form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
ý
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the quarterly period ended June 30, 2007
or
¨
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the
transition period from ___________ to ___________
Commission
File Number: 1-12911
GRANITE
CONSTRUCTION INCORPORATED
State
of Incorporation:
|
I.R.S.
Employer Identification Number:
|
Delaware
|
77-0239383
|
Corporate
Administration:
585
W.
Beach Street
Watsonville,
California 95076
(831)
724-1011
Indicate
by checkmark 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 such 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. ý
Yes ¨
No
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ý
|
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨
Yes ý
No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of July
20,
2007.
Class
|
|
Outstanding
|
Common
Stock, $0.01 par value
|
|
41,943,100 shares
|
Index
Granite
Construction Incorporated
(Unaudited
- in thousands, except share and per share data)
|
|
|
|
June
30,
2007
|
|
December
31,
2006
|
|
June
30,
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
246,278
|
|
$
|
204,893
|
|
$
|
|
|
Short-term
marketable securities
|
|
|
98,199
|
|
|
141,037
|
|
|
|
|
Accounts
receivable, net
|
|
|
489,435
|
|
|
492,229
|
|
|
|
|
Costs
and estimated earnings in excess of billings
|
|
|
39,710
|
|
|
15,797
|
|
|
32,882
|
|
Inventories
|
|
|
53,320
|
|
|
41,529
|
|
|
39,532
|
|
Real
estate held for sale
|
|
|
54,722
|
|
|
55,888
|
|
|
|
|
Deferred
income taxes
|
|
|
36,015
|
|
|
36,776
|
|
|
|
|
Equity
in construction joint ventures
|
|
|
32,400
|
|
|
31,912
|
|
|
|
|
Other
current assets
|
|
|
57,811
|
|
|
63,144
|
|
|
|
|
Total
current assets
|
|
|
1,107,890
|
|
|
1,083,205
|
|
|
|
|
Property
and equipment, net
|
|
|
490,328
|
|
|
429,966
|
|
|
|
|
Long-term
marketable securities
|
|
|
61,582
|
|
|
48,948
|
|
|
|
|
Investments
in affiliates
|
|
|
24,816
|
|
|
21,471
|
|
|
|
|
Other
assets
|
|
|
72,490
|
|
|
49,248
|
|
|
|
|
Total
assets
|
|
$
|
1,757,106
|
|
$
|
1,632,838
|
|
$
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
35,040
|
|
$
|
28,660
|
|
$
|
|
|
Accounts
payable
|
|
|
268,054
|
|
|
257,612
|
|
|
|
|
Billings
in excess of costs and estimated earnings
|
|
|
242,469
|
|
|
287,843
|
|
|
|
|
Accrued
expenses and other current liabilities
|
|
|
223,311
|
|
|
189,328
|
|
|
|
|
Total
current liabilities
|
|
|
768,874
|
|
|
763,443
|
|
|
|
|
Long-term
debt
|
|
|
139,715
|
|
|
78,576
|
|
|
|
|
Other
long-term liabilities
|
|
|
67,378
|
|
|
58,419
|
|
|
|
|
Deferred
income taxes
|
|
|
19,478
|
|
|
22,324
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in consolidated subsidiaries
|
|
|
30,675
|
|
|
15,532
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, authorized 3,000,000 shares, none
outstanding
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.01 par value, authorized 150,000,000 shares; issued and
outstanding 41,947,610 shares as of June 30, 2007, 41,833,559 shares
as of
December 31, 2006 and 41,836,889 as of June 30, 2006
|
|
|
419
|
|
|
418
|
|
|
|
|
Additional
paid-in capital
|
|
|
81,293
|
|
|
78,620
|
|
|
|
|
Retained
earnings
|
|
|
645,448
|
|
|
612,875
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
3,826
|
|
|
2,631
|
|
|
|
|
Total
shareholders’ equity
|
|
|
730,986
|
|
|
694,544
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,757,106
|
|
$
|
1,632,838
|
|
$
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Granite
Construction Incorporated
(Unaudited
- in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
660,384
|
|
$
|
|
|
$
|
1,077,016
|
|
$
|
|
|
Material sales |
|
|
100,091 |
|
|
108,551 |
|
|
166,202 |
|
|
170,181 |
|
Real
estate
|
|
|
10,401
|
|
|
|
|
|
15,318
|
|
|
|
|
Total
revenue
|
|
|
770,876
|
|
|
|
|
|
1,258,536
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
557,926
|
|
|
|
|
|
942,080
|
|
|
|
|
Material
sales
|
|
|
78,878
|
|
|
80,674
|
|
|
132,986 |
|
|
132,447 |
|
Real
estate
|
|
|
6,438
|
|
|
|
|
|
7,800
|
|
|
|
|
Total
cost of revenue
|
|
|
643,242
|
|
|
|
|
|
1,082,866
|
|
|
|
|
Gross
profit
|
|
|
127,634
|
|
|
|
|
|
175,670
|
|
|
|
|
General
and administrative expenses
|
|
|
65,130
|
|
|
|
|
|
119,467
|
|
|
|
|
Gain
on sales of property and equipment
|
|
|
4,346
|
|
|
4,049
|
|
|
5,059
|
|
|
|
|
Operating
income
|
|
|
66,850
|
|
|
|
|
|
61,262
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
6,439
|
|
|
|
|
|
13,282
|
|
|
|
|
Interest
expense
|
|
|
(2,028
|
) |
|
|
)
|
|
(3,114 |
) |
|
|
)
|
Equity
in (loss) income of affiliates
|
|
|
(29
|
) |
|
828
|
|
|
322 |
|
|
|
|
Other,
net
|
|
|
(433 |
) |
|
3,314 |
|
|
(666 |
) |
|
2,708 |
|
Total
other income
|
|
|
3,949
|
|
|
7,695
|
|
|
9,824
|
|
|
|
|
Income
before provision for income taxes and minority
interest
|
|
|
70,799
|
|
|
|
|
|
71,086
|
|
|
|
|
Provision
for income taxes
|
|
|
22,154
|
|
|
|
|
|
22,243
|
|
|
|
|
Income
before minority interest
|
|
|
48,645
|
|
|
|
|
|
48,843
|
|
|
|
|
Minority
interest in consolidated subsidiaries
|
|
|
(4,799
|
)
|
|
(5,585
|
)
|
|
(7,246
|
)
|
|
|
)
|
Net
income
|
|
$
|
43,846
|
|
$
|
33,289
|
|
$
|
41,597
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
$
|
|
|
$
|
1.01
|
|
$
|
|
|
Diluted
|
|
$
|
|
|
$
|
|
|
$
|
1.00
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,096
|
|
|
|
|
|
41,044
|
|
|
|
|
Diluted
|
|
|
41,631
|
|
|
|
|
|
41,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
|
$
|
|
|
$
|
|
|
$
|
0.20
|
|
$
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Granite
Construction Incorporated
(Unaudited
- in thousands)
|
|
Six
Months Ended June 30,
|
|
2007
|
|
2006
|
|
Operating
Activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
|
|
$
|
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
38,825
|
|
|
|
|
Provision
for (benefit from) doubtful accounts
|
|
|
1,156 |
|
|
(371 |
) |
Gain
on sales of property and equipment
|
|
|
|
)
|
|
|
)
|
Change
in deferred income taxes
|
|
|
(321
|
) |
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
Excess
tax benefit on stock-based
compensation
|
|
|
(2,700 |
) |
|
- |
|
Common
stock contributed to ESOP
|
|
|
|
|
|
|
|
Minority
interest in consolidated subsidiaries
|
|
|
|
|
|
6,652
|
|
Equity
in income of affiliates
|
|
|
|
)
|
|
|
)
|
Changes in assets and liabilities, net of business
acquisitions:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
|
|
|
|
)
|
Inventories
|
|
|
|
|
|
|
)
|
Real
estate held for sale
|
|
|
|
)
|
|
71
|
|
Equity
in construction joint ventures
|
|
|
|
|
|
|
)
|
Other
assets
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
|
|
|
Billings
in excess of costs and estimated earnings, net
|
|
|
|
)
|
|
|
|
Accrued
expenses and other liabilities
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
Purchases
of marketable securities
|
|
|
|
|
|
|
)
|
Maturities
of marketable securities
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
|
|
|
|
)
|
Proceeds
from sales of property and equipment
|
|
|
|
|
|
|
|
Acquisition
of businesses
|
|
|
(74,197 |
)
|
|
- |
|
Contributions
to affiliates
|
|
|
(3,574 |
)
|
|
- |
|
Issuance
of notes receivable
|
|
|
|
|
|
|
)
|
Collection
of notes receivable
|
|
|
|
|
|
|
|
Other
investing activities
|
|
|
|
|
|
|
)
|
Net
cash used in investing activities
|
|
|
|
|
|
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
Additions
to long-term debt
|
|
|
|
|
|
|
|
Repayments
of long-term debt
|
|
|
|
|
|
|
)
|
Dividends
paid
|
|
|
|
|
|
|
)
|
Repurchases
of common stock
|
|
|
|
|
|
|
)
|
Contributions
from minority partners
|
|
|
|
|
|
|
|
Distributions
to minority partners
|
|
|
|
|
|
|
)
|
Excess
tax benefit on stock-based
compensation
|
|
|
2,700 |
|
|
- |
|
Other
financing activities
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
|
|
|
|
)
|
Increase
in cash and cash equivalents
|
|
|
41,385
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
204,893
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
246,278
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Supplementary
Information
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,299
|
|
$
|
|
|
Income
taxes
|
|
|
738
|
|
|
|
|
Non-cash
investing and financing activity:
|
|
|
|
|
|
|
|
Restricted
stock issued for services
|
|
|
11,870
|
|
|
|
|
Dividends
accrued but not paid
|
|
|
4,195
|
|
|
|
|
Financed
acquisition of assets
|
|
|
1,492
|
|
|
|
|
Debt
repayments from sale of assets
|
|
|
4,277 |
|
|
13,521 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Granite
Construction Incorporated
1.
|
Basis
of Presentation:
|
The
condensed consolidated financial statements included herein have been prepared
by Granite Construction Incorporated (“we”, “us”, “our” or “Granite”) without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and should be read in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2006. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America have been condensed or omitted, although we believe 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
our
financial position at June 30, 2007 and 2006 and the results of our operations
and cash flows for the periods presented. The December 31, 2006 condensed
consolidated balance sheet data was derived from audited consolidated financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
Interim
results are subject to significant seasonal variations and the results of
operations for the three and six months ended June 30, 2007 are not necessarily
indicative of the results to be expected for the full year.
In
February 2007, we announced an organizational realignment of our business
operations which is designed to accommodate growth of our vertically integrated
Branch business in the West and improve profitability of our large, complex
Heavy Construction Division (“HCD”) projects. This realignment
involves the reorganization of our operating divisions geographically into
“Granite West” and “Granite East.” Granite West will
include the operations of our former Branch Division as well as the western
portion of our large project business that was formerly included in HCD. Granite
West will retain our successful decentralized operating structure, with each
of
its branch locations aligning under one of three operating groups: Northwest,
Northern California and Southwest. Granite East will include the
eastern portion of our large project business that had been included in HCD
and
will be aligned to focus on enhancing project management oversight and
discipline from estimating through execution. Granite East will be
operated out of three regional offices: the Central Region, based in
Dallas, Texas; the Southeast Region, based in Tampa, Florida; and the
Northeast Region, based in Tarrytown, New York.
During
the quarter ended June 30, 2007, we completed the reassignment of our large
projects in the West from our former Heavy Construction Division to the new
Granite West division (with the exception of certain projects that are nearing
completion which will remain with our new Granite East division) and made
substantial progress on other aspects of the realignment. As a result
we are reporting Granite West and Granite East as new reportable segments
effective with the quarter ended June 30, 2007. Prior period results
have been reclassified to conform to the new organizational structure (see
Note
13.)
2.
|
Recently
Issued Accounting Pronouncements:
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements,
but does not change existing guidance as to whether or not an instrument is
carried at fair value. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact of implementing
SFAS 157 on our consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standard
No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses
on items for which the fair value option has been elected are reported in
earnings. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact of implementing
SFAS 159 on our consolidated financial statements.
3.
|
Change
in Accounting Estimates:
|
Our
gross
profit in the three and six months ended June 30, 2007 and 2006 include
the
effects of significant changes in the estimates of the profitability of
certain
of our projects. The impact of these estimate changes on Granite
East gross profit is summarized as follows:
|
|
|
|
|
|
Granite
East Change in Accounting Estimates
|
|
Three
Months Ended June
30,
|
|
Six
Months Ended June
30,
|
|
(dollars
in millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Reduction
in gross profit
|
|
$
|
|
|
$
|
|
)
|
$
|
(48.1
|
|
$
|
|
)
|
Increase
in gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (reduction) in gross profit
|
|
$
|
|
|
$
|
|
)
|
$
|
|
|
$
|
|
)
|
Number
of projects with significant downward estimate changes
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
of reduction in gross profit from each project
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Number
of projects with significant upward estimate changes
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Range
of increase in gross profit from each project
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
During
the three and six months ended June 30, 2007, the
estimate changes that reduced gross profit resulted from changes in productivity
and quantity estimates based on experience gained in the
quarter, costs from design issues and owner-directed
changes. Three
of
the four Granite East projects with significant downward changes during
the three months ended June 30, 2007 also had significant downward
estimate changes in 2006.
Granite
Construction Incorporated
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table presents additional information about the four Granite East
projects with significant downward estimate changes for the three months
ended June 30, 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Projects
|
|
Total
Contract Value
|
|
Gross
Profit Reduction Impact
|
|
Backlog
at
June
30, 2007
|
|
Percent
of Total Granite East Backlog at June 30,
2007
|
|
Highway
project in California - 93% complete
|
|
|
1 |
|
$
|
448 |
|
$
|
15.7 |
|
$
|
32 |
|
|
2.1 |
% |
Other
projects at 91% and 94% complete
|
|
|
2
|
|
|
328
|
|
|
3.5
|
|
|
27
|
|
|
1.8
|
%
|
Project
at 59% complete
|
|
|
1
|
|
|
72
|
|
|
1.2
|
|
|
29
|
|
|
1.9
|
%
|
Total
for projects with significant downward changes
|
|
|
4
|
|
$
|
848
|
|
$
|
20.4
|
|
$
|
88
|
|
|
5.8
|
%
|
The
minority interest expense related to the net increase in gross profit for
the
three months ended June 30, 2007 was approximately $0.3 million. The
minority interest share of the net decrease in gross profit for
the six months ended June 30, 2007 and the three and six months ended
June 30, 2006 was approximately $1.1 million, $5.1 million and $5.8 million,
respectively. Two of our joint venture projects are currently forecast at a
loss and will require additional capital contributions from our minority
partners if the forecasts do not improve. Our joint venture agreements
require
that such capital contributions be made if needed. Based on our most recent
assessment of our partners’ financial condition, we currently believe that
one of our partners does not have the ability to contribute all of the
additional capital that will be needed if the project forecast does
not improve. Included in minority interest in our condensed
consolidated statements of income for the three and six months ended June
30, 2007 is expense related to the potentially uncollectible partner balance
of
approximately $1.8 million and $4.4 million, respectively. The remaining
minority interest balance related to these loss projects of $7.2 million
at June
30, 2007 has been included in other long-term assets in our condensed
consolidated balance sheet.
Six of
the seven Granite East projects that generated significant increased
gross
profit from changes in estimates during the three months ended June 30,
2007
were complete or substantially complete at June 30, 2007, and four of
the
seven projects had experienced significant margin deterioration in prior
periods. The increased gross profit resulted from a combination of
the settlement of certain revenue issues with the project owners and
the
resolution of other project uncertainties. The remaining
project was approximately 73.0% complete at June 30, 2007 and generated
additional estimated margin from the resolution of project uncertainties
and the
receipt of a change order that established payment for certain work for
which
the costs had been forecast in prior periods.
Additionally,
during the
three and six months ended June 30, 2007, Granite West
recognized increases
in gross profit
from the net
effects
of changes in the
estimates of project
profitability
of
$9.0
million and $13.9 million, respectively.
This
compares with net
increases in gross profit of $0.5 million and $8.3 million during the
three and
six months ended June 30, 2006, respectively. The increased Granite
West profitability estimates during the three months ended June 30,
2007 were
due
primarily to
the settlement of outstanding issues with contract owners,
higher productivity than
originally estimated and the resolution of certain project
uncertainties. Two
projects accounted for
approximately $3.3 million of the $9.0 million increase during the
three months
ended June 30, 2007.
We
currently have a highway project that was transferred to Granite
West from HCD in connection with our realignment that involves
construction of seven miles of highway in western Oregon. The
project includes construction of at least eight new structures over creeks,
rivers and a railroad, as well as construction of several retaining walls,
culverts and drainage improvements. While clearing and excavating the
site, numerous and massive landslides throughout the seven-mile project site
were discovered. Some of these ancient landslides are at critical locations
of
the project, including under bridge abutments. At
December 31, 2006, we had forecast this project at a loss of approximately
$20.0
million, largely due to preliminary designs and estimates of cost associated
with these geotechnical issues. During the quarter ended March 31, 2007,
the
geotechnical design was completed along with our analysis of the impact
of these
landslides on the project. As a result of this analysis we have determined
that
the potential cost would be significantly higher than our earlier estimates
and
that the project would take approximately two years longer to complete
than
originally anticipated. After conferring with the Oregon Department of
Transportation (“ODOT”) on the most cost effective way to deal with these
differing site conditions, we requested that ODOT terminate the original
contract.
After
several months of negotiations, Granite and ODOT have agreed that in lieu
of terminating the contract, it is in the best interests of the parties
to temporarily suspend work. This suspension will allow time for both
parties to jointly complete additional geotechnical site investigations
and
explore alternative, less expensive landslide mitigation solutions. Under
the
terms of the agreement, construction work on the project will be suspended
beginning on or about September 1, 2007 and will resume no earlier than
June 1,
2008. During the suspension period, a small management team will remain
on the
project to ensure that all required environmental protection measures
are
maintained. Costs associated with the temporary suspension of the project
will
be shared between ODOT and Granite. However,
no agreement has been reached regarding the responsibility for the landslide
mitigation costs. Both parties have agreed to take the issue to the standing
Dispute Review Board under the dispute resolution provisions of the contract.
Upon resolution of this issue, and agreement on the final cost and schedule
to
complete the project, Granite will restart construction under a signed
change
order issued by ODOT with no associated unresolved revenue issues or
disputes. Because
there is remaining
uncertainty surrounding the ultimate determination of responsibility
for the
landslide mitigation costs we have not recorded any adjustments to our
project
forecast during the quarter ended June 30, 2007.
We
believe we are entitled to additional compensation related to some of
our
downward estimate changes in both Granite East and Granite West and
are actively pursuing these issues with the contract owners. However,
the amount
and timing of any future recovery is highly uncertain. While we recognize
the
impact of estimated costs immediately when known, under our accounting
policies
we do not recognize revenue from contract changes until we have a signed
change
order or executed claim settlement. We believe that our current estimates
of gross profit are achievable. However, it is possible that the actual
cost to complete will vary from our current estimate and any future estimate
changes could be significant.
Inventories
consist primarily of quarry products valued at the lower of average cost or
market.
Granite
Construction Incorporated
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5.
|
Property
and Equipment, Net:
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
June
30,
2007
|
|
December
31,
2006
|
|
June
30,
2006
|
|
Land
|
|
$
|
72,566
|
|
$
|
56,797
|
|
$
|
|
|
Quarry
property
|
|
|
126,876
|
|
|
115,657
|
|
|
|
|
Buildings
and leasehold improvements
|
|
|
73,597
|
|
|
69,972
|
|
|
|
|
Equipment
and vehicles
|
|
|
849,506
|
|
|
804,370
|
|
|
|
|
Office
equipment
|
|
|
29,530
|
|
|
26,006
|
|
|
|
|
Property
and equipment
|
|
|
1,152,075
|
|
|
1,072,802
|
|
|
|
|
Less:
accumulated depreciation, depletion and amortization
|
|
|
661,747
|
|
|
642,836
|
|
|
|
|
Property
and equipment, net
|
|
$
|
490,328
|
|
$
|
429,966
|
|
$
|
|
|
The
following table indicates the allocation of goodwill by reportable segment
which
is included in other assets on our condensed consolidated balance
sheets:
|
|
|
|
|
|
|
|
(in
thousands)
|
|
June
30,
2007
|
|
December
31,
2006
|
|
June
30,
2006
|
|
Goodwill
by segment:
|
|
|
|
|
|
|
|
|
|
|
Granite
East
|
|
$
|
|
|
$
|
-
|
|
$
|
|
|
Granite
West
|
|
|
|
|
|
9,900
|
|
|
|
|
Total
goodwill
|
|
$
|
|
|
$
|
9,900
|
|
$
|
|
|
The
following other intangible assets are included in other assets on our
consolidated balance sheets (see also Note 14 “Acquisitions”):
|
|
|
|
|
|
June
30, 2007
|
|
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Value
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Covenants
not to compete
|
|
$
|
1,436
|
|
$
|
(204
|
)
|
$
|
1,232
|
|
Permits
|
|
|
32,105
|
|
|
(1,166
|
)
|
|
30,939
|
|
Trade
names
|
|
|
1,425
|
|
|
(870
|
)
|
|
555
|
|
Other
|
|
|
1,712
|
|
|
(386
|
)
|
|
1,326
|
|
Total
amortized intangible assets
|
|
$
|
36,678
|
|
$
|
(2,626
|
)
|
$
|
34,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Value
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Covenants
not to compete
|
|
$
|
161
|
|
$
|
(109
|
)
|
$
|
52
|
|
Permits
|
|
|
2,000
|
|
|
(761
|
)
|
|
1,239
|
|
Trade
names
|
|
|
1,425
|
|
|
(768
|
)
|
|
657
|
|
Other
|
|
|
603
|
|
|
(193
|
)
|
|
410
|
|
Total
amortized intangible assets
|
|
$
|
4,189
|
|
$
|
(1,831
|
)
|
$
|
2,358
|
|
|
|
|
|
|
|
June
30, 2006
|
|
|
|
Gross
Value
|
Accumulated Amortization
|
Net
Value
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Covenants
not to compete
|
|
$
|
161
|
|
$
|
(92
|
)
|
$
|
69
|
|
Permits
|
|
|
2,000
|
|
|
(694
|
)
|
|
1,306
|
|
Trade
names
|
|
|
1,425
|
|
|
(666
|
)
|
|
759
|
|
Other
|
|
|
603
|
|
|
-
|
|
|
603
|
|
Total
amortized intangible assets
|
|
$
|
4,189
|
|
$
|
(1,452
|
)
|
$
|
2,737
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense related to intangible assets was approximately $653,000 and $795,000
for
the three and six months ended June 30, 2007, respectively, and approximately
$90,000 and $190,000 for the three and six months ended June 30, 2006,
respectively. Amortization expense expected to be recorded in the future
is as
follows: $3.8 million for the balance of 2007, $6.2 million in 2008,
$5.9 million in 2009, $5.4 million in 2010, $5.1 million in 2011 and $7.7
million thereafter.
Granite
Construction Incorporated
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7.
|
Construction
Joint Ventures:
|
We
participate in various construction joint ventures. Generally, each construction
joint venture is formed to accomplish a specific project and is jointly
controlled by the joint venture partners. The joint venture agreements typically
provide that our interest in any profits and assets, and our respective share
in
any losses and liabilities that may result from the performance of the contract
are limited to our stated percentage interest in the project. Although each
venture’s contract with the project owner typically requires joint and several
liability among the joint venture partners, our agreements with our joint
venture partners provide that each partner will assume and pay its full
proportionate share of any losses resulting from a project.
We
have
determined that certain of these joint ventures are variable interest entities
as defined by FASB Interpretation No. 46 (revised December 2003), “Consolidation
of Variable Interest Entities.” Accordingly, we have consolidated those joint
ventures where we have determined that we are the primary beneficiary. At
June
30, 2007, the joint ventures we have consolidated were engaged
in construction projects with total contract values ranging from $126.7 million
to $463.9 million. Our proportionate share of the consolidated joint ventures
ranges from 52.0% to 99.0%.
Consistent
with Emerging Issues Task Force Issue 00-01, “Investor Balance Sheet and Income
Statement Display under the Equity Method for Investments in Certain
Partnerships and Other Ventures,” we account for our share of the operations of
construction joint ventures in which we have determined we are not the primary
beneficiary on a pro rata basis in the consolidated statements of operations
and
as a single line item in the consolidated balance sheets. At June 30, 2007,
the
joint ventures in which we hold a significant interest but are not the primary
beneficiary were engaged in construction projects with total contract values
ranging from $94.3 million to $353.5 million. Our proportionate share of these
joint ventures ranges from 20.0% to 40.0%.
We
also
participate in various “line item” joint venture agreements under which each
partner is responsible for performing certain discrete items of the total scope
of contracted work. The revenue for these discrete items is defined in the
contract with the project owner and each venture partner bears the profitability
risk associated with its own work. All partners in a line item joint venture
are
jointly and severally liable for completion of the total project under the
terms
of the contract with the project owner. There is not a single set of books
and
records for a line item joint venture. Each partner accounts for its items
of
work individually as it would for any self-performed contract. We account for
our portion of these contracts as a project in our accounting system and include
receivables and payables associated with our work on our consolidated balance
sheet.
Although
our agreements with our joint venture partners for both construction joint
ventures and line item joint ventures provide that each party will assume and
pay its share of any losses resulting from a project, if one of our partners
is
unable to pay its share, we would be fully liable under our contract with the
project owner. Circumstances that could lead to a loss under our joint venture
arrangements beyond our proportionate share include a partner’s inability to
contribute additional funds to the venture in the event the project incurs
a
loss, or additional costs that we could incur should a partner fail to provide
the services and resources toward project completion that had been committed
to
in the joint venture agreement. At June 30, 2007, approximately $581.9 million
of work representing our partners’ share of unconsolidated and line item joint
venture contracts in progress had yet to be completed.
We
participate in real estate partnerships through our Granite Land Company
subsidiary. Generally, each partnership is formed to accomplish a specific
real
estate development project. We have determined that certain of these
partnerships are variable interest entities as defined by FASB Interpretation
No. 46 (revised December 2003), “Consolidation of Variable Interest Entities.”
Accordingly, we have consolidated those partnerships for which we have
determined that we are the primary beneficiary. At June 30, 2007, the
partnerships we have consolidated were engaged in development projects with
total assets ranging from approximately $0.4 million to $24.6 million. At
June
30, 2007, approximately $54.7 million was classified as real estate held
for
sale on our condensed consolidated balance sheet and of that balance
approximately $51.7 million was pledged as collateral for the obligations
of
consolidated real estate partnerships. Our proportionate share of the results
of
these partnerships varies depending on the ultimate profitability of the
partnerships.
We
account for our share of the operations of real estate partnerships in
which we
have determined we are not the primary beneficiary in “investments in
affiliates” in our consolidated balance sheets and in “other
income (expense)” in our consolidated statements of income. At June 30, 2007,
the partnerships in which we hold a significant interest but are not the
primary
beneficiary were engaged in development projects with total assets ranging
from
approximately $5.8 million to $57.3 million. Total liabilities of real
estate
partnerships in which we are not the primary beneficiary were approximately
$87.9 million at June 30, 2007. Our proportionate share of the results of
these partnerships varies depending on the ultimate profitability of the
partnerships.
Granite
Construction Incorporated
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9.
|
Weighted
Average Shares
Outstanding:
|
A
reconciliation of the weighted average shares outstanding used in calculating
basic and diluted net income per share in the accompanying condensed
consolidated statements of income is as follows:
|
|
|
|
|
|
|
|
Three
Months Ended June
30,
|
|
Six
Months Ended June
30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock outstanding
|
|
|
41,938
|
|
|
|
|
|
41,890
|
|
|
|
|
Less:
weighted average restricted stock outstanding
|
|
|
842
|
|
|
|
|
|
846
|
|
|
|
|
Total
basic weighted average shares outstanding
|
|
|
41,096
|
|
|
|
|
|
41,044
|
|
|
|
|
Diluted
weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
41,096
|
|
|
|
|
|
41,044
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock options and units
|
|
|
45
|
|
|
|
|
|
45
|
|
|
|
|
Restricted
stock
|
|
|
490 |
|
|
|
|
|
471
|
|
|
|
|
Total
weighted average shares outstanding
|
|
|
41,631 |
|
|
41,466 |
|
|
41,560 |
|
|
41,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock representing approximately 88,000 shares
for the six months ended June 30, 2007 and approximately 169,000
shares and 177,000 shares for the three and six months ended June 30, 2006,
respectively, have
been
excluded from the calculation of diluted net income per share because their
effects are anti-dilutive.
10.
|
Comprehensive
Income:
|
The
components of comprehensive income, net of tax, are as follows:
|
|
|
|
|
|
|
|
Three
Months Ended June
30,
|
|
Six
Months Ended June
30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
|
$
|
43,846
|
|
$
|
|
|
$
|
41,597
|
|
$
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in net unrealized gains on investments
|
|
|
845
|
|
|
|
)
|
|
1,195
|
|
|
|
|
Total
comprehensive income
|
|
$
|
44,691
|
|
$
|
|
|
$
|
42,792
|
|
$
|
|
|
Uncertain
tax positions: We
adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes − an Interpretation of FASB Statement 109” (“FIN
48”), on January 1, 2007. As a result of the implementation of FIN 48, we
recognized an increase in the liability for uncertain tax positions of
approximately $4.8 million, of which approximately $0.6 million is accounted
for
as a decrease in the January 1, 2007 balance of retained earnings.
Including the cumulative increase at the beginning of 2007, we had approximately
$5.5 million of total gross unrecognized tax benefits at June 30, 2007. There
were no unrecognized tax benefits that would affect the effective tax rate
in
any future period at either January 1, 2007 or June 30, 2007 and we do not
believe it is reasonably possible that the total amounts of our liability for
uncertain tax positions will significantly increase or decrease
within twelve months of June 30, 2007.
We
file
income tax returns in the U.S. federal and various state and local
jurisdictions. We are not currently under examination by federal, state or
local
taxing authorities for any open tax years. The tax years 2002 through 2006
remain open to examination by the major taxing authorities to which we are
subject. We record interest related to uncertain tax positions as interest
and
any penalties are recorded as other expense in our statement of operations.
As
of June 30, 2007 we estimated interest of approximately $3.3 million which
was
included in our liability for uncertain tax positions.
Provision
for income taxes: Our
effective tax rate increased to 31.3% for both the three and six months ended
June 30, 2007 from 30.5% and 29.7%, respectively, for the corresponding periods
in 2006. The increased effective tax rate is due primarily to lower estimated
income from our minority partners’ share of income in our consolidated
construction joint ventures which are not subject to income taxes on a
stand-alone basis.
Granite
Construction Incorporated
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Silica
Litigation
Our
wholly owned subsidiary Granite Construction Company (“GCCO”) is one of
approximately 100 to 300 defendants in ten active California Superior Court
lawsuits. Of the ten lawsuits, five were filed against GCCO in 2005 and
five
were filed against GCCO in 2006, in Alameda County (Riley vs. A-1 Aggregates,
et
al.; Molina vs. A-1 Aggregates, et al.; Dominguez vs. A-1 Aggregates, et
al.;
Cleveland vs. A. Teichert & Son.; Guido vs. A. Teichert & Son, Inc.;
Williams vs. A. Teichert & Son, Inc.; Horne vs. Teichert & Son, Inc.;
Harris vs. A-1 Aggregates, et al.; Kammer vs.A-1 Aggregates, et al.; and
Solis
vs. The 3M Company et al.). Each lawsuit was brought by a single plaintiff
who
is seeking money damages by way of various causes of action, including
strict
product and market share liability, and alleges personal injuries caused
by
exposure to silica products and related materials during the plaintiffs’ use or
association with sand blasting or grinding concrete. The plaintiff in each
lawsuit has categorized the defendants as equipment defendants, respirator
defendants, premises defendants and sand defendants. We have been identified
as
a sand defendant, meaning a party that manufactured, supplied or distributed
silica-containing products. Our preliminary investigation revealed that
we have
not knowingly sold or distributed abrasive silica sand for sandblasting,
and
therefore, we believe the probability of these lawsuits resulting in an
incurrence of a material liability is remote. We have been dismissed from
fourteen other similar lawsuits.
Hiawatha
Project DBE Issues
The
Hiawatha Light Rail Transit (“HLRT”) project was performed by Minnesota Transit
Constructors (“MnTC”), a joint venture that consisted of GCCO and other
unrelated companies. GCCO was the managing partner of the joint
venture, with a 56.5% interest. The Minnesota Department of
Transportation (“MnDOT”) is the contracting agency for this federally funded
project. MnDOT and the U.S. Department of Transportation Office of
Inspector General (“OIG”) each conducted a review of the Disadvantaged Business
Enterprise (“DBE”) program maintained by MnTC for the HLRT
project. In addition, the U.S. Department of Justice (“USDOJ”) is
conducting an investigation into compliance issues with respect to MnTC’s DBE
Program for the HLRT project. MnDOT and the OIG (collectively, the
“Agencies”) have initially identified certain compliance issues in connection
with MnTC’s DBE Program and, as a result, have determined that MnTC failed to
meet the DBE utilization criteria as represented by MnTC. There has
been no formal administrative subpoena issued, nor has a civil complaint
been
filed in connection with the administrative reviews or the
investigation. MnTC is fully cooperating with the
Agencies and, on July 2, 2007, presented its response to the initial
determination of the Agencies as well as the investigation by the USDOJ to
MnDOT.
The
I-494
project was performed by a joint venture (“JV”) that consisted of GCCO and other
unrelated companies. GCCO was the managing partner of the JV, with a
60% interest. MnDOT is the contracting agency for this federally
funded project. MnDOT conducted a review of the DBE program
maintained by the JV for the I-494 project. MnDOT has initially
identified certain compliance issues in connection with the JV’s DBE program,
and as a result, has determined that the JV failed to meet the DBE utilization
criteria as represented by the JV. There has been no formal
administrative subpoena issued, nor has a civil complaint been filed in
connection with the administrative reviews or the investigation. The
JV is fully cooperating with MnDOT and will be provided an opportunity to
informally present its response to MnDOT’s initial determinations.
US
Highway 20 Project
GCCO
and
its majority-owned subsidiary, Wilder Construction Corporation, are the members
of a joint venture known as Yaquina River Constructors (YRC) which is currently
constructing a new road alignment of US Highway 20 near Eddyville, Oregon
under
contract with the Oregon Department of Transportation (ODOT). The
project involves constructing seven miles of new road through steep and
forested terrain in the Coast Range Mountains. During the fall and
winter of 2006, extraordinary rain events produced runoff that overwhelmed
erosion control measures installed at the project and resulted in discharges
to
surface water in alleged violations of the stormwater permit. The
Oregon Department of Environmental Quality issued a notice of violation and
fine
of $90,000 to ODOT for these alleged violations and has indicated that it
also
intends to take enforcement action against YRC. The Oregon State
Police and the U.S. Environmental Protection Agency are conducting a criminal
investigation in connection with stormwater runoff from the
project. The JV is fully cooperating in the investigation, but does
not know whether criminal charges, if any, will be brought or against
whom.
Other
Legal Proceedings
We
are a
party to a number of other legal proceedings arising in the normal course
of
business which, from time to time, include inquiries from public agencies
seeking information concerning our compliance with government construction
contracting requirements and related laws and regulations. We believe that
the
nature and number of these proceedings and compliance inquiries are typical
for
a construction firm of our size and scope. Our litigation typically involves
claims regarding public liability or contract related issues. While management
currently believes, after consultation with counsel, that the ultimate outcome
of such proceedings and compliance inquiries which are currently pending,
individually and in the aggregate, will not have a material adverse effect
on
our financial position or overall trends in results of operations or cash
flows,
litigation is subject to inherent uncertainties. Were an unfavorable ruling
to
occur, there exists the possibility of a material adverse impact on the results
of operations, cash flows and/or financial position for the period in which
the
ruling occurs. While any one of our pending legal proceedings is subject
to
early resolution as a result of our ongoing efforts to settle, whether or
when
any legal proceeding will resolve through settlement is neither predictable
nor
guaranteed.
Granite
Construction Incorporated
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13.
|
Business
Segment Information:
|
As
more
fully described in Note 1, we have substantially completed a realignment
of our
former Branch Division and Heavy Construction Division into two geographically
based divisions – Granite West and Granite East. Both Granite West
and Granite East represent reportable segments and the prior period segment
information presented below has been reclassified to conform to the new
organizational structure.
Granite
West is comprised of decentralized branch offices in the western United States
that perform various heavy civil construction projects with a large portion
of the work focused on new construction and improvement of streets, roads,
highways and bridges as well as site preparation for housing and commercial
development. Each branch reports under one of three operating groups:
Northwest, Northern California and Southwest. Because the operating groups
have similar economic characteristics as defined in Statement of Financial
Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and
Related Information” (“SFAS 131”), we have aggregated them into the Granite West
reportable segment. Although most Granite West projects are started and
completed within a year, the division also has the capability of constructing
larger projects and currently has five projects, each with total
contract revenue greater than $50.0 million, including two projects from
our
legacy Heavy Construction Division. All of our revenue from the sale
of construction materials is generated by Granite West which mines
aggregates and operates plants that process aggregates into construction
materials for internal use and for sale to others. These activities
are vertically integrated into the Granite West construction business, providing
both a source of profits and a competitive advantage to our construction
business.
Granite
East operates in the eastern portion of the United States with a focus
on large,
complex infrastructure projects including major highways, large dams, mass
transit facilities, bridges, pipelines, canals, tunnels, waterway locks
and
dams, and airport infrastructure. Granite East operates out of three
regional offices: the Central Region, based in Dallas, Texas; the Southeast
Region, based in Tampa, Florida; and the Northeast Region, based in Tarrytown,
New York. Because the regions have similar economic characteristics as
defined in SFAS 131, we have aggregated them into the Granite East reportable
segment. Granite East construction contracts are typically greater than
two years in duration.
Additionally,
we purchase, develop and sell real estate through our Granite Land Company
subsidiary (“GLC”), which also provides real estate services for other Granite
operations. GLC’s portfolio of projects includes both commercial and
residential development and is geographically diversified throughout the
West
and Texas.
The
accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies contained in our 2006 Annual Report
on Form 10-K. We evaluate performance based on operating profit or loss
(excluding gain on sales of property and equipment), and do not include income
taxes, interest income, interest expense or other income (expense). Unallocated
other corporate expenses principally comprise corporate general and
administrative expenses. Segment assets include property and equipment, and
real
estate held for sale.
Summarized
segment information is as follows:
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
(in
thousands)
|
|
Granite
West
|
|
Granite
East
|
|
|
GLC
|
|
Total
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$
|
540,533
|
|
$
|
219,942
|
|
$
|
|
|
$
|
|
|
Inter-segment
revenue transfer
|
|
|
1,914
|
|
|
(1,914
|
) |
|
-
|
|
|
|
|
Net
revenue
|
|
|
542,447
|
|
|
218,028
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
Operating
income
|
|
|
|
|
|
|
|
|
2,978
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$
|
|
|
$
|
|
|
$
|
33,649
|
|
$
|
|
|
Inter-segment
revenue transfer
|
|
|
|
|
|
|
)
|
|
-
|
|
|
-
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
Operating
income (loss)
|
|
|
|
|
|
|
) |
|
16,690
|
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
|
Granite
West
|
|
Granite
East
|
|
GLC
|
|
Total
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
836,844
|
|
$
|
406,374
|
|
$
|
15,318
|
|
|
|
|
Inter-segment
revenue transfer
|
|
|
3,697
|
|
|
(3,697
|
|
|
-
|
|
|
|
|
Net
revenue
|
|
|
840,541
|
|
|
402,677
|
|
|
15,318
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
|
|
|
4,768
|
|
|
45
|
|
|
36,841
|
|
Operating
income (loss)
|
|
|
96,721
|
|
|
(10,185
|
)
|
|
|
|
|
|
|
Segment
assets
|
|
|
427,105
|
|
|
30,388
|
|
|
59,205
|
|
|
516,698
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
|
|
$
|
|
|
$
|
33,679
|
|
$
|
|
|
Inter-segment
revenue transfer
|
|
|
10,033
|
|
|
(10,033
|
|
|
-
|
|
|
-
|
|
Net
revenue
|
|
|
745,389
|
|
|
528,937
|
|
|
33,679
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
24,955
|
|
|
6,981
|
|
|
10
|
|
|
31,946
|
|
Operating
income (loss)
|
|
|
80,327
|
|
|
(30,965
|
)
|
|
15,512
|
|
|
|
|
Segment
assets
|
|
|
351,088
|
|
|
45,205
|
|
|
42,675
|
|
|
|
|
Granite
Construction Incorporated
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A
reconciliation of segment operating income to consolidated totals is as
follows:
|
|
|
|
|
|
|
|
Three
Months Ended June
30,
|
|
Six
Months Ended June
30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Total
operating income for reportable segments
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sales of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
other corporate expense
|
|
|
|
|
|
|
)
|
|
|
|
|
|
)
|
Income
before provision for income taxes and minority interest
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
On April
3, 2007, the Company acquired certain assets of the Superior Group of
Companies (“Superior”), a Pacific Northwest-based construction materials
producer and asphalt paving company, for approximately $58.6 million in
cash. The acquisition agreement also provides for the payment of an
additional $3.0 million for the assumption of a certain lease and related
intangible assets which has not yet been completed. The acquired
business operates under the name Granite Northwest, Inc. as a wholly owned
subsidiary of Granite Construction Incorporated and will operate as the
Columbia
River Branch in our Granite West segment. The purchased assets
include 16 asphalt plants and related permits, more than 50 million
tons of permitted reserves (owned and leased), construction equipment
and
rolling stock and all associated shops and buildings. We have
accounted for this transaction in accordance with Statement of Financial
Accounting Standards No. 141, “Business Combinations” (“SFAS 141”) and the
results of operations of this acquisition are included in our consolidated
financials statements as of April 3, 2007.
Preliminary
Purchase Price Allocation
In
accordance with SFAS 141, the total purchase price was allocated preliminarily
to the net tangible and identifiable intangible assets based on their
estimated
fair values as of April 3, 2007 as set forth below. The allocation of the
purchase price was based upon a preliminary valuation and our estimates
and
assumptions are subject to change. The current estimated fair value of
the
assets acquired approximates the purchase price; therefore, no goodwill was
recorded. Purchased intangibles are generally amortized on a straight-line
basis over their respective useful lives. The primary areas of the purchase
price allocation that are preliminary relate to finalizing the valuations
of
mining rights and certain intangible assets and completing our assessment
of
asset retirement obligations.
|
|
|
|
(in
thousands)
|
|
|
Land
& buildings
|
|
$ |
6,900 |
|
Plant
& equipment
|
|
|
24,500 |
|
Inventory
|
|
|
3,900 |
|
Mining
rights
|
|
|
6,200 |
|
Permits
|
|
|
16,900 |
|
Other
intangible assets
|
|
|
2,100 |
|
Asset
retirement obligations and other liabilities
|
|
|
(1,900 |
)
|
Total
purchase price
|
|
$ |
58,600
|
|
Pro
Forma Financial Information
The
financial information in the table below summarizes the combined results
of
operations of Granite and Superior, on a pro forma basis, as though the
companies had been combined as of the beginning of each of the periods
presented. The pro forma financial information is presented for informational
purposes only and is not indicative of the results of operations that would
have
been achieved if the acquisition had taken place at the beginning of each
of the
periods presented.
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
(in
thousands, except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Acquisitions
In
June 2007, we also purchased certain assets and assumed certain liabilities
of an asphalt concrete manufacturer near Santa Clara, California for cash
consideration of approximately $15.6 million. This purchase was
accounted for in accordance with SFAS 141. The results of the
acquired business’ operations are included in our consolidated results as of
June 1, 2007, the date of acquisition. Although the purchase price
allocation is still preliminary, the current estimated fair value of the
assets
acquired approximates the purchase price; therefore, no goodwill was
recorded.
Forward-Looking
Disclosure
From
time to time, Granite makes certain comments and disclosures in reports and
statements, including in this Quarterly Report on Form 10-Q, or statements
made
by its officers or directors that are not based on historical facts and which
may be forward-looking in nature. Under the Private Securities Litigation Reform
Act of 1995, a “safe harbor” may be provided to us for certain of these
forward-looking statements. We wish to caution readers that forward-looking
statements are subject to risks regarding future events and future results
of
Granite that are based on current expectations, estimates, forecasts, and
projections as well as the beliefs and assumptions of Granite’s management.
Words such as “outlook,” “believes,” “expects,” “appears,” “may,” “will,”
“should,” “anticipates” or the negative thereof or comparable terminology, are
intended to identify such forward-looking statements. In addition, other written
or oral statements which constitute forward-looking statements have been made
and may in the future be made by or on behalf of Granite. These forward-looking
statements are estimates reflecting the best judgment of senior management
that
rely on a number of assumptions concerning future events, many of which are
outside of our control, and involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those more specifically described
in our Annual Report on Form 10-K under “Item 1A. Risk Factors.” Granite
undertakes no obligation to publicly revise or update any forward-looking
statements for any reason. As a result, the reader is cautioned not to rely
on
these forward-looking statements, which speak only as of the date of this
Quarterly Report on Form 10-Q.
Overview
We
are
one of the largest heavy civil contractors in the United States and are engaged
in the construction and improvement of streets, roads, highways and bridges
as well as dams, airport infrastructure, mass transit facilities and other
infrastructure-related projects. We have offices in Alaska, Arizona,
California, Florida, Minnesota, Nevada, New York, Oregon, Texas, Utah and
Washington.
In
February 2007, we announced an organizational realignment of our business
operations which is designed to accommodate growth of our vertically integrated
Branch business in the West and improve profitability of our large, complex
Heavy Construction Division (“HCD”) projects. This realignment
involves the reorganization of our operating divisions geographically into
“Granite West” and “Granite East.” Granite West includes
the operations of our former Branch Division as well as the western portion
of
our large project business that was formerly included in HCD. Granite West
will
retain our successful decentralized operating structure, with each of its
branch
locations aligning under one of three operating groups: Northwest, Northern
California and Southwest. Granite East will include the eastern
portion of our large project business that had been included in HCD and will
be
aligned to focus on enhancing project management oversight and discipline
from
estimating through execution. Granite East will be operated out of
three regional offices: the Central Region, based in
Dallas, Texas; the Southeast Region, based in Tampa, Florida; and the
Northeast Region, based in Tarrytown, New York.
During
the quarter ended June 30, 2007, we completed the reassignment of our large
projects in the West from our former Heavy Construction Division to the new
Granite West division (with the exception of certain projects that are nearing
completion which will remain with our new Granite East division) and made
substantial progress on other aspects of the realignment. As a result
we are reporting Granite West and Granite East as new reportable segments
effective with the quarter ended June 30, 2007. Prior period results
have been reclassified to conform to the new organizational structure (see
Note
1
of the “Notes to the Condensed Consolidated Financial
Statements”).
The
following table shows the impact to revenue and gross profit of the
three projects reassigned from our former Heavy Construction Division to
the newly created Granite West:
|
|
|
|
|
Granite
West
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
(in
thousands)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Branch
Division revenue
|
|
$ |
511,862
|
|
|
$ |
471,297
|
|
|
$ |
793,304
|
|
|
$ |
722,395
|
|
Reassigned
projects revenue
|
|
|
30,585
|
|
|
|
14,261
|
|
|
|
47,237
|
|
|
|
22,994
|
|
Granite
West Division revenue
|
|
|
542,447
|
|
|
|
485,558
|
|
|
|
840,541
|
|
|
|
745,389
|
|
Branch
Division gross profit
|
|
|
106,394
|
|
|
|
86,886
|
|
|
|
157,145
|
|
|
|
130,495
|
|
Reassigned
projects gross profit
|
|
|
3,015
|
|
|
|
-
|
|
|
|
4,593 |
|
|
|
-
|
|
Granite
West Division gross profit
|
|
|
109,409
|
|
|
|
86,886
|
|
|
|
161,738
|
|
|
|
130,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granite
East
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
(in
thousands)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Heavy
Construction Division revenue
|
|
$ |
248,613
|
|
|
$ |
307,091
|
|
|
$ |
449,914
|
|
|
$ |
551,931
|
|
Reassigned
projects revenue
|
|
|
(30,585 |
) |
|
|
(14,261 |
) |
|
|
(47,237 |
) |
|
|
(22,994 |
) |
Granite
East Division revenue
|
|
|
218,028
|
|
|
|
292,830
|
|
|
|
402,677
|
|
|
|
528,937
|
|
Heavy
Construction Division gross profit (loss)
|
|
|
17,426
|
|
|
|
(11,242 |
) |
|
|
10,996
|
|
|
|
(14,200 |
) |
Reassigned
projects gross profit
|
|
|
(3,015 |
) |
|
|
-
|
|
|
|
(4,593
|
) |
|
|
-
|
|
Granite
East Division gross profit (loss)
|
|
|
14,411
|
|
|
|
(11,242 |
) |
|
|
6,403
|
|
|
|
(14,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
backlog related to the three reassigned projects was $199.1 million, $195.5
and $264.9 million at June 30, 2007, March 31, 2007 and June 30, 2006,
respectively.
Granite
West is comprised of decentralized branch offices in the western United States
that perform various heavy civil construction projects with a large portion
of the work focused on new construction and improvement of streets, roads,
highways and bridges as well as site preparation for housing and commercial
development. Although most Granite West projects are started and
completed within a year, the division also has the capability of constructing
larger projects and currently has five projects with total contract revenue
greater than $50.0 million, including two projects from our legacy Heavy
Construction Division. All of our revenue from the sale of
construction materials is generated by Granite West which mines aggregates
and
operates plants that process aggregates into construction materials for internal
use and for sale to others. These activities are vertically
integrated into the Granite West construction business, providing both a
source
of profits and a competitive advantage to our construction
business.
Granite
East operates in the eastern portion of the United States with a focus
on large,
complex infrastructure projects including major highways, large dams, mass
transit facilities, bridges, pipelines, canals, tunnels, waterway locks
and
dams, and airport infrastructure. Granite East construction contracts
are typically greater than two years in durations. Additionally,
we purchase, develop and sell real estate through our Granite Land Company
subsidiary (“GLC”), which also provides real estate services for other Granite
operations. GLC’s portfolio of projects includes both commercial and
residential development and is geographically diversified throughout the
West
and Texas.
Our
contracts are obtained primarily through competitive bidding in response
to
advertisements by federal, state and local agencies and private parties and
to a
lesser extent through negotiation with private parties. Our bidding activity
is
affected by such factors as backlog, current utilization of equipment and
other
resources, our ability to obtain necessary surety bonds and competitive
considerations. Bidding activity, backlog and revenue resulting from the
award
of new contracts may vary significantly from period to period.
The
two primary economic drivers of our business are (1)
federal, state and local public funding levels and (2) the overall health
of the
economy, both nationally and locally. The level of demand for our services
will
have a direct correlation to these drivers. For example, a weak economy will
generally result in a reduced demand for construction in the private sector.
This reduced demand increases competition for fewer private sector projects
and
will ultimately also increase competition in the public sector as companies
migrate from bidding on scarce private sector work to projects in the public
sector. Greater competition can reduce revenue growth and/or increase pressure
on gross profit margins. A weak economy also tends to produce less tax revenue,
thereby decreasing the funds available for spending on public infrastructure
improvements. There are funding sources that have been specifically earmarked
for infrastructure spending, such as gasoline taxes, which are not necessarily
directly impacted by a weak economy.
However, even these funds can be temporarily at risk as state and local
governments struggle to balance their budgets. Conversely, higher public
funding
and/or a robust economy will increase demand for our services and provide
opportunities for revenue growth and margin improvement.
Our
general and administrative costs include salaries
and related expenses, incentive compensation, discretionary profit sharing
and
other variable compensation, as well as other overhead costs to support our
overall business. In general, these costs will increase in response to the
growth and the related increased complexity of our business. These costs
may
also vary depending on the number of projects in process in a particular
area
and the corresponding level of estimating activity. For example, as large
projects are completed or if the level of work slows down in a particular
area,
we will often re-assign project employees to estimating and bidding activities
until another project gets underway, temporarily moving their salaries and
related costs from cost of revenue to general and administrative expense.
Additionally, our compensation strategy for selected management personnel
is to
rely heavily on a variable cash and restricted stock performance-based incentive
element. The cash portion of these incentives is expensed when earned while
the
restricted stock portion is expensed over the vesting period of the stock
(generally five years). Depending on the mix of cash and restricted stock,
these
incentives can have the effect of increasing general and administrative expenses
in very profitable years and decreasing expenses in less profitable
years.
Results
of Operations
|
|
|
|
|
|
Comparative
Financial Summary
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenue
|
|
$
|
770,876
|
|
$
|
|
|
$
|
1,258,536
|
|
$
|
|
|
Gross
profit
|
|
|
127,634
|
|
|
|
|
|
175,670
|
|
|
|
|
General
and administrative expenses
|
|
|
65,130
|
|
|
|
|
|
119,467
|
|
|
|
|
Gain
on sales of property and equipment
|
|
|
4,346
|
|
|
|
|
|
5,059
|
|
|
|
|
Operating
income
|
|
|
66,850
|
|
|
|
|
|
61,262
|
|
|
|
|
Net
income
|
|
|
43,846
|
|
|
|
|
|
41,597
|
|
|
|
|
Our
results of operations for the three and six months ended June 30, 2007 reflect
strong results from Granite West which realized increases in revenue
and gross margins. These higher results were partially offset by a
reduction in construction materials sales due to a slow down in the residential
markets. Granite East saw improved performance for the three and six
months ended June 30, 2007 compared to the same periods in 2006 due to a
significant decrease in the amount of negative forecast
adjustments. Operating results
for the three months and six months ended June 30, 2007 also reflect a
decrease in the contribution from GLC due to fewer real estate project
sales as well as an increase in general and administrative expense due
primarily to costs incurred to support our growth strategy and higher variable
compensation resulting from improved profitability. Additionally, our net
income for the three months ended June 30, 2007 reflected a decrease in
non-operating income of approximately $3.7 million in the second quarter of
2006 due primarily to the sale of gold, which is a by-product of one of our
aggregate mining operations and held for investment.
|
|
|
|
|
|
Total
Revenue
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Revenue
by Division:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granite
West
|
|
$
|
542,447
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
Granite
East
|
|
|
218,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.0
|
|
|
|
|
|
|
|
Granite
Land
|
|
|
10,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
770,876
|
|
|
|
|
$
|
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
|
|
|
|
|
|
Granite
West Revenue
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
California:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
sector
|
|
$
|
181,884
|
|
|
|
|
$
|
|
|
|
|
|
$
|
275,545
|
|
|
|
|
$
|
|
|
|
|
|
Private
sector
|
|
|
54,483
|
|
|
18.3
|
|
|
|
|
|
|
|
|
96,240
|
|
|
|
|
|
|
|
|
|
|
Material
sales
|
|
|
61,134
|
|
|
|
|
|
|
|
|
|
|
|
106,275
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
297,501
|
|
|
100.0
|
|
$
|
|
|
|
|
|
$
|
478,060
|
|
|
|
|
$
|
|
|
|
100.0
|
|
Granite
West (excluding California):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
sector
|
|
$
|
148,789
|
|
|
|
|
$
|
|
|
|
|
|
$
|
212,890
|
|
|
|
|
$
|
|
|
|
|
|
Private
sector
|
|
|
57,200
|
|
|
|
|
|
|
|
|
|
|
|
89,664
|
|
|
|
|
|
|
|
|
|
|
Material
sales
|
|
|
38,957
|
|
|
|
|
|
|
|
|
|
|
|
59,927
|
|
|
|
|
|
|
|
|
18.9
|
|
Total
|
|
$
|
244,946
|
|
|
|
|
$
|
|
|
|
100.0
|
|
$
|
362,481
|
|
|
|
|
$
|
|
|
|
100.0
|
|
Total
Granite West Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
sector
|
|
$
|
330,673
|
|
|
|
|
$
|
|
|
|
|
|
$
|
488,435
|
|
|
|
|
$
|
|
|
|
|
|
Private
sector
|
|
|
111,683
|
|
|
|
|
|
|
|
|
|
|
|
185,904
|
|
|
|
|
|
|
|
|
|
|
Material
sales
|
|
|
100,091
|
|
|
|
|
|
|
|
|
|
|
|
166,202
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
542,447
|
|
|
|
|
$
|
|
|
|
100.0
|
|
$
|
840,541
|
|
|
|
|
$
|
|
|
|
100.0
|
|
Revenue
by Contract Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
unit price
|
|
$ |
266,320 |
|
|
49.1 |
|
$ |
244,573 |
|
|
50.4 |
|
$ |
412,217 |
|
|
49.0
|
|
$ |
366,833 |
|
|
49.2 |
|
Fixed
price, including design/build
|
|
|
163,627 |
|
|
30.2
|
|
|
119,743 |
|
|
24.7 |
|
|
233,619 |
|
|
27.8 |
|
|
187,178 |
|
|
25.1 |
|
Other
|
|
|
12,409 |
|
|
2.3 |
|
|
12,691 |
|
|
2.6 |
|
|
28,503 |
|
|
3.4 |
|
|
21,297 |
|
|
2.9 |
|
Material
Sales
|
|
|
100,091 |
|
|
18.4 |
|
|
108,551 |
|
|
22.3 |
|
|
166,202 |
|
|
19.8 |
|
|
170,081 |
|
|
22.8 |
|
Total
|
|
$ |
542,447 |
|
|
100.0 |
|
$ |
485,558 |
|
|
100.0 |
|
$ |
840,541 |
|
|
100.0 |
|
$ |
745,389 |
|
|
100.0 |
|
Granite
West Revenue: Revenue
from Granite West for the three and six months ended June 30,
2007 increased by $56.9 million, or 11.7%, and $95.2 million, or 12.8%,
respectively, over the corresponding 2006 periods. The increased
revenue was driven by higher backlog in the public sector at the
beginning of 2007 from higher state funding as well as the contribution of
our newly acquired operations in Washington. These
increases were partially offset by a slow down in residential development
opportunities that have impacted both private sector work and the volume
of
material sales.
|
|
|
|
|
|
Granite
East Revenue
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Revenue
by Geographic Area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
$
|
26,594
|
|
|
12.2 |
|
$
|
19,162
|
|
|
6.5
|
|
$
|
42,753
|
|
|
10.6
|
|
$
|
29,041
|
|
|
5.5
|
|
Northeast
|
|
|
57,270
|
|
|
26.3
|
|
|
75,575
|
|
|
25.8
|
|
|
98,252
|
|
|
24.4
|
|
|
140,658
|
|
|
26.6
|
|
South
|
|
|
36,448
|
|
|
16.7
|
|
|
|
|
|
22.6
|
|
|
72,265
|
|
|
17.9
|
|
|
|
|
|
|
|
Southeast
|
|
|
79,688
|
|
|
36.5
|
|
|
70,980
|
|
|
24.2
|
|
|
158,357
|
|
|
39.3
|
|
|
126,100 |
|
|
23.8
|
|
West
|
|
|
18,028
|
|
|
8.3
|
|
|
|
|
|
|
|
|
31,050
|
|
|
7.8
|
|
|
|
|
|
|
|
Total
|
|
$
|
218,028
|
|
|
100.0 |
|
$
|
|
|
|
100.0
|
|
$
|
402,677
|
|
|
100.0 |
|
$
|
|
|
|
100.0
|
|
Revenue
by Market Sector:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
sector
|
|
$
|
215,111
|
|
|
98.7
|
|
$
|
|
|
|
|
|
$
|
396,178
|
|
|
98.4
|
|
$
|
|
|
|
|
|
Private
sector
|
|
|
2,917
|
|
|
1.3 |
|
|
|
|
|
|
|
|
6,499
|
|
|
1.6
|
|
|
|
|
|
|
|
Material
sales
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
- |
|
|
|
|
|
-
|
|
Total
|
|
$
|
218,028
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
$
|
402,677
|
|
|
100.0 |
|
$
|
|
|
|
100.0
|
|
Revenue
by Contract Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
unit price
|
|
$
|
39,365
|
|
|
18.1
|
|
$
|
|
|
|
|
|
$
|
72,732
|
|
|
18.1
|
|
$
|
|
|
|
|
|
Fixed
price, including design/build
|
|
|
178,663
|
|
|
81.9
|
|
|
|
|
|
|
|
|
329,945
|
|
|
81.9
|
|
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Total
|
|
$
|
218,028
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
$
|
402,677
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
Granite
East Revenue: Revenue from Granite East for the three
and six months ended June 30, 2007 decreased by $74.8 million, or 25.5%,
and $126.3 million, or 23.9%, respectively, over the corresponding 2006
periods. The
decreases were mainly due lower backlog at the beginning of 2007 compared
with
the beginning of 2006. Geographically, the largest decreases
were experienced in the West and the South. Under
the
realignment, Granite East retained certain projects in the West that were
nearing completion and the decrease in revenue in the West reflects progress
on
those projects over time. In the South, the decreases were due
primarily to certain large projects in Texas nearing completion. Increases
in the Southeast resulted from revenue contributions from a large
design/build project in Mississippi that was awarded in February
2006. The percent of our revenue from fixed price contracts increased in
2007 due primarily to the growth in design/build projects in our
backlog.
Granite
Land Company Revenue: Revenue from GLC for the three and
six months ended June 30, 2007 decreased by $23.2 million, or 69.1%, and
$18.4 million, or 54.5%, respectively, over the corresponding 2006
periods. GLC’s
revenue is dependent on the timing of a low volume of real estate sales
transactions, which can cause variability in the timing of revenue and
profit recognition.
|
|
|
|
|
|
|
|
Total
Backlog
|
|
June
30, 2007
|
|
March
31, 2007
|
|
June
30, 2006
|
|
(in
thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Backlog
by Division:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granite
West
|
|
$
|
986,316
|
|
|
39.4
|
|
$
|
955,770
|
|
|
38.3
|
|
$
|
|
|
|
|
|
Granite
East
|
|
|
1,516,785
|
|
|
60.6
|
|
|
1,542,700
|
|
|
61.7
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,503,101
|
|
|
100.0
|
|
$
|
2,498,470
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
Granite
West Backlog
|
|
June
30, 2007
|
|
March
31, 2007
|
|
June
30, 2006
|
|
(in
thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
California:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
sector
|
|
$
|
301,159
|
|
|
74.2
|
|
$
|
377,289
|
|
|
81.9
|
|
$
|
|
|
|
|
|
Private
sector
|
|
|
104,888
|
|
|
25.8
|
|
|
83,642
|
|
|
18.1
|
|
|
|
|
|
|
|
Total
|
|
$
|
406,047
|
|
|
100.0 |
|
$
|
460,931
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
Granite
West (excluding California):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
sector
|
|
$
|
526,786
|
|
|
90.8
|
|
$
|
423,449
|
|
|
85.6
|
|
$
|
|
|
|
|
|
Private
sector
|
|
|
53,483
|
|
|
9.2
|
|
|
71,390
|
|
|
14.4
|
|
|
|
|
|
|
|
Total
|
|
$
|
580,269
|
|
|
100.0
|
|
$
|
494,839
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
Total Granite
West backlog:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
sector
|
|
$
|
827,945
|
|
|
83.9
|
|
$
|
800,738
|
|
|
83.8
|
|
$
|
|
|
|
|
|
Private
sector
|
|
|
158,371
|
|
|
16.1
|
|
|
155,032
|
|
|
16.2
|
|
|
|
|
|
|
|
Total
|
|
$
|
986,316
|
|
|
100.0 |
|
$
|
955,770
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
Backlog
by Contract Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
unit price
|
|
$
|
489,703 |
|
|
49.6 |
|
$
|
510,392 |
|
|
53.4 |
|
$
|
606,243 |
|
|
48.8 |
|
Fixed
price including design/build
|
|
|
484,029 |
|
|
49.1 |
|
|
430,257 |
|
|
45.0 |
|
|
618,457 |
|
|
49.7 |
|
Other
|
|
|
12,584 |
|
|
1.3 |
|
|
15,121 |
|
|
1.6 |
|
|
18,633 |
|
|
1.5 |
|
Total
|
|
$
|
986,316 |
|
|
100.0 |
|
$
|
955,770 |
|
|
100.0 |
|
$
|
1,243,333 |
|
|
100.0 |
|
Granite
West Backlog: Granite
West backlog of $986.3 million at June 30, 2007 was $30.5 million, or
3.2%, higher than at March 31, 2007 and $257.0 million, or
20.7%, lower than at June 30, 2006. Additions to Granite West backlog in
the second quarter of 2007 included the awards of a $30.0 million interchange
project in Alaska, a $19.9 million airport project in Nevada and a $19.4
million flood control project in Arizona. The lower backlog
at June 30, 2007 compared with June 30, 2006 is primarily due to fewer
residential development opportunities which directly impacts private sector
backlog and indirectly impacts public sector backlog due to a
resulting increase in the competition for public
work. Additionally, anticipated public spending increases in
California as a result of the transportation-related ballot
measures passed last year by California voters have been slow
to result in increased bidding opportunities (see
“Outlook”). Granite West backlog includes $199.1 million, $195.5
million and $264.9 million of backlog at June 30, 2007, March 31, 2007
and June
30, 2006, respectively, transferred from our former Heavy Construction
Division
related to our realignment.
|
|
|
|
|
|
|
|
Granite
East Backlog
|
|
June
30, 2007
|
|
March
31, 2007
|
|
June
30, 2006
|
|
(in
thousands)
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Backlog
by Geographic Area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest
|
|
$
|
380,190
|
|
|
25.1
|
|
$
|
406,782
|
|
|
26.4
|
|
$
|
17,134
|
|
|
1.4
|
|
Northeast
|
|
|
173,562
|
|
|
11.4
|
|
|
195,879
|
|
|
12.7
|
|
|
312,105
|
|
|
25.0
|
|
South
|
|
|
188,681
|
|
|
12.4
|
|
|
180,426
|
|
|
11.7
|
|
|
|
|
|
|
|
Southeast
|
|
|
743,054
|
|
|
49.0
|
|
|
710,822
|
|
|
46.1
|
|
|
463,212
|
|
|
37.1
|
|
West
|
|
|
31,298
|
|
|
2.1
|
|
|
48,791
|
|
|
3.1
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,516,785
|
|
|
100.0
|
|
$
|
1,542,700
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
Backlog
by Market Sector:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
sector
|
|
$
|
1,487,534
|
|
|
98.1
|
|
$
|
1,510,984
|
|
|
97.9
|
|
$
|
|
|
|
|
|
Private
sector
|
|
|
29,251
|
|
|
1.9
|
|
|
31,716
|
|
|
2.1
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,516,785
|
|
|
100.0
|
|
$
|
1,542,700
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
Backlog
by Contract Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
unit price
|
|
$
|
114,545
|
|
|
7.6
|
|
$
|
144,031
|
|
|
9.3
|
|
$
|
|
|
|
|
|
Fixed
price including design/build
|
|
|
1,402,240
|
|
|
92.4
|
|
|
1,398,669
|
|
|
90.7
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,516,785
|
|
|
100.0
|
|
$
|
1,542,700
|
|
|
100.0
|
|
$
|
|
|
|
100.0
|
|
Granite
East Backlog: Granite East backlog of $1.5 billion at
June 30, 2007 was $25.9 million, or 1.7%, lower than at March 31, 2007, and
$267.3 million, or 21.4%, higher than at June 30, 2006. Additions
to Granite East backlog in
the second quarter of 2007 included the awards of a $92.6 million highway
construction project in Florida and a $37.3 million highway construction
project
in Texas. Additionally, Granite East backlog includes approximately $47.6
million related to our 20% share of a joint venture project to construct
a
transportation hub at the World Trade Center in New York. We currently expect
that the total revenue on this contract could exceed $1.5 billion of which
our share could exceed $300.0 million. Included in Granite East
Backlog at June 30, 2007 is approximately $17.4 million from a federal
government project for which the funding has not yet been
fully allocated. Granite East backlog
excludes $199.1 million, $195.5 million and $264.9 million of backlog at
June
30, 2007, March 31, 2007 and June 30, 2006, respectively, transferred to
our former Branch Division related to our
realignment.
|
|
|
|
|
|
|
|
Gross
Profit
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Granite
West
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Percent
of division revenue
|
|
|
|
%
|
|
|
17.9
|
|
|
|
|
%
|
|
|
17.5
|
%
|
|
Granite
East
|
|
$
|
|
|
|
$
|
|
)
|
|
$
|
|
|
|
$
|
|
)
|
|
Percent
of division revenue
|
|
|
|
%
|
|
|
|
|
|
|
1.6
|
%
|
|
|
|
|
|
Granite
Land
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Percent of division revenue |
|
|
38.1 |
% |
|
|
51.2
|
%
|
|
|
49.1 |
% |
|
|
50.0 |
% |
|
Other
gross profit |
|
|
(150 |
) |
|
$ |
227 |
|
|
|
10 |
|
|
$
|
206 |
|
|
Total
gross profit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Percent
of total revenue
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
Gross
Profit: We
recognize revenue only equal to cost, deferring profit recognition, until a
project reaches 25% completion. In certain cases, such as large complex
design/build projects, we may continue to defer profit recognition beyond the
point of 25% completion until such time as we believe we have enough information
to make a reasonably dependable estimate of contract revenue and cost. Because
we have a large number of projects at various stages of completion in Granite
West, this policy generally has a lesser impact on Granite
West gross profit on a quarterly or annual basis. However, Granite
East has fewer projects in process at any given time and the average size
of those projects tend to be much larger than the Granite West
projects. As a result, Granite East gross profit as a
percent of revenue can vary significantly in periods where one or several very
large projects reach the point of profit recognition and the deferred profit
is
recognized or conversely, in periods where backlog is growing rapidly and a
higher percentage of projects are in their early stages with no associated
gross
margin recognition. Revenue from jobs with deferred
contract profit is as follows:
|
|
|
|
|
|
Revenue
from Contracts with Deferred Profit
|
|
Three
Months Ended June
30,
|
|
Six
Months Ended June
30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Granite
West
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Granite
East
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue from contracts with deferred
profit
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Additionally,
we do not recognize revenue from contract claims until we have a signed
settlement agreement and payment is assured, and we do not recognize revenue
from contract change orders until the contract owner has agreed to the change
order in writing. However, we do recognize the costs related to any contract
claims or pending change orders when they are incurred. As a result, our gross
profit as a percent of revenue can vary during periods when a large volume
of
change orders or contract claims are pending resolution (reducing gross profit
percent) or, conversely, during periods where large change orders or contract
claims are agreed to or settled (increasing gross profit percent). Although
this
variability can occur in both Granite West and Granite East, it is more
pronounced in Granite East because of the larger size and complexity of its
projects.
Granite
West gross profit as a percent of revenue for the three and six months
ended
June 30, 2007 increased to 20.2% and 19.2%, respectively, from 17.9% and
17.5% for the three and six months ended June 30, 2006,
respectively. The increase in 2007 is attributable to higher
construction project profit margins due to our ability to capitalize on
the
strong demand for our construction services for work added to our backlog
at the
end of 2006 and beginning of 2007. Additionally,
during the
three and six months ended June 30, 2007, Granite West
recognized an increase in gross profit of $9.0 million and $13.9 million,
respectively, from the net effects of changes in the estimates of the project
profitability. This compares with a net increase in gross profit of
$0.5 million and $8.3 million during the three and six months ended June
30,
2006, respectively. The increased Granite West profitability
estimates during the three months ended June 30, 2007 were due primarily
to the
settlement of outstanding issues with contract owners, higher productivity
than
originally estimated and the resolution of certain project
uncertainties. Two projects accounted for approximately $3.3
million of the $9.0 million increase during the three months ended June
30,
2007.
Granite
East gross profit as a percent of revenue for the three and six months
ended
June 30, 2007 increased to 6.6% and 1.6%, respectively, from a gross loss
as a percent of revenue of 3.8% and 2.7% for the three and six months ended
June 30, 2006, respectively. The improved gross profit margins in the
2007
periods were driven by a significantly lower impact from negative project
forecast estimate changes. The net impact of project
forecast estimate changes for the three and six months ended June 30,
2007 was
an increase in gross profit of approximately $2.3 million and a decrease in
gross profit of approximately $13.2 million, respectively. The net impact
of such estimate changes for the three and six months ended June 30, 2006
was a decrease in gross profit of approximately $27.1 million and $40.6
million,
respectively (see Note 3 of the “Notes to the Condensed Consolidated
Financial Statements”).
Granite
Land Company gross profit as a percent of revenue for the three and six
months ended June 30, 2007 decreased to 38.1% and 49.1%, respectively, from
51.2% and 50.0% for the three and six months ended June 30, 2006,
respectively.
|
|
|
|
|
|
|
Large
Project Revenue
(>$50.0 million contract
value) |
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Granite
West
|
|
$ |
50,005
|
|
|
$ |
47,194
|
|
|
$ |
80,771
|
|
|
$ |
70,873
|
|
Number
of active
projects
|
|
6
|
|
|
6
|
|
|
6
|
|
|
6
|
|
Granite
East
|
|
$ |
204,063
|
|
|
$ |
263,714
|
|
|
$ |
389,326
|
|
|
$ |
469,369
|
|
Number
of active projects
|
|
36
|
|
|
40
|
|
|
39
|
|
|
43
|
|
Total
|
|
$ |
254,068
|
|
|
$ |
310,908
|
|
|
$ |
470,097
|
|
|
$ |
540,242
|
|
Number
of active
projects
|
|
42
|
|
|
46
|
|
|
45
|
|
|
49
|
|
Revenue
from projects over $50 million for the three and six months ended June
30,
2007 decreased by $56.8 million, or 18.3%, and $70.1 million, or 13.0%,
respectively, over the corresponding 2006 periods.
|
|
|
|
Large
Project Backlog (>$50.0 million contract
value)
|
|
|
|
(in
thousands)
|
June
30, 2007
|
|
June
30, 2006
|
Granite
West
|
$
|
240,703
|
|
$
|
417,693
|
Number
of active projects
|
5
|
|
6
|
Granite
East
|
$
|
1,465,167
|
|
$
|
1,166,769
|
Number
of active projects
|
33
|
|
35
|
Total
|
$
|
1,705,870
|
|
$
|
1,584,462
|
Number
of active projects
|
38
|
|
41
|
Backlog at June 30, 2007 on projects
over $50.0
million by expected profitability is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Number
of Active Projects
|
|
|
Average
Percent Complete
|
|
|
Backlog
Amount
|
|
|
Percent
of Large Project Backlog
|
|
|
Projects
with forecasted loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granite
West
|
|
|
1
|
|
|
|
33 |
% |
|
$
|
86,900
|
|
|
5.1
|
% |
|
Granite
East
|
|
|
11
|
|
|
|
74 |
% |
|
|
178,133
|
|
|
10.4
|
% |
|
Total
|
|
|
12 |
|
|
|
61 |
% |
|
$
|
265,033
|
|
|
15.5
|
% |
|
Projects
with forecasted profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granite
West
|
|
|
4
|
|
|
|
50 |
% |
|
$
|
153,803
|
|
|
9.0
|
% |
|
Granite
East
|
|
|
22
|
|
|
|
19 |
% |
|
|
1,287,034
|
|
|
75.5
|
% |
|
Total
|
|
|
26 |
|
|
|
22 |
% |
|
$
|
1,440,837
|
|
|
84.5
|
% |
|
Backlog
on projects over $50.0 million was $1.7 billion at June 30, 2007, an increase
of
$121.4 million, or 7.7%, over such backlog at June 30, 2006. The
increase was primarily due to the awards of a $420.0 million design/build
consolidated joint venture highway reconstruction project in St. Louis,
Missouri
during the fourth quarter of 2006 and a $463.9 million consolidated joint
venture highway construction project in Maryland during the first quarter
of
2007. This increase was partially offset by other projects in both
divisions progressing towards completion.
|
|
|
|
|
|
General
and Administrative Expenses
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Salaries
and related expenses
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Incentive
compensation, discretionary profit sharing and other variable
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Percent
of revenue
|
|
|
|
|
|
6.0
|
%
|
|
|
|
|
7.4
|
%
|
General
and Administrative Expenses: Salaries
and related expenses in the three and six months ended June 30, 2007
increased $6.8 million, or 26.6%, and $11.0 million, or 20.0%, over the
comparable periods in 2006 due primarily to increased personnel and associated
costs to support our growth strategy - particularly in Granite West.
Incentive compensation, discretionary profit sharing and other variable
compensation increased due to higher income and greater participation in
our
incentive compensation plans in the 2007 periods. Other general and
administrative expenses for the three and six months ended June 30, 2007
reflects an increase related to higher reserves for doubtful accounts of
approximately $1.5 million, compared with the 2006 periods. Other general
and
administrative expenses include information technology, occupancy, office
supplies, depreciation, travel and entertainment, outside services, marketing,
training and other miscellaneous expenses, none of which individually exceeded
10% of total general and administrative
expenses.
|
|
|
|
|
|
Gain
on Sales of Property and Equipment
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Gain
on sales of property and equipment
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Gain
on Sales of Property and Equipment: Gain
on
sales of property and equipment was lower in the six months ended June 30,
2007
as compared with the six months ended June 30, 2006 due to the sale of a rental
property recognized in the first quarter of 2006 of approximately $2.3
million.
|
|
|
|
|
|
Other
Income (Expense)
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Interest
income
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Interest
expense
|
|
|
|
|
|
|
)
|
|
|
|
|
|
)
|
Equity
in (loss) income of affiliates
|
|
|
|
)
|
|
|
|
|
322
|
|
|
|
|
Other,
net
|
|
|
|
)
|
|
|
|
|
|
)
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Other
Income (Expense): Interest
income increased in both the three and six months ended June 30,
2007, compared with the corresponding periods in 2006, due to a higher
average yield on higher balances of interest bearing
investments. Interest expense increased in both the three and six
month ended June 30, 2007, compared with the corresponding periods in 2006,
due to an increase in debt outstanding under our revolving line of
credit. Other (net) in the 2006 quarter included approximately
$3.2 million recognized on the sale of gold which is produced as a by-product
of
one of our aggregate mining operations and held for
investment.
|
|
|
|
|
|
Provision
for Income Taxes
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Provision
for income taxes (in thousands)
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Effective
tax rate
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
Provision
for Income Taxes: Our
effective tax rate increased to 31.3% for both the three and six months ended
June 30, 2007 from 30.5% and 29.7%, respectively, for the corresponding periods
in 2006. The increased effective tax rate is due primarily to lower
estimated income from our minority partners’ share of income in our consolidated
construction joint ventures which are not subject to income taxes on a
stand-alone basis.
|
|
|
|
|
|
Minority
Interest in Consolidated Subsidiaries
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Minority
interest in consolidated subsidiaries
|
|
$
|
|
|
$
|
|
)
|
$
|
|
|
$
|
|
)
|
Minority
Interest in Consolidated Subsidiaries:
Our
minority interest in consolidated subsidiaries represents the minority owners’
share of the income or loss of our consolidated subsidiaries, primarily Wilder
Construction Company, certain real estate development entities and various
consolidated construction joint ventures.
Two
of
our joint venture projects are currently forecast at a loss and will require
additional capital contributions from our minority partners if the forecasts
do
not improve. Our joint venture agreements require that such capital
contributions be made if needed. Based on our most recent assessment
of our partners’ financial condition, we currently believe that one of our
partners does not have the ability to contribute all of the additional capital
that will be needed if the project forecast does not improve. Included in
minority interest in our consolidated statement of income for the three and
six months ended June 30, 2007, is expense related to the potentially
uncollectible partner balance of approximately $1.8 million and $4.4 million,
respectively. The remaining minority interest balance related to these
loss projects of $7.2 million at June 30, 2007 has been included in other
long-term assets in our condensed consolidated balance
sheet.
Outlook
We
are
encouraged by the strength of our business and the opportunities ahead
for both
our Granite East and Granite West operating divisions. We continue to
focus our efforts on the organizational and strategic realignment of
our
business and are pleased with the progress we have made thus far.
Granite
West started the first half of the year with excellent results and
our outlook
for the remainder of the year is positive. However, there has been
an increase
in competition for public sector projects in California which may affect
Granite
West’s ability to meet or exceed last year’s record operating performance. While
the Company did not anticipate that the projects funded by the ballot
measures
approved by California voters last November would have a significant
impact on
bottom line results in 2007, the delay in project lettings, coupled
with the
slowdown in the private sector market, is creating a more competitive
public
sector bidding environment in California than was experienced last
year.
The
ownership of aggregate materials is both a valuable resource for our
core
construction business, as well as a strategic and profitable retail
business. Although our construction materials business remains healthy, it
has slowed down from a year ago as a result of a slowdown in residential
housing starts. Our strategic growth plan is to invest significantly
in this business by acquiring additional aggregate reserves, “green fielding”
new facilities and expanding our existing operations.
In
terms
of the private sector, we are anticipating that the demand for residential
development work will continue to be slow for the foreseeable future.
To help
offset this decline, we are targeting other private sector opportunities
related
to commercial and industrial site development projects.
As
we
stated above, while we are seeing a delay in some of the projects related
to the
California bond measures, we continue to be very optimistic regarding the
opportunities that the state’s transportation program will provide over the next
ten years. Our branches are concentrating significant effort on building
capacity, in terms of people, equipment and construction materials
to take full
advantage of those opportunities.
Our
outlook for Granite East and our Large Project business east of the
Rockies is
improving. Our portfolio of projects now consists mostly of work
which we believe has the potential to contribute improved gross
margins. We have diligently worked through the problem projects in
our backlog, learned from our experiences, and instituted considerable
change -
from our realignment and project selection, to risk analysis and project
staffing. In addition, the current high market demand is providing us
the opportunity to capture higher risk adjusted margins, especially
on
design/build contracts. Given this outlook, we believe Granite East
should achieve breakeven operating results in 2007.
With
regard to raw materials costs, we are subject to energy and petroleum
related
price volatility as it relates to our use of diesel fuel for our rolling
stock
equipment, natural gas, propane and diesel fuel to heat our hot-mix
asphalt
plants, as well as liquid asphalt for production of asphaltic concrete.
We
manage our exposure to these price changes by monitoring the fluctuation
of
these commodities and pricing them into our projects and contracts
accordingly.
Some of our contracts include clauses for liquid asphalt and fuel escalation
and
de-escalation that provide protection in the event that oil product
prices
change significantly. Although we are exposed to price spikes in projects
that
do not include such clauses, this potential impact can be reversed
when prices
come down.
Liquidity
and Capital Resources
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
Cash
and cash equivalents excluding consolidated joint
ventures
|
|
$
|
119,218 |
|
$
|
172,768 |
|
Consolidated
joint venture cash and cash equivalents
|
|
|
127,060 |
|
|
132,208 |
|
Total
consolidated cash and cash equivalents
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
|
|
$
|
|
|
Investing
activities
|
|
|
|
|
|
|
)
|
Financing
activities
|
|
|
|
|
|
|
)
|
Capital
expenditures
|
|
|
|
|
|
|
|
Working
capital
|
|
|
|
|
|
|
|
Our
primary sources of liquidity are cash flows from operations and borrowings
under
our credit facilities. We expect the principal use of funds for the foreseeable
future will be for capital expenditures, working capital, debt service,
acquisitions and other investments. We have budgeted $110.0 million for capital
expenditures in 2007, which includes amounts for construction equipment,
aggregate and asphalt plants, buildings, leasehold improvements and the purchase
of land and aggregate reserves.
Our
cash
and cash equivalents and short-term and long-term marketable securities totaled
$406.1 million at June 30, 2007 and included $127.1 million
of cash from our consolidated construction joint ventures. This joint venture
cash is for the working capital needs of each joint venture’s project. The
decision to distribute cash must generally be made jointly by all of the
partners. We believe that our current cash and cash equivalents, short-term
investments, cash generated from operations and amounts available under our
existing credit facilities will be sufficient to meet our expected working
capital needs, capital expenditures, financial commitments and other liquidity
requirements associated with our existing operations through the next twelve
months and beyond. If we experience a significant change in our business,
such as the execution of a significant acquisition, we would likely need to
acquire additional sources of financing, which may be limited by the terms
of
our existing debt covenants, or may require the amendment of our existing debt
agreements.
Cash provided
by operating activities of $73.2 million for the six months ended June 30,
2007 represents a $134.8 million decrease from the amount provided by
operating activities during the same period in 2006. Contributing to this
decrease was a decrease in net billings in excess of costs and estimated
earnings during the 2007 period due primarily to progress on the projects that
had received large mobilization payments in the prior year.
Cash used
in investing activities of $107.1 million for the six months ended June 30,
2007 represents a $36.0 million increase from the amount used in the same
period in 2006 due primarily to the acquisition of certain assets of two
businesses (see Note 14 of the “Notes to the Condensed Consolidated
Financial Statements”). This was partially offset by an increase in
the net maturities of marketable securities.
Cash provided
by financing activities was $75.3 million for the six months ended June 30,
2007, a change of $107.1 million from the same period in 2006, which was
due primarily to $75.0 million borrowed under our bank revolving line of credit
in 2007 which is due on June 24, 2011 as well as increased net contributions
from our minority partners.
We
had
standby letters of credit totaling approximately $4.7 million outstanding
at June 30, 2007, which will expire between February 2008 and October
2008. We are generally required by the beneficiaries of these letters
of credit to replace them upon expiration. Additionally, we typically
are required to provide various types of surety bonds that provide an additional
measure of security under certain public and private sector
contracts. At June 30, 2007, approximately $2.4 billion of our
backlog was bonded and performance bonds totaling approximately $9.5 billion
were outstanding. Performance bonds do not have stated expiration dates; rather,
we are generally released from the bonds when each contract is accepted by
the
owner. The ability to maintain bonding capacity to support our
current and future level of contracting requires that we maintain cash and
working capital balances satisfactory to our sureties.
We
have a
$150 million bank revolving line of credit, which allows for unsecured
borrowings through June 24, 2011, with interest rate
options. Interest on outstanding borrowings under the revolving line
of credit is at our choice of selected LIBOR rates plus a margin that is
recalculated quarterly. The margin was 0.6% at June 30, 2007. The
unused and available portion of this line of credit was $70.6 million at June
30, 2007. Additionally, our Wilder subsidiary has a bank revolving
line of credit of $5.0 million from October 1 through March 31 and $15.0 million
from April 1 through September 30 of each year that expires in June
2009. The unused and available portion of this line of credit was $4.0
million at June 30, 2007.
Restrictive
covenants under the terms of our debt agreements require the maintenance of
certain financial ratios and the maintenance of tangible net worth (as
defined). We were in compliance with these covenants at June 30,
2007. Additionally, our Wilder subsidiary has restrictive covenants
(on a Wilder stand-alone basis) under the terms of its debt
agreements. Wilder was in compliance with these covenants at June 30,
2007. Failure to comply with these covenants could cause the amounts
due under the debt agreements to become currently payable.
Except
for the $75.0 million borrowing under our line of
credit discussed above, there have been no material changes to the
contractual obligations previously disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2006.
Website
Access
Our
website address is www.graniteconstruction.com. On our website we make
available, free of charge, our annual report on Form 10-K, quarterly reports
on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports
as
soon as reasonably practicable after such material is electronically filed
with
or furnished to the Securities and Exchange Commission. The information on
our
website is not incorporated into, and is not part of, this report. These
reports, and any amendments to them, are also available at the website of
the
Securities and Exchange Commission, www.sec.gov.
During
the second quarter of
2007, we used $75.0 million of our revolving line of credit. We had
amounts outstanding under our line of credit of $75.0 million at June 30, 2007
which bear interest at six month LIBOR plus a margin of 0.6%. The
interest rate resets every six months and all amounts outstanding are due in
June 2011. At June 30, 2007 the note bore interest at
5.96%. The estimated fair value of amounts payable under our
revolving line of credit at June 30, 2007 reflects the principal amount of
$75.0
million since the variable interest rate approximates the rate currently
available to us for a loan with similar terms. There was
no other
significant change in our
exposure to market risk during the six months ended June 30,
2007.
We
carried out an evaluation, under the supervision of and with the participation
of management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of
1934, as amended). Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of June 30, 2007, our disclosure
controls and procedures were effective.
During
the second quarter of 2007, there were no changes in our internal controls
over
financial reporting that have materially affected, or are reasonably likely
to
materially affect, our internal control over financial
reporting.
Our
wholly owned subsidiary Granite Construction Company (“GCCO”) is one of
approximately 100 to 300 defendants in ten active California Superior Court
lawsuits. Of the ten lawsuits, five were filed against GCCO in 2005 and five
were filed against GCCO in 2006, in Alameda County (Riley vs. A-1 Aggregates,
et
al.; Molina vs. A-1 Aggregates, et al.; Dominguez vs. A-1 Aggregates, et
al.;
Cleveland vs. A. Teichert & Son.; Guido vs. A. Teichert & Son, Inc.;
Williams vs. A. Teichert & Son, Inc.; Horne vs. Teichert & Son, Inc.;
Harris vs. A-1 Aggregates, et al.; Kammer vs.A-1 Aggregates, et al.; and
Solis
vs. The 3M Company et al.). Each lawsuit was brought by a single plaintiff
who
is seeking money damages by way of various causes of action, including strict
product and market share liability, and alleges personal injuries caused
by
exposure to silica products and related materials during the plaintiffs’ use or
association with sand blasting or grinding concrete. The plaintiff in each
lawsuit has categorized the defendants as equipment defendants, respirator
defendants, premises defendants and sand defendants. We have been identified
as
a sand defendant, meaning a party that manufactured, supplied or distributed
silica-containing products. Our preliminary investigation revealed that we
have
not knowingly sold or distributed abrasive silica sand for sandblasting,
and
therefore, we believe the probability of these lawsuits resulting in an
incurrence of a material liability is remote. We have been dismissed from
fourteen other similar lawsuits.
Hiawatha
Project DBE Issues
The
Hiawatha Light Rail Transit (“HLRT”) project was performed by Minnesota Transit
Constructors (“MnTC”), a joint venture that consisted of GCCO and other
unrelated companies. GCCO was the managing partner of the joint
venture, with a 56.5% interest. The Minnesota Department of
Transportation (“MnDOT”) is the contracting agency for this federally funded
project. MnDOT and the U.S. Department of Transportation Office of
Inspector General (“OIG”) each conducted a review of the Disadvantaged Business
Enterprise (“DBE”) program maintained by MnTC for the HLRT
project. In addition, the U.S. Department of Justice (“USDOJ”) is
conducting an investigation into compliance issues with respect to MnTC’s DBE
Program for the HLRT project. MnDOT and the OIG (collectively, the
“Agencies”) have initially identified certain compliance issues in connection
with MnTC’s DBE Program and, as a result, have determined that MnTC failed to
meet the DBE utilization criteria as represented by MnTC. There has
been no formal administrative subpoena issued, nor has a civil complaint
been
filed in connection with the administrative reviews or the
investigation. MnTC is fully cooperating with the
Agencies and, on July 2, 2007, presented its response to the initial
determination of the Agencies as well as the investigation by the USDOJ to
MnDOT.
The
I-494
project was performed by a joint venture (“JV”) that consisted of GCCO and other
unrelated companies. GCCO was the managing partner of the JV, with a
60% interest. MnDOT is the contracting agency for this federally
funded project. MnDOT conducted a review of the DBE program
maintained by the JV for the I-494 project. MnDOT has initially
identified certain compliance issues in connection with the JV’s DBE program,
and as a result, has determined that the JV failed to meet the DBE utilization
criteria as represented by the JV. There has been no formal
administrative subpoena issued, nor has a civil complaint been filed in
connection with the administrative reviews or the investigation. The
JV is fully cooperating with MnDOT and will be provided an opportunity to
informally present its response to MnDOT’s initial
determinations.
US
Highway 20 Project
GCCO
and
its majority-owned subsidiary, Wilder Construction Corporation, are the members
of a joint venture known as Yaquina River Constructors (YRC) which is currently
constructing a new road alignment of US Highway 20 near Eddyville, Oregon
under
contract with the Oregon Department of Transportation (ODOT). The
project involves constructing seven miles of new road through steep and
forested terrain in the Coast Range Mountains. During the fall and
winter of 2006, extraordinary rain events produced runoff that overwhelmed
erosion control measures installed at the project and resulted in discharges
to
surface water in alleged violations of the stormwater permit. The
Oregon Department of Environmental Quality issued a notice of violation and
fine
of $90,000 to ODOT for these alleged violations and has indicated that it
also
intends to take enforcement action against YRC. The Oregon State
Police and the U.S. Environmental Protection Agency are conducting a criminal
investigation in connection with stormwater runoff from the
project. The JV is fully cooperating in the investigation, but does
not know whether criminal charges, if any, will be brought or against
whom.
Other
Legal Proceedings
We
are a
party to a number of other legal proceedings arising in the normal course
of
business which, from time to time, include inquiries from public agencies
seeking information concerning our compliance with government construction
contracting requirements and related laws and regulations. We believe that
the
nature and number of these proceedings and compliance inquiries are typical
for
a construction firm of our size and scope. Our litigation typically involves
claims regarding public liability or contract related issues. While management
currently believes, after consultation with counsel, that the ultimate outcome
of such proceedings and compliance inquiries which are currently pending,
individually and in the aggregate, will not have a material adverse effect
on
our financial position or overall trends in results of operations or cash
flows,
litigation is subject to inherent uncertainties. Were an unfavorable ruling
to
occur, there exists the possibility of a material adverse impact on the results
of operations, cash flows and/or financial position for the period in which
the
ruling occurs. While any one of our pending legal proceedings is subject
to
early resolution as a result of our ongoing efforts to settle, whether or
when
any legal proceeding will resolve through settlement is neither predictable
nor
guaranteed.
There
have been no material changes to the risk
factors disclosed in our Annual Report on Form 10-K. Information regarding
risk factors appears in “Item 1A. Risk Factors” in our Annual Report
on Form 10-K for fiscal year ended December 31, 2006.
During
the three months ended June 30, 2007, we did not sell any of our equity
securities that were not registered under the Securities Act of 1933, as
amended. The following table sets forth information regarding the repurchase
of
shares of our common stock during the three months ended June 30,
2007:
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
number of shares purchased1
|
|
Average
price paid per share
|
|
Total
number of shares purchased as part of publicly announced plans or
programs2
|
|
Approximate
dollar value of shares that may yet be purchased under the plans
or
programs2
|
|
April
1, 2007 through April 30, 2007
|
|
|
6,970
|
|
$ |
57.57
|
|
|
-
|
|
$
|
22,787,537
|
|
May
1, 2007 through May 31, 2007
|
|
|
|
|
|
|
|
|
-
|
|
$
|
22,787,537
|
|
June
1, 2007 through June 30, 2007
|
|
|
3,848
|
|
|
68.49
|
|
|
-
|
|
$
|
22,787,537
|
|
|
|
|
10,818
|
|
$ |
61.45
|
|
|
-
|
|
|
|
|
|
1
|
The
total number of shares purchased includes shares purchased in connection
with employee tax withholding for shares granted under our 1999 Equity
Incentive Plan.
|
|
2
|
On
October 16, 2002, we publicly announced that our Board of Directors
had
authorized us to repurchase up to $25.0 million worth of shares of
our Company’s common stock, exclusive of repurchases related to employee
benefit plans, at management’s discretion.
|
None
At
our
annual meeting of shareholders on May 21, 2007, the following members were
elected to three-year terms on our Board of Directors:
|
|
|
Votes
|
|
Affirmative
|
|
Withhold
|
|
38,856,418
|
|
230,675
|
|
37,913,816
|
|
1,173,277
|
William
H. Powell |
38,839,813
|
|
|
|
38,838,333
|
|
248,760
|
The
following proposals were approved at the annual meeting:
|
|
|
|
Votes
|
|
Affirmative
|
|
Against
|
|
Abstain
|
|
Proposal
to amend Granite’s Bylaws to provide that in uncontested elections
director nominees be elected by affirmative vote of the majority
of vote
cast at the annual meeting of shareholders.
|
37,873,626
|
|
1,091,084
|
|
122,383
|
|
Proposal
to ratify the appointment by the Audit/Compliance Committee of
PricewaterhouseCoopers LLP as Granite’s independent registered public
accounting firm for the fiscal year ending December 31,
2007.
|
38,395,563
|
|
671,006
|
|
20,524
|
|
None
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:
|
July
30, 2007
|
|
By:
|
/s/
William E. Barton
|
|
|
|
|
|
William
E. Barton
|
|
|
|
|
|
Senior
Vice President and Chief Financial Officer
|
|