-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DqEP84UAc5mYc1e4dAjAq2Pa4JN2QJj/C+3EDyrrnaZ51ryx+bYW8ljUFIv2QWBD d4J2Nl39LXcB4Dow4i2d0g== 0000950149-98-001898.txt : 19981118 0000950149-98-001898.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950149-98-001898 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRANITE CONSTRUCTION INC CENTRAL INDEX KEY: 0000861459 STANDARD INDUSTRIAL CLASSIFICATION: HEAVY CONSTRUCTION OTHER THAN BUILDING CONST - CONTRACTORS [1600] IRS NUMBER: 770239383 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12911 FILM NUMBER: 98753919 BUSINESS ADDRESS: STREET 1: 585 WEST BEACH ST CITY: WATSONVILLE STATE: CA ZIP: 95076 BUSINESS PHONE: 4087241011 MAIL ADDRESS: STREET 1: 585 WEST BEACH ST CITY: WATSONVILLE STATE: CA ZIP: 95076 10-Q 1 FORM 10-Q DATED SEPTEMBER 30, 1998 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. 2 GRANITE CONSTRUCTION INCORPORATED INDEX
Page ---- 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
2 3 PART I. FINANCIAL INFORMATION 3 4 GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
=========================================================================================================== SEPTEMBER 30, December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------- (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 ===========================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE DATA)
========================================================================================================================== THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, - -------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ 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 ==========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED- IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 - -------------------------------------------------------------------------------------------------------------------- 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 ====================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 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:
SEPTEMBER 30, December 31, 1998 1997 ------------------------------- (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 ===============================
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 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:
============================================================================================================================== THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 --------------------------------------------------------------- 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 ==============================================================================================================================
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 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 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 11 REVENUE BY MARKET SECTOR NINE MONTHS ENDED SEPTEMBER 30, (IN MILLIONS)
1998 1997 $ % $ % ------------ ------------ ------------ ------------ 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% ============================================================
AWARDS AND BACKLOG END OF PERIOD (IN MILLIONS)
AWARDS BACKLOG ------ ------- 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
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 13 BACKLOG BY MARKET SECTOR (IN MILLIONS)
SEPTEMBER 30, 1998 DECEMBER 31, 1997 $ % $ % ------------ ------------ ------------ ------------ 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% ============================================================
SEASONALITY OF BUSINESS REVENUE AND NET INCOME BY QUARTER (IN MILLIONS)
NET REVENUE INCOME ------- ------ 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
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 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 16 LIQUIDITY AND CAPITAL RESOURCES
- ------------------------------------------------------------------------------------------ DOLLARS IN THOUSANDS 1998 1997 - ------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------
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 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 18 PART II. OTHER INFORMATION 16 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 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 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 22 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE - ------ ----------- ---- 27 Financial Data Schedule . . . . . . . . . . . . . . 20 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 56,573 30,608 228,782 1,308 16,494 409,489 528,933 320,153 666,417 276,785 74,177 0 0 277 290,167 666,417 888,100 888,100 772,343 833,432 0 0 6,375 58,787 22,339 36,448 0 0 0 36,448 1.37 1.33
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