCOME (EXPENSE) SEPTEMBER 30, SEPTEMBER 30, - -------------------------------------------------------------------------------- IN MILLIONS 2001 2000 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest income $ 3.9 $ 2.8 $ 8.7 $ 8.4 Interest expense (2.5) (1.9) (6.5) (5.9) Gain on sales of property and equipment 3.5 .2 8.4 2.6 Other, net 3.9 1.2 4.1 2.6 - -------------------------------------------------------------------------------- Total $ 8.8 $ 2.3 $14.7 $ 7.7 ================================================================================ </TABLE> Other Income (Expense): Interest income increased by $1.1 million and $0.3 million for the three-month and nine-month periods ended September 30, 2001, respectively, when compared to the same periods ended September 30, 2000 due to the increased level of short-term investments and interest-bearing cash equivalents. Interest expense increased by $0.6 million for the three-month and nine-month periods ended September 30, 2001 when compared to the same periods ended September 30, 2000 due primarily to the issuance of $75 million in private placement debt in May 2001. Gains on sales of property and equipment in 2001 reflect gains recognized on sale of excess and developed property of approximately $2.9 million in the third quarter 2001 and $2.2 million in the first quarter 2001. Other, net increased over the prior periods due primarily to higher income reported by the Company's equity method investments in the quarter ended September 30, 2001 when compared to the same period in 2000. <TABLE> <CAPTION> - -------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED PROVISION FOR INCOME TAXES SEPTEMBER 30, SEPTEMBER 30, - -------------------------------------------------------------------------------- IN MILLIONS 2001 2000 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Provision for income taxes $14.7 $15.6 $23.5 $29.1 Effective tax rate 38.0% 38.5% 38.0% 40.3% ================================================================================ </TABLE> Provision for Income Taxes: The Company's effective tax rate decreased to 38.0% for the three months ended September 30, 2001 from 38.5% in the same period in 2000. The decrease relates primarily to the expected changes in the relationship of permanent differences such as the percentage depletion deduction to pretax earnings for the year. Additionally, the decrease in the effective tax rate for the nine months ended September 30, 2001 reflects the absence of additional tax expense recognized in the first quarter of 2000 related to the Company reaching an agreement with TIC to divest its investment over a three and one-half year period. 15
OUTLOOK The outlook for our business going forward continues to be very positive. The Company entered the fourth quarter with a record-level backlog of $1,593.1 million. This figure includes the $200.0 million in backlog assumed with the acquisition of Halmar Builders of New York, Inc. The Heavy Construction Division (HCD) is targeting a number of design/build projects throughout the country as states increasingly choose this form of project delivery over the traditional form of design/bid/build. Looking at the project bid schedule over the next few months, HCD has a full plate of opportunities in which to bid, including a number of large design/build projects in Nevada, Arizona and Texas. It is our opinion that Granite's technical expertise, experience and financial strength in the design/build area provides us with a competitive advantage for these types of projects. Currently, design/build projects make up approximately 50% of HCD's total backlog. A combination of record levels of public funding, healthy bid lists and the anticipation that three large HCD projects will reach the 25% complete stage in 2002 lead us to believe that next year will be a very strong year for HCD. Also contributing to HCD's positive outlook is our recent acquisition of Halmar. Granite Halmar is well-positioned to take advantage of the New York area heavy-civil construction marketplace - estimated to yield about $6.0 billion a year in bidding opportunities. Granite Halmar's major clients include the New York State/New York City Departments of Transportation, New York Port Authority and the Metropolitan Transit Authority. Our Branch Division has had a tremendous year to date. We are unclear, however, as to how much this division will be impacted by any economic slow down. As we have previously indicated, we could see a slow down in the Branch business as a result of softening in the private sector market, particularly in California, where the bulk of the Branch's private sector business is derived. As we have seen historically with a slowdown in the private sector, the Branch Division has started to see increased competition in a couple of its markets for public jobs, as contractors who primarily bid on private sector work begin to move into the public sector marketplace. Although this is not likely to impact our year-end 2001 results, gross profit margins in the Branch Division could be affected in 2002 if the economic downturn continues. At the state and local level, the Associated General Contractors of America (AGC) is reporting that in the aftermath of September 11th, many state and local governments are "feeling the pinch of lower tax revenues and higher expenses for relief, security and other spending." At this point in time, Granite has not observed any project delays and continues to see a sizeable amount of projects coming out to bid from all of the states in which we operate. On the federal level, guaranteed funding levels continue to provide the Company with many opportunities in each of the states in which we operate. On July 12, the Senate Appropriations Committee approved a 2002 transportation bill that included $33.2 billion in federal aid for highways. This amount is in line with the guaranteed funding amounts under the Transportation Act for the 21st Century (TEA-21). 16
The Company is also keeping a close eye on the much talked about economic stimulus legislative package. According to an October 4, 2001 article in the Washington Post, the Bush Administration is attempting to put together a stimulus package as large as $75 billion that could include a plan to spend $15 billion on highways, roads, bridges and transit. In California, the Company's largest market, there are two ballot measures that, if passed, could have a significant impact on Granite. On the March 2002 ballot in California is Proposition 42, a proposed constitutional amendment that would redirect the sales tax on gasoline from the state's general fund to transportation funds, including highways and mass transit. It would generate more than $1 billion per year for transportation, according to the California Department of Finance, and that sum will grow with inflation. This is the most important infrastructure funding measure since Proposition 111, which raised the state gasoline tax $0.09 per gallon, starting in 1990. If passed, Prop 42 would take effect in 2003. Early polling by the Yes on Prop 42 campaign indicates fairly strong support for the measure. This would be a very important new long-term source of transportation funding for the state, and would have a positive impact on the Company's business in California. In addition, industry leaders are working to place a measure on the March 2002 ballot which would allow the state to sell $5 to $10 billion in bonds to help speed up construction projects and stimulate it's economy. In early November, Texas voters approved Proposition 15, a constitutional amendment that will allow the state to issue bonds to pay for new highways. Historically, approximately 10% of the Company's revenues are generated from Texas and it is one of HCD's larger markets. Funds from the bonds will be used to finance construction and expansion of state highways, and help pay for toll roads and other transportation projects, including light rail projects. In summary, the Company is faring extremely well in a difficult economic environment. Our healthy backlog and an outstanding list of projects on which to bid provide us with a positive outlook going forward. 17
LIQUIDITY AND CAPITAL RESOURCES <TABLE> <CAPTION> - -------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, - -------------------------------------------------------------------------------- (IN MILLIONS) 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> Cash and cash equivalents $112.0 $ 48.6 Net cash provided (used) by: Operating activities 68.1 39.3 Investing activities (75.8) (36.3) Financing activities 61.9 (16.2) Capital expenditures $57.9 $ 39.0 ================================================================================ </TABLE> Cash provided by operating activities of $68.1 million for the nine months ended September 30, 2001 represents a $28.8 million increase over the same period in 2000. Changes in cash from operating activities primarily reflect variations based on the amount and progress of work being performed. In particular, billings in excess of costs and estimated earnings, net, as of September 30, 2001 increased over December 31, 2000 due to cash timing differences on several large projects in the early stages of construction. Cash used by investing activities for the nine month period in 2001 increased $39.5 million over the corresponding 2000 period due primarily to higher purchases of property and equipment and greater amounts invested in short-term investments versus cash equivalents as well as the absence of the $5.0 million proceeds from the second quarter 2000 TIC divestiture, partially offset by higher proceeds from sales of property and equipment. The Company generated cash from financing activities in the nine months ended September 30, 2001 due to additions to long-term debt which includes $75.0 million received in May 2001 under a new senior credit facility with a group of institutional holders. The borrowing is due in nine equal annual installments beginning in 2005 and bears interest at 6.96% per annum. The funds from this borrowing will be used for general corporate purposes. The Company has budgeted $58.3 million for capital expenditures in 2001, 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 $60.0 million, of which $30.4 million was available at September 30, 2001. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting and Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations," and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under a single method --the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS 142 requires that 18
goodwill no longer be amortized to earnings, but instead be reviewed for impairment upon initial adoption of the Statement and on an annual basis going forward. The provisions of SFAS 142 will be effective for fiscal years beginning after December 15, 2001. In August 2001, FASB issued Statement No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations." SFAS 143 requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. SFAS 143 will be effective for financial statements for fiscal years beginning after June 15, 2002. In October 2001, FASB issued Statement No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 provides guidance on the accounting for the impairment or disposal of long-lived assets, supercedes SFAS 121, and is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact, if any, of adopting SFAS 142, 143 and 144. 19
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, 2000. 20
PART II. OTHER INFORMATION 21
ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits None b) Reports on Form 8-K On July 16, 2001, the Company filed a report on Form 8-K which announced the Company's acquisition of Halmar Builders of New York, Inc. A Copy of the Company's press release announcing the acquisition was attached and incorporated by reference therein. 22
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. GRANITE CONSTRUCTION INCORPORATED Date: September 14, 2001 By: /s/ William E. Barton -------------------- -------------------------------------- William E. Barton Senior Vice President and Chief Financial Officer 23