10-Q 1 f67325e10-q.txt FORM 10-Q 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, 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: 585 West Beach Street Watsonville, California 95076 (831) 724-1011 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 9, 2000. Class Outstanding ------------------------------ ----------------- Common Stock, $0.01 par value 27,288,713 shares 2 GRANITE CONSTRUCTION INCORPORATED INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999..............................................4 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2000 and 1999....................................5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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...........................................21 Item 5. Other Information.............................................21 Item 6. Exhibits and Reports on Form 8-K..............................22 Exhibit Index.................................................24
2 3 PART I. FINANCIAL INFORMATION 3 4 GRANITE CONSTRUCTION INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, December 31, 2000 1999 ------------------------------------------------------------------------------------------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 48,608 $ 61,832 Short-term investments 41,459 46,245 Accounts receivable 282,545 211,609 Costs and estimated earnings in excess of billings 19,037 14,105 Inventories 15,602 12,823 Deferred income taxes 14,885 14,885 Equity in construction joint ventures 27,358 30,611 Other current assets 8,266 10,211 --------- --------- Total current assets 457,760 402,321 ------------------------------------------------------------------------------------------------ Property and equipment 247,147 242,913 ------------------------------------------------------------------------------------------------ Other assets 44,492 34,338 ------------------------------------------------------------------------------------------------ $ 749,399 $ 679,572 ================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 1,127 $ 5,985 Accounts payable 114,738 95,662 Billings in excess of costs and estimated earnings 65,734 66,342 Accrued expenses and other current liabilities 110,794 90,675 --------- --------- Total current liabilities 292,393 258,664 ------------------------------------------------------------------------------------------------ Long-term debt 63,935 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 27,288,265 shares in 2000 and 26,995,506 in 1999 269 270 Additional paid-in capital 56,049 49,817 Retained earnings 319,065 285,832 --------- --------- 375,383 335,919 Unearned compensation (10,635) (8,187) --------- --------- 364,748 327,732 ------------------------------------------------------------------------------------------------ $ 749,399 $ 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------ Revenue: Construction $391,014 $368,091 $ 885,637 $841,706 Material sales 50,742 50,612 116,261 121,093 ---------------------------- ------------------------------- Total revenue 441,756 418,703 1,001,898 962,799 ---------------------------- ------------------------------- Cost of revenue: Construction 332,740 317,257 759,559 732,419 Material sales 41,538 42,937 98,813 102,373 ---------------------------- ----------------------------- Total cost of revenue 374,278 360,194 858,372 834,792 ---------------------------- ----------------------------- GROSS PROFIT 67,478 58,509 143,526 128,007 General and administrative expenses 29,304 25,621 79,088 70,035 ---------------------------- ----------------------------- OPERATING INCOME 38,174 32,888 64,438 57,972 ------------------------------------------------------------------------------------------------------------ Other income (expense) Interest income 2,775 1,920 8,438 5,740 Interest expense (1,948) (1,969) (5,933) (5,875) Gain on sales of property and equipment 218 446 2,596 4,254 Other, net 1,268 616 2,586 478 ---------------------------- ----------------------------- 2,313 1,013 7,687 4,597 ------------------------------------------------------------------------------------------------------------ INCOME BEFORE PROVISION FOR INCOME TAXES 40,487 33,901 72,125 62,569 Provision for income taxes 15,587 13,052 29,068 24,089 ------------------------------------------------------------------------------------------------------------ NET INCOME $ 24,900 $ 20,849 $ 43,057 $ 38,480 ============================================================================================================ Net income per share Basic $ 0.95 $ 0.80 $ 1.64 $ 1.47 Diluted $ 0.93 $ 0.77 $ 1.60 $ 1.42 Weighted average shares of common stock Basic 26,348 26,057 26,289 26,220 Diluted 26,913 27,007 26,842 27,143 Dividends per share $ 0.10 $ 0.07 $ 0.36 $ 0.33 =============================================================================================================
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)
---------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ---------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 43,057 $ 38,480 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 33,124 31,631 Gain on sales of property and equipment (2,596) (4,254) Gain on sale of investment (636) - Decrease in unearned compensation 4,464 3,218 Common stock contributed to ESOP 632 2,146 Equity in (gain) loss of affiliates and other (431) 1,303 Changes in assets and liabilities: Accounts and notes receivable (73,387) (64,837) Inventories (2,779) (1,678) Equity in construction joint ventures 3,253 (6,505) Other assets 1,745 682 Accounts payable 19,076 4,897 Billings in excess of costs and estimated earnings, net (5,540) 7,144 Accrued expenses 19,280 24,693 ------------------------- Net cash provided by operating activities 39,262 36,920 ---------------------------------------------------------------------------------------------------------- Investing Activities Purchases of short-term investments (61,994) (63,421) Maturities of short-term investments 66,780 87,204 Additions to property and equipment (38,985) (64,154) Proceeds from sales of property and equipment 4,547 8,431 Proceeds from sale of investment 5,000 - Investment in affiliates (14,303) - Development and sale of land and other investing activities 2,658 4,819 ------------------------- Net cash used by investing activities (36,297) (27,121) ---------------------------------------------------------------------------------------------------------- Financing Activities Repayments of long-term debt (5,776) (5,747) Employee stock options exercised 406 71 Repurchase of common stock (1,834) (19,930) Dividends paid (8,985) (8,745) ------------------------- Net cash used by financing activities (16,189) (34,351) ---------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (13,224) (24,552) Cash and cash equivalents at beginning of period 61,832 62,470 ------------------------- Cash and cash equivalents at end of period $ 48,608 $ 37,918 ========================================================================================================= Supplementary Information Cash paid during the period for: Interest $ 4,966 $ 3,020 Income taxes 10,441 10,335 Noncash investing and financing activity: Restricted stock issued for services $ 6,912 $ 6,429 Dividends accrued but not paid 2,729 1,901 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 September 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 nine months ended September 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:
---------------------------------------------------------------------------- SEPTEMBER 30, December 31, 2000 1999 (UNAUDITED) ---------------------------------------------------------------------------- Land $ 37,729 $ 36,485 Quarry property 47,000 46,891 Buildings and leasehold improvements 38,590 33,791 Equipment and vehicles 496,623 478,990 Office furniture and equipment 8,396 7,110 ----------------- --------------- 628,338 603,267 Less accumulated depreciation, depletion and amortization 381,191 360,354 ---------------------------------------------------------------------------- $247,147 $ 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------- NUMERATOR - BASIC AND DILUTED EARNINGS PER SHARE Net income $24,900 $20,849 $43,057 $38,480 ==================================================================================================================== DENOMINATOR - BASIC EARNINGS PER SHARE Common stock outstanding 27,288 27,173 27,195 27,322 Less restricted stock outstanding 940 1,116 906 1,102 --------------------------------------------------------------- TOTAL 26,348 26,057 26,289 26,220 --------------------------------------------------------------- Basic earnings per share $ 0.95 $ 0.80 $ 1.64 $ 1.47 ==================================================================================================================== DENOMINATOR - DILUTED EARNINGS PER SHARE Denominator - Basic Earnings per Share 26,348 26,057 26,289 26,220 Effect of Dilutive Securities: Common stock options 8 40 9 42 Warrants 96 221 95 226 Restricted stock 461 689 449 655 --------------------------------------------------------------- TOTAL 26,913 27,007 26,842 27,143 --------------------------------------------------------------- Diluted earnings per share $ 0.93 $ 0.77 $ 1.60 $ 1.42 ====================================================================================================================
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 28% 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 September 30, 2000 the Company held 2,093,248 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. On September 25, 2000 Granite purchased an additional 15,817 shares of Wilder stock. At September 30, 2000 the Company held 1,349,746 shares of Wilder stock representing a 37% minority interest. 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. 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 is currently evaluating the effect, if any, that the adoption of this pronouncement will have on the Company's financial position and results of operations. 9 10 Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) 10. 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 SEPTEMBER 30, HCD BRANCH TOTAL ------------------------------------------------------------------------------------ 2000 Revenues from external customers $91,120 $350,636 $441,756 Intersegment revenue transfer (4,196) 4,196 - --------------------------------- Net revenue 86,924 354,832 441,756 Depreciation and amortization 1,735 7,982 9,717 Operating profit 10,015 39,609 49,624 ------------------------------------------------------------------------------------ 1999 Revenues from external customers $97,656 $321,047 $418,703 Intersegment revenue transfer (6,411) 6,411 - --------------------------------- Net revenue 91,245 327,458 418,703 Depreciation and amortization 3,985 14,774 18,759 Operating profit 7,842 34,768 42,610 ------------------------------------------------------------------------------------
10 11 Granite Construction Incorporated NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share Data) 10. BUSINESS SEGMENT INFORMATION, CONTINUED: Information about Profit and Assets, continued:
----------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, HCD BRANCH TOTAL ----------------------------------------------------------------------------------- 2000 Revenues from external customers $276,207 $725,691 $1,001,898 Intersegment revenue transfer (12,017) 12,017 - -------------------------------- Net revenue 264,190 737,708 1,001,898 Depreciation and amortization 5,416 23,769 29,185 Operating profit 27,472 63,810 91,282 Property and equipment 26,446 200,137 226,583 ----------------------------------------------------------------------------------- 1999 Revenues from external customers $278,110 $684,689 $962,799 Intersegment revenue transfer (17,061) 17,061 - -------------------------------- Net revenue 261,049 701,750 962,799 Depreciation and amortization 6,045 22,450 28,495 Operating profit 22,546 60,442 82,988 Property and equipment 28,921 190,372 219,293 -----------------------------------------------------------------------------------
Reconciliation of Segment Profit to the Company's Consolidated Totals: ------------------------------------------------------------------------ THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 ------------------------------------------------------------------------ Profit: Total profit for reportable segments $ 49,624 $ 42,610 Other income 2,313 1,013 Unallocated other corporate expenses (11,450) (9,722) ------------------------------------------------------------------------ Income before provision for income taxes $ 40,487 $ 33,901 ======================================================================== ------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ------------------------------------------------------------------------ Profit: Total profit for reportable segments $ 91,282 $ 82,988 Other income 7,687 4,597 Unallocated other corporate expenses (26,844) (25,016) ------------------------------------------------------------------------ Income before provision for income taxes $ 72,125 $ 62,569 ========================================================================
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 September 30, 2000 1999 CHANGE % --------------------------------- -------- -------- ------ ---- (In Millions) Revenue: Branch Division $ 354.9 $ 327.5 $ 27.4 8.4 Heavy Construction Division 86.9 91.2 (4.3) (4.7) ------------------------------- $ 441.8 $ 418.7 $ 23.1 5.5 ===============================
Nine Months Ended September 30, 2000 1999 CHANGE % -------------------------------- -------- ------ ------ ---- (In Millions) Revenue: Branch Division $ 737.7 $701.8 $35.9 5.1 Heavy Construction Division 264.2 261.0 3.2 1.2 ------------------------------- $1,001.9 $962.8 $39.1 4.1 ===============================
Revenue and Backlog: Revenue for the third quarter 2000 increased 5.5% to $441.8 million from the third 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 revenue reflects the fact that a number of HCD projects are nearing completion and have only recently been replaced by new awards. Branch Division revenue in the third quarter 2000 reflects favorable market conditions in the West and a high level of public infrastructure funding. Revenue for the nine months ended September 30, 2000 increased 4.1% to $1.0 billion from $962.8 million for the same period in 1999, reflecting growth in both divisions. 12 13 Revenue from private sector contracts increased to 24.3% of total revenue in the third quarter of 2000 from 23.0% in the 1999 quarter and to 25.5% of total revenue for the nine months ended September 30, 2000 from 22.7% 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 slowing growth in the private sector (see "Outlook").
------------------------------------------------------------------------------- BACKLOG BY MARKET SECTOR (IN MILLIONS) SEPTEMBER 30, SEPTEMBER 30, VARIANCE 2000 1999 AMOUNT PERCENT ------------------------- -------------- --------------- --------- ------------ CONTRACTS Federal $ 78.2 $ 21.7 $ 56.5 260.4 State 663.8 604.2 59.6 9.9 Local 309.8 179.0 130.8 73.1 -------------------------------- Total public sector 1,051.8 804.9 246.9 30.7 Private sector 114.1 166.3 (52.2) (31.4) -------------------------------- $1,165.9 $971.2 $194.7 20.0 ==============================================================
The Company's backlog at September 30, 2000 was $1,165.9 million, up $194.7 million, or 20.0% from September 30, 1999 and also increased $372.6 million, or 47.0% from December 31, 1999. New awards for the quarter totaled $712.1 million and included a $154.0 million monorail project in Nevada and the Company's $164.6 million portion of a light rail joint venture in Minnesota. Gross Profit: Gross profit as a percent of revenue increased to 15.3% in the third quarter 2000 from 14.0% in the third quarter 1999 and to 14.3% for the nine months ended September 30, 2000 from 13.3% in the corresponding 1999 period. The gross profit margins for the quarter and the nine months reflect the overall successful execution of projects in both the Branch Division and HCD. To a lesser extent, the gross profit margin in the quarter and nine months ended September 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. Revenue recognized for projects less than 25% complete was approximately $23.2 million and $43.2 million for the nine months ended September 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 upward pressure on costs associated with labor markets and oil prices; however, the Company's gross profit margins were not materially impacted by such changes during the first nine months of 2000. 13 14 General and Administrative Expenses: General and administrative expenses for the three and nine months ended September 30, 2000 and 1999, respectively, comprised the following (in millions):
---------------------------------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------------------------------------------------------------- IN MILLIONS 2000 1999 2000 1999 ---------------------------------------------------------------------------------- Salaries and related expenses $11.6 $11.0 $35.2 $32.3 Incentive compensation, discretionary profit sharing and pension 9.0 7.8 18.4 16.5 Other general and administrative expenses 8.7 6.8 25.5 21.2 ---------------------------------------------------------------------------------- Total $29.3 $25.6 $79.1 $70.0 ---------------------------------------------------------------------------------- Percent of revenue 6.6% 6.1% 7.9% 7.3% ==================================================================================
Salaries and related expenses increased for the three and nine months ended September 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 primarily as a function of the Company's increased gross profit margin and higher amortization of restricted stock. 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 increased in the third quarter 2000 compared to the third quarter 1999 due primarily to an increase in gross profits on projects nearing completion. For the nine months ended September 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 third quarter 2000 over the comparable 1999 period, reflecting increases in construction revenue and gross margins as described in the "Gross Profit" section above. Other Income (Expenses): Other income increased $3.1 million to $7.7 million for the nine months ended September 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. 14 15 Provision for Income Taxes: The Company's effective tax rate remained flat at 38.5% for the three months ended September 30, 2000 compared to the same period last year. The Company's effective tax rate was 40.3% for the nine months ended September 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 As we disclosed in our third quarter press release, our Branch operations were impacted in October by wet weather in California. As a result, the Branch business is not expected to be as strong as October 1999, when weather had little, if any, impact on operations. The total impact on the Company's fourth quarter is impossible to discern at this writing, having completed only one month in the quarter. Although we anticipate excellent results for the year, it is the length of the building season that will largely determine how much work we can perform between now and year-end and ultimately what our financial results for the quarter will be. Looking ahead to 2001, the Company's fundamental business outlook remains very favorable, based on the combination of strong public funding, healthy economic conditions and a quality backlog which is expected to provide the Company with ample opportunity to grow earnings and revenues next year. Moreover, we are very pleased with the size and quality of our backlog. On the federal funding front, President Clinton recently signed an FY 2001 transportation appropriations bill that included a record $33.42 billion outlay for the federal highway program, an increase of $4.62 billion or 16% over this year's level. Next year, Congress is expected to start work on a bill to replace TEA-21, which is up for reauthorization in 2003. The chairman of the Senate Environment and Public Works Committee, Bob Smith (R-N.H.), recently announced that he intends to draft a $300 billion federal surface transportation program reauthorization bill. The total funding authorization contained in TEA-21 is $218 billion. At the state level, the voters approved Proposition 35, the contracting out initiative on the California ballot, on November 7th. Proposition 35 will give the California Department of Transportation, the Company's largest customer, the flexibility to contract out design services to private engineering companies. We are unsure at this point in time as to what degree the passage of Proposition 35 will impact the level of bidding activity on state public works projects and when this will occur. However, it will probably not occur until late 2001 or 2002. In Arizona, voters rejected an initiative put on the ballot by the Sierra Club to restrict growth. Proposition 202 was soundly defeated by a margin of 30% in favor to 70% opposed. Passage of this measure could have severely limited private sector development in the state. Looking ahead at the private side of our business, the California economy appears to be growing at a slower rate. According to the University of California at Los Angeles Anderson 15 16 Forecast, job growth is predicted to hover around 2.6% next year. That is down from the 3.8% gain projected for 2000, but on a par with the 2.5% average job growth rate the state showed during the 1980s. Furthermore, a new forecast from the Continuing Study of the California Economy predicts continued economic growth in California through at least next year based on three short-term strengths: 1) A surge in export demand based on worldwide economic growth and the competitiveness of California products and services; 2) spectacular levels of venture capital funding, which will span a multitude of new successful companies in California; and 3) a large backlog of construction demand in housing and infrastructure. Our Heavy Construction Division is targeting several large design-build projects across the country, including the $1.3 billion Southeast Corridor Project in Colorado, the $200 million U.S. 60 Project in Arizona, the $500 million Legacy Highway Project in Utah and the $120 million Peace River Bridge in Florida. Our Branch Division, buoyed by a significant amount of new awards in the third quarter, should take a strong backlog into 2001 and is expected to benefit from the increased levels of public works spending that are expected in California, Nevada, Utah and Arizona. Despite strong public sector spending, the ultimate success of the Branch Division, as always, will hinge on the strength of the private sector, particularly in California. In summary, the Company is well positioned to capitalize on the opportunities presented by the very strong marketplace it finds itself in today. 16 17 LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------------- (IN MILLIONS) NINE MONTHS ENDED 2000 1999 SEPTEMBER 30, ----------------------------------------------------------- Cash and cash equivalents $ 48.6 $ 37.9 Net cash provided (used) by: Operating activities 39.3 36.9 Investing activities (36.3) (27.1) Financing activities (16.2) (34.4) Capital expenditures 39.0 64.2 -----------------------------------------------------------
Cash provided by operating activities of $39.3 million for the nine months ended September 30, 2000 represents a $2.4 million increase 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 nine month period in 2000 increased $9.2 million over the corresponding 1999 period due primarily to the investment in Wilder Construction in which the Company has a 37% 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 $18.2 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 September 30, 2000. 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 is currently evaluating the effect, if any, that the adoption of this pronouncement will have 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 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None 21 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit 27 - Financial Data Schedule b) Reports on Form 8-K None 22 23 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: November 14, 2000 By: /s/ William E. Barton ------------------ ------------------------------------------------- William E. Barton Senior Vice President and Chief Financial Officer 23 24 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 27 Financial Data Schedule 25
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