<PAGE> 1
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, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File No. 0-18350
GRANITE CONSTRUCTION INCORPORATED
State of Incorporation: I.R.S. Employer Identification
Delaware Number: 77-0239383
Corporate Administration:
585 West Beach Street
Watsonville, California 95076
(408) 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, 1998.
Class Outstanding
----------------------------- -----------------
Common Stock, $0.01 par value 27,627,256 shares
This report on Form 10-Q, including all exhibits, contains 20 pages. The exhibit
index is located on page 19 of this report.
<PAGE> 2
GRANITE CONSTRUCTION INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets as of September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements
of Income for the Three Months and Nine
Months Ended September 30, 1998 and 1997 . . . . . . . . . . . . . 5
Condensed Consolidated Statements
of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . 6
Notes to the Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-15
PART II. OTHER INFORMATION
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 . . . . . . . . . . . . . . . . . 17
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
3
<PAGE> 4
GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
===========================================================================================================
SEPTEMBER 30, December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 56,573 $ 54,359
Short-term investments 30,608 18,410
Accounts receivable 227,474 168,968
Costs and estimated earnings in excess of billings 24,585 22,585
Inventories 16,494 12,251
Deferred income taxes 13,955 13,365
Equity in joint ventures 19,931 12,951
Other current assets 19,869 11,394
---------------------------------
Total current assets 409,489 314,283
- -----------------------------------------------------------------------------------------------------------
Property and equipment 208,780 194,339
- -----------------------------------------------------------------------------------------------------------
Other assets 48,148 43,187
- -----------------------------------------------------------------------------------------------------------
$ 666,417 $ 551,809
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 10,796 $ 12,921
Accounts payable 99,021 80,809
Billings in excess of costs and estimated earnings 57,421 51,573
Accrued expenses and other current liabilities 109,547 65,070
---------------------------------
Total current liabilities 276,785 210,373
- -----------------------------------------------------------------------------------------------------------
Long-term debt 74,177 58,396
- -----------------------------------------------------------------------------------------------------------
Deferred income taxes 25,011 25,606
- -----------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, $0.01 par value, authorized
3,000,000 shares, none outstanding -- --
Common stock, $0.01 par value, authorized 50,000,000
shares; 1998- issued and outstanding 27,623,606 shares;
1997- issued and outstanding 27,399,563 shares 277 274
Additional paid-in capital 44,100 39,745
Retained earnings 253,319 223,498
---------------------------------
297,696 263,517
Unearned compensation (7,252) (6,083)
---------------------------------
290,444 257,434
- -----------------------------------------------------------------------------------------------------------
$ 666,417 $ 551,809
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
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,
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 411,986 $ 328,988 $ 888,100 $ 718,385
Cost of revenue 357,783 290,106 772,343 632,663
------------------------------------------------------------------------
GROSS PROFIT 54,203 38,882 115,757 85,722
General and administrative expenses 23,002 19,517 61,089 54,633
------------------------------------------------------------------------
OPERATING PROFIT 31,201 19,365 54,668 31,089
- --------------------------------------------------------------------------------------------------------------------------
Other income (expense)
Interest income 2,468 2,863 7,326 5,551
Interest expense (2,206) (1,929) (6,375) (5,124)
Gain on sales of property
and equipment 275 263 1,152 2,567
Other, net 1,360 1,106 2,016 1,157
------------------------------------------------------------------------
1,897 2,303 4,119 4,151
- --------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 33,098 21,668 58,787 35,240
Provision for income taxes 12,577 8,017 22,339 13,039
------------------------------------------------------------------------
NET INCOME $ 20,521 $ 13,651 $ 36,448 $ 22,201
==========================================================================================================================
Net income per share
Basic $ 0.77 $ 0.52 $ 1.37 $ 0.84
Diluted $ 0.75 $ 0.51 $ 1.33 $ 0.83
Weighted average shares
of common stock
Basic 26,597 26,422 26,611 26,388
Diluted 27,530 26,933 27,314 26,831
Dividends per share $ 0.06 $ 0.04 $ 0.24 $ 0.20
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED- IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 36,448 $ 22,201
Add (deduct) noncash items included in net income:
Depreciation, depletion and amortization 28,702 28,723
Gain on sales of property and equipment (1,152) (2,567)
Deferred income taxes (1,185) --
Decrease in unearned compensation 2,514 1,729
Common stock contributed to ESOP 859 2,356
Equity in (gain) loss of affiliates (1,339) 894
Cash provided by (used in):
Accounts and notes receivable (62,620) (66,973)
Inventories (4,243) (300)
Equity in construction joint ventures (6,980) (3,559)
Other assets (8,395) 1,113
Accounts payable 18,212 11,758
Billings in excess of costs and estimated earnings, net 3,848 18,008
Accrued expenses 43,917 13,634
-------------------------------
Net cash provided by operating activities 48,586 27,017
- --------------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property and equipment (45,283) (44,337)
Proceeds from sales of property and equipment 3,839 3,968
Investment in affiliates (400) (13,578)
Additions to notes receivable (173) (121)
Repayments of notes receivable 414 947
Decrease (increase) in investments and other assets 1,024 (7,354)
Purchases of short-term investments (48,703) (24,095)
Maturities of short-term investments 36,505 39,508
-------------------------------
Net cash used by investing activities (52,777) (45,062)
- --------------------------------------------------------------------------------------------------------------------
Financing Activities
Additions to long-term debt 60,000 32,969
Repayments of long-term debt (46,344) (5,467)
Employee stock options exercised 423 153
Repurchase of common stock (1,607) (2,820)
Dividends paid (6,067) (5,474)
-------------------------------
Net cash provided by financing activities 6,405 19,361
- --------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 2,214 1,316
Cash and cash equivalents at beginning of period 54,359 38,663
-------------------------------
Cash and cash equivalents at end of period $ 56,573 $ 39,979
====================================================================================================================
Supplementary Information
Cash paid during the period for:
Interest $ 4,218 $ 3,232
Income taxes 14,382 312
Noncash investing and financing activity:
Restricted stock issued for services $ 3,795 $ 3,498
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
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 generally accepted accounting principles 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, 1998 and the
results of operations and cash flows for the periods presented. The
December 31, 1997 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, 1998 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,
1998 1997
-------------------------------
<S> <C> <C>
(UNAUDITED)
Land $ 31,032 $ 20,654
Quarry property 35,862 35,862
Buildings and leasehold improvements 19,887 17,175
Equipment and vehicles 437,541 416,073
Office furniture and equipment 4,611 5,467
-------------------------------
528,933 495,231
Less accumulated depreciation,
depletion and amortization 320,153 300,892
-------------------------------
$ 208,780 $ 194,339
===============================
</TABLE>
4. LONG-TERM DEBT: In March 1998 the Company issued long-term debt in the
amount of $60.0 million to a group of institutional holders. The notes are
due in nine equal annual installments beginning in 2002 and bear interest
at 6.54% per annum. Of the proceeds of the notes, $39.0 million was used
to retire the Company's outstanding bank revolving credit notes.
7
<PAGE> 8
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. EARNINGS PER SHARE: In accordance with the disclosure requirements of SFAS
128, a reconciliation of the numerator and denominator of basic and
diluted earnings per share is provided as follows:
<TABLE>
<CAPTION>
==============================================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR - BASIC AND DILUTED EARNINGS PER SHARE
Net income $ 20,521 $ 13,651 $ 36,448 $ 22,201
==============================================================================================================================
DENOMINATOR - BASIC EARNINGS PER SHARE
Common stock outstanding 27,622 27,399 27,618 27,342
Less restricted stock outstanding 1,025 977 1,007 954
---------------------------------------------------------------
TOTAL 26,597 26,422 26,611 26,388
---------------------------------------------------------------
Basic earnings per share $ 0.77 $ 0.52 $ 1.37 $ 0.84
==============================================================================================================================
DENOMINATOR - DILUTED EARNINGS PER SHARE
Denominator - Basic Earnings per Share 26,597 26,422 26,611 26,388
Effect of Dilutive Securities:
Common stock options 72 82 68 80
Warrants 217 -- 148 --
Restricted stock 644 429 487 363
---------------------------------------------------------------
TOTAL 27,530 26,933 27,314 26,831
---------------------------------------------------------------
Diluted earnings per share $ 0.75 $ 0.51 $ 1.33 $ 0.83
==============================================================================================================================
</TABLE>
6. CONTINGENCIES: The Company is currently a party to various claims and
legal proceedings, none of which is considered by management to be
material to the Company's financial position.
7. RECLASSIFICATIONS: Certain prior year financial statement items have been
reclassified to conform to the current year's presentation.
8. STOCK SPLIT: On July 6, 1998, the Company announced that its Board of
Directors approved a three-for-two stock split in the form of a 50% stock
dividend payable on August 7, 1998 to stockholders of record on July 17,
1998. All references in the financial statements to number of shares and
per share amounts of the Company's common stock have been retroactively
restated to reflect the increased number of shares outstanding.
8
<PAGE> 9
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997 the FASB issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 requires
publicly-held companies to report financial and other information about
key revenue-producing segments of the entity for which such information is
available and is utilized by the chief operations decision maker. Specific
information to be reported for individual segments includes profit or
loss, certain revenue and expense items and total assets. A reconciliation
of segment financial information to amounts reported in the financial
statements would be provided. SFAS 131 is effective for the Company at
year-end 1998 and the impact of adoption has not been determined.
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
[GRAPH]
Revenue for the quarter ended September 30, 1998 was $412.0 million, bringing
the nine month total to $888.1 million, an increase of $83.0 million, or 25.2%,
and $169.7 million, or 23.6%, respectively, over the same periods last year. The
increase in the quarter and for the nine months reflects the Company's strong
backlog and turn business.
For the nine months ended September 30, 1998, revenue from public sector
contracts increased $116.5 million to $615.9 million, or 69.4% of total revenue,
from $499.4 million, or 69.6% of total revenue in 1997. Revenue from private
sector contracts of $168.1 million, or 18.9% of total revenue, increased $43.6
million from the nine months ended September 30, 1997 level of $124.6 million.
The increase in private sector revenue reflects a stronger housing and
commercial site development market in the west. Revenue in the Company's primary
geographical area, California, increased in dollars to $427.1 million, but
decreased as a percentage of revenue to 48.1% of total revenue, from $371.6
million, or 51.7% of total revenue, last year.
[GRAPH]
Backlog at September 30, 1998 was $895.9 million, a $154.1 million decrease from
September 30, 1997 and a $13.9 million decrease from December 31, 1997. New
awards for the quarter totaled $275.5 million. The awards and backlog do not
include a $92.4 million interchange project in Texas which was awarded after the
end of the 1998 quarter.
10
<PAGE> 11
REVENUE BY MARKET SECTOR
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
$ % $ %
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Public 615.9 69.4% 499.4 69.6%
Private 168.1 18.9% 124.6 17.3%
Materials 104.1 11.7% 94.4 13.1%
------------------------------------------------------------
888.1 100.0% 718.4 100.0%
============================================================
</TABLE>
AWARDS AND BACKLOG
END OF PERIOD
(IN MILLIONS)
<TABLE>
<CAPTION>
AWARDS BACKLOG
------ -------
<S> <C> <C>
1994
Q1 111.8 664.7
Q2 148.9 640.1
Q3 194.9 594.9
Q4 128.2 550.2
1995
Q1 199.5 644.4
Q2 302.9 720.6
Q3 143.1 557.2
Q4 289.2 590.1
1996
Q1 188.0 624.3
Q2 259.9 635.8
Q3 382.5 715.7
Q4 106.1 597.9
1997
Q1 483.0 934.1
Q2 317.7 1,009.2
Q3 369.7 1,050.0
Q4 169.7 909.8
1998
Q1 191.0 917.4
Q2 407.8 1,032.4
Q3 275.5 895.9
</TABLE>
<PAGE> 12
[GRAPH]
The private sector backlog increased to 14.9% of total backlog from 6.6% at
December 31, 1997 and 6.7% at September 30, 1997. The increase in private sector
backlog primarily reflects a railroad project in Texas, which contributed $37.2
million to private sector backlog, as well as the stronger market for housing
and commercial site development.
Gross profit for the quarter ended September 30, 1998 was $54.2 million, or
13.2% of revenue, as compared to $38.9 million, or 11.8% of revenue, for 1997.
The nine month gross profit increased $30.1 million to $115.8 million, or 13.0%
of revenue versus $85.7 million or 11.9% of revenue in 1997. The increased gross
profit margin reflects the current favorable market conditions as well as the
Company's Interstate-15 rebuild project in Salt Lake City, Utah which reached
the 25% completion threshold for profit recognition during the second quarter.
Revenue in an amount equal to cost incurred is recognized prior to contracts
reaching 25% completion.
General and administrative expenses for the three months ended September 30,
1998 increased $3.5 million to $23.0 million, but decreased as a percentage of
revenue to 5.6% in 1998 from 5.9% for the same quarter last year. For the nine
months, general and administrative expenses increased $6.5 million to $61.1
million and decreased as a percentage of revenue to 6.9% from 7.6% last year.
The dollar increase is primarily due to higher profit sharing, incentive
compensation and other costs resulting from the Company's increased revenue and
bidding activities partially offset by the collection of a previously
written-off bad debt.
[GRAPH]
Net income for the quarter ended September 30, 1998 was $20.5 million, or $0.75
per diluted share, an increase of $6.9 million or $0.24 per diluted share from
the quarter ended September 30, 1997. For the nine months, net income was $36.4
million, or $1.33 per diluted share, a $14.2 million, or $0.50 per diluted share
increase from the prior year.
11
<PAGE> 13
BACKLOG BY MARKET SECTOR
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
$ % $ %
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Public 762.4 85.1% 849.5 93.4%
Private 133.5 14.9% 60.3 6.6%
------------------------------------------------------------
895.9 100.0% 909.8 100.0%
============================================================
</TABLE>
SEASONALITY OF BUSINESS
REVENUE AND NET INCOME BY QUARTER
(IN MILLIONS)
<TABLE>
<CAPTION>
NET
REVENUE INCOME
------- ------
<S> <C> <C>
1994
Q1 106.7 (2.1)
Q2 173.6 4.6
Q3 240.2 13.6
Q4 172.9 3.3
1995
Q1 105.3 1.2
Q2 226.7 8.3
Q3 306.6 13.2
Q4 256.2 5.8
1996
Q1 153.7 0.4
Q2 248.5 9.1
Q3 302.6 15.1
Q4 223.9 2.8
1997
Q1 146.8 0.2
Q2 242.6 8.3
Q3 329.0 13.7
Q4 309.8 5.6
1998
Q1 183.3 1.4
Q2 292.8 14.5
Q3 412.0 20.5
</TABLE>
<PAGE> 14
OUTLOOK
This "Outlook" section contains forward-looking statements which are made in
reliance on the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
involve risks and uncertainties, including, 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; competition and pricing pressures;
state referendums and initiatives; and other risks detailed from time to time in
the Company's filings with the Securities and Exchange Commission.
As 1998 comes to a close, we are in line to finish the year with record results.
Our strong financial performance this past year was primarily due to a higher
volume of work at higher margins in both divisions. Contributions made from El
Nino-related emergency work and the initial recognition of profit from the I-15
project in Salt Lake City were two events unique to 1998 that also positively
impacted the year. As discussed in the following outlook, we believe that many
of the factors necessary for a continuation of a strong underlying business are
in place.
Evidenced by the signing of the Transportation Equity Act for the 21st Century
(TEA-21) and the recently passed appropriations bill, federal funding levels for
transportation are at an all time high. Signed by the president on October 21,
1998, the Transportation Appropriations Bill allots $27 billion in spending for
highways, approximately $3.7 billion over levels in fiscal year 1998. These
funding levels remain consistent with the guaranteed amounts provided in TEA-21.
In many of the states in which Granite operates, including California, Texas and
Florida, the Company believes it is well-positioned to take advantage of these
record funding levels over the life of the bill.
The opportunities that TEA-21 provides for companies such as Granite are just
beginning to emerge. Because the cycle for federal money to progress from
planning to design to actual construction bids takes time, the five month-old
bill and subsequent appropriations bills will take time to translate into a
significant amount of construction work.
On the political front, California voters recently passed Proposition 2, which
encourages government fiscal responsibility by putting a stop to the
Legislature's ability to siphon off funds from local and state transportation
resources for General Fund programs. Proposition 2 amends the state Constitution
requiring that any loans from transportation funds be repaid during the same
fiscal year, thereby helping to ensure that money raised for transportation will
be made available for construction projects throughout the state.
Looking ahead to 1999, bidding opportunities for both divisions look very
strong. HCD is witnessing a consistent stream of new projects coming out to bid
in both highway and transit construction. Projects in line for bid include a
portion of the "Big Dig" project in downtown Boston and various light rail
projects in Seattle, Portland, Sacramento and Salt Lake City. Granite recently
announced the award of a $92.4 million highway contract in Texas, signifying the
third largest individually awarded contract in the Company's history (excluding
awards from joint venture projects).
Bidding activity in the Branch Division is also strong - fueled by public sector
demand and increased opportunities in the private sector. In California, housing
starts and private site development work has been strong even though this
industry has lagged the growth of the general economy. While the state's economy
remains strong, housing and land development may be one of the earlier
indicators of a slow up.
12
<PAGE> 15
Much has been written recently about the global economic crisis and its affect
on U.S. companies and the U.S. economy. How might this downturn affect Granite?
Since our focus is solely on the domestic marketplace, we have no work overseas,
thus no exposure to delays or cancellations of overseas projects. If the current
economic turmoil in Asia and South America were to pull the U.S. economy into a
recession, our private sector market could soften, particularly site development
and housing. We would not expect an economic downturn to directly affect our
public sector markets, particularly our highway and transit markets, which will
be buoyed by the TEA-21 bill for the next five years. However, competition would
likely increase for public sector work to the extent that private sector work
dries up.
Overall, the Company will remain focused on growth externally and internally
through both acquisitions and expansion of our internal operations. We feel that
with the continued strength of our "turn" business, a healthy backlog and our
ability to take advantage of the exciting opportunities ahead of us, Granite is
well-positioned to grow our business into the coming year.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents, September 30 $ 56,573 $ 39,979
Net cash provided (used) by:
Operating activities 48,586 27,017
Investing activities (52,777) (45,062)
Financing activities 6,405 19,361
- ------------------------------------------------------------------------------------------
</TABLE>
Cash provided by operating activities of $48.6 million for the nine months ended
September 30, 1998 represents a $21.6 million increase from the 1997 amount for
the same period. Changes in cash provided from operations reflect seasonal
variations based on the amount and progress of work being performed.
Cash used by investing activities in 1998 increased $7.7 million which reflects
a higher level of short-term investments partially offset by the absence of the
investment in TIC Holdings, Inc. which occurred in May 1997.
Cash provided by financing activities primarily reflects the issuance of
long-term debt in March 1998 in the amount of $60 million to a group of
institutional holders. The notes are due in nine equal annual installments
beginning in 2002 and bear interest at 6.54% per annum. Of the proceeds of the
debt, $39.0 million was used to retire existing debt.
The Company's current borrowing capacity under its revolving line of credit is
$75 million of which $71.5 was available on September 30, 1998. The Company
believes that its current cash balances combined with cash flows from operations
and cash available under its revolving credit agreements will be sufficient to
meet its operating needs, anticipated capital expenditure plans and other
financial commitments as least through 1998.
IMPACT OF THE YEAR 2000 ISSUE
This section of the Year 2000 issue contains forward-looking statements which
are made in reliance on the safe harbor provisions of the Private Securities
Litigation Reform Act of 1998. Investors are cautioned that such forward looking
statements involve risks and uncertainties outlined below and other risks that
may be detailed from time to time in the Company's filings with the Securities
and Exchange Commission. The costs of the planned Year 2000 modifications and
the dates by which the Company expects to complete its plans are based on
Management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third-party modification plans and other factors. Specific factors that might
cause differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas, the
ability to locate and correct all relevant computer codes, changes in consulting
fees and costs to remediate or replace hardware and software as well as
non-incremental costs resulting from redeployment of internal resources, timely
responses to and corrections by third parties such as significant customers and
suppliers, and similar uncertainties.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The issue arises if
date-sensitive software recognizes a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
14
<PAGE> 17
The Company's information technology systems consist primarily of hardware and
software purchased from outside parties. The vendor for the Company's
enterprise-wide software has informed the Company that the version of its
software that the Company is currently utilizing is Year 2000 compliant and the
Company is currently testing to ensure that this is the case. This testing phase
is expected to be complete by the end of 1998. The Company is in the process of
addressing the Year 2000 compliance of other software and hardware, including
embedded chips, being used in its business. The Company is utilizing a seven
step process in addressing compliance of these other systems: (1) awareness; (2)
inventory of all systems and documentation; (3) assessment to identify any areas
of noncompliance; (4) remediation/renovation of any noncompliant systems; (5)
verification of compliance through testing and/or vendor certification; (6)
implementation of any necessary changes revealed during verifications; and (7)
monitoring of the results of implementation. The Company expects to have
completed this process for its non-enterprise software and hardware by the end
of first quarter 1999.
The Company has begun the process of identifying and making inquiries of its
significant suppliers and large public and private sector customers to determine
the extent to which the Company is vulnerable to those third parties' failure to
solve their own Year 2000 issues. The Company expects that the process of making
inquiries to these significant suppliers and customers will be ongoing through
the end of 1999. However, there can be no guarantee that the systems of other
companies or public agencies with which the Company does business will be timely
converted, or that failure to convert by another company or public agency would
not have a material adverse effect on the Company.
The Company's most reasonably likely worst case Year 2000 scenario would be an
interruption in work or cash flow resulting from unanticipated problems
encountered with the information systems of the Company, or of any of the
significant third parties with whom the company does business. The Company
believes that the risk of significant business interruption due to unanticipated
problems with its own systems is low based on the progress of the Year 2000
project to date. If unforeseen internal disruptions occur, the Company believes
that its existing disaster recovery program, which includes the manual
processing of certain key transactions, would significantly mitigate the impact.
The Company's highest risk relates to significant suppliers or customers failing
to remediate their Year 2000 issues in a timely manner. Relating to its
suppliers, the Company has identified and will continue to identify alternative
suppliers. The Company's suppliers are generally locally or regionally based,
which tends to lessen the Company's exposure from the lack of readiness of any
single supplier. The risk relating to the Company's customers relates primarily
to any delay in receipt of payment due to a customer's unresolved Year 2000
issue. The Company's existing financial resources will help to mitigate such an
impact and the Company will continue to assess this risk as it receives
communications about the Year 2000 status of its customers.
The Company estimates that costs to address the Year 2000 issue will total
approximately $500,000, including costs already incurred. These estimated costs
include consulting fees and costs to remediate or replace hardware and software
as well as non-incremental costs resulting from redeployment of internal
resources. To date, approximately $380,000 has been incurred and expensed
related to the Year 2000 issue. The Company's Year 2000 costs will be funded
from its operating cash flows.
15
<PAGE> 18
PART II. OTHER INFORMATION
16
<PAGE> 19
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
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
None
17
<PAGE> 20
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
By: /s/ William E. Barton
------------------------------------------
Date: November 13, 1998 William E. Barton
Vice President and Chief Financial Officer
18
<PAGE> 21
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
By:
------------------------------------------
Date: November 13, 1998 William E. Barton
Vice President and Chief Financial Officer
18
<PAGE> 22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
27 Financial Data Schedule . . . . . . . . . . . . . . 20
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF INCOME, AND
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q, SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 56,573
<SECURITIES> 30,608
<RECEIVABLES> 228,782
<ALLOWANCES> 1,308
<INVENTORY> 16,494
<CURRENT-ASSETS> 409,489
<PP&E> 528,933
<DEPRECIATION> 320,153
<TOTAL-ASSETS> 666,417
<CURRENT-LIABILITIES> 276,785
<BONDS> 74,177
0
0
<COMMON> 277
<OTHER-SE> 290,167
<TOTAL-LIABILITY-AND-EQUITY> 666,417
<SALES> 888,100
<TOTAL-REVENUES> 888,100
<CGS> 772,343
<TOTAL-COSTS> 833,432
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,375
<INCOME-PRETAX> 58,787
<INCOME-TAX> 22,339
<INCOME-CONTINUING> 36,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,448
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.33
</TABLE>
