<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 JUNE 30, 1999
( ) 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
(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 August 9, 1999.
Class Outstanding
Common Stock, $0.01 par value 27,178,160 shares
<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 June 30, 1999 and
December 31, 1998......................................4
Condensed Consolidated Statements
of Income for the Three Months and Six
Months Ended June 30, 1999 and 1998....................5
Condensed Consolidated Statements
of Cash Flows for the Six Months
Ended June 30, 1999 and 1998...........................6
Notes to the Condensed Consolidated
Financial Statements................................7-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................11-16
Item 3. Qualitative and Quantitative Disclosures about
Market Risk ......................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................19
Item 2. Changes in Securities.................................19
Item 3. Defaults upon Senior Securities.......................19
Item 4. Submission of Matters to a Vote
of Security Holders...................................20
Item 5. Other Information.....................................20
Item 6. Exhibits and Reports on Form 8-K......................21
Exhibit Index.........................................23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
3
<PAGE> 4
GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 29,684 $ 62,470
Short-term investments 24,466 58,954
Accounts receivable 194,491 174,748
Costs and estimated earnings in excess of billings 22,041 14,677
Inventories 15,592 12,773
Deferred income taxes 15,397 15,397
Equity in joint ventures 21,948 20,020
Other current assets 9,992 11,769
--------------------------
Total current assets 333,611 370,808
- ----------------------------------------------------------------------------------------------------
Property and equipment 236,382 205,737
- ----------------------------------------------------------------------------------------------------
Other assets 47,746 50,026
- ----------------------------------------------------------------------------------------------------
$ 617,739 $ 626,571
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 10,717 $ 10,787
Accounts payable 85,831 88,194
Billings in excess of costs and estimated earnings 47,787 50,619
Accrued expenses and other current liabilities 83,664 78,760
--------------------------
Total current liabilities 227,999 228,360
- ----------------------------------------------------------------------------------------------------
Long-term debt 65,198 69,137
- ----------------------------------------------------------------------------------------------------
Deferred income taxes 27,792 27,792
- ----------------------------------------------------------------------------------------------------
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; 1999- issued and outstanding 27,178,160 shares;
1998- issued and outstanding 27,648,961 shares 272 277
Additional paid-in capital 49,250 45,080
Retained earnings 258,037 262,517
--------------------------
307,559 307,874
Unearned compensation (10,809) (6,592)
--------------------------
296,750 301,282
- ----------------------------------------------------------------------------------------------------
$ 617,739 $ 626,571
====================================================================================================
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 329,292 $ 292,792 $ 544,096 $ 476,114
Cost of revenue 283,123 250,412 474,598 414,560
---------------------------------------------------------------
GROSS PROFIT 46,169 42,380 69,498 61,554
General and administrative expenses 24,792 19,855 44,414 38,087
---------------------------------------------------------------
OPERATING PROFIT 21,377 22,525 25,084 23,467
- ----------------------------------------------------------------------------------------------------------
Other income (expense)
Interest income 1,041 2,358 3,820 4,858
Interest expense (2,063) (2,267) (3,906) (4,169)
Gain on sales of property
and equipment 3,509 268 3,808 877
Other, net 739 576 (138) 656
---------------------------------------------------------------
3,226 935 3,584 2,222
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 24,603 23,460 28,668 25,689
Provision for income taxes 9,472 8,915 11,037 9,762
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 15,131 $ 14,545 $ 17,631 $ 15,927
==========================================================================================================
Net income per share
Basic $ 0.58 $ 0.55 $ 0.67 $ 0.60
Diluted $ 0.56 $ 0.54 $ 0.65 $ 0.59
Weighted average shares
of common stock
Basic 26,046 26,583 26,255 26,525
Diluted 26,963 27,156 27,164 27,033
Dividends per share $ 0.07 $ 0.05 $ 0.26 $ 0.18
==========================================================================================================
</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)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 17,631 $ 15,927
Add (deduct) noncash items included in net income:
Depreciation, depletion and amortization 20,781 18,863
Gain on sales of property and equipment (3,808) (877)
Decrease in unearned compensation 2,212 1,156
Common stock contributed to ESOP 2,146 --
Equity in (gain) loss of affiliates 1,039 (179)
Cash provided by (used in):
Accounts and notes receivable (21,322) (18,411)
Inventories (2,819) (3,138)
Equity in construction joint ventures (1,928) (3,854)
Other assets 643 (3,359)
Accounts payable (2,363) (7,842)
Billings in excess of costs and estimated earnings, net (8,206) (3,844)
Accrued expenses 4,661 11,613
-------------------------
Net cash provided by operating activities 8,667 6,055
- ---------------------------------------------------------------------------------------------------------------
Investing Activities
Additions to property and equipment (53,239) (33,322)
Proceeds from sales of property and equipment 7,491 1,493
Purchases of short-term investments (36,711) (35,699)
Maturities of short-term investments 71,199 28,505
Other 1,794 (1,736)
-------------------------
Net cash used in investing activities (9,466) (40,759)
- ---------------------------------------------------------------------------------------------------------------
Financing Activities
Additions to long-term debt -- 60,000
Repayments of long-term debt (5,709) (46,287)
Employee stock options exercised 51 380
Repurchase of common stock (19,487) (294)
Dividends paid (6,842) (4,686)
-------------------------
Net cash (used in) provided by financing activities (31,987) 9,113
- ---------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (32,786) (25,591)
Cash and cash equivalents at beginning of period 62,470 54,359
-------------------------
Cash and cash equivalents at end of period $ 29,684 $ 28,768
===============================================================================================================
Supplementary Information
Cash paid during the period for:
Interest $ 2,607 $ 3,162
Income taxes 3,653 5,589
Noncash investing and financing activity:
Restricted stock issued for services $ 6,429 $ 3,795
Dividends accrued but not paid 1,902 1,381
Financed acquisition of property and equipment 1,700 --
===============================================================================================================
</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 June 30, 1999 and the results of
operations and cash flows for the periods presented. The December 31, 1998
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 six months ended June 30, 1999 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>
- ----------------------------------------------------------------
JUNE 30, December 31,
1999 1998
(UNAUDITED)
- ----------------------------------------------------------------
<S> <C> <C>
Land $ 29,665 $ 30,195
Quarry property 42,046 35,862
Buildings and leasehold
improvements 20,917 20,595
Equipment and vehicles 484,383 443,095
Office furniture and equipment 5,039 4,835
-------- --------
582,050 534,582
Less accumulated
depreciation,
depletion and amortization 345,668 328,845
- --------------------------------------------------------------
$236,382 $205,737
==============================================================
</TABLE>
7
<PAGE> 8
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR - BASIC AND DILUTED EARNINGS
PER SHARE
Net income $15,131 $14,545 $17,631 $15,927
======================================================================================================
DENOMINATOR - BASIC EARNINGS PER SHARE
Common stock outstanding 27,316 27,607 27,419 27,523
Less restricted stock outstanding 1,270 1,024 1,164 998
----------------------------------------------------
TOTAL 26,046 26,583 26,255 26,525
----------------------------------------------------
Basic earnings per share $ 0.58 $ 0.55 $ 0.67 $ 0.60
======================================================================================================
DENOMINATOR - DILUTED EARNINGS PER
SHARE
Denominator - Basic Earnings per Share 26,046 26,583 26,255 26,525
Effect of Dilutive Securities:
Common stock options 40 65 43 66
Warrants 218 136 229 114
Restricted stock 659 372 637 328
----------------------------------------------------
TOTAL 26,963 27,156 27,164 27,033
Diluted earnings per share $ 0.56 $ 0.54 $ 0.65 $ 0.59
======================================================================================================
</TABLE>
5. 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.
6. RECLASSIFICATIONS: Certain prior year financial statement items have been
reclassified to conform to the current year's presentation.
8
<PAGE> 9
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. 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.
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 JUNE 30, HCD BRANCH TOTAL
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Revenues from external customers $ 101,731 $227,561 $329,292
Intersegment revenue transfer (5,909) 5,909 --
------------------------------------------
Net revenue 95,822 233,470 329,292
Depreciation and amortization 2,060 7,676 9,736
Operating income 12,638 17,859 30,497
------------------------------------------
1998
Revenues from external customers $ 85,762 $207,030 $292,792
Intersegment revenue transfer (10,061) 10,061 --
------------------------------------------
Net revenue 75,701 217,091 292,792
Depreciation and amortization 1,696 6,870 8,566
Operating income 9,455 23,956 33,411
- ----------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. BUSINESS SEGMENT INFORMATION, CONTINUED:
<TABLE>
<CAPTION>
Information about Profit and Assets, continued:
- -------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, HCD BRANCH TOTAL
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Revenues from external
customers $ 180,454 $363,642 $544,096
Intersegment revenue
transfer (10,650) 10,650 --
------------------------------------------
Net revenue 169,804 374,292 544,096
Depreciation and
amortization 4,007 14,781 18,788
Operating income 14,704 25,674 40,378
Property and equipment 29,342 191,546 220,888
- -------------------------------------------------------------------------------
1998
Revenues from external
customers $ 142,359 $333,755 $476,114
Intersegment revenue
transfer (13,562) 13,562 --
------------------------------------------
Net revenue 128,797 347,317 476,114
Depreciation and amortization 3,540 13,558 17,098
Operating income 7,106 32,494 39,600
Property and equipment 25,359 175,775 201,134
- -------------------------------------------------------------------------------
</TABLE>
Reconciliation of Segment Operating Income to the Company's
Consolidated Totals:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Profit:
Total profit for reportable segments $ 30,497 $ 33,411
Other income 3,226 935
Unallocated other corporate expenses (9,120) (10,886)
- -------------------------------------------------------------------------
Income before provision for income taxes $ 24,603 $ 23,460
=========================================================================
- -------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999 1998
- -------------------------------------------------------------------------
Profit:
Total profit for reportable segments $ 40,378 $ 39,600
Other income 3,584 2,222
Unallocated other corporate expenses (15,294) (16,133)
- -------------------------------------------------------------------------
Income before provision for income taxes $ 28,668 $ 25,689
=========================================================================
</TABLE>
10
<PAGE> 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 the costs
of planned year 2000 modifications and expected dates of year 2000 plan
completion, the most reasonably likely worst case year 2000 scenario, and
the impact of legislation, availability of highway funds and economic
conditions on the Company's future results. Additionally, forward-looking
statements include statements that can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or comparable
terminology, or by discussions of strategy.
All such forward looking statements are subject to risks and
uncertainties that could cause actual results of operations and financial
condition and other events to differ materially from those expressed or
implied in such forward-looking statements. Specific risk factors include,
without limitation, changes in the composition of applicable federal and
state legislation appropriation committees; federal and state
appropriation changes for infrastructure spending; the general state of
the economy; competition and pricing pressures; and state referendums and
initiatives. Forward-looking statements regarding the year 2000 issue
carry risk factors which include, without limitation, the availability and
cost of personnel trained in these areas; the ability to locate and
correct all relevant computer codes; changes in consulting fees and costs
to remediate or replace hardware and software; changes in non-incremental
costs resulting from redeployment of internal resources; timely responses
to and corrections by third parties such as significant customers and
suppliers; and similar uncertainties.
RESULTS OF OPERATIONS
Revenue for the quarter ended June 30, 1999 was $329.3 million, bringing
the six month total to $544.1 million, an increase of $36.5 million, or 12.5%,
and $68.0 million, or 14.3%, respectively, over the same periods last year. The
increase in the quarter and for the six months is due to an increase in volume
in both our Branch and Heavy Construction Divisions.
For the six months ended June 30, 1999, revenue from public sector
contracts increased $12.8 million to $351.2 million, or 64.6% of total revenue,
from $338.4 million, or 71.1% of total revenue in 1998. Revenue from private
sector contracts of $122.4 million, or 22.5% of total revenue, increased $40.1
million from the six months ended June 30, 1998 level of $82.3 million. The
increase in private sector revenue reflects a strong housing and commercial site
development market, particularly in the west.
11
<PAGE> 12
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
REVENUE BY MARKET SECTOR
(IN THOUSANDS)
SIX MONTHS ENDED VARIANCE
JUNE 30,
1999 1998 AMOUNT PERCENT
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRACTS
Federal $ 15,652 $ 27,793 $(12,141) (43.7)
State 232,710 210,017 22,693 10.8
Local 102,857 100,602 2,255 2.2
------------------------------------------
Total public
sector 351,219 338,412 12,807 3.8
Private sector 122,396 82,258 40,138 48.8
Aggregate sales 70,481 55,444 15,037 27.1
-------------------------------------------
$544,096 $476,114 $67,982 14.3
================================================================
</TABLE>
Backlog at June 30, 1999 was $969.4 million, a $63.0 million decrease from
June 30, 1998 and a $67.8 million increase from December 31, 1998. New awards
for the quarter totaled $384.5 million and include a $50.1 million design-build
contract in Texas.
The private sector backlog increased to 18.5% of total backlog from 12.2%
at December 31, 1998 and 13.0% at June 30, 1998. The increase in private sector
backlog primarily reflects a railroad project and a toll road project in Texas,
as well as the stronger market for housing and commercial site development.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
BACKLOG BY MARKET SECTOR
(IN THOUSANDS)
JUNE 30, DECEMBER 31, VARIANCE
1999 1998 AMOUNT PERCENT
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRACTS
Federal $ 24,213 $ 22,550 $ 1,663 7.4
State 592,030 635,833 (43,803) (6.9)
Local 173,489 133,138 40,351 30.3
---------------------------------------------
Total public
sector 789,732 791,521 (1,789) (0.2)
Private sector 179,685 110,071 69,614 63.2
- ------------------------------------------------------------------
$969,417 $901,592 $67,825 7.5
==================================================================
</TABLE>
Gross profit for the quarter ended June 30, 1999 was $46.2 million, or
14.0% of revenue, as compared to $42.4 million, or 14.5% of revenue, for 1998.
Gross profit as a percent of revenue was 12.8% for the six months ended June 30,
1999 and 12.9% for 1998. The second quarter 1999 gross margin reflected our
ability to successfully execute the work from a strong backlog, as well as
benefits from several Heavy Construction Division projects that reached the 25%
completion threshold for profit recognition during the quarter and improved
margins on projects nearing completion. The second quarter 1998 gross margin
reflected increased margins related to the Company's Interstate-15 rebuild
project in Salt Lake City, Utah which reached the 25% completion threshold in
that quarter and the impact of flood related emergency work.
12
<PAGE> 13
General and administrative expenses for the three months ended June 30,
1999 increased $4.9 million to $24.8 million or 7.5% of revenue from $19.9
million or 6.8% of revenue in the corresponding period in 1998. For the six
months, general and administrative expenses increased $6.3 million in 1999 over
the same period in 1998 and increased as a percentage of revenue to 8.2% from
8.0% last year. The increase is primarily due to increased salaries and wages,
burden and other costs associated with increased volume of work and the absence
of a bad debt recovery received in second quarter 1998.
The Heavy Construction Division's contribution to operating income
increased in the three month and six month periods ended June 30, 1999 over the
same periods in 1998 due primarily to an absence of the unusually wet weather
conditions that impacted the 1998 periods and increased volume related to the
current favorable market conditions. The Branch Division's contribution to
operating income for the three and six month periods ended June 30, 1999
decreased from 1998 due primarily to the absence of El Nino emergency related
work that benefited the 1998 periods.
Other income increased $2.3 million in the three months ended June 30,
1999 over the corresponding period in 1998 due primarily to a $2.8 million gain
on the sale of depleted quarry property during the quarter.
Net income for the quarter ended June 30, 1999 was $15.1 million, or $0.56
per diluted share, an increase of $0.6 million or $0.02 per diluted share from
the quarter ended June 30, 1998. For the six months, net income was $17.6
million, or $0.65 per diluted share, a $1.7 million, or $0.06 per diluted share
increase from the prior year.
OUTLOOK
Healthy economic conditions in most of our geographic markets coupled with
record levels of public funding continue to provide the Company with a positive
outlook for the year going forward.
On the public front, we are just beginning to feel the impact of 1998's
federal transportation bill, TEA-21, in a few of our geographic markets,
particularly in Arizona and Texas. As projects finish their design phase and
agencies put them out for construction bids, we expect to see the effects of
TEA-21 in all of our markets by the end of the year. TEA-21 funding to the
states should increase the number and size of highway bidding opportunities.
Increased TEA-21 funding should also fuel the growth in large, design-build
projects as well. Keep in mind, however, that any large projects awarded to the
Company in the second half of this year would probably not reach the 25%
completion threshold the Company uses to recognize earnings until the Year 2000.
Looking at the private sector - demographics, household formation trends,
real medium income, the unemployment rate, consumer confidence and of course,
interest rates, all continue to bode well for residential construction.
According to a study done by FMI, five of the top ten single family growth
markets are in California. Our California branches continue to benefit from
increased private sector opportunities and we see no signs of this business
slowing in the near future.
13
<PAGE> 14
You may be aware, though, that the Federal Reserve raised the discount
rate by a quarter of percent as a precautionary move to keep inflation in check.
At some point higher interest rates could hinder private sector development. It
is unclear at this point in time at what level interest rates would have to rise
to cause this to occur.
Recently the Company experienced a steeper increase in wages and fringes
in negotiating collective bargaining agreements with labor unions. For the last
several years, the average increase in wages and fringes has been approximately
3% per year. The Company signed two three-year agreements with two separate
labor unions in one of its strongest geographic markets at rates somewhat higher
than previously negotiated. We believe this may be an isolated incident as wages
and fringes in this particular market has not kept pace with the rest of the
country. We will continue to monitor this situation but at this time have no
reason to believe it is indicative of a trend.
Labor, particularly craft workers, continues to be tight. It has not,
however, prevented the Company from taking on new work. While some of our
Branches are temporarily at or near capacity in certain disciplines, especially
asphalt paving, we believe this is just a short-term phenomenon, and our
competitors are in the same situation. Consequently, in some areas, we are
seeing an opportunity to increase our margins. Moreover, we continue to actively
bid new work to carry us through the end of this year and build backlog for the
year 2000. We also continue to build capacity by aggressive recruiting, active
training and strengthening retention measures.
Looking at the political landscape, our immediate sights are set on
California's SCA 3. This bill, which has passed the Senate and now heads to the
Assembly, would place an initiative on the ballot to amend the California
Constitution to allow renewal of expiring half-cent sales taxes for
transportation purposes with a simple majority for a period of 20 years.
Providing it passes in the Assembly, SCA 3 would be put on the November 2000
ballot and require a majority vote of the voters in the eighteen counties that
have such a program. Another important bill is SB 315 which would place an $8
billion transportation bond measure on the same ballot.
With TEA-21 in place, Congress has now shifted its infrastructure
attention to airports. This summer the House passed the Airport Improvement
Program for the 21st Century, dubbed AIR-21. Just like the highway bill, AIR-21
takes the Aviation Trust Fund off budget and builds a firewall to protect those
funds. The bill doubles the Airport Improvement Program over the next four
years. The bill has passed the House and is now in the Senate.
Looking at the schedule over the next few months, both divisions have a
full plate of opportunities on which to bid. Our Heavy Construction Division
(HCD) is targeting a number of large design-build opportunities in Florida,
Texas, Colorado, Arizona and South Carolina. HCD continues to campaign the large
highway construction programs in Texas, Florida and North Carolina. In fact, HCD
is bidding or building projects in 5 of the top 10 states receiving TEA-21
funds. Concurrently, our Branch Division business continues at a rapid pace,
both bidding and building work. A combination of record public funding and ample
private sector opportunities should contribute to another strong year for the
Branch Division.
14
<PAGE> 15
As we have stated earlier in the year, the Company is very pleased with
the execution of the work we are building to date, the strength of our backlog
and the substantial bidding opportunities out in front of us. Our growth
strategies have been in place for several years and it is rewarding to now
experience a market which is responding positively.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
DOLLARS IN THOUSANDS 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents, June 30 $29,684 $28,768
Net cash provided by (used in):
Operating activities 8,667 6,055
Investing activities (9,466) (40,759)
Financing activities (31,987) 9,113
-------------------------------------------------------------------------------
</TABLE>
Cash provided by operating activities of $8.7 million for the six months
ended June 30, 1999 represents a $2.6 million increase from the 1998 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 1999 decreased $31.3 million due to a
higher level of short-term investment maturities partially offset by increased
property and equipment purchases.
Cash used by financing activities in 1999 primarily reflects the
repurchase of the Company's common stock on the open market and the absence of
the long-term debt additions relating to the issuance of the Senior Notes in
1998.
The Company's current borrowing capacity under its revolving line of
credit is $75 million of which $61.7 was available on June 30, 1999. 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 at least through 1999.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The issue arises if
date-sensitive software recognizes a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company's information technology systems consist primarily of hardware
and software purchased from outside parties. The vendor for the Company's
enterprise-wide software has informed the Company that the version of its
software that the Company is currently utilizing is Year 2000 compliant and the
Company has completed its testing to verify that this is the case and the
testing plan and results have been reviewed by a third party. The Company is in
the process of addressing the Year 2000 compliance of other software and
hardware, including embedded chips,
15
<PAGE> 16
being used in its business. The Company is utilizing a seven step process in
addressing compliance of these other systems: (1) awareness; (2) inventory of
all systems and documentation; (3) assessment to identify any areas of
noncompliance; (4) remediation/renovation of any noncompliant systems; (5)
verification of compliance through testing and/or vendor certification; (6)
implementation of any necessary changes revealed during verifications; and (7)
monitoring of the results of implementation. The Company expects to have
completed this process for its non-enterprise software and hardware in the
second half of 1999.
The Company is in 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 $825,000, 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 $715,000 has been incurred and expensed
related to the Year 2000 issue. The Company's Year 2000 costs will be funded
from its operating cash flows. The Company does not expect its Year 2000 efforts
to have any significant impact on other information technology projects.
16
<PAGE> 17
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, 1998.
17
<PAGE> 18
PART II. OTHER INFORMATION
18
<PAGE> 19
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
19
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders on May 24, 1999, the
following members were elected to the Board of Directors:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE VOTES WITHHELD
VOTES VOTES ABSTAINED NONVOTE
----------- --------- --------- -------
<S> <C> <C> <C> <C>
Joseph J. Barclay 25,018,525 -- 44,395 --
David H. Watts 25,018,521 -- 44,399 --
</TABLE>
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE VOTES WITHHELD
VOTES VOTES ABSTAINED NONVOTE
----------- -------- --------- -------
<S> <C> <C> <C> <C>
To ratify the
directorship of (1)
director appointed by
the Board on May 18,
1998.
George B. Searle 25,018,296 -- 44,624 --
To approve the Granite
Construction
Incorporated 1999 Equity
Incentive Plan. 17,052,155 5,776,810 76,959 2,156,996
To ratify the
appointment of
PricewaterhouseCoopers
LLP as the independent
accountants of the
Company for the fiscal
year ending December 31,
1999. 23,731,960 1,245,131 85,829 --
</TABLE>
ITEM 5. OTHER INFORMATION
None
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
None
21
<PAGE> 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: August 16, 1999 By: /s/ William E. Barton
------------------------------------
William E. Barton
Senior Vice President and Chief
Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule ........................ 24
</TABLE>
23
<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, JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 29,684
<SECURITIES> 24,466
<RECEIVABLES> 194,705
<ALLOWANCES> 214
<INVENTORY> 15,592
<CURRENT-ASSETS> 333,611
<PP&E> 582,050
<DEPRECIATION> 345,668
<TOTAL-ASSETS> 617,739
<CURRENT-LIABILITIES> 227,999
<BONDS> 65,198
0
0
<COMMON> 272
<OTHER-SE> 296,478
<TOTAL-LIABILITY-AND-EQUITY> 617,739
<SALES> 544,096
<TOTAL-REVENUES> 544,096
<CGS> 474,598
<TOTAL-COSTS> 519,012
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,906
<INCOME-PRETAX> 28,668
<INCOME-TAX> 11,037
<INCOME-CONTINUING> 17,631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,631
<EPS-BASIC> .67
<EPS-DILUTED> .65
</TABLE>
