10-Q 1 e10-q.txt QUARTERLY REPORT PERIOD END 6/30/00 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, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _____________ Commission File No. 1-12911 GRANITE CONSTRUCTION INCORPORATED State of Incorporation: I.R.S. Employer Identification Delaware Number: 77-0239383
Corporate Administration: 525 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, 2000. Class Outstanding ----------------------------- ----------------- Common Stock, $0.01 par value 27,288,629 shares
2 GRANITE CONSTRUCTION INCORPORATED INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.................................................4 Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2000 and 1999............................................5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999......................................6 Notes to the Condensed Consolidated Financial Statements...........................................7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................12-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......19 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................21 Item 2. Changes in Securities............................................21 Item 3. Defaults upon Senior Securities..................................21 Item 4. Submission of Matters to a Vote of Security Holders..............................................22 Item 5. Other Information................................................22 Item 6. Exhibits and Reports on Form 8-K.................................23 Exhibit Index....................................................25
3 PART I. FINANCIAL INFORMATION 3 4 GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
============================================================================================= JUNE 30, December 31, 2000 1999 --------------------------------------------------------------------------------------------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 35,498 $ 61,832 Short-term investments 28,575 46,245 Accounts receivable 217,272 211,609 Costs and estimated earnings in excess of billings 20,187 14,105 Inventories 17,505 12,823 Deferred income taxes 14,885 14,885 Equity in construction joint ventures 25,892 30,611 Other current assets 7,896 10,211 --------------------------- Total current assets 367,710 402,321 --------------------------------------------------------------------------------------------- Property and equipment 250,768 242,913 --------------------------------------------------------------------------------------------- Other assets 43,572 34,338 --------------------------------------------------------------------------------------------- $ 662,050 $ 679,572 ============================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 865 $ 5,985 Accounts payable 95,296 95,662 Billings in excess of costs and estimated earnings 43,240 66,342 Accrued expenses and other current liabilities 88,984 90,675 --------------------------- Total current liabilities 228,385 258,664 --------------------------------------------------------------------------------------------- Long-term debt 64,238 64,853 --------------------------------------------------------------------------------------------- Deferred income taxes 28,323 28,323 --------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding -- -- Common stock, $0.01 par value, authorized 100,000,000 shares; issued and outstanding 27,288,629 shares in 2000 and 26,995,506 in 1999 273 270 Additional paid-in capital 56,014 49,817 Retained earnings 296,895 285,832 --------------------------- 353,182 335,919 Unearned compensation (12,078) (8,187) --------------------------- 341,104 327,732 --------------------------------------------------------------------------------------------- $ 662,050 $ 679,572 =============================================================================================
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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------- Revenue: Construction $ 301,274 $ 285,643 $ 494,623 $ 473,615 Material sales 42,438 43,649 65,519 70,481 ------------------------- ------------------------- Total revenue 343,712 329,292 560,142 544,096 ------------------------- ------------------------- Cost of revenue: Construction 258,371 246,823 426,819 415,161 Material sales 35,668 36,300 57,275 59,437 ------------------------- ------------------------- Total cost of revenue 294,039 283,123 484,094 474,598 ------------------------- ------------------------- GROSS PROFIT 49,673 46,169 76,048 69,498 General and administrative expenses 26,925 24,792 49,784 44,414 ------------------------- ------------------------- OPERATING INCOME 22,748 21,377 26,264 25,084 -------------------------------------------------------------------------------------------------- Other income (expense) Interest income 2,486 1,041 5,663 3,820 Interest expense (2,273) (2,063) (3,985) (3,906) Gain on sales of property and equipment 1,397 3,509 2,378 3,808 Other, net 1,550 739 1,318 (138) ------------------------- ------------------------- 3,160 3,226 5,374 3,584 -------------------------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES 25,908 24,603 31,638 28,668 Provision for income taxes 9,975 9,472 13,481 11,037 -------------------------------------------------------------------------------------------------- NET INCOME $ 15,933 $ 15,131 $ 18,157 $ 17,631 ================================================================================================== Net income per share Basic $ 0.61 $ 0.58 $ 0.69 $ 0.67 Diluted $ 0.59 $ 0.56 $ 0.68 $ 0.65 Weighted average shares of common stock Basic 26,329 26,046 26,275 26,255 Diluted 26,918 26,963 26,822 27,164 Dividends per share $ 0.10 $ 0.07 $ 0.26 $ 0.26 ==================================================================================================
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)
============================================================================================== SIX MONTHS ENDED JUNE 30, 2000 1999 ---------------------------------------------------------------------------------------------- Operating Activities Net income $ 18,157 $ 17,631 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 21,894 20,781 Gain on sales of property and equipment (2,378) (3,808) Gain on sale of investment (636) -- Decrease in unearned compensation 3,021 2,212 Common stock contributed to ESOP -- 2,146 Equity in loss of affiliates and other 381 1,039 Changes in assets and liabilities: Accounts and notes receivable (5,774) (21,322) Inventories (4,682) (2,819) Equity in construction joint ventures 4,719 (1,928) Other assets 1,407 643 Accounts payable (366) (2,363) Billings in excess of costs and estimated earnings, net (29,184) (8,206) Accrued expenses (2,530) 4,661 ----------------------- Net cash provided by operating activities 4,029 8,667 ---------------------------------------------------------------------------------------------- Investing Activities Purchases of short-term investments (32,610) (36,711) Maturities of short-term investments 50,280 71,199 Additions to property and equipment (31,347) (53,239) Proceeds from sales of property and equipment 4,192 7,491 Proceeds from sale of investment 5,001 -- Investment in affiliates (13,976) -- Development and sale of land and other investing activities 874 1,794 ----------------------- Net cash used by investing activities (17,586) (9,466) ---------------------------------------------------------------------------------------------- Financing Activities Repayments of long-term debt (5,735) (5,709) Employee stock options exercised 406 51 Repurchase of common stock (1,193) (19,487) Dividends paid (6,255) (6,842) ----------------------- Net cash used by financing activities (12,777) (31,987) ============================================================================================== Decrease in cash and cash equivalents (26,334) (32,786) Cash and cash equivalents at beginning of period 61,832 62,470 ----------------------- Cash and cash equivalents at end of period $ 35,498 $ 29,684 ============================================================================================== Supplementary Information Cash paid during the period for: Interest $ 2,735 $ 2,607 Income taxes 4,195 3,653 Noncash investing and financing activity: Restricted stock issued for services $ 6,912 $ 6,429 Dividends accrued but not paid 2,729 1,902 Financed acquisition of property and equipment -- 1,700 ==============================================================================================
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 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, 2000 and the results of operations and cash flows for the periods presented. The December 31, 1999 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, 2000 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:
------------------------------------------------------------------- JUNE 30, December 31, 2000 1999 (UNAUDITED) ------------------------------------------------------------------- Land $ 36,868 $ 36,485 Quarry property 47,150 46,891 Buildings and leasehold improvements 37,886 33,791 Equipment and vehicles 492,354 478,990 Office furniture and equipment 8,116 7,110 ---------------------- 622,374 603,267 Less accumulated depreciation, depletion and amortization 371,606 360,354 ------------------------------------------------------------------- $250,768 $242,913 ===================================================================
7 8 Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) 4. EARNINGS PER SHARE:
---------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------------------- 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------- NUMERATOR - BASIC AND DILUTED EARNINGS PER SHARE Net income $15,933 $15,131 $18,157 $17,631 ============================================================================================== DENOMINATOR - BASIC EARNINGS PER SHARE Common stock outstanding 27,289 27,316 27,164 27,419 Less restricted stock outstanding 960 1,270 889 1,164 ---------------------------------------------- TOTAL 26,329 26,046 26,275 26,255 ---------------------------------------------- Basic earnings per share $ 0.61 $ 0.58 $ 0.69 $ 0.67 ============================================================================================== DENOMINATOR - DILUTED EARNINGS PER SHARE Denominator - Basic Earnings per Share 26,329 26,046 26,275 26,255 Effect of Dilutive Securities: Common stock options 7 40 8 43 Warrants 103 218 95 229 Restricted stock 479 659 444 637 ---------------------------------------------- TOTAL 26,918 26,963 26,822 27,164 ---------------------------------------------- Diluted earnings per share $ 0.59 $ 0.56 $ 0.68 $ 0.65 ==============================================================================================
5. CONTINGENCIES: DISCLOSURE OF SIGNIFICANT ESTIMATES - REVENUE RECOGNITION: As outlined in the Summary of Significant Accounting Policies, the Company's construction revenue is recognized on the percentage of completion basis. Consequently, construction revenue and gross margin for each reporting period is determined on a contract by contract basis by reference to estimates by the Company's engineers of expected costs to be incurred to complete each project. These estimates include provisions for known and anticipated cost overruns, if any exist or are expected to occur. These estimates may be subject to revision in the normal course of business. DISCLOSURE OF SIGNIFICANT ESTIMATES - LITIGATION: The Company is a party to a number of legal proceedings and believes that the nature and number of these proceedings are typical for a construction firm of its size and scope and that none of these proceedings is material to the Company's financial position. The Company's litigation typically involves claims regarding public liability or contract related issues. 6. RECLASSIFICATIONS: Certain prior year financial statement items have been reclassified to conform to the current year's presentation. 8 9 Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) 7. INVESTMENT IN T.I.C. HOLDINGS, INC.: The Company currently holds a 27% minority interest in T.I.C. Holdings, Inc. ("TIC"). The Company and TIC have reached an agreement under which the Company will sell its minority interest back to TIC over a three and one half-year period. Under the agreement TIC will have the opportunity to repurchase shares sooner based on an agreed to formula. On June 5, 2000 TIC repurchased 478,012 shares representing 6% of the TIC shares held by the Company. The Company received $5 million in proceeds on the transaction and recognized a gain of $0.6 million. At June 30, 2000 the Company held 2,093,258 shares of TIC stock. 8. INVESTMENT IN WILDER CONSTRUCTION: In January 2000, the Company purchased 30% of the common stock of Wilder Construction Company ("Wilder") for a purchase price of $13.1 million. The purchase agreement provides for the Company to increase its ownership in Wilder to between 51% and 60% in 2002 and to 75% in 2004. Wilder is a heavy-civil construction company with regional offices located in Washington, Oregon and Alaska. Wilder has annual revenues of approximately $150 million and employs approximately 650 people throughout the Northwest and Alaska. 9 10 Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) 9. 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).
Information about Profit and Assets: --------------------------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, HCD BRANCH TOTAL --------------------------------------------------------------------------------------------------- 2000 Revenues from external customers $ 95,058 $ 248,654 $ 343,712 Intersegment revenue transfer (4,269) 4,269 -- ------------------------------------------------ Net revenue 90,789 252,923 343,712 Depreciation and amortization 1,814 8,062 9,876 Operating profit 8,130 23,430 31,560 --------------------------------------------------------------------------------------------------- 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 profit 12,638 17,859 30,497 ---------------------------------------------------------------------------------------------------
10 11 Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) 9. BUSINESS SEGMENT INFORMATION, CONTINUED:
Information about Profit and Assets, continued: ------------------------------------------------------------------------------------------ SIX MONTHS ENDED JUNE 30, HCD BRANCH TOTAL ------------------------------------------------------------------------------------------ 2000 Revenues from external customers $ 185,087 $ 375,055 $ 560,142 Intersegment revenue transfer (7,821) 7,821 -- ------------------------------------------------ Net revenue 177,266 382,876 560,142 Depreciation and amortization 3,681 15,787 19,468 Operating profit 17,457 24,201 41,658 Property and equipment 26,006 200,003 226,009 ------------------------------------------------------------------------------------------ 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 profit 14,704 25,674 40,378 Property and equipment 29,342 191,546 220,888 ------------------------------------------------------------------------------------------
Reconciliation of Segment Profit to the Company's Consolidated Totals: ------------------------------------------------------------------------------ THREE MONTHS ENDED JUNE 30, 2000 1999 ------------------------------------------------------------------------------ Profit: Total profit for reportable segments $ 31,560 $ 30,497 Other income 3,160 3,226 Unallocated other corporate expenses (8,812) (9,120) ------------------------------------------------------------------------------ Income before provision for income taxes $ 25,908 $ 24,603 ==============================================================================
------------------------------------------------------------------------------ SIX MONTHS ENDED JUNE 30, 2000 1999 ------------------------------------------------------------------------------ Profit: Total profit for reportable segments $ 41,658 $ 40,378 Other income 5,374 3,584 Unallocated other corporate expenses (15,394) (15,294) ------------------------------------------------------------------------------ Income before provision for income taxes $ 31,638 $ 28,668 ==============================================================================
11 12 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING DISCLOSURE: This report contains forward-looking statements; such as statements related to the impact of government regulations on the Company's operations, the existence of bidding opportunities and the impact of legislation, availability of highway funds and economic conditions on the Company's future results. Additionally, forward-looking statements include statements that can be identified by the use of forward-looking terminology such as "believes," "expects," "appears, " "may," "will," "should," or "anticipates" or the negative thereof or comparable terminology, or by discussions of strategy. All such forward-looking statements are subject to risks and uncertainties that could cause actual results of operations and financial condition and other events to differ materially from those expressed or implied in such forward-looking statements. Specific risk factors include, without limitation, changes in the composition of applicable federal and state legislation appropriation committees; federal and state appropriation changes for infrastructure spending; the general state of the economy; weather conditions; competition and pricing pressures; and state referendums and initiatives. RESULTS OF OPERATIONS
Three Months Ended June 30, --------------------------- (In Millions) 2000 1999 CHANGE % ------------- ---- ---- ------ - Revenue: Branch Division $ 252.9 $ 233.5 $ 19.4 8.3 Heavy Construction Division 90.8 95.8 (5.0) (5.2) ----------------------------------------- $ 343.7 $ 329.3 $ 14.4 4.4 =========================================
Six Months Ended June 30, ------------------------- (In Millions) 2000 1999 CHANGE % ------------- ---- ---- ------ - Revenue: Branch Division $ 382.8 $ 374.3 $ 8.5 2.3 Heavy Construction Division 177.3 169.8 7.5 4.4 ----------------------------------------- $ 560.1 $ 544.1 $ 16.0 2.9 =========================================
Revenue and Backlog: Revenue for the second quarter 2000 increased 4.4% to $343.7 million from the second quarter 1999. The increased revenue reflects strong Branch Division volume partially offset by decreased volume in the Company's Heavy Construction Division ("HCD"). The decreased HCD volume reflects the fact that a number of HCD projects are nearing completion and have only recently been replaced by new awards. Branch Division volume in the second quarter 2000 was reflective of a strong backlog of work coming off of a first quarter that had more typical rainfall levels compared to the unusually dry first quarter of 1999. Revenue for the six months ended June 30, 2000 increased 2.9% to $560.1 million from $544.1 million for the same period in 1999, reflecting growth in both divisions. 12 13 Revenue from private sector contracts increased to 26.7% of total revenue in the second quarter of 2000 from 22.2% in the 1999 quarter and to 26.4% of total revenue for the six months ended June 30, 2000 from 22.5% of total revenue in the same period in 1999. Although the private construction market remains strong in many of the areas that the Company works, there have been some signs of a leveling off of growth in the private sector (see "Outlook").
------------------------------------------------------------------------------------- BACKLOG BY MARKET SECTOR (IN MILLIONS) JUNE 30, JUNE 30, VARIANCE 2000 1999 AMOUNT PERCENT ------------------------------------------------------------------------------------- CONTRACTS Federal $ 88.3 $ 24.2 $ 64.1 264.9 State 531.0 592.0 (61.0) (10.3) Local 137.3 173.5 (36.2) (20.8) --------------------------------------- Total public sector 756.6 789.7 (33.1) (4.2) Private sector 138.9 179.7 (40.8) (22.7) ------------------------------------------------------------------- $895.5 $969.4 $(73.9) (7.6) ===================================================================
The Company's backlog at June 30, 2000 was $895.5 million, down $73.9 million, or 7.6% from June 30, 1999 and an increase of $102.2 million, or 12.9% from December 31, 1999. New awards for the quarter totaled $461.2 million and included a $81.5 million bridge contract in Florida, a $43.4 million dam contract in Missouri and a $34.2 million highway contract in Texas. Gross Profit: Gross profit as a percent of revenue increased to 14.5% in the second quarter 2000 from 14.0% in the second quarter 1999 and to 13.6% for the six months ended June 30, 2000 from 12.8% in the corresponding 1999 period. The gross profit margins for the quarter and the six months reflect the overall successful execution of projects in both the Branch Division and HCD. The gross profit margin in the quarter and six months ended June 30, 2000 was also positively impacted by a lower level of revenue from projects that did not meet the Company's 25% completion threshold for profit recognition compared to the 1999 periods. The Company recognizes revenue only to the extent of cost incurred until a project reaches 25% complete. Project to date revenue recognized for projects less than 25% complete was approximately $24.7 million and $32.3 million at June 30, 2000 and 1999, respectively. Cost of revenue consists of direct costs on contracts; including labor and materials, amounts payable to subcontractors, direct overhead costs, equipment expense (primarily depreciation, maintenance and repairs) and insurance costs. The Company has experienced some upward pressure on costs associated with labor markets and oil prices, however, the Company's gross profit margins were not significantly impacted by such changes during the first six months of 2000 (See "Outlook"). 13 14 General and Administrative Expenses: General and administrative expenses for the three and six months ended June 30, 2000 and 1999, respectively, comprised the following (in millions):
-------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------------------------------------------------- IN MILLIONS 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------- Salaries and related expenses $11.8 $10.4 $23.6 $21.3 Incentive compensation, discretionary profit sharing and pension 6.5 6.4 9.4 8.8 Other general and administrative expenses 8.6 8.0 16.8 14.3 -------------------------------------------------------------------------------------------------- Total $26.9 $24.8 $49.8 $44.4 -------------------------------------------------------------------------------------------------- Percent of revenue 7.8% 7.5% 8.9% 8.2% ==================================================================================================
Salaries and related expenses increased for the three and six months ended June 30, 2000 over 1999 due primarily to increased staffing to support the Company's current and expected growth. Incentive compensation and discretionary profit sharing and pension costs increased slightly as a function of the Company's increased gross profit margin. Other general and administrative expenses include various costs to support the Company's operations, none of which exceeds 10% of total general and administrative expenses. The increase in other general and administrative expenses in 2000 primarily reflects increases in costs to support the Company's growth. Operating Income: The Heavy Construction Division's contribution to operating income decreased in the second quarter 2000 compared to the second quarter 1999 due primarily to the decrease in revenue described in "Revenue and Backlog" above. Additionally, the 1999 quarter reflected benefits from several HCD projects that reached the 25% completion threshold for profit recognition. For the six months ended June 30, 2000 HCD's contribution to operating income increased over the corresponding period in 1999 due to both increases in the volume of work and the profit margins the Division was able to achieve on the strong backlog of work carried forward from 1999. The Branch Division's contribution to operating income increased in the second quarter 2000 over the comparable 1999 period, reflecting increases in construction revenue and gross margins as described above, partially offset by increases in salaries and other costs to support expected growth and slightly lower revenue from material sales. Other Income (Expenses): Other income increased $1.8 million to $5.4 million for the six months ended June 30, 2000 over the same period in 1999. The increase was due primarily to higher interest income resulting from the combined factors of higher interest rates and higher invested balances, partially offset by lower gains on the sale of property and equipment. In the second quarter 1999 the Company recognized a $2.8 million gain on the sale of a depleted quarry property. 14 15 Provision for Income Taxes: The Company's effective tax rate remained flat at 38.5% for the three months ended June 30, 2000 compared to the same period last year. The Company's effective tax rate was 42.6% for the six months ended June 30, 2000 compared to 38.5% in 1999. The increase reflects additional tax expense recognized in the first quarter 2000 related to the Company reaching an agreement with TIC to divest its 30% investment over a three and one-half year period. OUTLOOK Overall, we are very pleased with our financial performance through the first six months of 2000. Many of our geographic marketplaces continue to experience healthy economic conditions, providing on-going opportunities for both our Branch and Heavy Construction Divisions (HCD). In an attempt to predict how the rest of the year will unfold, weather is always the biggest unknown. In 1999, the Company experienced an unusually dry fourth quarter, leading to an extended work season and ultimately to record revenues and earnings. Although we anticipate a strong year in 2000, based on a quality backlog, it is the length of the building season that strongly determines year in and year out how much work we can perform and consequently what our final results may be at year-end. Bidding activity in both divisions continues to be very strong and the size and scope of some of these projects, particularly for HCD, are substantial. After experiencing a nearly 8-month drought on new awards, HCD had a very successful second quarter. While adding to our backlog, these new projects are not expected to impact our profitability until 2001, when most if not all reach 25% complete. The Division will continue to maintain a disciplined bidding philosophy as it seeks to continue the success it has achieved in recent months. Many of HCD's new projects and a host of those on the current bid schedule are the products of TEA-21, the Transportation Equity Act for the 21st Century. We are very optimistic the increased funding from TEA-21 coupled with our geographic diversity throughout the U.S., will provide significant bidding opportunities that should lead to strong revenue and earnings growth going forward. Looking at the schedule over the next few months, both divisions have a full plate of opportunities in which to bid. HCD is targeting a number of large design-build opportunities in Texas, Florida, Arizona, Minnesota, Colorado and Nevada. While the Branch Division got off to a late start this year due to weather, the business is building momentum as the year progresses and continues to experience a strong public sector market throughout California, Nevada, Arizona and Utah. In terms of the private sector, the decrease in private sector backlog and the steady increase in interest rates provide us the indication that this sector is leveling off as we head into the second half of the year. 15 16 As we have discussed previously, the Company has continued to experience upward pressure on costs associated with higher oil prices that affect both asphalt oil and diesel fuel costs. In the second quarter of 2000, the impact was felt primarily on our smaller jobs and private contracts, which are typically not indexed to oil prices. It is important to note that many of our larger projects in California and Nevada are indexed and are sometimes able to take advantage of both sides of the pricing cycle. Politically, the Company is very involved in supporting California's Proposition 35 on the upcoming November ballot. If passed, Proposition 35 would amend the state Constitution to give state and local entities more freedom to contract with private entities for engineering and architectural services on public works projects. Currently there is a $3 billion backlog of funded and approved projects that cannot get designed because the California Department of Transportation is precluded from contracting out to private sector companies for design services. Passage of Proposition 35 could break that logjam, and give the Company a substantial increase in bidding opportunities in California. We are very excited that transportation was a primary focus of California Governor Davis this year. The result was the Governor's Traffic Congestion Relief Program, passed this summer as part of California's 2000 budget. The six-year, $7 billion plan includes $2 billion this year from the general fund, part of the multi-billion-surplus that the state enjoys this year, and a diversion of $500 million from the sales tax on gasoline that previously went into the general fund. In the five subsequent years, all general fund sales taxes on gasoline and diesel fuel (about $1 billion per year) will be diverted for this purpose. In summary, we are very pleased with the success of our current operations and look forward to the opportunities ahead to build our backlog as we go into 2001. As always, adverse weather and the seasonality of our business must remain a key factor in determining how well we can perform for the remainder of the year. 16 17 LIQUIDITY AND CAPITAL RESOURCES
------------------------------------------------------------ (IN MILLIONS) SIX MONTHS ENDED JUNE 30, 2000 1999 ------------------------------------------------------------ Cash and cash equivalents $35.5 $29.7 Net cash provided (used) by: Operating activities 4.0 8.7 Investing activities (17.6) (9.5) Financing activities (12.8) (32.0) Capital expenditures 31.3 53.2 ------------------------------------------------------------
Cash provided by operating activities of $4.0 million for the six months ended June 30, 2000 represents a $4.7 million decrease from the 1999 amount for the same period. Changes in cash from operating activities primarily reflects seasonal variations based on the amount and progress of work being performed. Cash used by investing activities for the six month period in 2000 increased $8.1 million over the corresponding 1999 period due primarily to the investment in Wilder Construction in which the Company has a 30% equity investment and a lower level of short-term investment maturities offset by a decrease in property and equipment purchases, and proceeds from the TIC divestiture (Note 7). Cash used by financing activities in 2000 decreased $19.2 million from 1999 because of the absence of the Company's share repurchases which took place in 1999. The Company has budgeted $58.0 million for capital expenditures in 2000, which includes amounts for construction equipment, aggregate and asphalt plants, buildings, leasehold improvements and the purchase of land and aggregate reserves. The Company anticipates that cash generated internally and amounts available under its existing credit facilities will be sufficient to meet its capital and other requirements, including contributions to employee benefit plans, for the foreseeable future. The Company currently has access to funds under its revolving credit agreement which allow it to borrow up to $75.0 million, of which $63.2 million was available at June 30, 2000. IMPACT OF YEAR 2000 ISSUE The Company has not incurred material costs in the six months ended June 30, 2000 associated with its efforts to become year 2000 compliant. Furthermore, based on our assessment to date, we believe that any future costs associated with our year 2000 compliance efforts will not be material. 17 18 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "SFAS 133", Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes methods of accounting and reporting for derivative instruments and hedging activities related to those instruments as well as other hedging activities, and is effective for fiscal quarters of fiscal years beginning after June 15, 2000, as amended by SFAS 137. The Company believes that adoption of this pronouncement will have no material impact on the Company's financial position and results of operations. 18 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's exposure to market risk since December 31, 1999. 19 20 PART II. OTHER INFORMATION 20 21 ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 21 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Shareholders on May 22, 2000, the following members were elected to the Board of Directors:
AFFIRMATIVE NEGATIVE VOTES WITHHELD VOTES VOTES ABSTAINED NONVOTE Richard M. Brooks 23,430,886 -- 346,547 -- Raymond E. Miles 23,433,214 -- 344,219 -- Linda Griego 23,429,062 -- 348,371 --
The following proposals were approved at the Company's Annual Meeting:
AFFIRMATIVE NEGATIVE VOTES WITHHELD VOTES VOTES ABSTAINED NONVOTE ----- ----- --------- ------- To ratify the directorship of J. Fernando Niebla 23,448,424 329,009 -- -- To amend the Certificate of Incorporation of the Company so as to increase the authorized Common Stock to 100,000,000 19,500,202 4,227,214 50,017 -- To ratify the appointment of PricewaterhouseCoopers LLP as the independent accountants of the Company for the fiscal year ending December 31, 2000. 23,558,827 159,315 59,291 --
ITEM 5. OTHER INFORMATION None 22 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit 27 - Financial Data Schedule b) Reports on Form 8-K None 23 24 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 14, 2000 By: /s/ William E. Barton ----------------- ------------------------------------------------- William E. Barton Senior Vice President and Chief Financial Officer 24 25 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . 26
25